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Beacon Roofing Supply, Inc. (NASDAQ:BECN)

F1Q09 (Qtr End 12/31/08) Earnings Call

February 06, 2009 10:00 AM ET

Executives

Robert Buck - Chairman and Chief Executive Officer

David R. Grace - Senior Vice President and Chief Financial Officer

Paul M. Isabella - President and Chief Operating Officer

David Manthey - Robert W. Baird

Analysts

Tom Hayes - Piper Jaffray

Brent Rakers - Morgan Keegan

Robert Kelly - Sidoti & Company

Scott Ciccarelli - RBC Capital Markets

Theodor Kundtz - Needham &Company

Operator

Good day, ladies and gentlemen, and welcome to the Beacon Roofing Supply Fiscal Year 2009 First Quarter Conference Call. My name is Connie, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference.

At that time, I will give you instructions on how to ask a question. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

On this call, Beacon Roofing Supply may make forward-looking statements including statements about its plans and objectives and future economic performance. Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements, as a result of various important factors including but not limited to those set forth in the risk factor section as the company's latest Form 10-K.

On the call today for Beacon Roofing Supply will be Mr. Robert Buck, Chairman and CEO; Mr. Paul Isabella, President and COO; and Mr. David Grace, Chief Financial Officer.

I would now like to turn the call over to Mr. Robert Buck, Chairman and CEO. Please proceed, Mr. Buck.

Robert Buck

Thank you, Connie. Welcome everyone to our first quarter earnings call for fiscal year 2009. We are obviously very pleased to announce these results, and it's always satisfying to exceed the expectations of our analysts, which intern is very good for our loyal shareholders and fellow employees. A lot of hard work by our employees made these results possible.

As usual David Grace, our CFO, will present the financial details, and when David is finished; Paul Isabella, our President and COO, will answer prepared questions. When Paul is finished, we will open the call for additional questions that you may have.

And let me just say that our new fiscal year, fiscal '09 is of to a very strong start. Our growth was solid, gross margins improved and expenses were well controlled.

In addition, you can quickly see the quality of our balance sheet and in particular the quality of the receivables and a continued reduction of our debt ratios.

Again the fiscal year is of to a strong start and we were looking, working hard to keep it going that way. We have a good -- very good tactical and strategic plans in place that are being executed very well by our officers under Paul's leadership.

I will now turn the call over to David, and he will present the financial details of this performance and then Paul will take over. Thank you. David?

David R. Grace

Thank you, Bob. And just as a reminder, all of our results for the quarter are now from existing markets.

Sales increased 16.3% to $463.3 million from $398.4 million in 2007 with residential roofing sales increasing 58.4% as we benefited from higher year-over-year prices combined with strong demand from the damage caused by Hurricane Ike.

Non-residential roofing products declined 14.7%, as activity -- 4.7%, as activity slowed especially in the regions which experienced an early onset of winter.

Complimentary products, which we believe are more discretionary in nature than our roofing products were down 17.3% and continue to be negatively impacted by both the slowdown in the economy, in the lower levels of residential construction.

We estimate inflation in product cost base upon our current inventory product mix in the invoice cost, as compared to the invoice cost of the same products a year ago.

Based upon this estimate, our product cost were up 12% to 14% compared to 2007 months, or pricing to our customers increase slight ahead of the product cost increases.

In addition, we have 62 business days in 2008, as compared to 61 days in 2007, which we estimate further boosted up sales flow by 1.9%.

Almost all of our overall sales growth on a sales based basis in the quarter gain from price increases.

Volume gains and residential roofing were offset by volume losses in non-residential and complementary products. We close four branches and did not open any during the quarter compared to one new branch opening and one closing during the first quarter of 2007.

Today, we operate a total of 170 branches as of the end of the quarter, compared to 178 last year.

First quarter gross profit was 116.0 million for 2008, as compared to 91.7 million in 2007, a 26.5% increase, with gross margins increasing to 25.0% from 23.0%. The increase was largely the result of a product mix shift to more residential roofing products, which has substantially higher gross margins and the more competitive non-residential products.

