Paul Isabella - President and Chief Executive Officer Joseph Nowicki - Executive Vice President and Chief Financial Officer.

Jason Marcus - JPMorgan & Co. Matthew McCall - Seaport Global Securities, LLC Ryan Merkel - William Blair & Company, LLC Albert Kaschalk - Wedbush Securities Inc Kathryn Thompson - Thompson Research Group Philip Ng - Jefferies LLC Sam Darkatsh - Raymond James & Associates, Inc David Manthey - Robert W. Baird & Co..

Good afternoon, ladies and gentlemen, and welcome to the Beacon Roofing Supply’s First Quarter 2017 Earnings Conference Call. My name is Kathryn, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference.

At that time, I will give you instructions on how to ask a question. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. This call will contain forward-looking statements including statements about its plans and objectives and future economic performances.

Forward-looking statements are only predictions and are subject to a number of risks and uncertainties.

Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to, those set forth in the risk factors section of the Company’s latest Form 10-K.

These forward-looking statements fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding future events and the future financial performance of the Company, including the Company’s financial outlook.

The forward-looking statements contained in this call are based on information as of today, February 2, 2017, and except as required by law, the Company undertakes no obligation to update or revise any of these forward-looking statements. Finally, this call will contain references to certain non-GAAP measures.

The reconciliation of these non-GAAP measures is set forth in today’s press release. The Company has posted a summary financial slide presentation on the Investors section of its website under events and presentations. This 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 afternoon and welcome to our first quarter 2017 earnings call. Similar to recent quarters, we’ll be filing our 10-Q in a few days. During today's call, we will provide a detailed review of our quarterly results, discuss current industry trends and provide an update on our 2017 outlook.

As outlined in our press release, 2017 is off to a very solid start with our third consecutive quarter of sales greater than $1 billion.

A few noteworthy Q1 highlights include our 11th consecutive quarter of residential organic sales and our ninth straight quarter of year-to-year gross margin gains with first quarter gross margin improvement of over 100 basis points. In the quarter, adjusted EBITDA grew 9% versus the prior year. This is very solid progress.

Companywide sales growth was 2.6% during the first quarter including acquisition growth of approximately $44 million. Our RSG related sales are now included as part of Beacon’s existing markets as the acquisition reached its one-year anniversary at the start of the first quarter.

On a same day basis, organic sales were flat during the quarter driven primarily by the more normal winter weather in November and December in many markets and heavy rain in the West. Last year as you might recall Q1 weather patterns were very mild.

Following a demand pattern similar to Q4, the first quarter saw strength in residential, modest declines in complimentary and decreased revenues within commercial. Residential organic daily sales increased 6.5%. These gains came on top of the 15% growth rate in the year-ago quarter which demonstrates solid consistent growth in this product line.

Residential roofing volumes grew 8.1% when factoring in the 1.6% price deflation we saw in the quarter. Commercial sales declined approximately 9% during Q1. This was mainly driven by the more difficult weather comparisons some not repeating large jobs in 2% price deflation. As a reminder, in Q1 of 2016, commercial products had organic growth of 6.4%.

During the first half of fiscal 2016 commercial sales increased 14%, providing an indication of both the challenging comparisons on last year's increase in available work days given the milder temperatures. The December 2016 month was particularly difficult as temperatures in Northern markets were much colder than a year ago levels.

Our West Coast branches, which have a heavy commercial sales component, have also faced difficult comparisons as El Nino fears a year ago boosted reroofing demand. The West also saw heavy rains in Q1 as I mentioned, in 2017 which further pressured sales and you may recall in Q1 2016 our west region grew 40% organically.

As we have previously indicated, we expect commercial growth to be strong in the second half of the year. We view the items that have impacted commercial sales as normal variations we see over time and we're confident we will see growth for the full-year 2017.

Our complimentary products group saw sales decline of approximately 1.6%, however this product will be shown growth in 12 of the last 15 quarters. Complimentary products experience remains one of our key growth initiatives and we're expecting strong second half sales increases.

On a geographic basis regional performance variations during Q1 are primarily tied to weather effects and timing.

Our Southwest region posted Beacon’s strongest growth rate for the third consecutive quarter with a 16% increase, Texas in particular has been a significant beneficiary of heavy and concentrated hail damage repair work through our most of calendar 2016.

We also posted mid-to-high single-digit total organic sales increases in the mid-Atlantic in Southeast markets, with some benefit there coming from Hurricane Matthew or other four geographic regions each experience sales declines during the quarter.

These four markets have higher percent exposure to commercial products further these regions with the exception of the West are typically the most influenced by winter seasonality. We believe the prior years mild winter demand pull forward in difficult year ago comparisons impacted sales growth in these regions as I previously stated.

Specifically, in the December month, slowed considerably versus the trends we saw in October and November. For January just completed, we saw basically flat organic same day sales growth for the total company. As a reminder last year January, we saw 20% organic growth. So this was a good sign for the start of Q2.

