U.S. Markets close in 4 hrs 40 mins

Edited Transcript of BLD earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 TopBuild Corp Earnings Call

DAYTONA BEACH Jun 2, 2019 (Thomson StreetEvents) -- Edited Transcript of TopBuild Corp earnings conference call or presentation Tuesday, May 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gerald Volas

TopBuild Corp. - CEO & Director

* John S. Peterson

TopBuild Corp. - CFO & VP

* Robert M. Buck

TopBuild Corp. - President & COO

* Tabitha N. Zane

TopBuild Corp. - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Adam Michael Baumgarten

Macquarie Research - Analyst

* James A. Morrish

Evercore ISI Institutional Equities, Research Division - Analyst

* Justin A. Speer

Zelman & Associates LLC - MD of Research

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Kenneth Robinson Zener

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Matthew Schon McCall

Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst

* Megan McGrath

* Philip H. Ng

Jefferies LLC, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the TopBuild Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Tabitha Zane. Please go ahead.

--------------------------------------------------------------------------------

Tabitha N. Zane, TopBuild Corp. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, and good morning. On the call today are Jerry Volas, Chief Executive Officer; Robert Buck, President and Chief Operating Officer; and John Peterson, Chief Financial Officer. Please note, we have posted senior management's formal remarks on the Investor Relations section of our website at topbuild.com.

As shown on Slide 2 of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial conditions. These forward-looking statements include known and unknown risks, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. In addition, we will also discuss non-GAAP financial measures, which can be reconciled to the most comparable GAAP measures in a table included in today's press release.

Please turn to slide 3. I will now turn the call over to Jerry Volas.

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [3]

--------------------------------------------------------------------------------

Welcome everyone, and thanks for joining us today. Our first quarter results have TopBuild off to a very good start in 2019 with solid growth in both sales and earnings. Before discussing our financial results, I'd like to comment on our view of the current state of the U.S. housing industry. Affordability continues to be an issue, although it has been improving over the past few months.

With the Fed hitting the brakes on further rate increases, mortgage rates have decreased significantly from late 2018 when they were approaching 5%. Mortgage rates at that level were one factor pricing potential buyers out of the market. Fortunately, most of that increase has been reversed and 4% is again in sight. This reduction in rates does a couple of things. First, it contributes to pushing mortgage payments as a percentage of income back down to just below the historical average. Second, the optics signal to those on the sidelines that now is a good time to buy their first house or trade up to a bigger one. This is likely a key reason for new home sales in March increasing 3% year-over-year and 2% on a trailing 3-month basis.

Builders are also getting a bit of a break as the price of lumber, a major cost component, is considerably lower than previous levels. That certainly helps them in their quest to control pricing and footprint size, build more homes that consumers can afford, and still make money doing it.

So while housing starts have been disappointing over the last several months, we believe they will climb higher as the year progresses for a couple of reasons; a strong economy with solid job and wage growth and improved affordability are driving new home sales; builders are increasingly focused on building entry-level homes, where inventory is extremely tight; and the recent trend for permits, which provide a forecast for starts has been strong. In summary, supply and demand fundamentals continue to suggest a healthy construction environment in 2019 and for at least the next several years.

Moving to TopBuild's results on Slide 4, the strength and diversity of our operating model was very much on display this quarter as we reported record first quarter results. Total sales were up 26%, with same branch sales increasing 7.1%. Both residential and commercial performed extremely well. Because our footprint spans the entire U.S., the unusually wet weather in parts of the country did impact a few of our branches, but most reported very healthy results.

The conversion of that top line to the bottom line was again outstanding and produced EPS of $1.06 for the quarter. All of the earnings-related metrics were very good, and John will follow me with more detail on those. Driving all this positive news is a continued focus on improving the fundamentals of our business. The diversity of our business model offers numerous levers to manage top line growth and our relentless pursuit of operational efficiency drives conversion to the bottom line. Robert will have more to say about that in his comments.

Turning to Slide 5. Acquisitions have proven to be an excellent use of capital and we have developed an effective core competency around selection, execution and integration. Since 2016, we have acquired 10 companies generating over $500 million of annual revenue. USI, the largest and most recent of these, continues to perform very well due in large part to cost-related synergies well north of the $15 million we identified a year ago. I want to congratulate our dedicated team of seasoned and talented professionals, from both the TopBuild and previous USI organizations, for turning this significant investment into a financial win for TopBuild and its shareholders.

Last spring, we intentionally hit the pause button on acquisitions to give our full attention to USI. Today, we have a robust pipeline of prospects that we have identified and are moving through our disciplined process. We expect to close on a number of these opportunities this year. Although we see considerable further runway with our current product offerings, we are always considering adjacent product categories that could add to our already substantial growth trajectory. Our approach is disciplined and boxes to check include margin potential, scalability and ease of execution. We have learned a few things from our long history in this business, and will always find a good balance between adjacent opportunities and ongoing focus on our current core products that serve us and our customers so well.

