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Good afternoon, ladies and gentlemen, and welcome to the Beacon Roofing Supply's Second Quarter 2018 Earnings Conference Call. My name is Alvin and I will be coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this session. 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 performances. Forward-looking statements are only predicted and are subject to a number of risks and uncertainties. Therefore, actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including but not limited to those set forth in the Risk Factors section of the company's latest Form 10-K.
These forward-looking statements fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the company, including the company's financial outlook. The forward-looking statements contained in this call are based on information as of today, May 8, 2018, and except as required by law, the company undertakes no obligation to update or revise any of the 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 & 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 Nowak, 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, and good afternoon and welcome to our second quarter earnings call. During today's call, we will provide a detailed review of our quarterly results, discuss early integration efforts related to Allied, and update our expectations for fiscal 2018.
As we have seen in the past, our second quarter can be quite unpredictable. This winter saw one of the most dramatic temperature swings in decades. We saw cold temperatures throughout the quarter, a rain-filled February month, and snow wind disruptions during March. These harsh conditions can limit our customers' productive workdays and hurt overall residential home improvement demand. These types of harsh winter quarters usually end up producing a very solid demand backdrop for the remainder of the year.
However, in spite of this, we had many positive aspects to our results. Sales, pricing, year-over-year gross margins, a solid balance sheet, solid execution on the Allied integration, and continued progress on our business strategy were all pluses.
In terms of sales, let me reinforce the strength of our top line results for the quarter. 64% total growth reflects the continued execution of our acquisition strategy. And as you know, we just added another one branch acquisition in Minnesota. We had approximately flat organic growth which may seem light for Beacon, but actually reflects a solid quarter. We were able to successfully offset the weather challenges due to the breadth of our branch coverage. In this case, specifically in Florida due to Hurricane Irma, but also in California, that demonstrates the stability of our business model as a result of our broad geographic footprint.
Even with the top line challenges I just mentioned and during the first three months of our integration of the Allied transaction, we were able to deliver adjusted EBITDA similar with last year at $31.7 million versus the $31.8 million in 2017. Looking back at historic second quarter EBITDA rates, I'll give you some perspective. During the past two years of mild winters, we've seen adjusted EBITDA margins up 3.5% to 4.5%. But during the colder 2014 and 2015 second quarters, margins were at a negative 1% to 2%. While we're not satisfied with this quarter's positive 2.2% EBITDA rate when you contrast this with past winter quarters, this demonstrates the progress we made in the quarter from prior years.
For the quarter, we reported adjusted EPS at a loss of $0.35 which compares to an $0.08 profit in the year-ago period. As you can imagine, we're not satisfied with these results. There are lot of items to unpack from that EPS number and also some positive items as I mentioned in our results. Joe will spend a good deal of time going through the specifics in his prepared remarks.
It's important to remember that our fiscal second quarter historically contains the largest weather extremes in the year, which creates similarly significant swings in customer available workdays and increases second quarter EPS volatility. That is what we saw this past quarter. Q2 is also our lowest revenue quarter of the year. During our history, we have produced a roughly equivalent amount of quarterly losses and profits during this period. While weather can swing from one quarter or even one month to the next, we believe key company initiatives are helping to sustain our performance.
We have a focused effort to invest in our employees with additional tools and training that are enhancing productivity for consistently expanding our product breadth and depth including our private label offering. And we're targeting new customer subsets including building out relationships with national accounts, large retailers in two-step customers, and we are investing in technology both for our own uses and for the benefits of our customers. One example of the successful technology initiative is our growing e-commerce platform. Although still only a small part of Beacon's business, it is expanding in importance as we penetrate new customers and add to its functionality and service offering.
Now specific to pricing, we reacted quickly during the quarter with our initial announcements and adjustments in the market. To-date, we've announced two increases with a third soon to come. The shingle manufacturers have announced three with the latest being recently in the last week or so. As we've highlighted in the past, successful price increases are aided by two primary factors, underlying raw materials inflation and a solid demand environment. We're certainly seeing inflation which we believe will continue.
Raw material increases are occurring across a wide range of key items including asphalt, steel and gypsum as well as for inbound, flatbed rates, and for outbound, costs including diesel and other delivery expenses. And demand for the reasons already mentioned were somewhat constrained during the quarter. In spite of this, our early efforts to raise prices made progress as we gained approximately 200 basis points in the quarter year-over-year. This was our strongest pricing gains in more than five years.
Material costs, however, exceeded our price gains because of the timing of input increases. This resulted in a 60-basis-point price-cost headwind in the quarter. And we have seen these price gains accelerate further from March to April, as our March price increase continues to be fully implemented. April saw approximately 375 basis points of year-over-year price gain. The overall inflationary environment is beginning to translate into a greater sense of urgency across the entire supply chain.
We're seeing some significant positive traction for pricing, specifically during the past one to two months as our messaging appears to be resonating with the market. We remain firmly committed to supporting manufacture price increases and successfully recovering from the rising cost environment. And as demand, for normal seasonality and the harsh winter increases, we should see more support for the current and future increases. Second quarter sales were relatively consistent throughout the quarter. We did see pockets of regional strength including in the west, the one part of the country which experienced favorable year-to-year weather trends. We also saw meaningful hurricane benefits mostly in Florida.
From a line of business standpoint, complementary products again represented our strongest performing category with 9.1% sales increase. The segment benefiting from higher levels of price inflation, a strong macroeconomic backdrop for both new construction and home improvement, and company initiatives. We're continuing to have great success cross-selling a variety of products, which should bode well for our recently acquired Allied interior business over time. Our non-residential roofing category produced 1.8% organic sales increase, representing our third straight positive growth. We continued to have a favorable outlook for non-res construction and believe the effects of winter weather in our northern markets should drive additional re-roofing activity for the remainder of 2018.
Residential roofing however showed a 3.8% organic sales decline. Remember, this business had generated positive growth for the 15 previous quarters, not surprisingly sales declines were largest in the regions most negatively impacted by winter weather including the Midwest, Canada and Mid-Atlantic. But most importantly, price was positive during that period, the first positive pricing since fiscal 2013 within residential roofing.
