Good day, ladies and gentlemen. And welcome to the Beacon Roofing Supply's Fourth Quarter and Fiscal 2018 Earnings Conference Call. My name is Justin, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session 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 performance.

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 sections 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, November 19, 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 Investors' Section of its website under Events and Presentations that will be referenced during management's review of the financial results. On the call today for Beacon Roofing Supply will be Mr.

Paul Isabella, President and CEO; 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. Sir, you may begin..

Thanks, Justin. Good afternoon. And welcome to our fourth quarter 2018 earnings call. 2018 was a year of two unique halves. One half that started out with solid revenue trends and good storm, volume carryover, and all of that was reflected in our financial performance.

And in January, we successfully closed on the Allied acquisition and have made tremendous progress throughout the year with the integration. Conversely, the second half of the year was volume challenged as weather had a considerable impact on our business. Simply put, these challenges in the second half drove our sales and EPS miss.

We know what happened as seasonal fluctuations are not new to our business. A dramatic drop off in demand in our Western markets caused by the prior two-year hail damage and repair in 2016 and ‘17, and subsequent lack of hail events in 2018 drove our miss in the second half.

In addition our fourth quarter was severely impacted by Hurricane Florence and extensive rain in the eastern U.S. and Texas during September, after starting the quarter basically on track in July and August. That summarizes the 2018 results. As I said previously, we know what happened.

We know the impact weather can have on our business quarter to quarter. That said, our strategy remains sound, and over time we have proven that we can grow consistently both sales and profit. I expect that to be the case moving forward.

It's important to note nothing has changed with industry fundamentals in our view, anchored by our 70% roofing sales and close to 75% reroof, repair, and remodel content. Our future is bright and as always we have high expectations for 2019, and now I will tell you why starting with some 2018 positives in a review of a few strategic elements.

First, 2018 was a transformative year for Beacon with a highly strategic acquisition of Allied, as I mentioned earlier. Allied has propelled us to nearly $7 billion of 2018 sales and has added density in existing geographies and added enviable new markets like New York and New Jersey.

We have made tremendous progress since the January close and are through most of the heavy lifting with the integration. Our team is energized and well-positioned for 2019. For the quarter and full year, we had record adjusted EBITDA performance. Year over year, we delivered a 30% plus improvement, which marks the fourth consecutive year of gains.

Our price cost performance was again positive during the quarter, building on our success from the third quarter. This not only reflects the discipline of our organization, but also the healthy and rational behavior by the entire industry.

We view this as a very good sign, especially given the second half weather challenge the industry saw and gross margins improved year-over-year. This is the third consecutive quarter of improvement. Another positive from Q4 in 2018 was our very strong free cash flow performance. It enabled us to pay down debt substantially and lower our debt leverage.

We will continue this focus in 2019 and beyond, balancing it with our business needs. While 2018 was a strong year for cash flow generation, it follows a very consistent long-term track record.

In fact, fiscal 2018 represents the 13th consecutive year that our operating cash flow has exceeded net income, an accomplishment that demonstrates our strong cash flow performance in all environments, but specifically illustrating how much free cash we generate during these weather-impacted demand periods.

In terms of the Allied integration, the progress has been tremendous as I pointed out earlier. The combined team is executing very well as we complete the work of systems integration and upgrades and remain committed to servicing our customer base without disruption.

In 2019, our team will continue their dedicated intense work, as we continue sharing the best of the best from both companies with a continued laser focus on adding value to our customers businesses.

This includes our product line additions such as Interior products, private label, waterproofing, insulation, and solar, as well as innovation in the supply chain distribution network in our digital platform.

Our strategic path is well defined, and we remain fully committed to our innovative growth initiatives, including our industry leading digital platforms, Beacon Pro+ and Beacon 3D+, our TRI-BUILT private label products, national account expansion, complimentary products expansion, two-step dealer sales, and our continued focus on residential and non-residential roofing organic growth.

Our e-commerce sales continue to grow and we envision a billion dollar business in the next few years. The addition of expanded customer offerings such as delivery notification and additional product lines will support this growth and augment the most complete digital offering in the industry.

Within complementary products, the available market opportunity remains very large and highly diverse, including interior products, siding, trim, and accessories, windows and doors, waterproofing, insulation and solar.

These combined markets are in the tens of billions of dollars annually and represent a strategic opportunity for Beacon to add to our current position and continue the consistent growth we have experienced in this category the last two years. Another strategic growth focus is our retail branch openings.

We plan on opening 10 to 15 new locations during fiscal 2019. While we have excellent national penetration currently, there continues to be adjacent markets that we can better serve with additional locations across our multiple platforms; the traditional roofing branch, a new waterproofing or installation location, or an interiors branch.

Our combined company has opened 77 over the last five years and we have become very efficient with both the launch and the development phases. As you can see, we have many avenues to grow, and we will have our team very focused on each of them.

