Paul M. Isabella - Beacon Roofing Supply, Inc. Joseph M. Nowicki - Beacon Roofing Supply, Inc..

Garik S. Shmois - Longbow Research LLC Philip Ng - Jefferies LLC Ryan J. Merkel - William Blair & Co. LLC Keith Hughes - SunTrust Robinson Humphrey, Inc. Kathryn Ingram Thompson - Thompson Research Group LLC Jay McCanless - Wedbush Securities, Inc. David J. Manthey - Robert W. Baird & Co., Inc.

Michael Jason Rehaut - JPMorgan Securities LLC Michael Eisen - RBC Capital Markets LLC Truman Patterson - Wells Fargo Securities LLC Kenneth R. Zener - KeyBanc Capital Markets, Inc. Blake Hirschman - Stephens, Inc. Matt McCall - Seaport Global Securities LLC.

Good afternoon, ladies and gentlemen, and welcome to Beacon Roofing Supply's First Quarter 2018 Conference Call. My name is Andrew and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session toward the end of this conference.

At that time, I will give you instructions on how to ask a question. 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 performance.

Forward-looking statements are only predictions and are subject to a number of risk 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 8, 2018, 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 investor's section of its website under Events and Presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr.

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

Thank you. Good afternoon, and welcome to our first quarter 2018 earnings call. We will be conducting our call slightly differently today. Unfortunately, I have come down with a bad case and a flu, so Joe will handle all of our prepared remarks and the Q&As.

I apologize for any inconvenience, but I came down with this during our Annual Managers Meeting last week, which was a great event with more than 800 Beacon and Allied employees, and 300 plus vendor representatives in attendance. Lots of good things happening and a great way to bring the Allied team into our organization.

As you will see, we had a very strong quarter and a great start to 2018. With that, I'm going to turn the call over to Joe..

Thanks, Paul, and good afternoon, everyone. We're very excited about our strong start to 2018 and anticipate a third consecutive year of record sales, adjusted EBITDA and adjusted EPS. Total sales growth during the first quarter was a very strong 12%, with an organic growth rate of 8.3%.

First quarter adjusted EPS was $0.68, levels materially above consensus estimates. We certainly benefit from U.S. tax reform during the quarter, but we also produced strong revenue growth across each of our three segments and generated solid operating cost leverage during the period.

Adjusted EBITDA was in line with consensus forecasts, but a meaningfully lower tax rate and lower interest expense supported the EPS upside.

Headline adjusted EPS moved from $0.56 last year to $0.68 this year, a 20% year-to-year increase, plus after adjusting for the $0.08 share count dilution tied to our September secondary offering, our adjusted EPS would have been $0.75 to $0.76 representing a more significant 34% year-to-year improvement.

Now, to provide some color on our first quarter sales, our Q1 sales growth represents back to back existing market growth rates above 8% during the September and the December quarters. And our topline performance exceeded our internal and Street expectations. As with Q4, our monthly sales growth rate accelerated over the course of the first quarter.

October daily sales increased 4.3%, November up 5.5%, and December jumps 17%. During the strong December month, it's also worth mentioning that the final one to two-week sales were negatively impacted across much of the country by the extreme cold temperatures. To start out our Q2, our January organic sales were flat to the prior year.

Many of our regions were negatively impacted by the unusually cold temperatures and winter weather. And while the year-ago comparisons may not appear particularly difficult, the prior 2 years were up 19.5% and 13.6% respectively.

We're not at all complaining about the cold and snow, as you know we've advocated a need for colder weather and heavier snowfall during the winters as a driver of stronger summer with fair demand.

While the weather concurred our second quarter, we believe that's a full year 2018 that winter weather conditions should be a positive for Beacon and for the overall roofing industry demand.

We estimate the incremental demand contributions from hurricanes Harvey and Irma at approximately $40 million during the period, topping our previous expectations, about 60% of the contribution is from Florida and the remainder in Texas.

The pace of demand from these two events is continued in January, and we anticipate the impacts continuing longer than previously thought. Investors should note that storms remain an important part of our business.

However, due to our scale and breadth of coverage across North America, there is no more balance nationwide from these events than in the past.

While we experienced a good increase in revenue from hurricane activity during the first quarter, the year-ago period saw benefits from Hurricane Matthew in a range of local and regional hail demands that did not carry over into the current year. Next I'd like to speak about our sales by line of business.

Residential roofing produced strong organic daily sales growth of 9.6%. The consistency of this segment's growth is particularly impressive with residential roofing seeing 14 straight quarters with growth rates above 5%. Complementary products represented our strongest performing category with an 11.7% increase.

This segment is benefiting from higher levels of price inflation, a strong macro economic backdrop for both new construction, home improvement, as well as specific Beacon initiatives to drive growth.