And continuing from the fourth quarter, we also still experienced the benefit of lower weighted average cost of residential roofing products in comparison to town price levels of those products in the marketplace.

We do not expect this weighted average cost benefit to continue much beyond the first quarter, and expect future gross margins to range from 23% to 24.5% depended upon product mix.

Operating expenses as a percentage of net sales decreased to 16.9% from 19.1%, as we can control our variable cost and leverage our fixed cost over the higher sales based.

Operating expenses increased 2.4 million or 3.2% to 78.3 million in 2008 from 75.9 million in 2007.

Despite year-over-year head count reductions, payroll and related cost increased by $2.7 million as our strong quarterly performance saw a three quarter increase performance based pay and perpetual.

Warehouse expenses increased 0.7 million mainly from the cost associated with the four brands closures. While credit card fees increased due to higher sales and they were also increases in other administrative cost.

Transportation cost were lower by $0.5 million due to the drop in diesel prices, while depreciation and amortization dropped about $1.2 million, mostly due to the drop off in amortization related to purchase account.

During the quarter, we experienced $3.2 million for the amortization of intangible assets recorded under purchase accounting compared to $3.9 million in 2007.

Interest expense decreased $0.9 million from the pay down of debt since 2007 in somewhat from lower interest rates.

Income tax expense of $12.9 million and $3.5 million was recorded in 2008 and 2007 respectively. The slight increase in our effective rates to 40.9%, 40.9% in 2008 from 40.2% in 2007 was primarily due to the allocation changes affecting our state taxes. We expect our future tax rate to range from 40.5 to 41%.

As a result of all I'd mentioned, we had net income of 18.6 million in our first quarter compared to 5.2 million in 2007. Diluted net income per share increased $0.29 to $0.41 compared to $0.12 in 2007, a 242% increase.

Our earnings before interest taxes, depreciation and amortization and stock-based compensation, our adjusted EBITDA which is reconciled to our GAAP net income in our press release was $46.6 million for 2008, as compared to $26.0 million in 2007.

Now little bit about cash flows. Cash flows from operations was $5.0 million in 2008, as compare $2.8 million in 2007, posted by the larger operating income.

In addition, we experienced typical seasonal decreases and account receivable, and inventory that totaled $84.2 million and $19.2 million, respectively in 2008. However, these favorable factors were more than offset by a decrease in accounts payable and crude expenses of $122.1 million.

The line of decrease was beyond the normal seasonal effect principally due to larger payments of previously approved income taxes, and some accelerate payments to certain of our vendors.

Inventory returns were consistent in 2008, as compared to 2007. As the price increase environment has settled, and inventory returns were more normal level.

In accounts receivable, we realize a decrease in our sales -- in our day sales outstanding in 2008, as compared to 2007. However, we are conscious of the current economic and credit conditions, and remained conservative in our allowance with full count reserve.

Capital expenditures in 2008 were $2.0 million compared to $1.1 million in 2007, as we increased capital spending slightly to continue proper schedule replacement of order equipment.

Net cash used by financing activities was $6.8 million in 2008 compared to $1.6 million in 2007, mainly to create non-existing debt. As of the end of the quarter, our trailing 12 months adjusted EBITDA was $154.3 million, which one divided into our net debt of $347.6 million, as defined under our credit facilities gives us a ratio of 2.25:1; down from 3.67:1 at the end of last year's first quarter and well below the required ratio of quarter one.

To summarize; some key points, organic sales grew 14.4% in the quarter on a same business day basis. Gross margin was up in the quarter to 25.0%.

Operating margins for the quarter was 8.1% compared to 4.0% in 2007. Diluted net income per share was $0.41 compared to $0.12 in 2007.

The balance sheet continues to improve with cash on-hand of $22.1 million, a working capital ratio of 2.6:1, and a debt to capital ratio of less than 50%. And now back to Bob.