And in terms of gross margins in operating expenses Joe will go into some detail during his remarks. Now I’ll recap our fiscal year-to-date Greenfield, an acquisition strategy. We opened up one Greenfield location during the first quarter in the Northeast with two additional ready to be announced soon.

As we've said we are targeting five to 10 total openings for fiscal 2017 and as we have also said in the past, we'll continue to balance our year-to-year branch opening strategy with potential acquisitions.

Following a strong 2016, where we completed aid acquisitions, we were able to close three purchases during the first four months of fiscal 2017, and December we completed the acquisition of BJ Supply and in January we added American Building and Roofing and Eco Insulation Supply, the combined sales from these companies is approximately $40 million to $50 million annually.

Both BJ and Eco our complimentary product focus businesses with singular branch locations in Pennsylvania, Connecticut respectively. We continue to look for strong complimentary product businesses to expand our product line and geographic reach in this important category.

ABR has seven branches located throughout Washington State with a heavy emphasis on residential roofing ABR provides an important presence in the Pacific Northwest, which will nicely compliment our 2016 purchase of wood fathers out of Portland Oregon. And the three locations acquired with our fee in Washington State.

Prior to fiscal 2016, Beacon add no locations in nether Oregon or Washington. The Company now has 14 branches in the two states and we're working to expand our footprint in this geography. Our acquisition pipeline remains very full.

We'll continue to pursue selective acquisitions that make sense for us both strategically and financially as we have said in the past. As you know in addition to growth through acquisition, we are deploying other initiatives to grow organically. Utilizing technology, we continue to drive selling effectiveness through our CRM platform.

We now have over 1,000 key employees utilizing this tool. In addition, we are in the early stages of our e-commerce rollout, which will enhance customer productivity and sales. In addition to sales effectiveness, we have made solid progress on our two step selling to lumber dealers and national accounts expansion businesses.

As noted on prior calls and during our Investor Day, these are important elements of our growth strategy along with acquisitions. Greenfield branch is an existing branch organic growth. Lastly, I wanted to provide an update on current market conditions and our 2017 outlook.

As many of you are aware, our suppliers have announced a series of price increases with scheduled implementation dates from January to March 2017 and mostly product lines. Given the announced timing and seasonal demand picture as you would expect market acceptance of these increases remains uncertain.

While saying that, we are cognizant of potential inflationary pressures building for manufactures later in the year including higher freight prices and rising raw material input costs. As we exit the slower winter demand period, we believe rising cost could create a more favorable environment for inflation.

And as we typically do each year, we will be announcing our own price increase to be effective March 1. As I've stated in the past, there are many factors impacting pricing and we will keep you updated as we move through the year. Now I'd like to turn to our 2017 outlook.

At this point, we are still comfortable with the sales outlook we established on our last earnings call. As a reminder, November we provided the sales growth outlook of 3% to 7% consisting of 2% of 5% organic growth and 1% to 2% incremental contribution from our 2016/2017 acquisitions.

The current Street adjusted EPS range is 218 to 254 with a midpoint of 233. At this point in year, we are comfortable with that midpoint as we've stated previously. We view the back half of the year is being very strong based on all the factors we have mentioned.

Economic indicators continued to suggest a continued recovery for our residential and commercial end markets, although repair remodel represents the majority product demand. We also recognize the timing of these replacements decisions can vary due to economic factors and weather conditions.

We expect the 2017 housing backdrop to remain favorable and economist are anticipating a low double-digit increase in single family housing starts and a low-to-mid single-digit increase in existing home sales. We believe housing turnover can represent a catalyst as far as reroofing activity.

Commercial indicators are also positive with business investment expected to increase in low-to-mid single-digits on at inflation adjusted basis.

And we expect overall asphalt shingle demand to be flat, relatively flat in calendar 2017 boosted by growth in single family starts and non-storm based reroofing activity that largely offset by challenging 2016 storm comparisons.

We believe that our growth initiatives will boost our residential sales growth to levels consistent with our previous low-to-mid single-digit growth targets. Now a little bit on our Investor Day. In December, we sponsored our first Investor Day. We are pleased with the positive feedback we received from many of you.

We believe the roofing industry remains highly attractive for its recurring revenue stream and favorable cyclical characteristics. We like our position as a leading consolidator in the market, but also as a Company that has attractive organic growth initiatives in place.

We remain highly confident in the strategic direction of our Company and our future growth trajectory. In summary, we are very pleased with our performance this quarter. We are confident with our ability to grow and are fully engaged with many initiatives to achieve that goal. With that, I will now turn the call over to Joe for his remarks.

Joe?.

Thanks, Paul and good afternoon, everyone. Now I'll highlight a little more detail and a few key financial results and metrics that are contained in our earnings press release in the Q1 slides that have been posted to our website. In my prepared remarks, I’ll go into greater detail on gross margins, operating expenses, and our balance sheet metrics.