In addition, we will continue to develop our pipeline of acquisition candidates and when the timing is right, I'm confident we will add solid companies. In 2019, we expect the industry to provide a healthier backdrop, as weather impacted markets normalize.

Regardless of weather, we anticipate another strong year through our continued focus on profitable sales, EPS and EBITDA growth, driving attractive level -- attractive levels of free cash flow, and improving our balance sheet through debt paydown.

In closing, I think, it's important that I repeat that our company is still approximately 75% reroof, repair, and remodel and 70% of our sales are roofing related, which is highly nondiscretionary. There are tens of millions of roofs in our geographies and simply put they will fail, and we will be there to help reroof them.

And now, I will turn the call over to Joe for some more details..

Thanks, Paul, and good afternoon, everyone. I will now provide some additional details related to our fourth quarter results and our 2019 guidance. Adjusted EPS finished fiscal 2018 at $2.70 another record for Beacon and our adjusted EBITDA was also a record at $484 million.

Our free cash flow performance was also very strong, nearly reaching $500 million for the full year and represents a high-teens free cash flow yield. This allowed us to significantly pay down our debt and lower debt leverage ratio to 4.2 times.

Although, some of this reflects favorable timing and key working capital items, we are nevertheless expecting another strong year in 2019, supporting further balance sheet improvements. We produce strong fourth quarter revenue growth of 50%, as results included contributions from the strategic acquisitions of Allied, Tri-State and Atlas.

Organic sales declined 5.6%, driven by significant volume challenges across the historical hail markets, a factor we discussed last quarter. This was partially offset by mid-to-high single-digit price increases and a continued strong contribution in Florida following Hurricane Irma.

The September month also saw meaningful business disruption from persistent rains in Texas and across the large portion of the eastern U.S., from the Carolina’s into New England.

We had seen sales improvement from the July to August months and we were positioned well to hit our revenue guidance, but the higher levels of precipitation hurt the quarter's final month and was the primary driver of the mess to our forecasted revenues.

It's important to note that we are seeing stabilization during October, which is right in line with what we were expecting. Business that was deferred as a result of September rainfall is now getting completed. Our complementary product segment was a positive highlight during Q4 and posted 8.1% organic growth for the full year.

This segment does not have the same storm exposure as our roofing lines and positive growth clearly benefit from our heightened focus on this category, as Paul mentioned during his remarks. Overall pricing was up almost 7.5 percentage points, with gains across all product categories.

This is a significant positive not only for Beacon but for our industry in total. Florida was a standout performer, again, primarily as a result of Hurricane Irma and we estimate a year-to-year Q4 revenue benefit to Beacon in the low-single digits.

The positive incremental contribution from Irma, however, has slowed since peaking in our fiscal second quarter. Hail states saw significant pressure during the period, with our volume down in those states close to 20%. Hail comparisons have been challenge for our industry, as Paul has mentioned.

Now shifting to gross margins, during the fourth quarter we increased our gross margin percentage year-over-year from 25% to 25.4%. Our company-wide gross margins benefited from strong profitability at our acquired businesses and a favorable price cost spread.

Quarterly gross margins would have been higher, but results were negatively impacted by an unfavorable product mix as our higher margin residential roofing products saw a volume decline in the period. This shows up clearly in our Q4 existing market gross margin a declined year-over-year.

As Paul mentioned, our selling prices were slightly more than our increases in product costs, given all that's happened with industry demand challenges the past two quarters, Beacon has still been successful at passing on higher supplier pricing, truly a great accomplishment from our organization.

It's probably also important to note that even in the markets that were the most challenged by post-storm weather like Texas and Colorado, we were still able to get price increases.

As you know, we will continue to supplement solid price cost discipline with other gross margin initiatives, examples include, the Allied related procurement synergies and expansion of our private label product lines. Our operating expenses were higher than our forecast, did not reflect our traditional rates of leverage.

But it's important to note that while our total GAAP operating expenses increased by approximately $148 million from 18.2% to 19.9%, the majority of that is related to our Allied acquisition.

Our adjusted existing market operating expenses were actually down by approximately $6 million and only up 40 basis points to 16.5%, all as a result of the lower volume. While we did take significant actions to reduce cost in the Western Hail markets, it was not enough to offset the quick drop in volume that occurred.

We found it very difficult to react as quickly as the weather changed, specifically the rain in Texas and on the East Coast coupled with the impact of Hurricane Florence. In addition, we didn't want to overreact as we still had the traditionally strong month of October ahead of us. Beacon has always been known for our lean operating expense structure.

This will be an area of continued focus in 2019 as we look to drive additional cost synergies. As you know, we are only 11 months in the integration and are – and so far less than halfway through the synergy realization. Our operating expense rate is high right now due to the Allied cost structure, we know that and we are not done yet.