Robert Buck

Thank you, David. As we've done in the past, Paul now has prepared questions and these questions, we give a lot of thought to, because we know these are topics that you really want to hear about. And Paul is going to read the question, go through the answers which we'll give you some insight into very key points.

When that is finished, I think we'll have a quite bit of time for questions from all of you so far more -- I'm going to turn it over Paul, and he'll go through the questions-and-answers.

Paul M. Isabella

Good morning. Let's jump right into 13 questions and answers. Number one; we know gross margin continue to expand, please explain the causes of the improvement and at what levels we can expect them to be in the future?

Due to the price increases over the last year and some solid demand from Hurricane Ike, a mix of residential roofing increased dramatically in the quarter from 37% in '07 to 51% in '08 and as you may know those are highest gross margin products.

We estimated that the higher residential mix contributed about a 130 basis points of the gain, and our overall margin gain with another 70 basis points coming from having lower average cost inventories in the current market price. We expect that the inventory cost advantage will take off within the next quarters, as David say and we expect that our gross margins to level off in the near future to 23% to 24.5%, again mostly depended upon our product mix.

Number two, can you give us an update on pricing in the industry after the recent drop in petroleum prices?

Vendor prices seem to have stabilized that the high levels they reached in our fourth quarter of last year. We have not seen any indication of price decreases from our suppliers yet. But we're cognizant of that possibility, and we will be prepared if it happens.

No, we cannot predict or control the future our vascular pricing. Some of our suppliers have already announced price increases for the spring.

Number three; how much of the growth in the quarters from pricing and how much is from unit growth?

It's always a difficult question to answer, but we're happy to give our perspective as we have in the past.

We possibly get through this question by comparing major SKUs over the same period of time for the prior year. By using this consistent method to answer this question, we believe almost all of the overall same day basis growth was from price increases.

Our product -- but we estimate that 50% of the residential roofing sales growth was from volume, other commercial and complimentary products had volume drops in excess of their price increases.

Number four; please discuss the impact at Hurricane Ike in the first quarter?

We have enjoyed some incremental demands from Ike, especially in the 10 or so branches in are around Houston. We're glad, we have locations which can help the impacted folks re-roof their homes and expect the activity continue for a few more months.

Storm related demand is normal for our industry; the only difference being up there is usually low storm activity in 2007.

Five; non-residential roofing has dropped-off significantly for the first time in quite a while. Can you give us an idea what you're seeing in the marketplace?

There is no question, we're seeing a slowdown in new commercial construction. We also think that some of our lower current volumes related to an early onset of winter as compared to last year.

Our strongest commercial regions are in the north, such as the Upper Midwest, New England, an Upper Mid-Atlantic regions that have experienced quite a bit of snow and harsh cold weather.

We're hopeful that after the worst of the winter conditions then we will see business pick up in the spring, as it did last year although this year maybe different due to the greater uncertainties related to the economy.

Six; how about complementary products?

Our complementary products continue to struggle, especially in regions more affected by new construction. Remember the purchase decisions for these products are much more discretionary than with roofing products, and therefore these sales will be more influenced by the economy.

Gross margins in the category were up slightly for the quarter but volume is still dragging and we don't inside yet it will almost see an uptake. However, we think margin percentages will remain stable in this category.

Seven, can you please comment on why payroll was up substantially in the quarter comparison to last year?

Due to our solid performance during the quarter and comparison to our Q1 performance in '07, payroll, profit sharing and other related cost increased 2.7 million, as Dave said due to the higher incentive and commission based paid plans. However, we incurred less overtime expense despite the higher sales in our head count has been lowered.

In addition, we're pleased that our overall operating cost as a percent to sales drop significantly, the 19.1% to 16.9% this year versus 2007. We definitely are on top of our expenses and payroll expenses only increased because many of our employees were paid for exceptional performance and we're excited for them.