Our second capital allocation priority after acquisitions is share repurchases. The $50 million ASR we announced last November was completed in the first quarter at an average price of $51.37 per share, and we acquired an additional 72,791 shares through March 31, 2019 at an average price of $63.49 per share. We will continue to make use of our current $200 million share buyback authorization as the year progresses.

John, I'll turn it over to you.

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [4]

--------------------------------------------------------------------------------

Good morning, everyone. As Jerry noted, our team continues to execute at a high level, generating strong results in the quarter. At both TruTeam and Service Partners, we saw solid selling price increases and operating margin expansion as we continue to manage inflationary pressures on our input costs and leverage our established business platforms.

Starting on Slide 6, in the first quarter, consolidated revenue increased 26% to $619.3 million, driven by $93.2 million of revenue from acquisitions primarily USI as well as price increases at both business segments and sales volume growth at TruTeam. On a same branch basis, revenue increased 7.1% compared to first quarter 2018.

Gross margin expanded 250 basis points to 25.1% compared to the same period a year ago, benefiting from pricing, commercial volume growth and continued operational efficiencies. Adjusted operating profit grew 54.8% to $59.1 million, with a corresponding margin improvement of 170 basis points. Both gross margin and operating margin improvements were driven by higher selling prices, residential and commercial sales, improved labor and sales productivity, and USI performance and synergies; partially offset by higher amortization expenses and higher stock-based compensation costs. First quarter 2019 adjustments totaled approximately $2.5 million primarily tied to the integration of USI.

First quarter adjusted EBITDA was $74.5 million compared to $46 million in 2018, and our adjusted EBITDA margin was 12%, a 260 basis point improvement from first quarter 2018. Our drop-down to adjusted EBITDA margin was 22.3%. On a same branch basis, adjusted EBITDA was $57.2 million and our drop-down to adjusted EBITDA was 32.2%. Incremental EBITDA related to our 3 acquisitions was 18.6%.

Moving to Slide 7, adjusted net income for the first quarter of 2019 was $36.6 million, or $1.06 per diluted share compared to $26.2 million, or $0.73 per diluted share in the first quarter of 2018. Adjusted EPS benefited $0.01 due to a modification of our normalized tax rate. With more clarifications now available on the 2017 Tax Cuts and Jobs Act, the effect of acquisitions and some legal entity restructurings, we are lowering our normalized effective tax rate from 27% to 26.5%.

Interest expense in first quarter 2019 increased from $2.3 million to $9.6 million primarily related to the funding of the USI acquisition in the second quarter of 2018, which included the issuance of $400 million Senior Notes and our borrowing of the $100 million delayed draw term loan.

As you can see on Slide 8, CapEx for the quarter was $10.2 million, approximately 1.6% of revenue. Working capital as a percent of pro forma trailing 12-month sales was 12.1%, 210 basis points higher than prior year. This increase was due to a number of factors including the higher mix of installation business from a year ago, strong growth in heavy commercial which has longer receivable terms, and the impact of significant selling price increases. The latter temporarily impacts the working capital percentage to sales calculation by immediately increasing the numerator in the quarter, but the impact on the denominator is delayed because it includes prior period sales which didn't benefit from the selling price increase to the same extent. Operating cash flow was $23.5 million for the quarter.

Moving to Slide 9. We ended the first quarter with net leverage of 2.05x using pro forma trailing 12 months EBITDA, well within our comfort zone of 2 to 2.5x. Total liquidity at March 31, 2019 was $281 million, inclusive of the available balance on the revolver of $182.7 million and cash of $98.3 million. In January, we adopted the new accounting guidance required by ASC 842 on leases, which requires leases to come on to the balance sheet as a right of use asset and corresponding lease liability. This change will have no impact on our cash flow or income statement.

On Slide 10, we've updated our 2019 annual guidance based on our first quarter results and our updated forecast. Our assumptions regarding new housing starts remain unchanged with a range between 1.26 and 1.3 million for the full year. We are now projecting total revenue to be between 2.610 and $2.670 billion, up $40 million on the low end and $35 million on the high end, and adjusted EBITDA to be between 330 and $350 million, up $20 million on both the low and high end of our range. These changes are primarily driven by both actual and projected improvements in our 2019 commercial volumes as well as continued strong operational execution in both segments. As a reminder, our guidance does not include any acquisitions we may make this year.

Robert will now discuss operations and segment results.