We're having great success operating our complementary products businesses both standalone operations, and through cross-selling and integrating these products within legacy Beacon branches.

Platform investments that we've made within the waterproofing and insulation areas have been a highly successful part of Beacon, and all this bodes well with our recent addition of the Allied interiors business. Our non-residential roofing category produced a 4.3% increase, following a mid to high single-digit increase in the September quarter.

We're very pleased by the return to positive growth within this business for the second quarter in a row. Next I'll move on to some geographic highlights. We saw five of our seven regions post positive growth during the quarter, with the two declining regions each down only 1%. Our strongest two regions were the west up 25%, and the southeast up 24%.

The west region benefited from easy year ago comparisons as heavy rainfall levels disrupted activity in California last year. In addition, this region saw tremendous complementary product growth in part the result of working closely with Lowry's, our acquisition from just this last summer to build out our waterproofing sales in that region.

The west region has now posted two consecutive quarters of 20%-plus growth. The southeast market delivered 24% growth, while seeing each of its three product categories producing double-digit gains. As mentioned earlier, the Florida market was particularly strong as that state benefited from Hurricane Irma demand.

Now, let's move on to gross margins as noted on slide four. Existing market gross margins came in at 23.9% compared to 25.1% in the year-ago period. There were several mix and timing-related impacts that caused the decrease. I'll spend a few minutes here to walk through them.

First, as we talked about last year, the prior year Q1 benefited by approximately 30 basis points to 50 basis points tied to true-up for annual vendor incentives, our annual volume gates. In the current year, the incentive true-ups just occurred earlier as we hit the volume gates much sooner in the calendar year.

So the timing of the benefit was slightly different this year. Second, our gross margins also experienced an unfavorable mix shift geographically. As we have discussed, different regions have different margin profiles. Our sales growth was clearly a positive in terms of GM dollars, but the mix geographically did have an impact on our GM rate.

Third, there were also some timing-related disconnects between vendor fall cost increases and our price increases to customers. We saw this particularly within the complementary products category, which experienced significant price increases following the hurricanes.

It's always difficult during the slower winter season to pass through price increases when volumes are at some of the lowest levels. But given the inflationary raw material trends, strong product demand and a favorable economy, we remain quite optimistic about spring pricing opportunities.

On the positive side, we're very excited to report that our overall pricing increased 50 basis points to 75 basis points during the first quarter. We realized a 400 basis point to 450 basis point increase in our complementary products category, which drove the bulk of the quarterly gain.

Commercial roofing prices increased approximately 30 basis points, and residential roofing prices declined slightly, around 40 basis points. We continue to see positive pricing trends in markets experiencing strong levels of demand, while other softer demand regions saw more challenging prices.

Our strongest price gains were realized on the West Coast, Florida and the Mountain regions. Overall product costs increased 175 basis points to 200 basis points with all categories experiencing cost inflation.

Complementary saw cost of 450 basis points to 500 basis points, while both roofing categories saw product costs up approximately 40 basis points. Now, let's move on to operating expenses.

Before going any further, I want to remind investors that we implemented a change to our supplemental disclosures involving adjusted operating expense and adjusted EPS.

With today's release and going forward, our supplemental adjusted EPS disclosures reflect add-backs for all intangible amortization expenses, which is different than the prior years, our non-recurring acquisition costs, and certain interest and other financing costs.

The comparable year-ago numbers provided in our supplemental slides are also adjusted to reflect this new methodology. In addition, during the current quarter, we've excluded the net positive one-time impact from tax reforms. That's an item that I'll discuss in more detail later in my prepared remarks.

Total operating expenses were $220.7 million, or 19.7% of sales. Excluding acquisition costs of $23.8 million, adjusted operating costs was $196.9 million or 17.5% of sales. This compares favorably to the year-ago first quarter with operating expenses of $182 million or 18.2% of sales, 70 basis points of improvement, very strong operating leverage.

And this is even prior to any of the Allied synergy impacts. There's a lot to look forward to in operating expense leverage going forward. The $23.8 million of acquisition costs consists of $18.2 million of amortization for the acquired intangibles, and $5.6 million of non-recurring charges associated with the Allied acquisition.

As noted on slide five, existing market operating expenses were $210.6 million for the quarter. When adjusting for the outlying non-recurring charges our adjusted existing market operating costs were $188.5 million or 17.4% of sales, also representing a strong improvement of 80 basis points over the prior year.

Interest expense and other financing costs increased from $13.6 million to $22.6 million in the current period. Adjusted for excluded items would result in a decrease from $12 million in the year-ago quarter to $10.3 million in the current quarter.

Current quarter adjusted interest expense excludes the interest tied to our new high-yield bond offering for the Allied transaction. As you know, we closed on those bonds early to take advantage of some outstanding interest rates, in fact, 4.875%, very outstanding.