As Paul said, we are pleased with our first quarter results, which put us on track for another great year in 2017. Our first quarter produced sales growth of 2.6% with over $1 billion in revenue representing a first quarter record for Beacon. Acquisitions continue to play an important part of our growth adding $47.1 million to quarterly sales.

Gross margins increased by a strong 117 basis points over the prior year. Adjusted operating cost increased year-to-year primarily tied to the above mentioned acquisitions. For the quarter, we achieved record first quarter adjusted EPS of $0.44 which compares favorable to the $0.41 from the prior year.

And our first quarter adjusted EBITDA grew 9% to $80 million from $73.4 million in the prior year. Q1 2017 and one fewer selling days in a year ago period, 61 days versus 62 which limited sales growth by approximately 1.5 percentage points.

Paul already went through our Q1 sales results as shown in Slide 4, so I won’t repeat any of that information here, but I will go through our monthly organic sales trends. October daily sales increased 2.3%, November sales were up 3.4%, and December sales declined 8.6%.

Keep this December data point in mind as this will be one of the drivers of our operating expense I’ll discuss later. As Paul mentioned, the just completed January month, our organic same day sales approximately flat to the prior year, which is a good accomplishment given the prior year Q1 was up 20%.

December 2016 weather conditions return to historic average levels and sharp contrast with record mild temperatures in the year ago period. Remember that each of the past to December months, we posted strong existing market growth rates 12.4% and 17.3% further highlighted the difficult comparisons.

The January and February months face similar challenging year ago winter comparisons while Beacon posted organic growth rates of 20% and 44% in the comparable months of 2016. We continue to be pleased with our strong gross margin performance. Our first quarter gross margin rate increased to 117 basis points to 25.1%.

Beacon’s strongest Q1 performance since our initial quarter as a public company. Within existing markets, gross margins improved 96 basis points versus last year and solid margins within our acquired businesses provided 21 basis point additional benefit.

A favorable mix shift to our higher margin residential products provided the primary margin lift overall during the quarter. Residential roofing represented 53% of sales, non-residential 31%, and complimentary products were 16% of quarterly sales.

Direct sales declined from 15% of sales to 14.1% which also contributed positively to our gross margin performance. In addition, approximately 30 to 50 basis points of improvement was a result of our traditional threw up for annual vendor incentives.

Our pricing declined modestly sequentially by less than a percent in occurrence we considered normal seasonality. On a year-over-year basis, our pricing declined approximately 1.5% to 2% which is declined somewhat of what we have observed in the fourth quarter.

Price changes can vary significantly between geographies based on a variety of factors including market demand, competition and storm related demand. Our expectations are for prices to continue to improve through 2017, but we expect them to become directionally clear after the seasonally slower second quarter.

By specific product category, our residential and commercial average prices declined 1.5% to 2%, while complimentary pricing declined less than 1%. Residential roofing product costs declined approximately 1%, and non-residential costs were down roughly 2%, and complimentary product costs were flat on a year-to-year basis.

Now moving on to operating expenses. Total operating expenses were $204.1 million or 20.4% of sales excluding the non-recurring costs of $9.1 million. Adjusted operating cost was 19.5% of sales. The $9.1 million consists of $1.1 million of non-recurring acquisition costs and $8 million of amortization step up from the RSG deal.

As noted on Slide 5, existing market operating expenses were $191.1 million for the quarter. On adjusting for the outlined non-recurring charges, our adjusted existing market operating costs were $181.9 million or 19.1% of sales, an increase of 59 basis points year-over-year.

A variety of mix and timing factors contributed to the higher first quarter operating expenses. First the sales mix shift to higher cost to serve residential roofing products drove approximately a $700,000 increase in costs.

Second, the main erosion occurred late in the quarter in December as I mentioned, which made it difficult to react quick enough to get our seasonal cost reductions required in order to achieve the leverage we wanted.

During the quarter, we also incurred unfavorable expenses related to insurance, sales meetings and fleet expenses of approximately $5 million that we don't believe should be extrapolated those same levels into future periods. Many are timing related issues.

On a positive note, we're continuing to see favorable synergy benefits tied to October 2015 acquisition of RSG. As noted on Slide 6, we remain on target to achieve $55 million in combined procurement and operating costs savings tied to the combination.

Incremental synergies during fiscal 2017 are largely concentrated in the first half of the year as we expect to anniversary for the majority of our savings by Q3. Additionally, while 2016 saw 40% to 50% of the synergies benefiting our gross margin line, a larger percentage of the current year benefits are expected to be reflected within SG&A.

We anticipate providing our final RSG cost energy synergy update in conjunction with our second quarter conference call. With that said, we have shifted our focus towards our organic growth initiatives that we discussed at the Investor Day in December, and which Paul provided an update on in his opening remarks.

Interest expense and other financing costs decreased from $16.3 million to $13.6 million in the current period. Adjusted for the onetime costs results in expense reduction from $12.5 million in the year ago quarter to $12 million in the current quarter.