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [5]

--------------------------------------------------------------------------------

Thanks, John and good morning. To echo Jerry and John, we are extremely pleased with our first quarter financial results. Our consistently strong performance quarter-after-quarter is a direct result of; our team's hard work; our focus on operational efficiency and excellence; our diversified model' our strong partnerships with our suppliers and customers; and our strategic approach to acquisitions and their integration onto our platform. Our operating model cadence and our focus on continuous improvements in all parts of the business enable us to maximize opportunities at every point in the cycle.

Looking at TruTeam's results on Slide 11. First quarter sales increased 36.4%, with USI contributing close to 26% of that growth. The USI acquisition continues to perform exceptionally well and the integration was completed ahead of schedule.

On a same branch basis, TruTeam sales were up 10.5% in the quarter, driven by a 6.1% increase in selling prices and 4.4% volume growth. TruTeam's adjusted operating margin expanded 250 basis points to 11.5%. This was driven by increased selling prices, residential and commercial sales, operational efficiencies and lower fixed costs as a percentage of sales due to higher sales volume, partially offset by higher material costs and higher amortization expense. Once again, great operational execution by TruTeam's leadership and everyone in the field.

Moving to Slide 12. Service Partners, first quarter sales grew 8.9% led by selling price increases of 6.8% and contributions from acquisitions, most notably USI; partially offset by a volume decrease of 2.4%, an improvement from fourth quarter's volume decline. As we discussed, last quarter we made deliberate price volume decisions and exited some low margin business. While those decisions are never easy, they were the right ones for our company as evidenced by the 60 basis point adjusted operating margin expansion compared to a year ago. We are gaining new customers and we expect continued solid performance in the Service Partners business as we drive profitable growth.

Turning to the next slide, our overall commercial business performed exceedingly well, with same branch sales surpassing our long-term target of 10% growth, yet another demonstration of the strength and importance of our diverse operating model. Our backlog for commercial work is very robust and we are already bidding projects for 2020 and early 2021. This is a $5 billion industry that is extremely fragmented and we believe, with only a high single-digit market share, we are the industry's largest player, giving us many opportunities for growth. We like this business because it has; high barriers entry; a different cycle than residential; and accretive operating margins.

Our growth strategy is to provide general contractors with a strong value proposition that includes expertise in a broad array of products, adherence to strict safety standards and excellent quality control, all from an established and financially stable company. Both TruTeam and Service Partners are also doing a nice job growing their spray foam businesses and we continue to see this product gaining momentum in the residential and commercial spaces.

Turning to fiberglass on Slide 14, most of you know there was an industry cost increase in January for both batts and loose fill which did have some traction. While a second cost increase is likely this year, the percentage increase and its stickiness will be highly dependent on industry demand and housing starts. While supply remains tight, it's not as tight as it was a year ago. Be assured, we have a high level confidence in the strength, stability and cost-effectiveness of our supply chain. We buy from all 4 manufacturers and have strong partnerships with our suppliers is an important competitive advantage.

Finally moving to Slide 15, I want to discuss the cadence by which we run our business every day. Today, we are often asked how much more efficiency we can achieve. Simply put, more opportunities exist. Since becoming a public company almost 4 years ago, improving our operating efficiency as well as our labor and sales productivity has been key areas of focus, all of which have led to significant margin improvement. With all of our different branches on a common ERP system, we can compare rank performance for each business on an apples-to-apples basis. With these systems, our senior leadership team focuses on the bottom quartile and determines what steps can be taken to move them up the ladder, whether it be a change in management, labor or product mix.

In some cases, it might even make sense to close that branch. Regardless, there will always be a bottom quartile presenting numerous opportunities for operational improvement. We are relentless in this focus on continuous improvement and our entire team is involved.

Our decision at Service Partners last quarter to walk away from some lower margin business is a good example of our discipline with this process. Yet, having systems and processes in place won't produce the desired results without the right team in place and we know we have the best people in our industry working at TopBuild. We have brought back talent to the business, acquired new talent and are continually developing future leaders. Our entire team is committed to being best-in-class from everything we do in branch management and safety, to supply chain, to finance and accounting, to acquisitions. Our local empowerment culture drives operational excellence and profitable growth. This is what TopBuild stands for and what we strive for every single day.

Looking ahead to the remainder of 2019, it should be another strong year for TopBuild. Builder sentiment is improving and we expect starts to increase as we move through the year.

In closing, I thank our entire TopBuild team for their hard work, safety lifestyle and dedication to creating value for our stakeholders. I'm proud to be part of this outstanding team. Jerry?