The interest cost for this early period will all be funded by CRH post closing to start our working capital true-up as outlined in the sales agreement. Current period interest expense also benefited from a reduction in our debt tied to our September secondary offering. We use the proceeds to pay down our debt and therefore lower our interest expense.

Now, I'd like to spend some time talking about our effective tax rate, one-time tax items, and our tax guidance going forward following the recent U.S. tax reform. Please refer to slide 6 in our supplemental slides. The recent passage of federal tax reform had a significant favorable impact on our fiscal first quarter.

First I'll talk about the two non-recurring impacts, the largest of which is the revaluation of our deferred tax assets and liabilities, which provided a $0.68 benefit to our earnings. This is primarily from our deferred tax liabilities both as a result of our accelerated amortization and depreciation taken for tax purposes.

The second non-recurring item is a much smaller one-penny negative impact from the repatriation tax of foreign earnings and profits. On a cumulative basis, this amounts to $0.67 net benefit to our GAAP earnings this quarter, a great benefit from the tax law change, but non-cash in nature and certainly not recurring.

As a result, we thought it was appropriate to remove it from our adjusted EPS calculations. On a more permanent basis, we estimate that the changes to the U.S. federal rate will reduce our long-term effective tax rate from 38% to 39%, down to 26% to 27% going forward.

However, our fiscal year 2018 has one quarter under the old rate structure and three quarters under these new lower rates. On a blended basis, which is what we require to use for each quarter of this year, just works out an average effective rate of approximately 30% for 2018.

During the first quarter, this rate was further reduced 25.3% as we adopted a new FASB accounting standard involving the treatment of stock-based compensation, which provides an additional tax benefit when stock-based compensation is exercised. Previously, it was recorded directly to the balance sheet.

This caused a favorable $2 million benefit to our tax line. While this could continue to have an impact on our effective rates in future quarters, we expect it to be much smaller. It's also difficult to precisely predict quarter-to-quarter. In summary, for adjusted Q1 EPS, we benefited by $0.09 from U.S.

tax reform, an additional $0.03 attributable to the new FASB standard. Now, I'm going to shift gears for a couple of minutes to talk about our important acquisition of Allied.

We officially closed our acquisition of Allied on January 2, as Allied's former parents, a public company, it has not yet disclosed December's quarterly results, we'll not be able to provide an update on their recent quarterly performance prior to our ownership.

However, since closing the transaction, we have been moving rapidly forward on the integration. We're following a proven path on this integration and many of our team were heavily involved in the large acquisition of RSG just two years ago.

Our beliefs going into the transaction have proven to be accurate as we are now seeing firsthand how similar the cultures are between Beacon and Allied. This is creating an excellent working relationship between our two teams.

We're currently working through the combination of our two sales organizations and remain intensely focused on our existing customers and maintaining or growing acquisitions with them throughout the process.

We also remain firmly committed to achieving $110 million in cost synergies related from the combination and the early signs are very positive across all areas of savings. As with the RSG targets, the three main components of our synergies include branch consolidations, SG&A related savings and procurement benefits.

In addition, we also have optimization targets representing a fourth component to our synergies. Next, I want to spend some time talking about our cash flows and balance sheet. As noted on slide eight, first quarter operating cash flow was down $40 million. This is not a surprising sign to us given our incredibly strong September quarter.

Q1 results were primarily impacted by increases in inventory and accounts payable. The inventory was primarily due to acquisitions and in locations where we are serving storm volumes as you would expect.

The AP increase is a timing-related issue tied directly to the very high AP we had at the end of September quarter coupled with our seasonally lower product purchases in the first quarter. As a reminder in fiscal 2017, cash flow benefited from a $229 million boost related accounts payable, and we anticipated giving some of this back in 2018.

Additionally, we also measure and track our performance in key areas, such as inventory, AR and AP, plus overall balance sheet metrics around working capital as a percentage of sales. All of these are shown on slide 7. Total inventory turns were a strong 4.8 times in the quarter, in line with last year's levels.

Winter weather negatively impacted our sales the last one to two weeks of December. Otherwise we would have expected inventory turns to look even better. Inventory turnover has been a key metric for us, and we've shown solid improvement during the past several years, and we expect that to continue as we integrate Allied.

Our accounts receivable day sales outstanding was essentially unchanged versus the comparable period last year coming in at 30.8 days versus 30.7 in the comparable year-ago quarter. Our headline working capital increased to $2.14 billion at quarter end from $683 million in the comparable quarter a year ago.

However, this year's current assets included a $1.3 billion in restricted cash from our bond offering that was waiting for the closing of the Allied transaction on January 2. Excluding this amount, adjusted working capital as a percentage of revenue decreased year-to-year from 16.8% to 16.4%.