We will also work to more aggressively and quickly align our costs to volume changes. In regard to synergies, the team did an excellent job delivering on our synergy commitments. We drove approximately $50 million in synergies for the year, ahead of our initial estimates of $40 million.

Last, I want to spend a few minutes providing an overview of our fiscal 2019 guidance expectations. The current street estimates have a very wide range for sales and EPS, our intent today is to reset those expectations and narrow that range, based on the market conditions we experienced in 2018.

For 2019, we are targeting revenues between $7 billion and $7.35 billion. From an acquisition perspective, Allied will provide an incremental contribution during Q1 of approximately $600 million, while our two smaller acquisitions that we made in 2018 are expected to add approximately $30 million incrementally during the full year.

Our estimate for organic sales is therefore basically flat year-over-year. But this is where the net impact of two offsetting factors.

All the positive initiatives we are undertaking to grow organically are being offset by our assumption of no major weather events in 2019, and therefore, suffering from the negative drag of 2016 and ‘17 hailstorms and the 2018 hurricanes.

The implementation of the organic growth initiatives that Paul described, combined with the successful execution of last year's price increases, we will drive a 2019 mid single-digit organic growth rate. This is all before the negative impact of the weather factored in which I will talk about next.

So this is on track with our long-term organic growth rates, nothing's changed at Beacon in our growth strategy. The challenge that we ran into in 2018, we believe will continue in 2019 for the industry is the weather impact. We came off to really strong hail events in the year 2016 and ’17. These are difficult to repeat.

They also pulled forward business into those years as roofs were replaced earlier in their lifecycle.

The midpoint of our forecast therefore assumes a weather year similar to 2018 with no major hail events and the continued weakness in the west due to the post 2016 and ‘17 hail impact, and the end of the favorable hurricane impact from Irma in Florida.

This weather impact will offset the growth initiative discussed above and when combined, drives an overall flat organic growth rate for the midpoint of our range. The low end of the revenue was developed in the event of a soft economy, and therefore, softer demand environment.

While the high end of the range assumes a return to normal storm demand in the second half of the year. As a result, our adjusted EBITDA is expected to range between $540 million and $610 million.

The lower end reflects the bottom of our revenue expectations and weaker gross margins tied to higher competitive pricing pressure that would be expected with a sustained softer demand environment.

The upper end of our EBITDA range reflects a return to a normal storm demand in the second half of 2019, which would also likely provide firmer gross margins. These results also assume approximately $100 million in Allied synergy realization for the full year or an incremental $50 million relative to 2018.

At this level of EBITDA that supports an adjusted EPS range of $2.90 to $3.35. I will now turn it back to Paul before taking your questions..

Thanks, Joe. Just a couple of comments before we go to Q&A, while it certainly wasn't our plan to have second half fiscal 2018 that we had these challenges were the result of unfavorable weather events that I have already mentioned. We do remain confident in this industry and our company's outlook going forward. The integration is going very well.

Our outstanding team of extraordinary people will continue to work tirelessly to add value to our customers. This effort will only get more intense. Our future is bright. With that, I'd like to turn the call back to the operator to initiate the Q&A portion of the call..

Thank you. [Operator Instructions] And our first question comes from Garik Shmois from Longbow Research. Your line is now open..

Oh! Hi. Thanks.

Just wondering if you could provide a little more color just on the organic growth target for fiscal ‘19, if you could provide maybe some of the different end market buckets that you are assuming there, whether it's residential, commercial, or the complementary business?.

Hey, Garik. This is Joe. I will give you a little bit more detail. So, hopefully, you caught the overall framing of the organic growth, right. So it's basically a flat overall growth. You have got kind of the weather impact on the downside.

So that's a down kind of mid-single, but then the core initiatives in growth, which I think which we are really trying to get at upper mid-single-digits range, and it’s those two weather [ph] offsetting those core initiatives part.

If I look at and try to break down that core initiatives piece a little bit more, that up mid singles, it's roughly about half of that is from price and then half of that would be from a unit or a volume growth, so the volume growth then really is a combination of both market growth and our traditional market overperformance based on the growth initiatives that Paul said.

At this point, when you look across product categories, so to your point of commercial versus residential, we view them all pretty similarly at this point in time in terms of that growth rates. In total, as I mentioned, the unit growth rates, the volume piece of it, up roughly in that 2% to 3% range.

That's a combination of our market growth and market overperformance..

That’s helpful.

And I guess, just as a follow up, would be just on price cost in fiscal ’19, can you provide a little bit more granularity on how you expect to make progress in ‘18 in a tough market? How should we think of price cost, moving forward?.

Yeah. I think the overarching view we have is that we won't gain any more, so it will just be the continuation and then hitting the comps to get to that two and change or so price with cost being basically neutral to it, as we go through the year, Garik, that's the assumption we made.

We feel good about that just based on the fact that, if we believe inflation is going to continue to put pressure on the manufacturers..

Okay. Thanks again..