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [6]

--------------------------------------------------------------------------------

Thanks, Robert. Before opening it up for Q&A, I want to re-emphasize 2 points. First, we anticipate an improving housing market as we move through 2019 and for several years beyond. This will provide an excellent external growth environment for TopBuild. Second, our company is diversified across a number of key dimensions, including; a business model offering both installation and distribution services; multiple end markets reaching both residential and commercial; product offerings, including all types of insulation and adjacent categories; and geography, with our national footprint.

We are leveraging this uniquely differentiated business model with a consistent strategy and focus on operational excellence and execution to produce outstanding financial results. The first quarter of 2019 was yet another good example. We look forward to delivering more of the same.

Operator, we're now ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Ken Zener with KeyBanc.

--------------------------------------------------------------------------------

Kenneth Robinson Zener, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [2]

--------------------------------------------------------------------------------

Very strong quarter in terms of the volume. And I think you guys have a unique position having such a high market share in single-family. So your 4% volume gain that you saw -- I'm using total starts seasonally adjusted just lag and showed down 5 that year-over-year. Can you talk about what you're seeing considering the government shutdown. There's obviously a lot of volatility out there in terms of the numbers, and I think you have better data than the government. Does down 5% for the market makes sense given your up 4%? Or could you kind of just update us on that -- you have thought process, you gain that much share, what really happened?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [3]

--------------------------------------------------------------------------------

Yes, Ken. This is Robert. So I'll point to 2 to 3 things happening and what we're seeing. Obviously, coming out of fourth quarter and end of first quarter, there was some backlog in the industry that was being worked. So as Jerry mentioned, there was some limited weather impact in some of our markets, but there is also a backlog that was built up that we worked on in Q1. So we think that's obviously an important part of it. I think, as we pointed out, we had some really strong residential growth, but an also strong commercial growth in our business, the health [ph] contribute that as well. We absolutely believe that we are gaining share both in commercial and residential. And then I'd say, as we were in Q1, we definitely saw the sentiment of the builders improved become more positive, I think a good spring selling season that we saw the builders kick into as well. So we're pretty positive about what we saw and we think that started off to be a great Q1.

--------------------------------------------------------------------------------

Kenneth Robinson Zener, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [4]

--------------------------------------------------------------------------------

Your guidance that was raised modestly did have roughly 50% incremental EBITDA. Can you kind of talk to why that happened, is that really just the price flowing through better or is that margin adjustments that you're making in the business like you guys talked at Service Partners?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [5]

--------------------------------------------------------------------------------

Sure, Ken. This is John. So couple of things on guidance I think I'll point it out. We'll start with the top line. So certainly, it's a good reflection of the fact that we have a pretty diverse model that we've talked about. So commercial probably one of the bigger drivers behind or increase from the top line. So commercial in the first quarter and what our expectations are for the year, along with the fact we expect residential to perform well too. So in terms of our EBITDA expansion in the guidance really driven by a couple of things, one is commercial was a big part of that growth and as we said before, commercial comes with increased margin performance versus our traditional residential business. And then our performance in the first quarter and what we see for the remainder of the year just suggest that between our ability to manage pricing in our input costs, we expect slightly more favorable results there. And in fact, from an operational efficiency standpoint, Robert talked about this in his prepared remarks, the teams continue to really perform well in the field and we're reflecting that now on our projected guidance on a long-term basis. So the combination of all those things really is what we would hold up to that total.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And our next question comes from the line of Phil Ng with Jefferies.

--------------------------------------------------------------------------------

Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [7]

--------------------------------------------------------------------------------

Guys, congrats on a very strong quarter. Jerry that you mentioned from what you can tell the spring selling season is off to a pretty solid start. Just curious if you could provide any color on order rates and backlogs, how that has progressed over the course of the year? And with this potential inflection of things kind of picking up and sentiment getting a little better, what type of lag do you expect that to kind of manifest before you see that inflection in your business?

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [8]

--------------------------------------------------------------------------------

Yes. The only thing I could say Phil, I'll turn it over to Robert in a minute here. He may have some more color to give to you, but we see good momentum in the business, I mean we came in, we came into the first quarter, our branches were busy. We've done a lot of -- it's sometimes very difficult to look at to slice and dice it, but we've done a lot of things with the business here over time. And the acquisitions have been big, adding USI to our to our equation really gave us a lot more -- a lot more significance in some really key markets. And so it's hard in any one quarter to say are regaining share or not. I can only tell you that we see a lot of momentum in the business. Our branches are busy. We do expect, as I indicated in my initial remarks that the housing start environment is going to improve. We hear optimism from builders. We continue to stay very busy. So Robert, may have a little bit more to say about anything geographically or anything to add to my comments, but overall, we're going to -- we have a lot of -- we have a lot of positive thinking about where we're headed here this year.