This reduction is primarily attributable to a lower interest rate from the September 2016, refinancing our term loan and also the pay down of our outstanding debt given recent principal payments. We will continue to deleverage our balance sheet over time and I addressed this further when I talk about our balance sheet metrics.

Our effective tax rate for the quarter was approximately 38.8% on both a GAAP and adjusted basis, which is in line with our expectations. As a reminder, during fiscal 2016 our cash tax rate was substantially lower as we were able to utilize over $30 million in tax benefits from NOLs of next day rule costs related to the purchase of RSG.

For 2017, we project will be able to utilize an additional $14 million to $15 million in tax benefits, primarily from NOLs lowering our cash tax rate into the low 30's. This is another benefit to our purchase of RSG has allowed us to further pay down our debt.

Our net earnings were $20.4 million for the quarter or $27 million on an adjusted basis, compared to $24.7 million adjusted earnings in the year ago period. Diluted EPS were $0.33 or $0.44 on an adjusted basis, compared to an adjusted $0.41 from the year ago period.

Adjusted EBITDA for the quarter was $80 million representing 8% of sales, compared to $73.4 million in the prior year and 7.5% of sales, solid year-to-year improvement driven primarily by our strong gross margin bring.

Now I’m going to provide some clarity on the onetime expenses that we show on the adjusted EPS and EBITDA tables within our press release and also on Slide 7 of the earnings release. We incurred a pretax total of $10.7 million in non-recurring costs in the quarter. $1.1 million of the costs are tied in non-recurring SG&A charges.

$1.6 million related to financing costs and $8 million relates to the RSG amortization step up. Now moving on to the status of our balance sheet, first, let me we talk about the cash flow generated.

As noted on Slide 8, cash flow from operations for Q1 was $78.1 million compared to $44.7 million in the year ago period, great cash flow driven by our solid operating results, and also working capital management.

Additionally, we also measure and track our performance in key areas such as inventory AR and AP plus overall balance sheet metrics on a working capital as a percentage of our sales all us shown on Slide 9. Total inventory returns were 4.8 in the quarter versus 5.0 times last year.

Inventory turnover has been a key metric for us and we've improved during the past several years. This year's slight decline reflects the December sales slowdown compared to last year's December surge in demand. Our accounts receivable days sales outstanding improved from 35.8 days last year to 30.7 days in Q4.

Our working capital increased to $784 million at quarter end from $625 million in the comparable quarter a year ago. As a percentage of revenue, average working capital increased from 16.3% last year to 16.8% this year driven by the combination of our acquisitions and the hiring.

The capital expenditures were $7.3 million for the quarter compared to $2.1 million in the prior year. We did a good job rationalizing the fleet over the course of the past year, as you may recall last year for Q1 we had just begun the RSG integration and put a lot of new capital spending on hold until we figured out what our true needs were.

For the full-year, we still see capital expenditures at approximately 1% of sales. We continue to steadily improve our net debt leverage ratio at the close of the RSG deal, we are at 4.3 times. We made steady progress to always finish the fiscal 2016 at 3.3 times and we continue that progress in fiscal 2017 as our leverage is now down to 3 times.

We remain on track to meet our commitment of reducing our leverage to under 2. To conclude my portion of our prepared remarks, I want to spend some time reviewing our 2017 expectations. As we discussed during the Q4 2016 call, we plan to continue to build our framework around the sales range and our adjusted EBITDA expectations.

As a highly acquisitive Company, we believe the EBITDA measure provides a good indicator of overall operating performance. Several items we remind analysts and investors regarding our disclosures, first, our adjusted EBITDA calculations exclude non-cash stock compensation which is expected to approximate $15 million to $16 million for 2017.

Second, we expect to exclude approximately $8 million per quarter related to the RSG’s step up amortization for our adjusted EPS calculations. For Q1, this $8 million is included in the $28.4 million in D&A that's shown in our cash flow statement.

And third, our adjusted EBITDA excludes other non-recurring items identified in our press release and supplemental slide materials. Now turning to Slide 10 to walk through our revenue expectations. Paul mentioned, we are targeting revenue growth of 3% to 7% for 2017.

It's also important to know there are two less selling days in 2017 which will have a negative impact of almost 1% on the year. We have factored this into our total sales projections. Our commercial business started the year slower than anticipated. We remain confident and stability to improve performance during the second half of 2017.

In addition, we believe the sales contributions from the three recent acquisitions provide some support in the event of modest commercial sales downside versus our original expectations. We expect EBITDA to be in the range of $365 million to $395 million or 8.6% to 8.9% of revenue.

As noted on Slide 11, during our Investor Day, we also provided expectations for gross margins in the range of 24.5% to 24.6%, up modestly from fiscal 2016 given our Q1 performance were off to a good start with regards to this line item. We also framed SG&A as a percentage of sales to improve by 20 basis points to 40 basis points year-to-year.