Thanks, Garik..

You bet..

Thank you. Your next question comes from Jay McCanless from Wedbush. Your line is now open..

Hi. Good afternoon. So the first question I had, the decline from 3Q to 4Q in your inventory numbers was a little bit higher on a percentage basis than what we have seen the last couple of years.

Could you talk about what's going on there and how you guys are thinking about inventory levels now?.

Yeah. I mean, I will give you just a quick high level. One, we think we are in a really good position as we exit the year.

I think it was really just a function of us being from our Q3 in very good position to sell-through, I mean, it would have been even lower, quite frankly, if September hadn't happened with all the intense rain, because that obviously impacted our resi sales for the most part, that's where most of that inventory is, so we feel good about it as we are entering the winter period.

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

No. I think that's exactly right we are a little bit high when we entered the quarter or so at the end of Q3 and we talked about that. And the team has done an excellent job working it down, as Paul said, we would have done even better except for the weather and the rain in September, but great job by the team..

Great.

And the second question I had is, are there any price increases you guys are trying to push through now or are those largely stopped, since it sounds like the manufacturers have not tried to push through their price increases?.

Yeah. I think for the most part, they have stopped, right. And mostly what the winter Jan, Feb, March time period brings, I mean, I can't even comment on that other than, as I said earlier, I think the manufacturers will continue to see inflation pressure, but time will tell with that. But for now, they have stopped..

I would suggest also is that, in the organic growth numbers that I went through, I talked about that [indiscernible] initiatives, piece being up that mid-single digits, half of that being priced, that half priced element really is just the carryover of what we saw in 2018, just rolling through the rest of the year.

As you know, we started with the price increases in that, January, February timeframe. So this is just rolling the rest of those right on through. There's no new price increases incorporated..

Sounds great. Thank you..

Thank you..

Thank you. Our next question comes from Michael Rehaut from J.P. Morgan. Your line is now open..

Hi. This is Elad on for Mike.

I was first wondering, you guys mentioned that price cost was positive, I believe across the industry, and I was wondering what you saw from some of the competitors and see sort of following the price increase which is what it sounded like?.

Yeah. No. The implication we, obviously, don't have any competitive data. The implication was that even with the down volume caused by, whether you look at September month, because of the rains in Florence or the western markets because of the hail comps year-over-year.

We were able to get price in those markets and pretty much flattish or positive price costs, not, not very much and so my view is that the -- in my comment and my prepared text for that, my feeling is that the industry is more rational. It's pretty rare for us to be able -- at least in my 11-year orientation to get price in a down market.

So I think that speaks well to rational behavior. That was the extent of my comment..

That’s encouraging. And then the other thing is, you mentioned that you guys took significant actions to reduce costs in the western region.

And I was just wondering, if you could expand a little bit on what are the actions that you took there and if there is maybe some upside to do that kind of stuff in 2019 as well?.

Yeah. Hey. We have always been a company that prides itself on running very lean. So this isn't new to us. And in the past, as we enter our winter period, we always reduce costs. We have done that well before I got here and we will continue that.

I think as the west regions looked at the extent of the hail drop off and the fact that the repair work got done quicker, they took that type of action just quicker. So we are really talking about all the cost buckets that could be actions related to sales.

I mean it really isn't any more complicated than that and they drove as much cost out as they could to right size the business for the volume they see going forward..

Okay. Great. Okay. Great. Thank you..

Thank you..

Thank you. Our next question comes from Kathryn Thomas (sic) [Thompson] from Thompson Research Group. Your line is now open..

Hi. Thanks for taking my questions today. As you look into 2019, I appreciate the color that you gave on the time EBITDA and EPS and the topline. But could you give a framework of how to think about free cash flow generation for ‘19 and any – and to follow on that, any thoughts on debt reduction as part of that free cash flow framework? Thank you..

Yeah. Kathryn, I will just say, we are not going to put out a specific number right now. We do know that the 500 or thereabouts was impacted because of timing, where we took inventory down et cetera. I wouldn't say a huge portion of it is.

But given that you know there's so many ins and outs related to cash, whether it be inventory build-up, potentially next year depending on where net debt is acquisitions right. It's very difficult right now for us to give an estimate other than it's going to continue to be strong, as I said in my script..

Okay. And there were quite a few kind of puts -- it was a fairly competitive landscape as you had acquired Allied and there were several of your peers that also had some transaction this year.

The feedback and feel that we have gotten is that it's fairly competitive in the landscape for much of the year, but it appears to be settling down as we come to the back half of the year.

Would you be willing to give any commentary just about what you are seeing in the distribution landscape in general and your observations on the general competitive landscape? Thank you..

Thanks, Kathryn. Yeah. As I said, I will go back to my view, given our price performance that the – that landscape is becoming more rational. I think it's still competitive. It was competitive 11 years ago. It was competitive 20 years ago. That's just the nature of distribution. I think a lot of it has to do with when the West is going to recover, right.