The teams continue to do an excellent job on managing our working capital. And as we get further into the Allied integration, we should see this continue to improve. First quarter capital expenditures were $7.4 million compared to $7.3 million in the prior year.

We produced favorable CapEx performance in each of the past 2 years, and we anticipate this lower rate of spending will continue into 2018. Similarly, when we purchased RSG, we should see a rationalization of our fleet across the branches.

Our debt leverage ratio improved to 1.9 times in the quarter as compared to the prior year, flat sequentially to the prior quarter.

As a reminder, leverage reached 4.3 times immediately following our announced acquisition of RSG nine quarters ago, while we anticipate a similar jump now that Allied has closed just after quarter end, we expect strong cash flow, coupled with debt reduction, with similarly lower leverage over a 2-year to 3-year period.

Now turning to slide nine, I want to provide a bit more detail regarding our updated 2018 outlook. We're keeping our revenue view for 2018 unchanged at this point. We continue to anticipate a range of $6.6 billion to $6.9 billion, a big range.

With that said, we do believe there is a favorable bias to annual revenues given our strong Q1 results, favorable recent pricing trends, and a likely stronger hurricane demand contribution than we have earlier anticipated.

As you know, though, it's very early in our fiscal year, so winter weather and storms can create volatility and we prefer to be more conservative at this point of the year with our formal expectations. As the year progresses, we'll look to narrow our guidance ranges in future quarters.

Our adjusted EBITDA view has been kept unchanged for the year at $560 million to $600 million, representing margins of approximately 8.5% to 8.7%. While there will be quarter-to-quarter fluctuations in our performance, we remain confident in our full-year expectations.

Importantly, we remain a 100% confident and committed to our existing $110 million run rate synergy targets related to the Allied combination across all areas of savings. Lastly, our adjusted EPS has been increased to a range of $3.40 to $3.70.

This new range is $0.45 above our earlier outlook, primarily reflecting the effects of tax reform, coupled with our strong Q1 results. We remain very positive on our outlook over the next several years, and certainly our combination with Allied represents an important step in reaching our long-term goals.

We'll continue to pursue further opportunities for growth both organically and by acquisition within the roofing and broader building materials distribution industries as well.

During 2018, we will remain intensely focused on combining our two great companies, while also ensuring a tight focus on running our base business and serving our valued customers. With that I'd like to turn the call over to the operator and open things up for the Q&A portion of the call..

And our first question comes from the line of Garik Shmois with Longbow Research. Your line is now open..

Hi, thank you. Congratulations on the quarter. Just wanted to ask about gross margins. I think previously coming out of 4Q, you had guided to full-year gross margins of I think $25.2 million to $25.5 million, if I'm not mistaken.

And I'm not seeing that today recognizing that mix was a headwind in Q1 and assuming the store markets will remain strong moving forward, is it fair to assume that mix will potentially impact gross margins through the balance of the year, and how should we just think about the range that you had provided previously?.

Sure thing. I'll give you a quick view on that one. If you look at our margins as I went through it, most of it was really all timing related, Garik. So our view on it is we're still in the same position where we were previously in regards to the gross margin, and most importantly the operating income range that we put there as well, too.

Many of those issues were kind of timing related. And based on, as I mentioned, what we're seeing around demand, what we're seeing around some of the current pricing, what we're seeing just overall in regards to the market conditions, we feel pretty positive about the margin number and our ability to still get there.

It's still early in the year, a lot of opportunity. So we're sticking with that same range as before..

Thank you..

And our next question comes from the line of Phil Ng with Jefferies. Your line is now open..

Hey, guys. Curious to get your thoughts on 2Q (26:07) trends in light of just colder weather, in general, and your thoughts about the full year did sound like you were a little more upbeat about demand, particularly on the hurricane side. Is that on just hurricanes that have happened, or are you expecting a bigger storm activity this year? Thanks..

Hey, Phil. Just to give you a view on the storm piece, I know our comments were really in regards to the two hurricanes that we already saw and the storms that were lapping over a bit from the prior year. In our initial view on the storms, I think last quarter we talked around $100 million estimate as the full-year impact from those two hurricanes.

Just based on what we've seen this quarter so far and with the teams are telling us, it probably views like that will be a little higher. Our estimate is now probably closer to $120 million. We'll see from those storms that will impact us in this year. And we think they'll also go through all four quarters of the year as well, too..

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

Hey, thanks. Good afternoon..

Hey, Ryan..

Hey, Ryan.

How are you doing?.

So I want to ask about gross margin.

Can you just talk about the pieces of the year-over-year decline, the 120 basis points for core? How much was the timing of rebates? How much was sort of geographic mix, and then how much was timing price cost?.

Yeah, a little of all of the above, Ryan. I'll give you a few of the pieces to it in some level of depth. And you hit on some of the items. But as with anything, I have a list of about 10 items that went through it as well, too. Clearly the timing of the vendor incentive gates, as you know, was an impact to it.