Number eight, remembering its expense control initiatives, what was been fully head count at the end of the first quarter, as compared to last year first quarter. We ended the quarter with 2,372 employees, which is down from 2,550 at the end of Q1 of last year for reduction of 142 about 6% of workforce. We reduced our head count as usual for the winter period and will adjust it again once winter is passed. As you know, this is our largest expense category and we monitored it very closely by region.

Number nine; can you comment on the quality of your account receivables at the end of Q1?

Bad debt expense was lower than last year and dropped as a percentage of sales from 0.37% to 0.48% in 2007. We'll be conservative and consistent with our bad debt reserves and believe they're adequate considering the softness in our economy.

Our days outstanding were less than last year, and over 60 day as two percentages, a detail we watch carefully was also below 2007. We continue to closely monitor credit daily, with a special emphasis on our commercial customers, as our credit organization continues to perform very well. I hope you can curve that reducing our bad debt expense in our first quarter, as compared to last year's first quarter is quite an accomplishment considering the economic times.

Ten, please update on us the strength of your balance sheet. Are you pleased with the progress, as Dave discussed in his comments, we had a 2.25:1 ratio in our only permanent debt covenant, which is a required adjusted EBITDA to net debt ratio of less than quarter one.

We have continued to pay down our debt; we also had about $22 million in cash, at the end of the quarter. As I just mentioned the current condition of AR is acceptable and our inventory levels, despite the affected inflation, our OEM modestly from last year.

We will have to maintain these healthy condition and our balance sheet is in excellent shape considering the state of the economy and credit loans affecting the country.

Eleven, do you have an update on annual estimates for full year 2009. We're still comfortable with the analyst ranges at this point in time, while we enjoyed some sales and profit benefits from the 2008 price increases in Q1, and they somewhat again in Q2 we will be up against especially tough comparisons in Q3 and Q4.

We think growth in sales and improved EPS for the full years which were striving for, will be appreciated by our shareholders considering the tough economic and credit environment.

Twelve, how is business going so far in the second quarter, as we've done in previous quarters, we'll give you a quick snapshot of the current quarter to date. But remember in our business, we can have large swings of activity from month-to-month particularly in the winter.

January sales were weak, especially in our northern regions for gross margins held up reasonably well and sales are still strong in the Southwest driven by the storm damage. It's a very difficult for us to evaluate the overall industry conditions during winter, all we believe current estimates for the year are reasonable.

Thirteen, as a little change regarding your acquisitions strategy, not really for the near future, we most likely will remain on the sideline. However we still talk the prospects because the economic reasons for consolidation remain, we don't believe there is a significant timetable for any acquisition and we do not feel the pressure complete X number of acquisitions within the certain time period.

We have a strong balance sheet, excellent banking relationships and continued to exercise prudent stewardship of our assets. As many of you know, I've heard from our sloppy four cost control, growing organically and steady gross margins represent our business priorities at this time. We believe our financial results conclude the wisdom of our strategy.

Now, I'll turn it over to Bob.

Robert Buck

Thanks Paul. These are a very positive numbers, and so we have an earnings call like this, just let you know despite a great quarter, my office renovation has been put on hold and the Falcon or whatever that 7X is being delayed just my small tip and humor here to -- it's a tough environment. So let's use that humor to launch the questions. So far away. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from Tom Hayes from Piper Jaffray.

Tom Hayes - Piper Jaffray

Great. Thank you. Good morning.

Robert Buck

Good morning.

Tom Hayes - Piper Jaffray

I guess in regards to the pricing expectation, and I guess specifically with the March increase it's kind of been further on the street. What are your thoughts as far as realization of that increase and then thoughts on the holding the prices through back half of the year?

Robert Buck

I, like last year there was some skepticism in the beginning when prices started coming out because demand was low. And everyone was very pessimistic, so it's going to happen again maybe even three have been announce, that could be two. But, I think they'll be there, it could be wrong but I think it'll stay and good reason for it. I believe the manufacturers needed. We'll try very hard to keep it and we will certainly try very hard to implement it. I think necessary.