And that's just the natural fact of home repair being pulled forward, and the fact that at some point it normalizes. Now we don't sit back and say we are waiting for that, as I listed in my initiatives we are extremely aggressive by products and even by channel to drive organic growth.

Again, I think, if you just fall back to our pricing performance, with that normal competition that occurs, I think, that's a good sign for the overall competitiveness of the industry..

Thank you very much..

Thanks, Kathryn..

Thank you. And our next question comes from Ryan Merkel from William Blair. Sir, your line is now open..

Hey. Thanks guys. Good afternoon..

Hi, Ryan..

Hi, Ryan..

So just thinking about the cadence of organic growth by quarter, should we think about the start to 2019 being down sort of mid-single digits and then improving as you hit easier comparisons as the year goes on?.

I think, in general, you are correct, it starts out much lower in the first quarter of the year, because if you think about it, one of the items impacting our revenues is the weather, right.

And some of that weather carryover from the hailstorms in the west is bigger in the first quarter and the second quarter, and that's when it starts to then mitigate after that. So you are correct, we will see more of a negative impact in the first half of the year than the second half of the year..

And then just as a follow up, you mentioned September was pretty rough with the rain and then October was stable, I think was the word, so it is October the same as September in terms of that growth decline, I guess?.

No. The October rate of decline was improved over where September was. October was a low single-digit type kind of growth rate -- negative low single-digit type drop off….

Yeah..

… in October, so much better than September..

Okay.

And then maybe just lastly, on share gains, with organic growth down about 5.6%, is your sense that that's in line with the market or better than the market?.

Ryan, it's, I mean, we are not going to try to forecast what the market has done. I know some folks are using certain indicators that we don't believe are valid. I mean, we continue to do the sanity check internally by customer, what the customer is seeing and our view is that we have not lost share. We think we have a very strong offering.

Sorry for the noise..

Okay..

It’s not us. We believe that we have a strong customer offering. So we think we are keeping pace or doing better than any of the market numbers. Again, they -- as you know they are very difficult to put a finger on….

Yeah. Okay..

… in the near-term. In the near-term. In the near-term..

Right. Okay. Thanks. I will pass it on..

Thanks, Ryan..

Thanks..

Thank you. Our next question comes from Keith Hughes with SunTrust, I am sorry. Sir, your line is now open..

Thank you.

My question is on operating expenses, you highlighted in the organic numbers, operating expenses as a percentage of sales up, but how did those numbers come in at Allied, that seems to be the one of the biggest deviation from the models that are out there heading into this quarter?.

Hey, Keith. It's Joe. Yeah. You are right. Our Allied operating expenses came in a little bit higher than we had anticipated, because you are right. If you look at the, our existing market OpEx numbers, we -- even when you adjust for some of the weather, right, so our existing market expenses should have been down, they were down $6 million.

It should have been down probably about $6.5 million when you account for our traditional fixed variable relationships. So we might have been off a $0.5 million, maybe $1 million on our existing markets, because of the weather issues I mentioned. We ran into some challenges more on the Allied side of our operating expenses.

Things like, one, some of their depreciation as we took the -- we completed the work on the step up of the depreciation of their asset values that drove a little higher depreciation than we were expecting. They have a little bit older and aged fleets, so we had a little bit higher cost on some of our maintenance and our fleet related costs.

And then there were a couple other items that drove the fuel costs, one, as an example, we saw some incremental fuel costs with the diesel prices up as well too, which cost us a little bit off guard as well too. So, yes, you are right, a lot of expenses came from the Allied piece.

But as you know, we are -- as I said, we are only 11 months in the integration, so as part of all we are getting as continuing down the path of the remaining portion of our synergies, plus as we do with RSG, continued to drive that synergy number even higher as we go into next year..

So what kind of EBITDA number did or EBITDA percentage of Allied you do in the quarter?.

Sorry, you broke up, their EBITDA percentage before we appeared?.

Yeah.

What kind of EBITDA percentage that Allied do in the quarter, you were not to as a combined company, I assume it was below that?.

Yeah. And that -- in the pro forma that we would have issued that was the public document. We are you were seeing they we are slightly below our EBITDA numbers, pretty close, but they were slightly below our EBITDA numbers. I think they were running somewhere -- what we reported, somewhere in that 9% to 10% range, if I remember correctly.

I'd have to look up on specific data….

Okay. I am asking on this fourth….

… because there is a lot..

I am asking on this fourth quarter, the quarter you just reported, what kind of EBITDA margin that Allied do?.

On the fourth quarter, yeah, I think, that's what I was referring to based on the pro forma….

Yeah..

… that we gave for that quarter..

Okay.

So that's for the fourth quarter you just reported, is that correct?.

Correct..

Okay..