As discussed throughout this call, SG&A as a percentage of sales for the quarter was challenged by several isolated timing related items. Demand rose late in the quarter that made it difficult to react quick enough to get the leverage we wanted in a mix shift to higher cost to serve residential roofing products during the period.

We are still confident in our ability to deliver on our improvement goals for 2017 and our long-term cost leverage targets. Slide 11 reiterates our investment thesis and long-term financial targets that we discussed at the Investor Day. We will now respond to any questions that you may have..

[Operator Instructions] Our first question comes from Jason Marcus with JPMorgan. Your line is open..

Hi. My question is on some of the regional trends that you’ve been seeing, obviously there's a pretty big disparity in certain regions versus others.

So just wanted to get a sense of some of the pricing differential that you're seeing across the footprint and if your pricing power has improved more in certain areas that have seen more storm activity relative to some of the other regions.

Is there any color around that would be helpful?.

Well, there's no doubt we've seen a lot going through the specific numbers by region we've seen pricing power in Texas where we continue to see great demand both on resi and commercial to a lesser extent of course, and you could imagine we’re going to see more negative price out of California, which was impacted pretty heavily in the quarter then even as I mentioned about January number even that’s been flat organically.

They were still impacted pretty heavily because of the range early in the month saw a little bit of goodness at the end of the month. Joe if you want to add..

Yes.

The other part I would add, Jason is that really [know the trends very different than] we've traditionally seen on a pricing perspective as we've always described biggest driver of kind of price for any of our markets is related to demand, and we see great demand whether it's from storm or other issues, and in particular region we usually do much better on price then other areas where there's more market competition or softer demand in it.

And really this quarter the same kind of trends occurred as well, so nothing really different from what we had seen before..

Okay. Great, thanks..

Thank you..

Thank you. Our next question comes from Matt McCall with Seaport Global. Your line is open..

Hey, Matt..

Thanks.

How are you?.

Very good..

So maybe hit the commercial market first, I was encouraged to hear that you're encouraged about the back half of this year, but are you seeing anything any concerns from commercial customers, hearing any concern from commercial customers about uncertainty around tax policy, could that maybe extend this period of softness a little bit longer than you had expected..

I mean that one would be tough for me to predict. I have not heard that. I haven’t heard that from many of my people. I mean if you look at our commercial performance, we can clearly lay out as we talk internally of course, we do our checks that we have.

There is no doubt the pull forward last year with the milder weather impacted us as we went through the year and towards the end of the year I think we even commented that on our fourth quarter call.

Right and that was primarily in the Northeast, upper Midwest and then you add some of the large jobs didn't repeat in the Southeast even though they are reasonable quarter and the heavy, heavy rains Southwest that I’ll just add it up for that complete commercial negative organic growth.

None of us here are concerned at all, but we've seen variations in the past, we know what our backlog is. This is a product line like most of ours that are negotiated and sales are driven at the local level. We have a fantastic commercial team and I'm sure we're going to see a turnaround.

And then of course, in the back half the comps are going to ease, right as we get through some of the tougher comps we've seen for last year especially in California where they're up 40% or so in total. Commercial is a little less, but still extremely robust for Q1. So I haven't heard anything macro based at all.

I think given that 80% of the commercial market is reroof. We're going to see roofs fail and if anything they spend more time and effort on the inspections and the replacement activity and we still have the same outlook for the back half, which means we're going to see robust activity in the back half. That's our view right now..

Hey, Matt. This is Joe. The piece I would add as Paul said, when you really dissect our commercial business, it was in the few specific areas that Paul mentioned, it wasn't broad, it was in a few highlighted areas.

And what really makes this optimistic as Paul talked about, take the one big example about California right on the West Coast where that was one of the areas that drove one of the larger amounts of our decrease in commercial business in the first quarter.

And when we think about the weather and the rain that occur there, we're very optimistic as we look at the second half of the year and that demand coming back even beyond what we've seen before. So that gives us a lot of optimism there especially that's one example, but that's why we're optimistic..

And I think the set up on that is the opposite, right alluded to right on the pull forward from the last year, I mean even though it impacts us in the quarter, we're seeing a little more winter, right it's normal compared to last year which and/or the rain on California, which is actually normalized as they typically see rain late in the year, not for the last six or seven or so years, but that should bode well as we go through the years as Joe said..

Okay. Thank you, guys..

Thank you..

Thank you. Our next question comes from Ryan Merkel with William Blair. Your line is open..

Thanks. First, I wanted to start with gross margin. I was hoping for a little help modeling the second quarter, just given how strong the first quarter was.

And last year gross margin was flat sequentially in the second quarter, but just tell me what's different about this year and what's the same about this year?.

Sure. This is Joe. I can give you a few kind of highlights on it. Traditionally, second quarter sequentially is always a little bit lower in margins than first quarter primarily just the seasonality soft demand during that period causes that.

So if you go to this quarter 25.1% margins that we had right, but as I mentioned, we had some lift in the quarter from some more unusual items, more timing related, threw ups of vendor incentives and others, right. If you take that out and then try to get to a more normalized kind of rate.