On a geographic basis, we saw three of our seven regions post positive growth during the quarter. The strongest was the Southeast, which includes the hurricane-impacted Florida market and the west. The west has been one of our two strongest performing regions for four quarters in a row, in part reflecting a favorable complementary products expansion initiative. Our two weakest performing regions were the Midwest and Atlantic, as I mentioned, down 11% and 8% respectively. Weather in the Midwest was truly punishing during the quarter as January, February and March were all significantly colder than the comparable months of 2017.
In terms of gross margin, Joe is going to walk you through a lot of detail on them. I will mention our second quarter total company gross margins improved 20 basis points from 2017, aided by the contribution from higher gross margin acquisitions, including Allied. Our existing gross margins declined approximately 80 basis points year-to-year with price-cost headwinds being 60 basis points negative of that. This has improved from the level we reported in Q1, which was 120 basis points of headwind. End market mix impacted the second quarter as our residential roofing segment posted a sales decline as I mentioned and we recognized a modest two-step customer mix headwind.
Now I want to provide an update to our ongoing integration of Allied. This is clearly an example of a combination where both sides are benefiting. We're clearly bringing positives to legacy Allied and they are likewise introducing positive attributes that can be implemented and are being implemented within Beacon. I'm very pleased to report that the early integration progress has provided us with the confidence to raise our previous synergy expectations from $110 million to an updated $120 million target. We're also raising our fiscal 2018 synergy expectations from approximately $35 million closer to $40 million.
While these new guidelines represent our public objectives, we will still strive to reach these goals sooner than anticipated as well as to attain cost savings above these updated goals. And as always, we will remain vigilant with our management of both integrating savings and revenue opportunities.
Regarding the specific synergy components, we began consolidating the two companies' procurement programs in January to secure the best supply arrangement from our vendors on a market by market basis. Based on the timing of new inventory purchases and final sales to customers, we realized only a modest benefit as expected in Q2 although this is expected to jump significantly during the third quarter. Overlapping personnel positions have been identified and we are moving forward on these difficult employee transitions. The cost savings related to these decisions is just beginning to positively contribute to a reduction in operating costs.
Finally, in early April, we identified the branches we plan to consolidate and inform the employees affected by these decisions. These consolidations will closely correlate with our systems conversions, which will occur in several waves during the spring with final conversions taking place this fall after the busy summer season. We feel very good about our process with the integration and expect to continue this positive trend.
Now I'll give our view on guidance for the full year. I will start out by saying, I do think it'll be prudent to tighten and modestly lower our previous EPS range of $3.40 to $3.70. Based on all the factors we analyze and of course the variability of those factors such as price-cost, sales attainment, weather events, we think it's prudent to set a new EPS range of $3.35 to $3.55. While our first quarter was largely in line with the Street's tax adjusted estimate, our softer second quarter has put us approximately $0.20 below the analysts' full year 2018 earnings pace. Our new guidance reflects the belief that we will recoup half of this shortfall during the second half of 2018.
The following factors will help explain this decision. We're increasing revenues by $125 million. This reflects a 3% price increase average during the year. We had previously assumed flat pricing for 2018. These gains are partially offset by a reduced net contribution from weather and storms including hurricanes, hail and winter impacts. We estimate this impact to EPS to represent a positive $0.15 to $0.20 per share gain versus our prior view.
Second, we're reducing our gross margin outlook by 55 basis points to 60 basis points from our previous number. While we're making meaningful progress each month, the proportion of price-cost recovery has been slower than we hoped and price-cost parity now won't most likely be attained before Q4. The gross margin headwind reflects an approximate $0.30 per share negative versus our earlier views.
And third, operating costs were slightly higher than our expectations during the first half. We're confident that higher second half synergy assumptions, tight cost controls and favorable operating leverage will help us more than recoup the first half OpEx rise. We believe operating costs and related leverage will provide a neutral to a $0.05 positive contribution to 2018.
Obviously, there continues to be opportunities for upside to this forecast and we are going to work hard to achieve that, and also of course downside risk potential. Given the April month price contribution, stronger than expected pricing may provide added revenue upside. Further, a more favorable price-cost relationship would also provide upside to our existing view. At this point in the year, we see downside most likely being demand based given the slow beginning to the 2018 hail season.
I think it's important to frame the second half based on the new guidance. The estimates demonstrate excellent progress over last year even with the slight reduction. Second half organic sales up high single-digits, second half total gross margins up approximately 50 basis points, and second half adjusted EPS that's up nearly 50% above 2017, these are very solid year-over-year numbers and we are very focused on attaining them.
And now I'm going to turn the call over to Joe for additional color on our second quarter results, balance sheet and 2018 outlook. Joe?
Thanks, Paul, and good afternoon, everyone. Now I'll highlight a little more detail on a few key financial results and metrics that are contained in our earnings press release and the second quarter slides that have been posted to our website. In my prepared remarks, I'll go into greater detail on gross margins, operating expenses, key balance sheet metrics, and our updated fiscal 2018 outlook.
Paul already covered our sales results in great detail but let me reinforce the strength of our top line results for the quarter, a 64% total growth reflecting the continued successful execution of our acquisition strategy, and flat organic growth reflecting the challenging weather environment this quarter. As Paul mentioned, for the quarter, we reported adjusted EPS at a loss of $0.35, which compares to an $0.08 profit in the year-ago period.
I'll spend a good deal of time now unpacking the details. As a reference point for the quarter, during our history, we've produced a roughly equivalent amount of adjusted quarterly losses and profits during this period. Our acquisition of Allied added additional concentration to our northern exteriors markets, it also creates additional incremental fixed cost burdens tied to depreciation and higher interest expense. Additionally, the accounting treatment for our new convertible preferred exaggerates the magnitude of the second quarter loss further, particularly within the context of our overall full year expectations. I'll walk through the impact of all these in the next several minutes.
First, starting with a little more detail in regards to the sales line, our monthly organic sales growth rates were fairly consistent during the second quarter, but with positive growth in the final month. January daily sales declined 0.5%, February declined 1%, but March increased 1.8%. There is a deeper story in our sales trends when you back out the outstanding performance that we're delivering in Florida due to the Hurricane Irma.
Without Florida, our organic sales growth would have declined mid single digits. This clearly shows the significant impact that winter weather had in our volumes this quarter. It also will help explain some of our operating expenses that occurred during the quarters we added costs in Florida to handle the storm volume, but we are not able to de-lever as quickly in the winter weather markets.