Now that we just reported, but for last year we don't provide Allied specific ranges by quarter and break them out that way. But when we did the performance for last year that's roughly what they were running, correct..

Okay. That's what I'm trying to get a sense for is, which direction is this heading, because we have been very positive on the synergies from this and we understand what happened in roofing on the quarter.

I think there was an expectation that allied would be on the upside here, but it doesn't really appear to be is, are all your synergies being offset by the cost you highlighted?.

On the Allied side, yes. Not all offset, not at all, because it's a significant amount of synergies that we have seen. But, clearly, we did get some offset from those Allied costs. But this is part of the -- we are still working through the rest of the synergies.

We are only halfway through of all the synergy realization, Keith, and I think, you will see us get it all those other elements as we go through the rest of the year..

Yeah. So, I think, it will get better. So, Keith, we are not concerned that all right, because as Joe just alluded to, we have the synergy piece, and then, of course, as volumes normalize, right. And that's why we gave this range by mid high. We would expect to see their performance continue to improve.

I mean they are great company, great products, great people, not far part of us, right. So our plan is intact and we are very positive about the combined company going forward..

And do keep in mind some of the synergies showed up -- show up in our existing market numbers as well, not all just on the Allies..

Okay. Complementary products was up 2.8% organically, in the quarter we have seen far better numbers than that for several quarters now.

I guess, number one, how much of a role that price play in that result and then could you just give us kind of a sense what the pacing is in that – those goods?.

So the price piece was pretty consistent across our product category. So we don't really breakdown the price element by product category, but it's pretty consistent amongst them in terms of our -- the total, as I said, was that roughly 7.5%. If you look at the volume piece of it.

The volume was kind of or the unit volume of it was also impacted by a lot of those same weather elements that we mentioned before, right. From the rain through also in the west, where we saw some of that down as well too….

Okay..

… and that within the driver, I think, you are referring to..

Yes.

We had a pretty negative units in the quarters, is that fair to say on complementary products?.

Certainly. Yeah..

Okay.

And all right -- did you get the sense that besides the weather impact, with there just a slowdown in spending in that area, we have seen that in some other companies as we go through earnings season?.

A slowdown, Keith, where?.

Just the complimentary goods in [inaudible] a little less weather sensitive than what we see in your roofing units.

Just a lower level spent particular becoming a negative?.

No. I think. No. We think it's just in terms of price cost, we believe it's just timing. I mean that thing is – complementary has perform very well for us as we have gone through the year. So, no, I wouldn't necessarily say there's any slowdown or any change other than just timing would hit.

And the weather impact, because a lot of the complimentary declines were in those same weather markets as well to Keith. So, if anything, we are quite optimistic on the growth we have seen on the complementary side..

Thank you. And our next question will be from Phil Ng from Jefferies. Your line is now open..

Hey, guys. It's actually Maggie on for Phil. Thanks for taking my questions. Going back to SG&A leverage in the Allied synergies, how should we think about the cadence of that incremental $50 million in 2019 of those Allied synergies? And should we expect that SG&A as a percentage of sales should that be improving steadily throughout the year? Thanks..

Hi. Yes. In regards to the Allied synergies, I think, your assumption is correct.

I would assume that it is primarily even through the course of the year, maybe a little bit more front-end loaded as we get a few more of some of the SG&A benefits that we have kind of put in place running through combined with some more of the supply chain purchasing synergies will come through a little bit earlier.

But, overall, I think, it's a fair assumption to assume level through the year..

Okay.

And then, can you just talk about your comfort around leverage and then in general your capital allocation priorities in 2019?.

Sure. One is you have seen, we had a great free cash flow through the year, especially the fourth quarter. And I think what we did with that cash, probably, would describe our priorities, we use it to pay down the debt, you saw our debt levels go from roughly $3.1 billion at the end of the third quarter to $2.65 billion at the end of this quarter.

So we took that free cash flow and use it to pay down our debt accordingly. As we said at the Allied acquisition, when we bought Allied, initially we had an initial debt leverage ratio around 4.5 times and our intent was to work it down roughly a 0.5 turn a year, that's still our intent.

Our primary utilization of cash, as Paul mentioned, will be to work down and pay through our -- pay down the debt. So that's the primary utilization of our cash flow at this point..

All right. Thanks, guys..

Thank you..

Thanks..

Thank you. And our next question comes from David Manthey from Baird. Your line is now open, sir..

Thanks. Good afternoon, guys.

So could you discuss the trends in pricing at the beginning of the quarter versus those at the end and what I'm getting at -- did you end the quarter with pricing that was worse than what you started with?.

Hey, Dave. This is Joe. Yeah. I can give you a general idea of the trend. While it did increase a bit each of the months through there, it really started to level off through the quarter. It did not decline at all in the last month. But it certainly did, the rate of increase kind of started to level off as we went through the quarter.

It was pretty consistent….

Okay. And then….

… but it leveled off, no decline..