Tom Hayes - Piper Jaffray

Okay. Is this is the follow-up that you indicated both on the call and in the queue that gross margin trends in the 23% to 24.5% range, which was about 50 basis points higher than previously range. Could you just comment on your thinking for the higher end of your guidance?

Robert Buck

Yes. At the time we made that announcement in November, we had not -- in December, I'm sorry. We had not seen that rapid dramatic spike in the gross margins from the product mix change that happens when we have more residential. I hope people know that we've told them in the past that commercial products actually have 700 to 900 basis point lower gross margins. And as a residential product mix changes that affects the overall margin rate, which puts us into that 24.5% range.

Tom Hayes - Piper Jaffray

Great. Thank you.

Robert Buck

Thank you.

Operator

And we'll take our next question from Michael Rehaut from JP Morgan.

Unidentified Analyst

Hi, guys. This is actually is Ray Horn for Mike.

Robert Buck

Hey, Ray.

Unidentified Analyst

Just a couple questions. I was wondering if you guys were able to, I think last quarter you did announce as on what the EPS benefit from the price increases on the storm related activity was, I was wondering if you have that for this quarter.

David Grace

We had not done that for this quarter. What happened Ray that we saw as far as the affect on the weighted average cost is that, we started a very strong in October and lost probably 40 basis points in November and then a couple -- 10 or 20 basis further in December. We think the effect on the weighted average cost is actually gone now.

As far as the hurricane and margins, there are no price fields in the hurricane area, we don't think they're substantially higher than the margins, we have across the rest of the country. And nor should they be, just because there's a hurricane. So we haven't seen much effect on gross margins from the hurricane.

Unidentified Analyst

Did you guys' breakout on what the storm related activity, in terms of like sales benefit was this quarter?

Robert Buck

We do not and again it's a little difficult to tell. We have 10 branches in around Houston, and if you take the average that we have per branch of $10 million. The most -- I think, they could exceed there on a year would be, maybe 30% to 40% increase of revenues. So that puts it in the $30 to $40 million range, and we've told folks in the past that we think that the hurricanes might last over the nine months depending on the severity. And as you know, the only part of it has the most of it, if that gives you some ideas. Our Houston locations were doing well before the storms hit; so it's very difficult for us to tell where the total revenue growth is coming from.

David Grace

Also I want to add if I can jump. I think there is also a feeling that fiscal '08 has hurricane volume, and it really didn't. So, as we go into the second quarter there is no hurricane volume that we need to -- no one wants to see another hurricane, but I just want to one know on the call, we didn't have any hurricane volume in '08.

Ike happened in the first quarter and actually probably causes a good after a slow start in the first quarter because the first couple weeks of our fiscal year, everyone was trying to figure out what was going on in that part of the country trying to get back to their homes and so forth.

So, no hurricanes was very unusual. But no hurricanes in fiscal '08 that obviously will be -- there are now, in '09 and still wait and see whether August or September of fiscal '09 has an additional hurricane. History would say that there will be but who knows where and how much. So just wanted to clarify that. So take the next question. Permian, please ask next question.

Operator

And we'll go next to David Manthey from Robert W. Baird.

David Manthey

Hi, thanks. Where ever that hurricane is so hopefully not Tampa. Could you talk about -- let see maybe for Paul. I'm wondering what the profit improvement at SBI in North Coast, and do you talk about what the profitability there is in EBIT basis, today versus what it was a year ago at those two business units?

Robert Buck

As we've said in the past we've recognized and we of course drive overall improvement in every region but we also specifically talked about those two regions and we placed a lot of emphasis, we're pleased to say they have made good progress over the last 12 months but probably their rating procedures, processes just about everything.

And if you look at the comparisons against the other regions we've always said our goal is to get them up to company averages from an operating income statement [inaudible]. Frankly, somehow for instances shelters are further the company from overall measurement perspective.

David Manthey

Okay. Thanks, and North Coast also on track?