Although we're not satisfied with these results, the comparisons were extremely difficult as we faced considerable mild winters. The February month compares and in particular, featured a greater than 50% cumulative sales gain over the past two years. As Paul discussed, our three primary business lines were mixed with commercial and complementary posting organic gains, while residential roofing declined. This mix shift also ties with the weather issues we experienced.
As we've mentioned in the past, during challenging winter weather, we'll always see a bigger decline in residential roofing to the difficulty of working on steep slope roofs. April month sales saw approximately 3% organic growth. As Paul mentioned, we gained approximately 375 basis points on price in April. These two data points combine make for a very promising start to Q3.
There are many moving parts to the second quarter weather story. The weather was significant in the quarter, but also important to understand our revenue expectations in the second half of the year. First, the difficult year ago hail comps from Texas primarily are producing a mid single digit negative headwind. We believe this is consistent with what you heard from our publicly traded suppliers. Second, the harsh winter weather as Paul discussed also represents a mid single digit negative impact to Beacon. Third, we had fiscal 2017's Hurricane Matthew that's providing a low single digit negative from a comp perspective. Now the positive side, Harvey and Irma are adding over overall growth by mid single digits. And finally, when you exclude the weather element, our non-weather impacted regions continued to produce solid mid single digit growth. When you put all those five pieces together, you get to basically flat organic growth for the quarter as we reported.
Going forward, we now expect Harvey and Irma to provide a $200 million positive contribution to our revenues with the majority in 2018, but some also sliding into the first half of 2019. We had previously anticipated $120 million contribution. Specifically during the second quarter, Beacon realized approximately $50 million from the hurricanes and another $15 million to $20 million is estimated impact across Allied.
Moving on to gross margins as noted on slide 4, although not shown specifically on this page, I'd point out that our company-wide gross margins improved 20 basis points during the second quarter. As outlined previously, higher margins within our acquired businesses lifted margins by over 100 basis points, again reflecting great execution on our overall acquisition strategy. This was partially offset by existing market gross margins, which came in at 22.7% compared to 23.5% in the year-ago period, an 80-basis-point decline.
The lower margins represent a combination of unfavorable product mix attributed to our declining organic sales growth within the highest margin residential roofing category. A mix related drag from direct sales in two-step and unfavorable geographic impact. Those items drove about a 20-basis-point decline in gross margin, with the majority of decline relates to product costs rising faster than prices to our end customers about a 60-basis-point negative impact.
Winter is historically difficult time to pass on price increases and the overall software winter demand further deferred our price realization. As Paul mentioned, we feel very strong that this will prove only a short-term occurrence and our gross margins will follow a similar pattern to those prior periods that had rising prices. 2008 and 2011 are the most noteworthy recent examples.
While not completely offsetting cost increases, we are very excited to report our overall pricing increased more than 200 basis points during the second quarter. We realized a sizable 500-basis-point to 550-basis-point increase in our complementary products category. We also saw some meaningful gains in our core roofing categories. Commercial roofing prices increased 100 basis points to 150 basis points and residential roofing prices rose more than 100 basis points, that's the first quarter we experienced residential price increasing in over four years.
As we went through the quarter, the price improvements also increased every month. January pricing was up 150 basis points; February 180 basis points; and March up over 240 basis points. And even more important as Paul mentioned previously, we're seeing that very positive pricing trends continue into April as prices are up approximately 375 basis points year-over-year, our early March price increases are being implemented into the marketplace.
In the quarter, overall product costs increased 250 basis points to 275 basis points with all categories experiencing cost inflation. Complementary cost increases of 650 basis points to 700 basis points, while commercial roofing costs were up 200 basis points to 225 basis points and residential roofing was up 150 basis points to 175 basis points.
In addition to the price increases as Paul mentioned, there are several other initiatives we have implemented to drive gross margin improvement from increased private label sales, to freight surcharges, to product mix shifts, we're addressing the gross margin challenges on several fronts. Based on the continued price improvements that I mentioned and these other initiatives we saw gross margin continued to improve in April. In fact, over the Q2 results by almost 50 basis points to 100 basis points, clearly demonstrating we're getting price in the market and our overall GM improvement strategy is working.
Now moving on to operating expenses. Our total operating expenses were $395.8 million or 27.8% of sales. Excluding the acquisition costs of $65.4 million, the adjusted operating cost was $330 million, or 23.2% of sales. The $65 million of acquisition costs consist of $37.1 million of amortization and $28.3 million of non-recurring charges associated with the Allied acquisition. These amounts are all aligned with our initial targets as part of that Allied acquisition.
As noted on slide 5, existing market operating expenses were $234.7 million for the quarter. When adjusting for the outlined non-recurring charges, our adjusted existing marketing operating costs were $190.1 million or 22.1%. This represents a $6.4 million year-to-year increase or 80 basis points as a percentage of sales. Now, I'm going to provide some specific factors impacting our second quarter adjusted existing market operating expense. $3 million of the increase is due to our incremental volume in Florida to serve the hurricane-impacted locations. With our Florida sales up over 70%, we had the substantial increased cost to serve that volume. But in total, our Florida business significantly lower their operating expense as a percentage of sales. We can definitely gain leverage as volumes increases we did in Florida, we typically did not add cost nearly as fast as revenues increase.
Similarly, our operating expenses were up $1 million year-over-year in California where our sales were up 13% and operating expenses were only up 5%, again great leverage. Third item is our annual merit increase program that drove our compensation cost up about $2 million year-over-year. Unfortunately, it is more difficult for us to reduce cost quickly when the weather is as volatile as it was this quarter.
Our inability to get leverage in the winter weather impacted areas cost us about $4 million in higher operating expenses. We're not satisfied with our second quarter existing markets operating expense, the rising cost profile as a percentage of sales is similar to the patterns we've seen during other harsh winters. 2014 and 2015 had existing markets operating expenses over 26% of sales.
While we make every effort to manage fixed cost during winter months, many of these elements are simply not that flexible. In addition, it's a necessity for us to also position ourselves for the demand acceleration typically experienced in March through May. Below our net income line, you will also see the impact from our new $400 million convertible preferred issue.