I think you'll see our probably lowest rate of the year will be in the second quarter and it will probably start to come back up in the third and the fourth quarter, still being where we had previously described. We've talked about it 24.5%, 24.6% range.

I think you'll see a dip down in the second quarter, and then come back in the third and fourth quarter to that 24.6% full-year range..

In the second half you're thinking that will be down year-over-year a little bit and that's just because non-res the mix there starts to go the other way and competitive pressures you're expecting that all year is that the commentary?.

A little bit – you're right because the last year, in the second half of the year, we were I think 25.1% for the whole second half of the year, right. So yes, I would expect this second half of the year to be a little bit less than that as well too and further reasons that you mentioned.

Mix will be a little bit probably more commercial to it and I think you're absolutely right on..

Okay, and then just lastly on SG&A.

It continues to be a little heavier than I was thinking and I can see from guidance that you're assuming better SG&A leverage in the second half, but beyond accelerating sales growth, is there anything else that you're doing that we can think about that should give us some confidence there?.

Yes, sure.

One of things I'll mention and I alluded to it in the call, we have some items that in this quarter were more timing or unusual in nature that we don't really see – I’d want to use as a recurring or items to extrapolate going forward, think as an example, one of the items, we had a significant amount of fleet repair and maintenance costs that occurred right, much more so than in the prior year.

And a lot of that’s timing of when those come into play and when we get them done as well too. We're also spending on new CapEx as well too, so that and the new trucks will hopefully reduce some of that in future.

We also had a larger one-time adjustment related to some insurance related costs, which really more of a true up of our accruals than anything else, then we had the timing, we had the some meeting, sales meeting that took place that really we’re in the first quarter December period, that last year we’re in the first period, so timing wise will wash out.

All those, it doesn't mean that $5 million will come out, but you won't see nearly that significant of an increase or that $5 million pace through in the remaining three quarters, that’s the other thing in some of the unusual items..

Yes, Ryan, to get the broader aspect to your question was if every branch, every Regional Manager, every Executive Vice President is tasked with a cost budget and a cost out budget by element within that P&L, right and they have to find actions to get out all those pieces in the absence or in the gain or volume, so we're continually searching that to be as productive as we can.

I think Joe already alluded to that, very difficult to react to a sales drop in plan where you see a little bit inventory going up that's where you saw turns slightly down and almost flat on an existing basis.

I think cost get impacted also, but as we look at it through the course of the year, right because we're balancing that with a readiness to serve which we absolutely have to have will be fine. We believe we have a very good process for controlling costs and reducing costs..

Okay, helpful. Thank you..

Thanks Ryan..

Thank you. Our next question comes from Al Kaschalk with Wedbush Securities. Your line is open..

Good afternoon, guys..

Hi, Al..

Hi, Al..

I appreciate that you don't want to talk so much about pricing, but I’m wondering if you could provide a little bit of color I guess, but 80% of the commercial demand is reroof and you posted I think in this quarter a little bit lighter pricing not sure how that was relative to your expectations.

But why shouldn't we see a little bit better pricing or expect a little bit better pricing if we're seeing the shift or push out in demand for volume for lake of better word?.

Yes. Our price in Q4 sequentially was flattish year-over-year down the same 2%, right and it is purely a function of the competitive nature of every region and that's been there way for a number of quarters if you go back.

I think for us, as we talk about the balance of the year, we've talked about no impact related to pricing, which implies we're going to see improvement as we go through the year because of that firming. So I think our thoughts are very similar years to get to an overall pricing scenario of flattish.

Now within that of course comes the other aspect of the balance of cost being lower also, right which at least buffets a bit of some of the negative price we might be seeing, and so time will tell on that.

As we believe the markets are going to firm because we're seeing a little more harsher winter meaning going to be more pent up et cetera as we're seeing. It could imply that we see some improvement, but again we already have no price built in positive or negative into our model and then we've offset it was either cost out or some other elements..

That's a great question Al and it’s a difficult one to respond to at this point.

Again, as we see more about how demand shapes up as we go into the spring and it gives us a better picture demands, it’s a biggest driver, but to tell you we're optimistic as the January numbers came in better than we had expected being at where they were last year given that 20% year-over-year increase last year is positive, so that’s cautiously optimistic on that one..

Okay, so just to make sure, I hear you if you're modeling flat pricing, one of the things in your pocket or you continue to as you grind on the cost side of things.

The cost efficiencies, cost improvements scale from larger procurement those could help you in terms of good guys in terms of that topline number there?.

You mean if we were to continue to get additional cost improvements as we get larger through acquisitions and scale and get better buying improvements that way will that help us to drive more in the margin piece, is that your question?.

Yes, if pricing does – was that your ability to meet your goal, it can be near-term aided by just cost efficiencies?.

Again historically over the last four or five, probably you're right, we determine that if price is down 1.5 cost has been down to 7, flattish down to 2, down to 2.8 on the cost side. Yes, so we are proving that we can do that.