Okay.

As it relates to next year, I think, I heard you say you are assuming 2% price and if we sort of look at the comparisons with this year and carry that forward, doesn't that imply that pricing for fiscal ‘19 is actually lower than it was in the fourth quarter, specifically that it comes off of these current prices?.

Yeah. No. Not at all, David. It's roughly 2% to 3%. So maybe they are picking the low end of the range. If you think about it more as 2.5% or a little bit above that, might get you more in the ballpark. But in total, although, we did on pricing, as our assumption is the price we have been getting, so where we ended this quarter at 7.5% range.

We looked at every quarter through the year, and said alright, in order to get back to every quarter up to the 7.5% where we are right now, what does that mean in incremental price..

Okay. And then, as it relates to your weather assumptions for next year, you are assuming no major weather events is what you said and then you also said you are assuming the weather is similar to fiscal ‘18.

I guess, I'm trying to understand, are you saying that you are assuming another below average weather year and that any major storm activity would be upside to your guidance.

Is that what you are implying?.

Yes. That would be correct, Dave. Because what we assumed in our forecast here was that, the weather elements kind of a down mid single and there's two pieces of that. One of them is same type of hail year as we saw last year, which was a soft tail year.

But keep in mind, last year we did have some hail work that was being done in the west in the first quarter and second quarter as they are working through the remaining of the ‘16 and ‘17 hailstorms. And then also keep in mind, we had last year a large amount, the second one is of the Irma volume that went through.

So we are assuming a little bit more Irma that gets finished up this quarter, but that's it. So you take those two things combined and that's what gets you this down mid singles on the weather for next year as the midpoint of our organic growth..

Yeah. Dave and I think the key is that's that midpoint. But again we just think it makes sense to talk about the year as we have framed and exited ‘18. And then to your point, if any of those events happen and based on our assumptions, right. That will drive us up closer or to a higher end.

And then again just for clarification, all the lower end in it is, is if there's some softening at all in the economy et cetera, et cetera or even quote worse weather, meaning, winter is very severe or not severe, right, it depends on a lot of different elements within normalized weather in the different markets..

Got it. Thank you..

Okay. Thanks, Dave..

Thank you. Our next question comes from Trey Morrish from Evercore. Your line is now open..

Thanks for fitting me in guys. So I want to talk on the synergies real quick. You mentioned that you are running slightly ahead of your expectations this year realizing $50 million in synergies, but your commentary for next year of realizing about $100 million all in including this year, seems back to be about in line with your pace.

So I'm wondering why you have a bit of a slowing from moving ahead of plan to moving to in line with the plan?.

I think our full pacing, as you know, is $120 million, so this may be the difference in the math is, for next year we won't see the full $120 million, but we will get it up to $100 million and then in the first quarter of the following year, we will add the extra $20 million on there and that gets to the $120 million number.

So I think if you take that into consideration that might help you with your pacing piece to show you that we are going to continue to make improvements. And by the way, as I also said in my prepared comments, our intent is to continue to work those synergy numbers as well too as we did with Allied, what we do with the RSG transaction and others.

So we are continuing to look for additional synergies as part of the integration work that's going on..

Yeah. So all that is, I will just add, there's just the timing of some of those actions hitting as we go through the beginning of this year and then they turn through next year or even later. And so let's say the second quarter of ‘19 and then as they go into ‘20, that's when we continue to see that benefit..

The other impact to keep in mind that impacts the synergy realization is the seasonality of our business, right, with slower revenues in this December quarter and primarily in that March quarter that means you won't realize as much to see, you can't just take the pacing that you have in the fourth quarter here and then we will look forward.

That might help as well to..

And then looking at your first calendar -- first fiscal quarter, some manufacturers talked about their Q4 shipments being down potentially 25%, now I'm just wondering if you think it's possible for your volumes to be down that magnitude in resi roofing or do you think it's going to be something a little bit better than that?.

Yeah. I think what you have to remember is and this is really important and we have said it a number of times is, you really have to detach especially within a quarter, even within a year to attach the manufacturers reported shipments of the distribution versus distribution sales, right.

Because there's a lot going on, it's prior year volumes that were shipped in the current demand i.e. we have been talking about the back, even the beginning of this year potentially through our Q2 of the Western Hale market still being soft.

So all of that plays into that element of the manufacturer's shipping product or not into distribution and it doesn't it mean anything related to us, right. We still have our sales initiatives. We said on this call we will still be impacted in Q1 by the fact that last year our western markets were still shipping and doing repair work for that damage.

So to try to draw a parallel between them saying they are down 25 and where we will be as it is impossible. Now maybe over time, decade, half a decade, there might be some parallel but in the near-term there's virtually nothing.

Because we still have inventory on hand that we are shipping, we are still naturally going to buy inventory, because we have to keep product in stock for our customer base right. That's the reality..