The declared dividends amounted to $6 million for the quarter or roughly $0.09 of the EPS. While we expect a similar quarterly dividend going forward, this is not likely to factor into our EPS calculations with the exception of future second quarters. In other quarters and for full years, we expect to exclude the preferred dividend and instead assume full conversion of preferred shares adding approximately 10 million shares to our diluted share count.
Our tax rate in Q2 was approximately 31%. Our 2018 guidance remains unchanged and we anticipate a range of 29% to 30%. As an FYI, our cash tax rate is now at approximately 8% to 10% for the full year. Aided by the acquisition cost associated with the Allied deal as well as incremental amortization and 100% deductibility of capital addition as a result of the new tax reform act, a very favorable cash impact for us.
Next, I'm going to spend some time talking about our cash flows and balance sheet. As noted on slide 6, our year-to-date operating cash flow is $40 million, below the $150 million in the first six months of 2016. But if you recall, we spoke last quarter about the detrimental first quarter impact in accounts payable from a favorable timing benefit to end fiscal 2017. Aside from that Q1 impact, our second quarter operating cash flows was a strong $79.4 million compared to $72.3 million in Q2 of 2017.
As noted on slide 7, our working capital increased to $1.13 billion at quarter end from $683 million in the comparable quarter a year ago, primarily as a result of the acquisitions. The teams continue to do an excellent job of managing our working capital. And as we get further into the Allied integration, we should see this continue to improve. Our net debt leverage ratio is at 4.5 times EBITDA when you consider our projected synergies of $120 million. Similar to the RSG transaction, we increased our net debt leverage for Allied, but as you know, we have defined plans reduce that leverage over the next two years.
Now turning to slide 8, I want to provide a bit more detail regarding our updated 2018 outlook. As you can see, we're raising our 2018 revenue view by $125 million at the midpoint. The increase is attributable to higher Allied and core Beacon contribution. We now expect Allied to add slightly more than $2.1 billion with three quarters of inclusion. Organic sales growth will move from approximately 5% to 6% to 6.5% to 8%, and based on our year-to-date organic sales growth of 4.4%, this calls for high single-digit increase over the next two quarters.
As you know, we've highlighted the need for colder and snowy winters as a driver of stronger summer repair demand. Beginning in the May month, we've incorporated a pickup in re-roof activity across many of these affected areas into our forecast. And we really believe this demand lift will also continue to Q4 and even early into 2019.
When looking at the growth acceleration plan, you should also understand that May and June monthly comparisons are easier, and we're anticipating further sequential price inflation benefits. During the second half of the year, the winter weather demand should shift materially from a meaningful drag to a low-to-mid single digit positive contribution. And we do anticipate pricing to contribute approximately 3% for the entire year. It's been 1.5% in the first half year and we are expecting 4.5% in the second half year. If you recall, our previous assumptions had called for flat prices.
Our adjusted EBITDA view has been lowered from a range of $560 million to $600 million down to $555 million to $585 million, essentially reducing the midpoint by $10 million. Our overall EBITDA margins would be lowered approximately 30 basis points from previous expectations. The negative effects of price-cost timing and our gross margins during the first half of 2018 is created a significant hurdle to overcome. But nonetheless, we anticipate steady year-to-year improvements to our gross margins during the second half.
We also now see synergy savings providing a $40 million boost to this year's results. We had previously anticipated $35 million favorable contribution. Analysts should model two-thirds of these benefits on the operating costs line and approximately one-third from procurement savings. We're very optimistic about our operating cost outlook and plan to show attractive second half leverage. We're targeting additional cost controls and expect to drive even more favorable cost leverage from the industry's pricing gains. In addition, we believe all these actions coupled with additional volume will allow us to make up a portion of the quarter's miss in the second half of the year.
Consistent with our adjusted EBITDA reduction, we are also reducing our adjusted EPS view. We've lowered the range from $3.40 to $3.70 down to $3.35 to $3.55. This new EPS outlook also reflects the second quarter shortfall, but with a partial recovery of the miss during the second half.
I'll now turn it back to Paul, before we take your questions.
Thanks, Joe. Just to issue a brief statement before we get into the question period. While we experienced short-term weather related demand and inflationary timing challenges during the second quarter, as you heard, we believe our second half will deliver solid growth and improvements in gross margin, cost and EBITDA. And as a company, we remain committed to driving growth and producing attractive margin performance within the current inflationary environment. 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.
We're off to a good start in April as you heard and we're very optimistic about the remainder of the year. As I've said before many times, we're in a great industry with a strong economic backdrop. Our talented team, branch density, and product diversity make us extremely positive about our future.
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. Thanks.
Our first question comes from Keith Hughes of SunTrust. Your line is open.
Thank you. Just wanted to ask about a couple of the April metrics you mentioned. I heard 100 basis points gross margin improvement, is that year-over-year sequential? And is that just organic? Any kind of details on those would be helpful.
Sure thing. Hey Keith, this is Joe. So thanks for the question. In regards to the gross margin through (37:15) April, still preliminary. So, I'll put that out there, as you know, but with our call being a little later, we had some more insight into the April results that we wanted to share. It's roughly around a 50 to 100-basis-point improvement in our gross margins over what we had seen in the prior quarters. So, improvement over the second quarter's results that we just released.
Okay. And as you look at the remainder of the year organically, within the guidance you're giving, are you expecting the price, the 4-odd percent price? And then what kind of volume on top of that to hit your guidance?
Sure, this is Joe. So, I'll tackle that one for you as well too. So in regards to the price, or the volume increase, as you saw, roughly $125 million is a midpoint of the increase in total sales for the back half of the year. If you break that down a bit, the price increases I said, roughly that 4%, 4.5% number, that will get you somewhere around $200 million from price, and then really you have to take the rest of the elements, and there are several kind of pluses and minuses in there from the weather impacts from the second quarter which were a bit of a negative, plus, as Paul mentioned, some of the positives from the winter that should help us in the second half going forward. So if you take the $200 million from the price and then roughly weather related activities, as Paul mentioned, would be about a negative $75 million. Does that help you?
Yeah. Well, so that's from the weather, and, I mean, there's other things going on, there's this organic growth in roofing, and what's the – are you assuming there is no other positives to offset that negative $75 million of volume?
You broke up on the back half of your question, Keith.
Yeah. So, let me do it in terms of percentages. So, you're assuming price really across the entire enterprise organically, there is a 4.5% in the second half of fiscal 2018. Will there be a volume percentage – netted together, with all the different things you've listed in the call, will there be volume that comes out on top of that, or is it just going to be price?