Our expectation would be going forward that price would – and that's why I said on previous calls that of course, we're always mindful of this and we work very hard and we want to see flattish or positive price in the absence of that because of the markets as we want to continue to drive sales, right because it drives the gross margin dollars, we continue to work on the material side, so yes.

What you're saying is correct. We believe we can do it because we've done it in the past and make sure we can do it..

Great, thanks for the color guys. Good luck..

Thank you, Al..

Thanks, Al..

Thank you. Our next question comes from Kathryn Thompson with Thompson Research. Your line is open..

Hi. Thank you for taking my question today. There's a lot of focus on pricing and price increases in the market, but one thing just on the margin side. Last year, obviously you got a boost from volume, but you also got a boost to gross margins from better negotiated pricing particularly boost RSG.

So we think that there's going to burn an inflationary environment and we can model that, but the area where there's a gap is that better negotiated pricing with manufacturers.

How should we think about framing that benefit as we head into fiscal 2017, so in other words where much of the gains for instance from RSG realized last fiscal year and with the acquisitions that were made later in 2016.

Should we see a benefit from better negotiated pricing among other factors as we go into 2017?.

That's a complicated question. I think we have as I said we've shown a great history have been able to think material cost out as we've seen pressure on the cost side – on the price side.

Trying to model the cause in effect of what price is going to do than what material costs are going to is very difficult, I mean that's why revert back to we think we’ll be price neutral for the year. I think typically and inflationary environments. We do see that cost go up.

So even there's all the relative degrees of how well that we negotiate with in that how big us our scale within that vendor even as we’re seeing let’s a price is passed down us. It's very difficult to answer that model of what would happen if we raise prices and you were able to get two points in price, what would happen to the cost base.

We believe inherently because of our size Kathryn that we're going to be able to negotiate very effectively. Our vendors like to do business with us because we pour a lot of volume through for them with very reliable.

Joe, I don’t know if you have anything to add?.

Other two pieces I would add is one, yes, you're correct on the synergies part. Most of the synergies on the buying power, they start to run themselves out around now, because last year at about this time was – when all of the contracts with RSG kind of kicked into gear.

So we really started to see all the benefits to procurement already in the numbers. So you're right that piece of it is worked its way through. The other part that I would add on is, we're not done yet in terms of our acquisitions and our growth strategy part. As Paul mentioned, our pipeline still is full.

We've done the three so far this year already and as he said we've got a broad pipeline with others. So expect us to continue to grow, continue to scale up and that will provide us the opportunity continue to have discussions with of them as around their size and scale and taking as much opportunity as we possibly can..

Great. Thank you so much..

Thank you, Kathryn..

Thank you. Our next question comes from Philip Ng with Jefferies. Your line is open..

Hey, guys. Good to see inventory down there in the quarter, but just curious if you're seeing any winner by the marketplace.

Do you have a view on inventory levels in the channel?.

Very hard for me to comment but what the channel looks like I mean we feel very good about where we're at. We’re always driving of course for improvement in terms et cetera. That's just the nature of trying to generate cash. But as we both Joe and I talked about earlier with the slight drop off we saw in December.

We obviously held more inventories through the end of quarter, even with that out of existing basis turns with flat, so that's good news. There is really no talk of a winter by at least coming through my years and my folks, their contacts in the market.

I think my views the manufacturers are going to be as prudent as they have been in the past couple of years to maintain a logical apply for the winter and yes, I feel good.

It's impossible for me to comment on my competitors inventory levels and/or the industry shipments of squares of shingles because there's so much variability quarter-to-quarter, and it's difficult to track anything from a one quarter basis even two..

Got it. That's really helpful. Obviously you have a price increase in the marketplace, in part due to these broad-based inflation in manufactures have one as well. Our demand factor seeing any attraction in historically I guess for you guys more importantly.

Inflation is generally positive for your bottom line is the up the case?.

Yes, inflation is typically been a positive for us right. And the price increases that have been announced and either put in the market in January or of course that will be put in March. It's way too early to tell about any impact. We're still in the lowest quarter for everybody in the industry.

Jan, Feb, March, so we will see really anything until April..

Okay..

I mean the good news is the view of year-over-year shingle shipments, the view as I alluded to there's a view that it could be flat, storm volume from 2016 at least anticipated to be down in 2017, but reroof up new construction slightly up, which gives us to a flat square count year-over-year that that's a view that many of the manufacturers all and that's right you my information from.

We'll just have to see how that there is out so far, if we look at some of the regions that is very well in our Q1 that weren’t impacted by this crazy weather. I mean that’s bearing out and then in January, we saw again more strength where a number of our reported regions are shipping above.

We haven't gotten the pure breakout of res commercial complementary for January, but I think we've made progress in all three firms..

Okay, very helpful. And just one last one for me, sorry if I missed this in the call. Did you guys give any breakout in terms of the sales contribution or impact of mix on margins for some of your recent acquisitions you've done? Thanks and good luck in the quarter..