David Grace

Yeah, as far as North Coast state goes, we continue to help those states, it takes three to five year period to make improvements. North Coast is a very strong commercial company, probably the best in the industry at commercial work that I've seen since I've been here.

But they need a better product-mix to make improvements in their EBIT line, and we're starting to introduce some of those products in some areas two to three branches at a time, we may add some branches at our residential only to give them some leverage on their SG&A.

But they have come a long way from where they started from, it's a very good acquisition, we just need some time. And I hope to be able to tell you in two years time that much like shelter when we told folks we could do that, there's going to be at that level too.

Robert Buck

David, this is Bob. In a different perspective, North Coast attention to the fundamentals has been very encouraging; in particular their focus on receivables and inventory, and all those kind of things that a good distributor.

So we're not only happy with their continued improvement and operations and income; but specifically, just getting into the details and those branches, they're doing really well. And we like that, so that always goes well for continued improvement. They have to first stick to the fundamentals and then everything else comes along, so.

The other thing too, with North Coast, is not only are they jumping out, all the great practices that the other regions have to offer, but we've been able to extract the number of key things from that business, because it is an extremely strong business, especially on the selling side, that we've been able to translate to the commercial businesses of the other regions.

So, it's really been a kind of a double positive hit for us as we've introduced the Beacon practices and then taken away some of the best North Coast practices to the other regions.

Operator

And we'll take our next question from Brent Rakers for Morgan Keegan.

Brent Rakers - Morgan Keegan

Yeah, Good morning. I guess let me start with some of the head count reductions and the branch closings. It looks like the level of head count reductions on the year-over-year basis is starting to taper off. I guess for maybe for Paul, do you feel comfortable now where that the total head count reductions are and then maybe as you could elaborate a little bit more on the strategy behind the branch closings and maybe even and what regions those were affected?

David Grace

Yeah I think, Brent, we're in the current we're in our current winter period. Sure so you see how good the weather was seen and it continue adjust. So there comes of a strategy which we look at these number everyday, we're very cognizant of our efficiency level, our first concern is always to serve our contract base.

So by no means are we finished. Let say I was going materialize to the levels we expect. You will make adjustments and we can pretty consistent I think quarter-to-quarter considering the amount of sales we generated. [Technical difficult].

Robert Buck

If I could ask the monitor to check the static, we're hearing some static here. Connie are you there?

Operator

Yes, give me just one moment.

Robert Buck

Okay.

Robert Buck

Yeah, we don't interrupt the accent from roster here with any static, so let's move.

David Grace

Its pretty quiet here.

Operator

And we'll take our next question from Robert Kelly from Sidoti.

Robert Kelly - Sidoti & Company

Good morning, Thanks for taking my call.

Robert Buck

Good morning.

Robert Kelly - Sidoti & Company

The question that I had in share pricing using stabilization assuming that you do have some threat of deflation in the second half of the year, you mentioned you're prepared for it, how do you actually try to come back that, just start off within ...?

Robert Buck

Well, the biggest thing that we do ahead in times, are inventory, which we are in good shape. Will take down those singles which we turn very quickly usually its at least six to nine times per year, depending on the season that we turned in. And that's where we've seen the vast majorities of price increases. So it's very controllable.

Now if we do see a drop, we hope that its not in droppable which would probably be harder to react too, but as the manufacture is have come out with some price increases even if things drop off a little bit, the perception is that [inaudible] slower if they need to.

David Grace

What I would say is that, I haven't seen the drop in asphalt pricing that maybe some people perceive as out there. And then so that happens, that...

Robert Kelly - Sidoti & Company

And then, as far as you talked about business, sustainable gross margin rate 23% to 24.5%, does that assume stabilization at these levels, the current level evaluated pricing?

David Grace

Yes, if we saw a big decrease in prices that would affect us in the downward, and if we see price increases, it may rise above that. But, we'll have to wait, it happens in the market.

Robert Kelly - Sidoti & Company

Thanks, again.

Robert Buck

Thank you.