No. Certainly it will be volume with it as well too.
Okay. So can you give us a rough idea of what that is?
It's roughly around 4% to 5% would be the volume-based organic growth that we would expect to see.
So, 9-ish total would be what you'd be looking for?
Yeah.
Keith, in my prepared I had said high singles, but in reality it's at 9%, 9% and change, again approximate for the back half.
Okay. Great. Thank you.
You bet. Thank you.
Thank you. Our next question comes from David Manthey of Baird. Your line is open.
Hey, guys. Good afternoon. First off, was wondering if you could talk about that price-cost relationship and what happened to that delta as we moved from January through April. And what I'm getting at is, was April better than 60 basis point shortfall that you saw in the second quarter overall, or is it getting worse before it gets better?
No, it's been improving. So every month the price-cost variance has gotten smaller. Just like as you recall from the first quarter – remember, our first quarter actuals, the price-cost was like a 120 basis-point negative. Second quarter, as I mentioned, 60 basis points, and then you'll see that in third and fourth quarter begin to narrow down as well, too. So it's gotten better every month through there.
And we said, Dave, as a reminder, I think it was Q3 and Q4 we'd see a 40 bps and 30 bps headwind. Again, it's early in April, we were able to get the pricing number, which is the first number we get. We're still working on the COGS input, a material input. It looks favorable, more favorable, but we got to get to the final for the month. So we're optimistic, one, with such a large price increase and it's not by accident, just so everybody knows. We are putting a tremendous amount of energy with our field team, operational team to really push and explain to our customer what the heck is happening with input costs because, as you know, from the OC and Carlisle releases, they are seeing real input cost pressure, and they're pushing on us very hard. So we have to get that. So we're optimistic. We wanted to show what we thought was our, I guess, an average case for the balance of the year, but we're working real hard to get rid of that headwind. We just can't say for sure, because it's so hard obviously to predict out five or six months, right, but we're focused very hard on eliminating it.
Okay. And then you implied from the release that the shortfall was – a lot of it was revenue based. And I'm looking at my numbers and the Street numbers and it seemed like you were in line to maybe a little bit better than what most people were looking for. And could you just tell us like by how much you missed your internal forecast? And then secondarily was, if you exclude this price-cost issue, was gross margin as you expected and the shortfall was related just to the price-cost, or was there something else there with mix or something else?
Hey, Dave. This is Joe. Yeah, I'll take that. And actually, it wasn't at all related to volume. In fact, volume is the other way. So if I look at the variance to kind of our guidance that we gave, we really missed by probably somewhere around $0.17 of EPS. Our revenue numbers were higher than we expected, so somewhere around $29 million higher than we expected, and that helped us by about $0.07. The gross margin piece really hurt us by about $0.13, and then the SG&A was a little bit higher. As I mentioned, that hurt us by $0.11.
So it really was the gross profit and the SG&A were the two elements, and we tried to unpack those on the call, the gross margin combination of the price-cost element plus some of the mix issues. And on SG&A really had a lot to do primarily with the weather impacts and the costs associated with Florida versus not getting the delever within some of the winter weather areas. Those are the two big drivers.
Yeah. So, Dave, just a little more color. Certainly, as I said, in general, we're not happy. But when you look at the fact that we had such a big gap in Q1 if you remember, the 120 basis points in terms of price-cost, I mean that just didn't go away in terms of that pressure, right. So we immediately started as best we could even in pretty lousy weather as we talk about in most parts of the country, other than maybe the West. We're able to get that 200 or so bps up on price and cut the gap substantially, right, from the 120 basis points. So we think we've made good progress. It just wasn't enough to overcome that pressure, right. And as you know, gross margin levers an awful lot on the amount of sales we generated. That's why we're focusing so much energy on the price side.
The good news as we said within April all of those things leaning in the right direction, clearly heading towards the details behind our Q3 and Q4 forecast, Dave.
All right, sounds good. Thanks, guys.
Thanks, Dave.
Thank you. Our next question comes from Matt McCall of Seaport Global Securities. Your line is open.
Thanks. Good morning, guys, or afternoon I guess it is now. Sorry about that...
(45:01)
So let me follow up on maybe a couple of those. So the first one's operating expenses. It sounds like – so you pointed to $3 million from Florida, $1 million from California. I mean by my math that only gives you 30 or so basis points. Is there – the merit increase was I assume in the guidance already. You referenced a second ago that you missed your implied guidance of about $0.17. I'm just trying to make sure – trying to figure out where I was off, because I was I think at a loss of $8 million. So looking at that SG&A specifically, those are the only two items you called out. Was that to say that you're really off only by the $3 million $4 million that you talked about relative to your previous outlook?
No. On the outlook, we were off roughly around $10 million, somewhere around $0.11 of EPS. It was the two items you mentioned.
Okay.
So really it was our expenses within both of those two areas, so California and Florida. And the third item I mentioned was our lack of ability to get leverage in the non-storm areas, right. Traditionally, we would be able to try to get some leverage out there as we didn't have the volume, but because of the weather and the impact of the winter weather, it made it very difficult for us to ramp down quickly, and that really cost us about $4 million difference than what we were expecting. That's the other third big piece there that we would have expected to take more cost out, but because of the nature of the weather, it made it really tough for us to get the volume up quickly. That was the other big item, Matt.
Yeah. What's interesting about those results I think as we tried to validate what was happening, right, it is extremely difficult as you're going through a quarter, even as you adjust cost at the beginning of that as best you can, right. You still don't know, especially in our Q2, what the weather is going to bring. And you have to have a readiness to serve, right. So you can't strip things down to the absolute bone.
As we went and looked outside our existing markets and looked at the Allied branches in those same markets, it was kind of amazing that the decreases and the delevering or lack of that they had was very similar to the Beacon legacy branches. So this isn't a function of, oh my God, we have this integration going on and their issues. It was purely contractors could not get on roofs. They couldn't do work. And as you know, you remember nor'easters played havoc, and again, a lot of that's going to – as we talked about, going to help deposit, it is going to help demand going forward. So we think from a standard (47:47) standpoint, it makes a lot of sense as we're looking at this. We're not happy, but we know that extreme weather can cause havoc and that's why I pointed out the EBITDA being positive versus in prior really rough quarters it's been historically negative.