That could be anywhere, our range is probably between 15 basis points and 30 basis points we might have seen from the vendor incentive gates that occurred. Some of the geographic, product mix elements to it, that could be another 30 basis points to 40 basis points. We had other issues around just the mix of business as well, too.

I think as you saw, we had little bit more two-step (28:10) or direct business which cost another 5 basis points to 10 basis points in there as well, too. We also had some accounting changes as well too where some items that we previously put within revenues around our service revenues, we now put through the other income line as well too.

And that also was a 10% to 20% impact on it. The rest, just in regards to the timing of the price increases going through, that probably was somewhere around 50 basis points or in that particular range. I think that gets you the big pieces to it.

I probably have another six other kind of puts and takes to it, but that probably gives you the key items to it. Again, if you look through it from our view, a lot of it was really all timing. The gross margin rate in the current quarter really doesn't concern us.

We feel quite positive going forward in the rest of the year, especially when you put on top of it, this quarter we'll start to have the Allied business combined with ours, driving great margins you saw it in the pro forma work we previously established.

And of course, we're going to start to see some of the synergies that will roll through as well too, and we'll see that in the second quarter. So all those will help us substantially going forward in the business..

Yeah, it's worth reminding everyone that we will have and we have had fluctuations from quarter-to-quarter for a lot of reasons. Joe just went through his detailed list. And that's why we pull everybody back to the full year as we focus on those numbers as we work through every quarter. So we feel very confident about the full year..

And if I could just ask a follow up, just on resi price cost, it sounds like you're pretty optimistic for the spring price increases.

So do you think that you can neutralize that? Is that what's sort of baked into your guidance?.

Yeah, we do. We are pretty optimistic around the spring one. One of the pieces we've always talked about, at a high level is, you need demand, you need raw material, input price increases inflation. So we've got a good environment in both of those two from strong demand, strong input prices to it.

So yes, we're feeling pretty optimistic while getting into the spring and being able to neutralize that impact..

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

Thank you. Just to be clear on the hit on timing of price increases affecting the gross margin.

Is that more of a residential roofing issue or felt more in the complementary products segment?.

It was some of both. We saw it substantially – so the question had to do with the timing comment that was made about the price increases from the manufacturers versus what we were able to pass along. We saw it in actually all three areas, but most prominently we saw it on the complementary products and on the residential roofing products.

Those are the two areas. Complementary had a big impact because it was a large increase 400 basis points, 450 basis points. So it was a large cost increase and price increase that went through with it. So the timing on that did have an impact. Residential, not as big of increases to it but bigger proportion of our business..

Thank you..

Did that help, Keith?.

Yes. Thank you..

Yeah. Keith, a lot of that on the complementary side had to do with lumber just related to the hurricane volume we saw down south, where they were passing increases through. That's the biggest piece of that on the complementary side..

And our next question comes from the line of Kathryn Thompson with Thompson Research. Your line is now open..

Hi. Thank you for taking my questions today. My questions were more focused around Allied. Just want to confirm that you're still on track for $30 million to $40 million in synergies to be realized in fiscal 2018.

And then just more stepping back, looking more strategically, with Allied being rolled into the Beacon network and also integrating with RSG, what are the top operational changes that we should expect I think going forward, and what are the top opportunities for potential synergies, not just looking at Beacon and Allied, but Allied with the RSG network? Thank you..

Okay. I think I got the six parts to that question. Let me see if I can kind of work through it for you..

It's all Allied..

Good questions. (32:33) You got me choking, Kathryn..

Questions Allied (32:34). First, your top-line question around just confirming our synergies that we would expect to see in this year, $30 million to $40 million range, yeah, absolutely still kind of intact.

If anything, as I hope you heard through my call, the tone of my optimism and Paul's through his coughing, his optimism as well too, and the work we've done is pretty strong on all the synergies. So yeah, that is still the range that we have, $30 million to $40 million, feel very confident of it within the current year.

Second, your question was a broader one, really about as we think about Allied and bringing them on board, the opportunities, I think a lot of them are the ones that we probably confirmed.

I'll give a couple here and then I'll hand it over to Paul who's writing down some good notes, but a couple of them that we talked about through the initial transaction I'm seeing is really coming through. One of them we talked earlier on around pricing, that they have a good price discipline in how they do things.

They have some good pricing tools in place that they utilize. We're becoming even more confident with what we see and their abilities and processes there. So I think that's an opportunity across the companies that you'll really see us be able to take advantage of.

Second, we talked a lot early on about some of the longer-term benefits they've had as they've gotten into – we described as RSAs or hub and spoke, really looking at the operations a little bit differently about how they run, and looking at a market area.

We've studied those, done a lot of good work, and we have some thoughts on some go-forward plans as well there, too. Not short-term, but clearly there's a good advantage to it as we think about the businesses that way.