Operator

And we'll go next to Scott Ciccarelli with RBC Capital Markets.

Scott Ciccarelli - RBC Capital Markets

Hi guys. How are you?

David Grace

How are you, Scott?

Scott Ciccarelli - RBC Capital Markets

Good. Question, are you guys, just in terms of the pace of business, particularly on the commercial side, I am assuming business that you're doing now is kind of been pre-booked if you will because you knew there are certain projects going on, but given what's going on the commercial side, are you guys expecting a material drop-off in those -- as we get to your second half?

Robert Buck

We talked to our VPs all the time is recently as yesterday. And those jobs are not pre-booked some will be re-roofing jobs caused by when our weather issues, some could be scheduled for months ahead because of projects are underway. But re-roofing is not as scheduled kind of event. And we still, and we tempered, but we're hearing that -- Paul you had this conversion, does it -- optimistic and contractors are, our VP's are that we take that listen to all but we tempered and we are tactical plans, are pretty real time everyday, every week. So, the re-roofing aspect of commercial is awfully strong, its 80% of the business.

And given that amount that gives us even more optimism, giving the strength in the -- I guess harshness of this winter, probably you certainly can't predict anything and we don't like even talk about weather.

But the reality is that present that's been very difficult through contractors even get on the roofing and northern climate. But as Bob said that there is some tempered optimism coming out of our regions that are strong commercially about prospects over the next six months once they can actually start working.

Scott Ciccarelli - RBC Capital Markets

Okay. That's helpful and then any kind of color regarding year specific competitive situation would be helpful just in terms there is a lot businesses both large and small under a tremendous amount of pressure given what's going on and obviously the real estate market as well as the broader economy I know roofing is obviously a lot more insulated, but any kind of feel or color would be helpful.

David Grace

All regarding our competitors?

Scott Ciccarelli - RBC Capital Markets

Yes.

Scott Ciccarelli - RBC Capital Markets

That'd be hard for me, most of my private. So I really couldn't give you a lot of information on that.

Scott Ciccarelli - RBC Capital Markets

I guess on, looking for -- are you seeing people kind a close stores, close shops that kind of stuffs or because of the stability of the industry, you're not really seeing that?

Robert Buck

You're right, it is just stable, stable industry and if there are private companies, well run 5 to 10 and 15 locations probably own the real estate, do a good job of inventory management, receivable management, people I know, good cash flow in this environment. These are good companies.

Scott Ciccarelli - RBC Capital Markets

Okay, that's helpful. All right, thanks guys.

Operator

And ladies and gentlemen, we have time for couple more questions. We'll go next San Taylor with MJXXF Management (ph).

Unidentified Analyst

Yeah, thanks for taking the call. And I had a question, if -- I heard and I think you mentioned it on previous calls. Not a huge interest in going by acquisition but more by organically. And looking at the cash flow statement and maybe I can't make 18 million in net income every quarter. But I'm just doing some quick math that if you keep receivables inventory under control you could well generate north of $40 or $50 million of free cash flow this year. And where would you say the demands on that cash flow go, Will it go to debt repayment or possibly share repurchase or might you change your tune on acquisitions?

David Grace

Yeah, well start with per day which is our attitude on acquisitions.

Unidentified Analyst

Okay.

David Grace

We still -- our long-term growth objective is to grow organically 5 to 10, and acquisitions 10 to 15, we've exceeded both those numbers, since going public. So, the acquisition strategy is still very key to what we do.

Unidentified Analyst

Okay.

David Grace

So, that we'll continue, what we have said is we are on the sidelines accumulating cash, as I say keeping our powder dry, and that's what we're doing. And we are accumulating cash, and I think your free cash flow estimates probably low.

Unidentified Analyst

Yeah.

David Grace

For the year. So, we would continue to build that cash, as we speak today, we are -- we do look at acquisitions and that's part of our gross strategy. But, we're also very conservative company. I think, we're in great shape now probably as good as shape to make acquisitions running when I know, and so -- does that answer your question?