Okay. Okay. So if I may sneak one more in, Paul. So I think you mentioned something about additional cost controls. Did I hear that term correctly? Are those cost controls aimed at your cost, your cost and the cost of goods line? Or is it more we're going to do something on the operating expense line to kind of recover some of the lost profits? What were you referencing when you said that?
Hey, Matt. Joe. That was related to the operating expense line. So we're really doing a more deeper dive on our SG&A cost. As you know, we have a lot going on, on the SG&A side to take cost out. Today, just as a result of the synergy impact, right, and the Allied acquisition, well, we've decided to push a little bit deeper on that and looked even further into it. We talked about there is room on the synergies to go even beyond synergies to optimization, drive the number higher. Well, because of what we've kind of gone through, we said, well let's keep pushing that one even further. So we're going deeper on the SG&A side to see if we can take some additional cost out. So we put several measures in place.
Yeah. And I wouldn't call it anything extraordinary, other than that's what we should be doing as leaders of the business, right, is continually looking at productivity and optimization. I mean, that's our job. So as we went through this period, we just – it gets us tougher think about what else can we do as we move forward. So really the way to look at it is would be to increase the SG&A portion of the synergies of the combined company because that's where a lot of that will come from, the optimization of the two cost centers within both legacy Allied and Beacon.
Okay. So it's included in the new synergy estimate?
No, this is the – well, this is beyond the synergies. It's included in our operating numbers. It's not included in the 120 basis points. So this is beyond that activity.
Perfect.
Yeah. And that's comment we made, I made, I think Joe made it about we're raising the estimates from 110 basis points to 120 basis points, but we're not stopping. So internally, we got a number much higher than that that we're driving and teams to as we should, as we did with RSG, and we're not going to stop at this one, right, until we get around two years into this thing and actually round out to get the number even above $120 million. I'm not saying that that's where we're going to end up, but we've got to have targets above that, right, to drive ourselves to it.
Okay. Thank you, guys.
You bet.
All right. Thank you.
Thank you. Our next question comes from Ryan Merkel of William Blair. Your line is open.
Hi. Good afternoon, everyone.
Hi, Ryan.
Hi, Ryan.
So I want to start with a high-level question. Just given that price-cost has been negative for a couple quarters here, has anything changed with the relationship with OEMs? Or anything changed within the market where now it's just going to be a lot harder for you to pass through these price increases? Or is it just a situation where there's been a lot of inflation, the OEMs are pushing hard, and then combine that with rough weather, which made even harder on you guys, and that's why we're going to have a year where price-cost is going to be negative. So it's really just something that's transitory versus some kind of secular change?
Yeah. The latter what you said, Ryan, is spot on. I mean there is no doubt. I think part of what we're seeing is five years of deflation. We're breaking out of that. We're in effect changing our own muscle memory, right, to say we can get price. We've spent a lot of time working with our team, both on the communications side, the process side showing the pressure that we're seeing from the manufacturer side, which is real. And then we've set up a ton of internal metrics with modified systems.
There is no doubt about it. I think it's just a question of catch up, right. We proved that we can get price in Q2, and we saw a bump again in April and we're not stopping. We're going to be announcing a third price increase because we cannot – we're just not going to take material up. So nothing has changed with the OEMs. If anything, I mean I think we have a better relationship because we're bigger, we're bigger piece of their business, we're an extremely good customer, and they enjoy doing business with us. But we focused heavily and we've said it publicly on best price contract that there is nothing wrong with that. We should do that and we're going to continue that.
So, no, I don't think anything structurally has changed at all. If anything, we're more intense no doubt about what we're doing on price internally and that's a change. But as inflation hit, we said we have to do this and we have to be quick about it, and we have to communicate to our customers that we're offering some serious advantages doing business with us, but we're feeling a tremendous amount of pressure on almost every cost front.
I think if you look at the last couple phone calls we went through, one of the things we talked about with Allied was we really liked their price discipline and approach, right. So we really like their price disciplined approach, and what you're going to see us doing is continuing to implement a lot of that price disciplined approach. As Paul said, it'll seem like a bit of a change for us, but we're going to lead the way in price.
Well, it's good to hear. I think there's going to be a lot of worry about price-cost until you guys see a few more quarters and you guys show the pricing, but that will just be what it's going to be. But I'm glad to hear you don't think anything's changed. Just moving to my second question, can you just talk about how Allied performed on an organic basis if you have that number handy? And then also you raised the synergies there, the $10 million. Where did that come from?
So I'll take the synergies piece of it, first, and get to that half of it. On the synergies part of it, it was a combination of improved SG&A costs plus also some improved in terms of the number of branch consolidations. As you remember, we broke it down into three pieces: the purchasing savings, the SG&A, and then also the third one was a branch consolidation. It really was SG&A a little better than we had thought in terms of improvements and cost we're able to take out, and second was in regards to more branch consolidations. We're also beginning to ramp up more work. We talked about on that hub-and-spoke RSA (54:35) approach. That will help us over time as well, too, and additionally some of the optimization stuff's paying off. But primarily right now it's from the branch consolidations and SG&A.
Yeah. And, Ryan, we're not going to break out the Allied piece. Obviously, we didn't own them last year in the quarter, right. I mean they had a good quarter. I could say that. They had a good contribution of EBITDA within that $31 million. I mean let's just put it that they had a good quarter and, as you know, in general, their gross margins are higher than ours. And so that's helping and that will continue to help as we go through the year.
There were no unusual differences between their results on the top line and our consolidated results. So pretty similar.
Okay. Okay. Perfect. Thanks.
Thank you.
Thank you. Our next comes from Phil Ng of Jefferies. Your line is open.
Hey, guys. OpEx on an absolute basis was a little higher than we expected. Part of that is weather and you called out a few things. How should we think about that the next few quarters, your ability to kind of get better OpEx leverage? And some of the cost controls you've called out, how quickly do you expect to see that?
Yeah. Few things, one, you will definitely start to see the synergies have an impact on SG&A going forward, right. So that's one big element to it. We talked about getting roughly $6 million of synergies in the quarter and most of that was kind of driven primarily on the SG&A side. But you'll see that number ramp-up significantly and actually double by the time you get to fourth quarter. So you will see a good improvement on the synergies amount when we go through third and fourth quarter.