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [9]

--------------------------------------------------------------------------------

Yes, Phil. This is Robert. So as I mentioned, we did work on some backlog there. I think the builders definitely spring selling season sentiment did improve. And I think the builders did a nice job, right. So as affordability became an issue back half of the year as they adjust to what they were working on relative growth to maybe a smaller footprint, town homes that type of thing. I think they started to increase demand because how they adjusted their approaches well in a relative to affordability. So I think very positive. And as we mentioned before, commercial was strong performance for our self, so we expect that to continue.

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [10]

--------------------------------------------------------------------------------

Well, Philip. This is John. The other thing I guess I'd add to that, just to finish up on that is that we are seeing the needle move a little bit more towards those entry-level type of properties and the cycle time on those tends to be a little more compressed than the traditional build cycle on custom single-family et cetera. So that's also I think having some contribution.

--------------------------------------------------------------------------------

Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

Great. And then from a incremental standpoint obviously very impressive, especially in the seasonally slower quarter. John, were there any like one-offs that helped the quarter? I know quarter-to-quarter it's always tough to predict, it gets a lot of noisy. And just get in some of the better performance, whether it's price cost, productivity and maybe the synergies kind of kicking in more fully with USI, could your incrementals kind of shake out more towards the higher end of the range this year? Thanks.

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [12]

--------------------------------------------------------------------------------

Yes. So Philip, this is John. So I think in terms of our business in the first quarter certainly great pricing performance, including obviously some of that a big carryover from last year. As you recall, last year we early in the year we are chasing some double-digit material cost increases both first and second quarter and obviously, a great success as the year one on. So we had great carryover of a good pricing, continue to price well, I think in the first quarter. Material cost increases, not as significant this year as we saw first quarter last year. So I think all of those contributed -- again, the team continues to do a great job in terms of operational efficiency. So I think when I talk about the comps, I think the comps get a little bit tougher as the year goes on, but again, last year, again, team did a good job of catching up to those cost increases as the year went on. So I do think the comps will get a little bit more difficult. So I think you kind of do the math on our numbers in terms of our projections, we're kind of in the middle range of our EBITDA drop-downs for the second through fourth quarter, and we feel pretty good about that at this point.

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [13]

--------------------------------------------------------------------------------

Phil, this is Jerry. The one thing I would add to that is in Robert's commentary, he talked a lot about how we run the business and that really -- I would probably put that as the head of the class in terms of the effect on our margins, on our ongoing basis because we have a constant effort here to analyze all of our branches, particularly those on the lower quartile and it just over time continues to develop an endless stream of operational improvement. And we think that's a big secret. And we have a long list of talented people out in the field, who do that for a living. And it is momentum that continues to build with the company and will always be responsible for us pushing the margin performance in the company.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from the line of Trey Morrish from Evercore ISI.

--------------------------------------------------------------------------------

James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [15]

--------------------------------------------------------------------------------

Hey guys, great job on the quarter. Really strong showing there. So I wanted to first, Jerry, I think you said in your prepared remarks that you plan to use some of your buyback authorization this year. I just wanted to understand that when you said that it sounds like you're almost guaranteeing that you will do some share repurchases this year. Am I taking your comments correctly?

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [16]

--------------------------------------------------------------------------------

Yes, Trey, on that, I would say, that it's going to be dependent on what happens with acquisitions in the timing of those. We've always talked about #1 priority being acquisitions and that remains true and share repurchases is number 2. So if I to make a guess, I'd say we are going to buy -- we are going to spend some money buying shares fast, but #1 priority is acquisition. So in terms of the magnitude of it will be dependent on the timing, but when we get some acquisitions to the finish line.

--------------------------------------------------------------------------------

James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [17]

--------------------------------------------------------------------------------

And then a couple of days ago one of your competitors mentioned that they had a headwind on their margin from work that they contracted in the fourth quarter that they couldn't complete until 1Q due to the size of builder backlogs. I'm wondering if you saw any type of margin headwind in either your inflationary or your distribution business because of that similar type of dynamic that you also highlighted?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [18]

--------------------------------------------------------------------------------

Trey, this is John. In terms of our performance I think I can just reflect back on what we've been saying in the past 2 or 3 quarters in terms of our performance that we have done a great job in terms of working our selling price and our operational efficiencies is offset to the inflationary impact on input costs, material being the best example and that just continued in the first quarter where the team just continue to execute extremely well in a difficult environment. So again, I can only speak for our numbers in terms of what we've done, but that really what we saw in the first quarter was a continuation of what really happened throughout 2018 and help deliver the results we just reported.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question comes from the line of Keith Hughes from SunTrust.

--------------------------------------------------------------------------------

Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

--------------------------------------------------------------------------------

As you look forward for acquisitions, the primary use of cash flow. Do you have a sense of where this is going to go versus -- I mean, you talked about commercial area you want to be more in moving into installation of noninsulation products. Is that a focus, any sort of detail on that topic would be helpful?