Unidentified Analyst

It does and just a follow-up. I agree I will borrow the cash flow as well and I think it'll be more. We have the rating agencies had a chance to digest this quarter's numbers, you might be chatting with them.

David Grace

We don't have rated debt. We had one-time rating on our debt.

Unidentified Analyst

Right.

David Grace

They don't even look at it.

Unidentified Analyst

That's all I had. Thank you.

David Grace

Thank you.

Robert Buck

Appreciate it.

Operator

And we'll go next to Ted Kundtz with Needham & Company.

Theodor Kundtz - Needham &Company

Yeah, hello everyone.

Robert Buck

Hi.

Theodor Kundtz - Needham &Company

Bob, could you comment on the outlook for new construction? And not -- we know its awful but its worse now that it was year ago and how much of an impact would that have on you guys going forward in terms of your volumes. It's a year-over-year change I'm looking for. Is it -- do you see it as a lot worst than last year or is it kind of comparable to last summer?

Robert Buck

Ted that's excellent question, I'm not a builder. So, they would probably have a better sense of where they think calendar year '09 is going to be. My personal opinion and again I'm not a builder, the personal opinion is housing starts at a low point. And for us with our product mix, we will benefit from an increase in housing starts, inventory levels are going down, I think the governments going to get mortgage rates down, foreclosures are going to stabilize, because people going to be supported, lot of things happening that will be very good for housing.

Even in January, existing home sales went up, and I'm sure some of those, home sales of existing, the seller was possibly buying a new homes in place. So, I think its cyclical bottom, could bounce along at these rates for several months and then get a lot better later in the year mainly because everything is aligned that way, people are saving more, mortgage rates are down and homes are more affordable. So that's how I see.

Theodor Kundtz - Needham &Company

Just wondering I your mix of the residential business is it still roughly 70% kind of re-roofing and 30% new construction related or is that mix changed where its really much more re-roofing now than it had been, because of this economy.

David Grace

Theodor, this is David. I don't think there's any question especially in the markets that we're that has client above that. I couldn't give you an exact percentage, we use very rely on in industry research company to provide us for that. But think if where we are in the North East along the East Coast, and we're not in Florida and Nevada and although big home buildings states which calculate the most. So there's no question in my mind that the re-roofing is probably declines above 75% but I couldn't prove it yet, my personal opinion.

Theodor Kundtz - Needham &Company

Okay, I'm just trying to get the delta there from last year to this year. Okay.

David Grace

Great.

Theodor Kundtz - Needham &Company

Thank you

David Grace

Thank you

Operator

And we'll take our last question from Garvin Buchanan with Boston Capital (ph).

Unidentified Analyst

Yeah, I apologies all my questions have been answered.

Robert Buck

All that are answered well.

Operator

And that's concludes the question, now I'd like turn the call back over to Mr. Buck for his closing comments.

Robert Buck

Okay. I appreciated. Thanks again for your questions and again David, Paul and I will be available for additional questions immediately following this call and as usual I'd like to close a call by emphasizing several points comment both point traction.

Number one; we are really pleased with this with our double-digit organic growth of around 16% for the quarter. Gross margins were up for the quarter both in dollars and a percentage to sales. Operating margins has a percent to sales actually doubled from 4.0% to 8.1 and this is some thing we talk about all the time, our balanced product mix couple with the diversified geographic footprint that we have, it serves us so well and we'll continue service well in the future as deal with economic situations.

Our balance sheet very strong and we want to always be known and we've said this before in -- always be known as good towards of the assets interested to us. And we believe our results and all these areas are pleasing to our employees, our suppliers and our shareholders.

So thanks very much for your continued interest in support of Beacon and speaking at behalf of our employees, we all truly appreciate it and we look forward to seen you in the coming months. Thanks very much.

David Grace

Thank you.

Operator

Thank you.

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Source: Beacon Roofing Supply F1Q09 (Qtr End 12/31/08) Earnings Call Transcript
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