Additionally, from the SG&A side those cost improvements that I mentioned, you'll start to see those in the third and the fourth quarter as well too. We'll get great leverage in the third and fourth quarter. You'll see our OpEx numbers come down substantially in both the third quarter and in the fourth quarter estimates. So both of them come down as a percentage of sales in line with where we were pretty much in the prior year. So they're getting pretty good results.
Okay. That's helpful. And then maybe it's a modeling thing, but complementary was obviously quite strong. What's driving the strength on that front? And appreciating that now that you have the interior business in that segment, can you remind us how to think about the margin dynamic on gross profit as well as EBITDA margin for your three different businesses?
Yeah. I mean, when you look within, we don't pull apart complementary, but the major product lines within there are product elements are siding, windows, installation...
Waterproofing.
...and waterproofing, right. Now obviously Lowry's was acquired, so that's not in that existing growth. And the Allied interior business is in there, but that's obviously not in the existing. So I mean, the bulk of that is siding and sidewall product, right, and that's what we're seeing. It's doing quite well.
Okay. And the reason why I'm asking is because historically gross margin was lower for complementary, the cost to serve is lower so on a EBITDA basis, complementary was pretty comparable to your other two segments. But just given the mix is a little different now that you have interior business, I just wasn't sure how that impacts that dynamic?
Yeah. There are really two different things, right. Our historic complementary business, and we've said it, is between in our res and our commercial, right, in those mid $20 million. The interior business just – and you can look at some of the competitors out there that are public. It's obviously higher GM rate. So it's a little blended up from our historic.
Okay, thanks.
Thank you.
Thank you. Our next question comes from Michael Rehaut of JPMorgan. Your line is open.
Hey, this is Elad on for Michael. Sorry, there is a fire drill in the background. So my first question is, I want to make sure that I heard you right when you said that price-cost is still expected to be negative in the second half by 30 basis points or 40 basis points. And if so, I think you mentioned that by 4Q it could be flat or positive. Could you just give a little more detail on that?
Yeah, sure. I'll take you through a little bit, because there are several pieces, of course, that impacted third quarter and the fourth quarter, right. On the price-cost piece, as Paul said, we're going from a first quarter price-cost negative 120 basis points, second quarter negative 60 basis points, sliding down in the third quarter probably a negative 40-ish basis points, and by the time you get the fourth quarter, may be a negative 30 basis points. But keep in mind, on top of that we also have the synergies start to kick into place in the third and fourth quarter. That will add between 40 basis points to 50 basis points in your gross margin improvement for you.
We also have the acquisition impact as well, too, on a year-over-year basis of having the Allied piece in there, and that was 100 basis points of improvement in the second quarter. It won't be quite that high in third and fourth, but that will help as well too. And then mix items that were a bit of a drain in the second quarter probably should be a little bit flatter when you get to third and fourth quarter as well, too. So certainly the cost sell has a bit of a negative impact in third and fourth quarter, but the other items are all going to offset that, and you'll see some good positive improvement in gross margin in the third and fourth quarter, positive over last year.
That's helpful. And then on a normalized basis, how should we think about gross margin beyond that?
Beyond...
Beyond the next couple of quarters, yeah.
Pricing will be the biggest one to watch. It's hard to say at this point beyond the next couple of quarters because it depends on what really happens with the pricing going forward, right? Paul talked about the third price increase the manufacturers have done that we're doing and it's all going to depend what happens after that and where those keep going. But our intent as you're seeing is continue to narrow and offset that price-cost so it starts to become a zero on the price-cost, right? And then of course through the acquisition and the other items, we'll start to offset that. I mean go the other way, make improvements to it long term.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Kathryn Thompson with Thompson Research. Your line is open.
Hi. Thank you for taking my questions today. Just a follow-up on the Allied cost saves in the quarter, I appreciated that you get a $6 million in synergies in the quarter. I assume that the majority of this was from SG&A. I wanted to confirm that. Also wanted to get your thoughts on how supply chain is progressing, if any of those upside was included in Q2 or if that's more a back half event.
And then finally, I assume branch consolidation because you're only starting to implement in April will be back half into early next fiscal year loaded. And then final, final question related to the synergies is, I assume that $120 million revised number does not include potential revenue synergies. Thank you.
I missed the last piece of that question but did you write everything down?
No, I got a couple of them, but we'll do our best to kind of...
Yeah. For Q2, yeah, there was very little if any procurement just because of the timing, right, of contract changes, inventory we had. So you're right, the majority is SG&A. And then you're also correct, as we developed the plan and then notified on the branch consolidations, I mean, that was late March, April, we're just starting to action those, right, and go through that process. So that will be a partial Q3 impact because we have folks that are leaving the business during the quarter. And there were two other pieces to that question.
The one you mentioned about the $120 million, you are correct, it does not include any revenue synergies. So there is no revenue synergies in the $120 million number. And I think that was the last question, was there one other one, Kathryn?
Yeah, I know there has been a lot of focus on Allied's gross margins. They do have a higher gross margin, but they also have a higher SG&A relative to core Beacon. Can you give any color in terms of how much of the SG&A delta is driven by this acquired asset?
So in the second quarter, as an example, the Allied – let's see if it's roughly around a third, so I think the Allied piece of it on SG&A probably drove a little over 1 point, 1.5 points of OpEx kind of higher on a consolidated basis to us. Their OpEx runs anywhere from roughly around 300 basis points more than our Beacon OpEx currently. That's in the current quarter. Keep in mind, it's really early. As we keep going through the year I think you'll see that change and adjust.
Yeah, the look now I believe in the second half, Kathryn, is the gap shrinks a bit, right, to about 2 points in Q3 and Q4 between the total and Allied's performance. So, we're going to make progress, and that's just a function of what's happening with the combination, the overlap, the synergies, all the things we're working on.
Thank you very much.
Thank you.
Thank you. Our next question comes from Kevin Hocevar of Northcoast Research. Your line is open.
Hey, good afternoon, everybody.
Hi, Kevin.
A lot of numbers have been thrown out. So trying to keep my head on straight. But the price-cost commentary in the balance of the year, that was helpful to you guys breaking down expectations. But wondering what the – also talked about a lot of – there's still manufacturer price increases out there for non-res, for resi. So what's your expectations for those increases baked into that guidance?