Last one that I'll point to is we also have talked about our ability to, now that we have interiors as part of our product capabilities and breadth, as we look at everything from national accounts to how we sell and how we might be able to also position the interiors business with our exteriors business as well, too.

Those are three biggies that I'll mention as opportunities, which really we talked about previously, and man if anything I'm becoming more confident that they've been confirmed through the work we've seen..

Yeah. And the only thing I can add Joe, Joe did a good job of going through would be with RSG. It just increased even further density in some of these MSAs that RSG brought us. We add even more with some of the great Allied branches. And Joe talked about the optimization will do in those markets, to reduce costs and get deliveries to customers quicker.

The only other piece I'd add is the great private label business that they've developed throughout the years. That combined with ours gives us quite a bit of heft and we're going to focus a lot of attention on to grow as much as we can quickly..

Thank you very much..

Thanks, Kathryn..

You're welcome. Thank you..

Our next question comes from the line of Jay McCanless with Wedbush. Your line is now open..

Hi. Good afternoon. I wanted to follow on that question on Allied.

Do you believe that bringing them into the fold now is going to help you on the pricing side for residential roofing? And with the price discipline you mentioned as well as the additional scale, is that going to help you push price a little bit better?.

Yeah, I would say absolutely. That was one of our initial points in the transaction, and actually something that we've talked about for a while that consolidation with the industry as we felt it is a good thing, and we continue to feel that as well, too.

So yes, just to be clear, we do think that the combination of us with Allied, their price discipline will help us..

And our next question comes from the line of David Manthey with Baird. Your line is now open..

Thanks. Hi, guys. Good evening. First off, what was the October organic sales growth? I missed that..

October was – let me look back to my script.

I think it was – is that 5.5%?.

4.3%..

4.3%..

Okay. And then second, forgive me if this is what you just went over when you talked about hub and spoke and pricing and that sort of thing. But Joe, you mentioned optimization targets. And I'm just a little unclear on that.

Is there some way you could just give us some examples of optimization targets related to Allied you'd be looking to achieve?.

Sure. I'd be happy to. I'll give you some concepts of kind of what they are. And as you know, we've talked publicly before about there being a big range, and that range was $110 million up to I think we said $150 million, $160 million top-end side.

And it's really a lot of the optimization calls and how you're driving it above some of that $110 million number that we've talked about. Categories of things in there, it is some of what I mentioned around how we look at and operate our branches and our structures.

Everything from hub and spoke and RSAs and related, really trying to get more efficient in our structure around those branches, Dave, and how we work with them.

Really trying to get within a specific market area of the branches to more effectively look at how they use inventory, trucks, fleet, logistics, scheduling, even people and resources as well, too. So great opportunities there.

And the second part is just looking across some of even all of the – we talked about our functional areas of how we run the business as well, too. Either way is to look and do things more efficiently and more effectively with the RSG transaction, we really just pulled their business into ours.

And this time we're just looking at are there more effective ways to use systems, automations and processes that are better that will help us improve. Those are the ideas..

And our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open..

Thanks. Good afternoon, everyone..

Hi Michael..

I wanted to follow on an earlier question about – maybe prior couple of questions around Allied, and as you fold it in realizing not only cost synergies but also top-line synergies.

And working off of, let's say, pre-Allied steady-state business, perhaps growing in the mid single-digit range, would it be too early to kind of give us a sense of – given the size of Allied and the opportunity that you might see, what that might add – not trying to ask for guidance here or anything, but as you think of like fiscal 2019, fiscal 2020, could that add a point, 2 points, 3 points of incremental sales growth opportunity, or any way to kind of frame how you're thinking about the combination from the top-line side?.

Yeah, you bet. I think, Michael, to answer your question right up front, you looked at it from the right way. This is not a short-term piece. It really is long term. So it's not how it will impact in the current year as we integrate the company, but it's really as you do look further down the road to 2019, 2020.

When you bring them together and you have that level of density, and our teams kind of coming together and really driving in the integration in place, that's when we'll start to see something from all the things we mentioned, sharing of products, interior, exterior products, density within certain market areas, everything that we've done.

I think this is what helps fuel, as we've talked about a 5% to 10% organic growth rate. That's what we've described for a long time as our kind of goal. I think this is how you get there by bringing the two companies together. So yes, good opportunity, clearly top line, clearly long-term as well, though, too..

And our next question comes from the line of Michael Eisen with RBC Capital Markets. Your line is now open..

Good evening. Just following up on the prior question.

When thinking about kind of your optimism of demand from the roofing, legacy roofing business, looking out to the rest of the year, have you guys changed your way of thinking of what type of level of growth Allied could bring in year one? And then following on from a longer-term perspective, have you guys already started to have, and have they been more positive conversations around the cross-selling between interior and roofing products, and how that plays out at a faster pace? I appreciate it..