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [21]

--------------------------------------------------------------------------------

Keith, Jerry here. We're going to concentrate on our core business for sure. We're never going to lose focus on what we do really well and that's our core insulation business. But I think we've talked before, a little bit about some of the product categories that came with the USI acquisition. One of them is the glass and window business. And that's an example of one that we're looking at closely. We believe that if we're going to expand ourselves meaningfully into some other adjacent product categories, we want to do our research carefully and we want to make sure that those boxes that can be checked that I mentioned in my comments relative to the margin potential scalability, ease of execution that we have an excellent opportunity to perform well with it.

So it's not going to be, it's not going to be scattergun ever. I also mentioned in my opening comments about learning some things from the history of the company. We know, way, way, way back more than 10 plus years ago, we did get into doing a lot of things very quickly and we saw what the execution challenge was that related to that. So we're very disciplined in the way to go about it. And all I can tell you is that in the pipeline, we have a number of companies, many of them are in our core business, whether it'd be installation, distribution. A couple of them are outside our historical core business, but again, we're going to do a lot of work here relative to being sure we understand the dynamics of those businesses, before we step into anything that's outside of our current core.

--------------------------------------------------------------------------------

Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

--------------------------------------------------------------------------------

Okay. Second question on USI, I think you said, you've completed the integration. Does that include all branch rationalization measure [ph]?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [23]

--------------------------------------------------------------------------------

Hey, Keith. It's Robert. So yeah, integration systems wise all that supply chain, back office, corporate office all that's complete. Relative to branch consolidation we finished and completed plus or minus 7 or 8, we got a handful in the range of 5 to 6 more that we're looking at considering there. The team is just doing a great job and we always looked at market-by-market, and I think the great work has been thus far on the 7 or 8, I've mentioned is really, we've seen this synergy. So I think the careful approach that we're taking, the very thoughtful approach we're taking to, is paying off, which is kind of you've seen throughout the whole USI integration piece in the performance.

--------------------------------------------------------------------------------

Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

--------------------------------------------------------------------------------

Okay. Based on these numbers that would be great. Thank you.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And our next question comes from the line of Matt McCall comes Seaport Global Securities.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [26]

--------------------------------------------------------------------------------

So maybe start with the volume side in installation. You made several comments about strength in commercial. I think maybe it sounded like that drove some upside in the quarter and in your outlook. But can you talk about maybe relative to expectations what residential volume look like? And then I know you gave your starts outlook, but you clearly been outperforming starts. How should we look at the full year volume expectations in your guidance for resi?

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [27]

--------------------------------------------------------------------------------

Yes. So certainly in the quarter, Matt, the commercial did what was really strong and exceeded our 10% long-term guidance that we gave. But residential, however, particularly on the single-family home was in pretty good shape. And the comments that we've had earlier in the call here, we were busy pretty much across the board in Q1. Now we certainly are not oblivious to the fact that housing starts reported at least have been pretty low here over the last 3, or 4, or 5 months. So we certainly understand that we're on a lag basis. But I have to tell you that the sentiment out there in our branches is continues to be strong. What we're hearing from builders continues to be optimism. And as I said, we've added a lot of the texture of the company here in the last 12, 18 months relative to acquisitions, relative to the diversity in the commercial.

So in total, we're pretty optimistic about where we're headed here in Q2 and beyond. And our guidance upgrade reflects that. We take that really serious in terms of what we do there because we know that signals are indenture for the year and we certainly have attached that to housing start environment the 1.260 million to a 1.3 million. And we think for all the reasons we talked about, it's going to get there. But I think what I want to leave you with as much as anything else is what's under our control is what I feel really good about, in terms of what we've been able to accomplish as a company and the kinds of things that drive our results are largely under our control. And that's why, I would say to you, that we have the confidence that we do.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [28]

--------------------------------------------------------------------------------

So did the starts outlook didn't change, but did your residential growth outlook change? Or was there all the upside driven by commercial?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [29]

--------------------------------------------------------------------------------

Yes, this is John. So as I mentioned in the prepared remark. Most of the increase in terms of our guidance was driven by our commercial business. And both our first quarter and what we're seeing now through the remainder of the year, as you know, a lot of that's heavy commercial those projects tend to be pretty chunky and what we're seeing is builders are general contractors, I should say, accelerating in some cases some of the work that we had in our backlog there. So I think that's what's driving the majority of the increase in our guidance that we just projected.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [30]

--------------------------------------------------------------------------------

Okay. And then last one, Robert, you mentioned the Q1 help from working through some backlog. Can you talk about how much maybe -- how much of a buffer that backlog gave you, how long you can kind of benefit from builders working through the backlog given that the starts have remained a little soft?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [31]

--------------------------------------------------------------------------------

Yes, Matt. Robert. So I would say, for the first quarter, I'd say a couple months there through 3 months and maybe a little bit of the buffer that was created because of the weather some of that could be buffered into Q2 as well. So I think coming out of there with that strong backlog is was good, head into the first quarter. And then as John mentioned before, as the builders have adjusted the entry level homes and stuff that does compress potentially some of the cycle time on some of the homes as well. So I think maybe a combination of that too, but definitely some good backlog as we headed into Q1 this year.