No, we didn't get specifically to the impact on margins of the mix of the acquisitions, but if you take all three of them, the two of the three of them were complimentary products for the most part and the larger one, which is on the West Coast was – you're talking about the new acquisitions, which is what I'm referring to is the three new….

That’s right, the new ones that you’ve done recently..

Correct, so BJ Supply and Eco will really be more complementary in product and then ABR in the West Coast would be primarily all residential..

Okay..

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

Good afternoon, Paul, Joe.

How are you?.

Hi, Sam. Great.

How are you?.

Couple real quick clarification question, first off, Joe, at least by my math, acquired SG&A in the quarter was up – was about $12.8 million, $13 million or so on $47 million of acquired sales. If I'm right that seems a little high as a percent of sales and I was curious as to the driver of that.

And then my follow-up question would be resi pricing down was a 1.6% a little bit worse than what your costs were, I think that's a reversal of a recent trend just curious as to whether that was driven by the December, and our desire to move volume and what was happening there?.

Yes. I'll answer the first on the resi piece. Sam that's really just the timing of being so close into the quarter and how things fell. You really didn't have anything necessarily to do with us driving more volume. Of course, our two step business has lower commercial volumes, if that wouldn't necessarily been in fact the pricing side.

So that is more just timing and has nothing to do with any other purposeful moves on our part..

In regards to the operating expenses on the acquisitions, your math was appropriate right, the acquisition operating expenses in the quarter was roughly $13 million on that acquired revenue of $47 million in total.

Keep in mind that hit a lot of one-time cost or transaction cost associated with them, legal cost also some of the first amortization cost as well. That drove a little bit higher. Shorter period, some of those are more fixed cost early on, that's a [trouble with the higher], nothing too unusual though..

Yes. For them Sam, nothing at all unusual about their business. Their ABR was almost 100% residential. The other two are complimentary and the span on complementary gross margin cost in OI which is very similar across all three of them..

And looking at the detail right now that amortization part, it was almost six points of that. So if you do the math, you are roughly around 27%, 28% OpEx on those acquired loans, right, of that 28%, you had almost 6%, which is amortization, so a big number to it. But keep in mind those did have a really good gross margin as well too.

So we’ve got to look at both of those pieces..

Got it. Thank you very much gentlemen..

Thanks, Sam..

Thank you. Our next question comes from David Manthey with Baird. Your line is open..

Yes. Good evening, guys..

Good evening..

What percentage of second fiscal quarter sales does January typically represent?.

Traditional quarter January sales out of the quarter are not a – they are clearly not a third of it, you're right.

And if you look at the data, why don’t you let us try to find the exact data on that one? Did you have a second question, while we try to find that one?.

Sure. Joe, you mentioned a number of benefits to the gross margin and a few drags on SG&A.

Could you discuss the magnitude of those usual items in aggregate if you want, but just in terms of basis points or millions of dollars just to have an idea of what the moving parts are there?.

Sure. You bet. On the gross margin side it was between 30 basis points and 50 basis points. It really more one-time or timing issues around some of these lender gates in our accruals form. So 30 basis points to 50 basis points, that's the amount that if you think about it.

I wouldn’t expect those to recur going forward, so when we talked about in the question we had earlier about lower margins in the second quarter, that's one of the elements, which will drive margins lower in the second quarter, in addition to the traditional seasonality to it. And the second part of your question in regards to the operating expenses.

There were somewhere around $5 million as I mentioned of more timing or unusual costs that they won't fully occurred to that level maybe 50% to 75% of them won't reoccur just because of the spread and the timing of when they happened.

So when I going back your initial question on the expenses by quarter – for the quarter, it looks like roughly around 30% of the sales are from January..

Okay. Great. Thanks a lot guys..

You bet..

Thanks, Dave. End of Q&A.

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

Sure. Just a few highlights, as we believe as I said we had a very, very strong opening quarter to the year. The $1 billion sales was a record for first quarter as I mentioned in our third consecutive quarter and over $1 billion in sales. Residential sales on a volume base grew 8% and represents our 11 consecutive quarter for growth.

As Joe talked through gross margin as a percent of sales, our pace in the prior year are close to 120 basis points and as our highest first quarter margin percent since our IPO. We continue to acquire great businesses adding three companies and nine branch locations since the beginning of the year.

As Joe talked about, our net debt leverage decreased to 3 times in a year has moved down from 4.3 times. We are on track to hit our full-year synergy target of $55 million and as always we're driving to attempt to add more there and we opened up one Greenfield in the quarter, two to come very soon with our plan of five to 10 for the current year.

I'd like to thank our approximately 5,000 employees for their hard work and dedication and made this possible. The Beacon team continues to work closely with our suppliers to serve the needs of our tens of thousands of Beacon customers on a daily basis and I also want to thank our customers and shareholders for their continued loyalty.

Thank you and have a great evening..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day..