Sure, Michael. Good questions. One, yeah, we are optimistic on regards to what we continue to see on the residential market, as I described in my kind of opening comments to it.

If we look, it's really more of a longer-term optimism, as I mentioned when I was talking to the other Michael from JPMorgan when we were describing and talk about when we would see that. So it's not really a short-term, it's more of a long-term issue that we will see that growth, and we are very optimistic about that piece.

And it will be across not only the residential elements of our product, but it will be across the complementary elements, too, where we have a very strong complementary platform, which we think will enhance a lot of what the branches do currently at Allied today.

On your cross-selling piece, certainly we've had discussions and began those dialogues across all of our branches today and with our major customers as well, too. So that's already taking place. But again, it's not something I would bake into this year's forecast or numbers. It will be something we'll talk about in 2019 and 2020..

Yeah, that's why we use this 5% to 10% range, because as we combine these two great sales groups and management teams, we're confident that good things are going to come from that. And everything we're planning is geared towards generating those good things, meaning upside on the organic sales side.

So I would say, it will just press us as we go through the end of 2018, 2019, 2020 to drive closer to the high-end of that range..

And our next question comes from the line of Truman Patterson with Wells Fargo. Your line is now open..

Good afternoon, guys..

Hey, Truman..

I just wanted to touch on, you guys had some nice leverage on your OpEx line, dropped 70 bps, 80 bps which was a little surprising. We were at a trade show earlier this week, and it seems like there was a lot of chatter about freight costs picking up, oil costs are up.

I guess, if you guys could just elaborate on that a little bit, what actions you're able to take to mitigate these costs, and maybe dive into what you're seeing, your own labor inflate at, and any potential of your talent being poached by outside transportation companies?.

Sure, I'll talk a little bit about it and you're right, thanks for the recognition. We did have a great quarter on operating expense leverage. We've talked for a long time about our focus on OpEx leverage. We've talked for a long time about our 60%-40% fixed variable relationship, and we really over performed that this time around as well, too.

So thanks for noting the 70 basis points improvement that we saw. It was great leverage. Looking at some of the pieces to it, yes, seeing the diesel and fuel costs increase, but fuel is only around a $25 million annual spend to us. So even as it does increase every 10%, it's not as significant of a number to us as you would expect.

So we've also done a lot of things to make improvements on the diesel side, our fleet of how we operate. We've got logistics systems in place, and we're getting more efficient all the time on how we route the trucks as well too. So all that helps to offset some of the costs to it. Our annual wages, not seeing a significant impact there.

Our annual merit programs run 2%, 3%, 4%, depending on average where folks are at and stuck in that same level. We haven't seen a significant impact on the wage inflation piece across the board, anyway.

Drivers clearly are an area that we've put a lot of focus and attention to, and it's a challenging market, but we've come up with some pretty creative solutions and our approach is to keep them, retain them and attract them as well, too. So we've been doing a good job there on our drivers. It's always an area that we're paying attention to right now.

Besides that, other areas where we focused on, just about every area, wages and salaries are our biggest area. So we're constantly looking at ways to, as we have, increase some utilization of automation and others in our areas. We looked at it across.

We had some good savings this quarter even around some of our insurance benefits and others as we've recalibrated and looked at some of those items. So across the board, healthcare insurance is another area where even though we're seeing cost improvements, we've done a great job in managing our programs, and that's been a benefit to us as well.

Those are a few items, anyway. I hope that gives you a little bit of sense of – we're tackling this from many avenues to try to continue to work that down.

And I think as you really put the Allied integration on there as well, too, we'll be able to leverage those costs even further, because then all of a sudden we'll be combining a lot of those shared resources, whether it's from finance, HR, IT and others over a much broader sales base.

So all that will help us to get the leverage in even better shape..

And our next question comes from the line of Ken Zener with KeyBanc. Your line is now open..

Good afternoon, gentlemen..

Afternoon, Ken..

I apologize if I missed it; I know you talked about pricing. I believe you're talking about it year-over-year. Could you talk to perhaps sequential pricing in residential, both kind of out to customers, and what you're paying on the cost side? And then comment on inventory if you can, not only for you, but I guess maybe just broadly.

Thank you very much..

Yeah, sure thing. So on the sequential pricing was the first part, and the second was on inventory. Those are the two that I think I heard. So on the sequential pricing, we were actually up, I think, 40 basis points sequentially, if I remember correctly..

(46:57)..

So on the residential element to it, so our residential pricing on a sequential basis, it was actually – is that the first quarter number up there? It improved, actually, 40 basis points on a sequential basis, on the resi pricing side.

The second question on inventory, the inventory increases and where we were seeing it, inventory in total is up about $75 million. Of that, roughly around $22 million of it had to do with the acquired companies. The remaining pieces of it, there's another $30 million of it, which is in the store markets.