--------------------------------------------------------------------------------

Matthew Schon McCall, Seaport Global Securities LLC, Research Division - MD and Furnishings & Senior Analyst [32]

--------------------------------------------------------------------------------

Okay. I just want to sneak one more in. You talk in Service Partners about gaining some new customers. The year-over-year decline there from a volume perspective ease from last quarter, should we expect that trajectory to continue. I guess I'm trying to figure out how much of a benefit these new customers are going to be relative to the business you walked away from?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [33]

--------------------------------------------------------------------------------

Yes, Matt. Robert. So we're really highly confident in our performance and service partners and conscious decisions that we made there. And we -- as we've readjusted brought on some new customers and stuff as well, we did expected the solid performance to continue to improve there.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

And our next question comes from the line of Justin Speer with Zelman & Associates.

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [35]

--------------------------------------------------------------------------------

Well, just off just broad -- morning, I wanted to broaden the picture out a little bit as we think about this 1.5 million start scenario as normalized scenario that you're painting maybe in a few years. With this combined business with the USI and with your commercial strategy as that in frozen to model. What's the -- what's a good normalized EBITDA margin for you in your mind?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [36]

--------------------------------------------------------------------------------

Yes. This is John, Justin. So we hadn't given that level. Other than the modeling metrics that we provide, which you can do the math, and I think it all depends on when you think a 1.5 million starts is going to occur because in their begin [ph] that we obviously have commercial growth too, which is happening in at the same time. So really the modeling on that has to be dependent on when people believe we're going to get back to the normalized margin level, but certainly the numbers we modeled historically and if you use the model and assume that even in 2022 timeframe, you're talking something north of 14% easily in terms of EBITDA margins and probably approaching to 15% target range. So…

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [37]

--------------------------------------------------------------------------------

Okay. And then just, on packing that commercial was there -- were there any large projects that explain the strength and thinking about the full year, just the mix of business and commercial in '19 versus '18 that you expect?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [38]

--------------------------------------------------------------------------------

Hey, Justin, it's Robert. So we saw a nice momentum growing the commercial business all through '18 and there is always big projects quarter-by-quarter. I mean working on some big projects on the West Coast right now, working on a big project in Las Vegas right now, there's always big projects that are completing, the new big projects that are starting as well, but we just seen some really nice momentum grow in the commercial business and as everyone's mentioned a really solid Q1 performance above there -- above the guidance of the 10%.

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [39]

--------------------------------------------------------------------------------

But in terms of the mix of business that's going to be commercial this year versus last year. Just trying to get a sense for how big that is in your portfolio?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [40]

--------------------------------------------------------------------------------

Yes, Justin. This is John. We don't break our numbers down from a guidance standpoint between residential and commercial. The 10% we gave us for long-term planning purposes. But suffice it to say, we absolutely expect to continue to gain share in commercial at a more rapid pace. And then I'll take you back to our spin timeframe, it was roughly 15%, 16% of our business. It's probably approaching now at 21% in terms of the overall, and I think you'll continue to see commercial -- the share gains, much more rapid because as you know, we have a -- we're the largest player in high single digits, but in a much more fragmented market. So the share opportunities there are pretty robust.

--------------------------------------------------------------------------------

Justin A. Speer, Zelman & Associates LLC - MD of Research [41]

--------------------------------------------------------------------------------

And then last question from me, just in terms of the capital allocation strategy. What are the going rates, what are the multiples that we should expect on EBITDA for residential relative to commercial in terms of perspective M&A?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [42]

--------------------------------------------------------------------------------

Yes. So I think -- this is John, Justin. So if you go backwards obviously, we talked about in the past 4.5 to 6x. We obviously haven't taken a deal over the finish lines in QSI. So I can't really exactly on what deal multiples are, but I wouldn't expect that they change dramatically from that total at this point. But again, we'll have to see how that plays out in and how successful we are this year.