We've incorporated into the guidance that we talked to both – all three of the manufacturers' price increases that we know of today. So the first, the second and the third, as you're probably aware, those price increases that they rolled out, they had – the first one was in a March-April start and it was 3% to 8% and we did roughly a 5% to 10% that started in April. They had a May increase of roughly 3% to 8% and we have a May increase starting this in that roughly 5% to 8%. And they have a June increase that just got announced. And the June increases are roughly in the 5% to 8% as well too. Those three we have all incorporated into our numbers as we think about our price-cost and our ability to realize it as well too.
So what it says basically, if you look at the 40 point and the 30 point headwind price-cost is that we're going to match as close as we can to those increases. And that's the unknown, right? Going forward, we'll obviously get more data as we go through April and close at our (1:06:06) May and June and then we'll report the quarter to see what that is. Hopefully, the gap is less than 40 points, but we're working very hard to offset everything we get, right, because we also have that 120 basis points hurt we had in Q1 that we'd like to eventually offset because we ate costs that we need to offset. So the assumption is we're going to go like-for-like with any increase they send out, because we know it's real and they're feeling that pressure.
The good news is, though, the price-cost piece is only one element of our year-over-year gross margin numbers, right? We will see third quarter and fourth quarter improvement in our gross margin rates year-over-year. That cost price in both third and fourth will be offset by the synergies...
Yeah.
...and also the acquisition impact of the Allied sales in total that has higher margins.
Got you. Okay. Very helpful. And then curious too, this was your first quarter of ownership with Allied and your first whack at some of the interior parts like wallboard and ceiling, so wondering on the wallboard side what you saw there in terms of – there was the January price increase and how was kind of that price-cost on that side of the equation?
Yeah, we're not going to tear apart the interior business. We combine it in complementary. I will say, and as you know, there have been a number of price increases on the wallboard, the steel studs and ceiling side ranging from anywhere 10% or 15% per month on studs and 5% roughly on ceilings. I think we've done a pretty good job of taking those and passing them through as we've seen that input. And I'll just leave it at that. The business in general performed very well and what it proved to us is there is much less seasonality to the interior business which is very, very positive for us. It's a great business, well run and we're glad to have it as part of Beacon.
Okay. Thank you very much.
Thank you. Our last question comes from Truman Patterson of Wells Fargo. Your line is open.
Hey good afternoon guys. Thanks for taking my call. So first question is really a big picture on gross margin following up on a prior question. Looking at 2016 when you guys made the RSG acquisition, you guys were able to get synergies. You bumped up gross margin nicely, but as we look more recently over the past five quarters core gross margins have kind of declined in each quarter despite a mix shift towards residential generally speaking. I guess what really caused these declines the past five quarters? And is this how we should think about the gross margin cadence going forward over the next couple of years as it relates to Allied?
I'll start and Joe can certainly chime in. There's a couple of factors. One, part of the challenges we had last year and offset by some very strong storm volumes, in fact we had a couple of winters of very, very weak weather, and that hurt a lot of the northern part of the country that normally would see repair and as a result, as we talk about all the time with reduced demand, there's more competition and hence they saw some of the challenges there.
Now we're able to offset some of it with the strength that we saw mostly in Texas and in the Rocky Mountains, right, with some of that hail, but not entirely. I think going forward; it's a little different story now because we've set the table having an extremely harsh winter which hurts us in Q2. You saw it and it's real and we react pretty quick, but it still hurt.
Now that sets us up for some stronger demand as we go through the balance of this year and possibly into next year, right, so I think that combined with Allied higher, just generally, higher gross margins lead us to believing and planning that we're going to continue to see increased gross margin and we're putting a tremendous amount as I said earlier, number of times, right. We're putting a tremendous amount of effort on the pricing piece to make sure we offset and eventually take that price-cost headwind down to zero and then even a gain as we go through time. Joe, I don't know if you have anything to add to that or?
The only piece I would add to Paul's response is the difficulty in getting price in the past because there really wasn't the inflationary environment.
That's important.
That's the big shift in my mind Truman is before really hard to get price. We had some volume increases because of some hailstorms and some weather that went through. No huge demand increases but enough, it was great. But we didn't have an inflationary environment. So the manufacturer started pushing price increases through, but it was very difficult for us to get those with the end market customers. Now, you're seeing a completely different environment much more of an inflationary environment, the re-price increases from the manufacturing is kind of real and it's here to stay. So I think as a result that's a big difference in my mind that I'd just add to what Paul said.
Okay. Last quarter you guys mentioned that you didn't see any much transportation cost flowing through the P&L. It seems like across a variety of industries that freight costs are really picking up. I guess, could you guys discuss what your driver wage inflation expectation is for 2018 in just transportation cost in general as we move through the year?
Yeah. Roughly, in general fuel external use of freight, I mean, we're talking in that 20% range, right. So trying to offset that, I think from a wage standpoint other than what we're doing on merit, we're not going to see much of an increase, right. That's just our natural cycle that we go through, and Joe mentioned that that was part of the Q2 merit increases. I mean, there's no doubt, there's a tremendous amount of pressure on freight inbound, outbound and diesel fuel and we're, also in addition to the price increases and I'm sure our competitors are doing it, freight surcharges and fuel surcharges are being applied both by the manufacturers and then being passed through by us from what they passed through and what we're seeing on the fuel side.
So there's other recouping, we're working extremely hard to get, right, because we're paying more, everybody's paying more and that's just the reality. But it's in that 20% range and even as you look at some of the commodities like asphalt, we're seeing a ton pricing going up in this just of late 20%, right? So that's why I said earlier in my prepared remarks, I mean I don't believe we're going to see a slowdown in inflation, so it behooves us to be extremely aggressive on the price side, because it's the right thing to do.
All right. Thanks guys.
Thank you.
Thank you.
Thank you. I'm showing no further questions. Now I'd like to turn the call back over to Mr. Isabella for his closing comments.
Great. Very short remarks. I want to thank you all for joining today's call. As always, we appreciate the interest from our investment community, our customers, our business and the commitment of our employees. And of course, we look forward to speaking again during our third quarter conference call. Have a great evening. Thank you very much.
Thank you. Ladies and gentleman that does conclude today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.