And then there was the remaining portions were in some of our higher volume markets like California. So all of the increase in the inventory we had was pretty much in line with where we would expect it to be between acquisitions and the store markets..

Yeah, Ken, the other piece is just so you have it on the pricing piece, sequentially commercial is flat with that slight gain, and then complementary was up from the 2%-and-change to 4%-and-change or so. So a lot of strength..

Okay..

And our next question comes from the line of Trey Grooms with Stephens. Your line is now open..

Yeah, good afternoon, guys. It's actually Blake Hirschman on here for Trey. Apologies if I missed it in your comments. But you guys kind of touched on some of the company-specific initiatives you're working on to drive the growth we're seeing in the complementary segment.

I was just wondering if you guys could dive into that a little bit more?.

Sure. So the question was really trying to get at what are we doing on the complementary side to drive the volume and performance there. Well, I think as you know, one of the biggest areas has been our focus on the acquisition side. We've made several acquisitions in the last 18 months. Lowry's most recently over the summer on the waterproofing side.

Prior to that, about a year-and-a-half ago, ProCoat also on the waterproofing side. On the insulation business, a company called Eco EIS probably just about a year ago, and before that RIS on the insulation business to us. And we also had combined several companies in the window siding business as well, too, that we've done through the last few years.

Acme out in Michigan and a couple others. So we've made several great acquisitions that have really helped to boost the complementary side of our business. We've also aligned a specific person in charge of those categories.

So we've gone to more with direct individuals responsible, waking up every day, thinking about growth within those complementary business categories which has also helped us as well, too. We've incorporated that discipline right into the plans and budgets across each of our selling regions.

So they all have specific goals and targets on the complementary business for us as well, too. All those things have continued to push and drive complementary sales to our business..

Yeah. Really no different than what we've done with these. We started these a couple of years ago as major pushes on the organic growth front, both product wise and channel. If you look at national accounts, two-step commercial growth, complementary was the fourth leg of that, besides obviously continue to focus on res roofing.

So it's just a continuation of all the efforts Joe mentioned on the acquired side. Then, of course, our intense focus on growing organically in each of our regions. And Allied has a nice complementary business also that will add to ours. So we'll have even more opportunity to grow..

And our next question comes from the line of Matt McCall with Seaport Global. Your line is now open..

Thank you. Good afternoon. So Joe, you gave an update on your top-line outlook, and reiterated I guess your top-line outlook. Sounds like you're incrementally more positive about the storm side.

Can you talk about some of the other components, re-roof, new resi, and then give me your thoughts on the non-res market and also your non-res growth as we progress through the year?.

Sure. You bet. Hey, Matt, I'll take through some of the components too, one on the non-res side, the last piece we mentioned here. We're two quarters in a row now of positive growth on the non-res, the commercial side business, which is great. And as you know, we have some low comps in the remaining quarters of the year as well, too.

So we're pretty optimistic on what we're going to be able to do to continue to grow that side of the business for us. The residential side of the business, what can we say, it's continued to be strong all the way through. This is another quarter that we've had a solid improvement in there.

And I think the number was 14 quarters over that 5% range, so strong growth in the residential. We see that demand continuing from the storms that have occurred all the way through.

We continue to see a good macroeconomic foundation under as well, too, where you're seeing the existing home sales continue to be strong, even new constructions continue to be strong as well, too.

So on the residential side, probably looking at a mid-singles kind of growth for the full year, which is very similar to what we're thinking about on the non-residential as well, too, in that mid-singles range.

Complementary, what we were just describing, we've had a lot of strength in from all the reasons we went through, from acquisitions through our focus and intention there as well too. And that's probably more in the mid to high single-digits where you'll see that occur. So that gives you a general view of our overall kind of revenue piece.

Hey, I want to go back to one question earlier because I found out the details I was looking for on some of the specifics kind of broken down in component, the question that was asked around the quarter-over-quarter, our sequential sell price changes.

And Paul gave you the total numbers which were correct, but you are out looking for the detail as well too. On the detail slide, our low slope sequentially from a quarter-over-quarter was pretty much flat. Our steep slope, quarter-over-quarter was down, looks like just about a point.

And our complementary was up quarter-over-quarter, a little over 5 points. So that gives you a sense of them. And Paul was correct because he mentioned in total that weighted average about 40 basis points, just to give you the specifics. Thanks. I'll hand it back now..

Okay. And that concludes today's questions. Now, I would like to turn the call back over to Mr. Joe Nowicki for closing comments..

Thanks all for joining this afternoon's call. We appreciate the interest from the investment community, our customers' business, and the commitment of our employees. We look forward to speaking again during our second quarter conference call. Have a great evening..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, enjoy the rest of your day..