Thank you. Our next question comes from Matt McCall from Seaport Global Securities. Your line is now active..

Thanks. Good afternoon, guys..

Hi, Matt..

Maybe go back to the deleveraging outlook a little bit Joe, I mean, if I look at EBITDA projections, you are going to get pretty close to a 0.5 turn of debt -- net debt-to-EBITDA reduction, without any debt reduction -- without any actual debt reduction.

What's kind of the actual debt reduction outlook that you are targeting for ‘19?.

So, again, we haven't given a specific free cash flow outlook number for it, Matt, in there. But when we went through the math based on those EBITDA numbers. We just went through and you look at that approximate free cash flow that it generates based on some of the metrics that Paul talked about.

We can pretty much get back in line with what we had said about taking just a turn out. Don't forget we -- there's CapEx that takes some of that away as well too and the CapEx year-over-year will probably be slightly up from where it was in the current year as we continue to kind of work through and manage that part of it.

So I think if you look at the metrics, Matt, I can take a look at it deeper, Matt, maybe dive into it with you afterwards on some specifics that will help you get to it. But it should be a line that we can get down to 0.5 turn each year, we are still on track..

Okay. And then, I think, Paul, you made a comment, I think, it was Kathryn's question around -- I think you mentioned it should -- depending on net leverage that you may look at acquisitions.

Well, what did you mean there, what -- would you get to a certain level and then you start to look at it again, I would assume that that debt reduction would be the number one focus right now..

Yeah.. As I said in my prepared remarks that, at the right, when the timing is right, so that doesn't necessarily mean in 2019, related to free cash, I said based on other uses, right. And that could be just inventory and I won't say it's highly unlikely we will do an acquisition in 2019.

But as we have said, our primary goal is to pay down debt, and then as a result, drive EBITDA, of course, and as a result net debt will reduce. I think if we were to do any acquisition, it would be very strategic and very small, what we have called a tuck-in. So I -- for those on the call I would not be concerned about that.

Our primary focus is continued debt pay down. But we have been an acquirer and we will continue to be an acquirer. We just have to balance everything to make sure we are doing the right thing for all the metrics. That's all I meant.

So there's no plans to necessarily do an acquisition in 2019, it was just more of a comment I made to say, hey, there could be other uses of cash like inventory drop if we found that's -- where I think that's the right thing to do as we enter or get to the midpoint of next year.

But any acquisition that we would potentially do would be very, very small and not have a major impact..

Thank you. Our next question comes from Scott Schrier from Citi. Your line is now open. If your phone is on mute, could you please unmute it..

Hi. It's Tim Mazurczak for Scott.

Can you hear me now?.

Yes. We can..

Okay. Perfect. So in terms of network rationalization, what is the opportunity with that, can you just kind of expand on that, you have combined 40….

Yeah..

… branches to-date?.

Yeah. Well, there's a couple of pieces, one, the 40 branches just allude to the synergy work and its consolidation because if you have a branch a half mile away and everything lines up. Of course, we are going to take the opportunity consolidate that's what we have done.

Beyond that it's just especially now with us having so many dense markets, so many dense MSAs with multiple branches, we need to continue our work to maximize shipments use of branch personnel all those things, which we have begun some of that is baked into our synergy target within the 120.

We think there's additional opportunity as we go through these next few years, so we are just really targeting. Again, it's a separate from the branch consolidations targeting our MSA is where we have multiple locations much like Allied is done to drive efficiencies within our network fuel, freight, inventory, et cetera..

Okay. Then just one quick follow up, you said about $1 billion in business will come from e-commerce in the next few years..

Yeah..

Are any -- is any of that revenue coming from the rationalization of networks are someone going from in-store to more e-commerce or now?.

Yeah. The assumptions that I make, when I say billion dollars is you know we are in pretty good shape in terms of where we are exiting the year and whether it's three years to five years, that's that billion dollar target, a lot of that will be cannibalization.

I mean there's a there's a piece of that that will be new, because we will attract new customers. Again, it's not an exact number but right now we are targeting 10% to 15% new, potentially some of that could come from that.

But we know as we roll have rolled this out and we really just went through our first fiscal year with the e-commerce platform and still continuing, as I mentioned, in my prepared remarks, continuing to add functionality that it's going to grow customers like it. It helps them do their jobs better.

We know that we will take existing product are orders that are going through our regular process convert them to e-commerce and then we will naturally grow additional customers as we go through time..

Thank you and that concludes the questions. Now like to turn the call back over to Mr. Isabella for closing comments..

Thanks, Justin. Just briefly thanks again for everyone participating in today's call. We appreciate the interest from investors, customers, suppliers and our employees. And as a reminder, our second Investor Day will be in New York City on December 13th, and this event will also be webcast. We wish all of you and your families a Happy Thanksgiving.

Have a good rest of evening. Thanks..

Thank you and this concludes today's call. Everyone may disconnect..