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [43]

--------------------------------------------------------------------------------

And Justin, Jerry here. It always depends on a bunch of other factors that play into it. Relative to the profitability of the organization, the talent that we're inheriting, what's the geography, the size of it. So there is a bunch. And we do a lot of analysis on our own internal rate of returns that kind of -- which is kind of the summary metric that we use to kind of put all that on 1 page. And so, yeah, there's nothing going on here right now that would suggest that the multiples we've historically paid are going to be a whole lot different going forward, but again, it's highly specific dependent on the acquisition that we're talking about.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Megan McGrath from Buckingham Research.

--------------------------------------------------------------------------------

Megan McGrath, [45]

--------------------------------------------------------------------------------

Just a couple of clarification questions. In terms of the distribution business, the headwind on volume from walking away from business, is that a carryover from last quarter? Or are you continuing that process as we move through the year?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [46]

--------------------------------------------------------------------------------

This is Robert, I take carryover from back half of last year, so Q3 and definitely Q4. And as we said, that was about a 5.3% decline in Q4 that went to 2.4% in Q1, which I think says we've brought on those new customers and some new business that we were absolutely consciously targeting.

--------------------------------------------------------------------------------

Megan McGrath, [47]

--------------------------------------------------------------------------------

Okay. Great. And then just a follow-up question on the pricing environment in residential. I know you don't like to give specific breakout on pricing and volume assumptions, but in your guidance, are you assuming a second price increase and have your assumptions around the pricing environment changed at all in the last few months?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [48]

--------------------------------------------------------------------------------

Yes, Megan. This is John. We -- to your point, we don't give out specific breakouts on our guidance other than the parameters on starts that we have is kind of the guard rails for that, so really nothing I can share with you there at this point in terms of what our individual pieces are in terms of pricing and material cost increases and things like that.

--------------------------------------------------------------------------------

Megan McGrath, [49]

--------------------------------------------------------------------------------

Maybe if I could ask a bit different way, you talked about the compare is getting a little tougher. So if we want to think about how the year might progress and if we want to assume, let's say, no additional price increases, how should we think about maybe the cadence of pricing as we model things out for the year?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [50]

--------------------------------------------------------------------------------

Well, the carryover pricing from last year obviously -- if you go to last year, we got hit with double-digit material cost increases first and second quarter and as we documented last year, we were chasing that especially in the first half of the year. So the point I was making in terms of the comps is that last year if you -- and especially if you look at our gross profit numbers, we had compression in the first half of the year, expansion in the back half of the year. So that's why I say that the comps get a little bit more difficult. So in terms of how this progresses throughout the year, I'd say, second, third and fourth quarter, it becomes a little bit more difficult comp for just that piece. Now there's a lot of other variables that come into play, but for that piece they get a little bit tougher as each quarter goes along.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And our next question comes from the line of Adam Baumgarten from Macquarie Group.

--------------------------------------------------------------------------------

Adam Michael Baumgarten, Macquarie Research - Analyst [52]

--------------------------------------------------------------------------------

On your 1Q results, did they reflect a full quarter of the benefit from your recent supplier changes in fiberglass?

--------------------------------------------------------------------------------

Robert M. Buck, TopBuild Corp. - President & COO [53]

--------------------------------------------------------------------------------

Adam, this is Robert. So we never look at -- whenever we look at Q1, we buy from our core suppliers, (inaudible) buy them with all 4 suppliers across really the entire business and stuff. We're always looking to leverage the scale. So I'd say there was nothing out of the ordinary in Q1 from our normal supply chain execution and how we look at our supply chain. I would just point to, the vast majority of our improvement and our results in Q1, really the operational performance in the field and just driving the efficiency in something, as I tried to talk about the cadence by which we're just constantly focused on that and keep the pressure on that.

--------------------------------------------------------------------------------

Adam Michael Baumgarten, Macquarie Research - Analyst [54]

--------------------------------------------------------------------------------

Got it. And then just on the USI synergy is now being well above $15 million. Can you put a new target on that? And if not, maybe just walking through which types of those synergies are coming in well above initial expectations?

--------------------------------------------------------------------------------

John S. Peterson, TopBuild Corp. - CFO & VP [55]

--------------------------------------------------------------------------------

Yes, Adam. This is John. So we're not going to give a new target suffice it to say the numbers are larger than we projected and are happening quicker. I think probably the biggest areas would be around the corporate consolidations and the different cost buckets that we were able to work on and take cost out of. And so that would probably be the largest one, but we're not going to continue to break that down on a go-forward basis, we got 1 more month to comp here on, but suffice it to say, it's been an excellent acquisition where we've overachieved in terms of our synergy buckets.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Thank you. And there are no further questions at this time.

--------------------------------------------------------------------------------

Gerald Volas, TopBuild Corp. - CEO & Director [57]

--------------------------------------------------------------------------------

Thanks to everyone for joining us today. We look forward to reporting our second quarter results in early August.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.