Welcome to TopBuild's Second Quarter 2015 Results Conference Call. My name is Steve, and I will be your conference operator today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call -- conference call over to Mr. Sam Levenson.

Thanks, Steve. As shown on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our second quarter 2015 earnings press release and our registration statement on Form-10. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today. In addition, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our second quarter 2015 earnings press release. At this time, I'd like to introduce Jerry Volas, Chief Executive Officer of TopBuild, who will lead our discussion. Jerry?

Thanks, Sam, and welcome to everyone who has joined us on this -- our first earnings call as a public company. We are pleased to share and discuss with you our views on TopBuild and the construction industry as well as our results for the second quarter and the first 6 months of this year. Joining me on the call today are Robert Buck, our President and COO; and John Peterson, our CFO. So turning to Slide 5. I'd like to speak to a couple of themes playing out during the first half of this year. As you know, the spin-off of TopBuild from our parent company, Masco, was executed on June 30. A tremendous amount of hard work from both the Masco team and the TopBuild team made that happen, and we're very excited to be moving into the third quarter as a separate public company. The financial results for the second quarter and the first 6 months of 2015 and the comparisons to 2014 have been adjusted to reflect our best estimate of the going-forward TopBuild business model. Let me start with a high-level review of our financial results. We recorded top line growth of 5.5% on the second quarter, which brings the first 6 months in at 6.4% ahead of last year. That compares favorably with the pace of housing starts lagged by 90 days. That number has been 4.4% throughout the first 6 months of 2015. As a reminder, we find that lagging reported housing starts by 90 days provides a reasonable indicator of the environment within which we are operating. That is particularly true with our residential single-family installation business, although somewhat less so with multi-family, commercial and Service Partners, our distribution business. But on balance, it's still the best overall indicator of the construction…

Thanks, Jerry. I would also like to take this opportunity to welcome everyone who's participating in this call. We appreciate your interest and support. Turning to Slide 8. During the first half of 2015, TruTeam and Service Partners, both leaders in their space, continue to leverage our 20-year operating history and execute against our strategic initiatives. As a reminder, TruTeam has over 190 installation branches in 43 states, and Service Partners has over 70 distribution centers in 35 states. Our footprint and scale is unrivaled in the industry. Both businesses are supported by our industry-leading building science business, TopBuild Home Services. TopBuild Home Services was recently recognized as a 2015 Energy Star Partner of the Year. Moving to Slide 9. I do want to discuss the Q1 price increases, movement to the marketplace by the fiberglass manufacturers and impact on our business in Q2. Coming off of a weak first quarter for the industry and slower than anticipated new housing ramp, we have not yet realized as much price with our customers as anticipated. The slow start to the year also forced some jobs bid for Q1 completion to push into Q2. However, as has always been our proven practice of the past, we completely expect that we will fully align customer pricing with our material costs. The results of the quarter for our TruTeam and Service Partners businesses showed different trends. The TruTeam top line revenue in the quarter, up 9.5%, benefited from improved residential construction installs and great organic growth in commercial business. Our Service Partners business was basically flat quarter-over-quarter due to challenging comps from increased second quarter 2014 customer purchases driven by an impending late second quarter 2014 selling price increase. We expect solid full year performance in both businesses, but as mentioned previously, results will…

Thanks, Robert. Jerry and Robert have provided some operational headlines on the company's second quarter performance, and now I'll take you through a more detailed financial review. As TopBuild became an independent public company at the end of the second quarter, there's a little bit of noise in our financial statements for the quarter due to 3 items. First, we recorded approximately $4 million of unusual and nonrecurring charges. Second, we recorded a fixed asset disposal of approximately $2 million tied to devices in our installation truck fleet that are being replaced with a more efficient and current technology. Finally, the company also received additional overhead allocations from Masco as required under the regulations for a spin and incurred approximately $1 million growth in expenses year-over-year as we prepare to be a stand-alone public company. As part of the reconciliation of GAAP to non-GAAP, we eliminate all Masco allocations and current period stand-alone public company costs and replace them with an estimated full quarter of our anticipated expense to become a public company. I'll cover the impact of these items in more detail later in this presentation. Moreover, let me note that we have provided a GAAP to non-GAAP reconciliation on Slide 18 that normalizes the adjusting items and in addition, reconciles to an adjusted EBITDA balance. Please turn to Slide 11. As Jerry mentioned, consolidated sales increased 5.5% to $404 million driven by strong growth in our installation segment in both residential and commercial lines of business and improved selling price. Overall growth was above 90-day lag starts of 4.4%, a benchmark we use to measure our performance versus industry growth. On average, the company distributes and installs material 90 days after a housing start. Although this performance varies and fluctuates due to quarterly seasonality and unit mix between…

[Operator Instructions] Our first question comes from the line of Keith Hughes with SunTrust.

But just a quick question on pricing. Could you give us an information on how pricing affected the installation division and what it was? I assume it was down there -- excuse me, on the distribution business, assume it was down there and what the impact was on the installation results total [ph]?

Yes, Keith, this is John. In terms of the discussion we had around the imbalance between material cost and pricing, really the impact had -- the significant impact was on the TruTeam side of the business. Service Partners, or the distribution side of the business, had a relatively, I call it, stable material and pricing relationships. So really the impact that drove the gross profit compression we had at the total business was really on the TruTeam side.

And to follow up, so it was simply a fact that the -- the pass-through. Did the situation improve as the quarter went along? And what are you seeing in pricing in July at TruTeam?

Keith, Jerry here. On the normal course of events, Keith, we'd indicate that as time goes on that, that alignment improves. That's always been the case historically, and we really believe that's going to continue to happen as we get into Q3. There's a couple of factors there. One is given the timing of some of the price commitments that we make, particularly with multi-family, some of those price commitments were made months ago, and so the revenue that shows up in the second quarter may have been priced some time ago. So there's always that factor that contributes to a bit of a delay. But we believe that as we get into the third quarter, we're already seeing that, we believe that, that alignment is going to improve and we would fully expect that to happen as time goes on.

Okay. Final question on the distribution here. We don't have a lot of long-term comps though. Given the way you described the year-ago period, I assume third quarter you would have the proverbial easy comp in that business. Is that the best way to look at it?

This is Robert, Keith. Yes, we would expect things to improve in Q3 coming off the prebuy that happened Q2 2014. So we expect to see some improvement definitely on the distribution side in Q3.

Your next question comes from the line of Mike Wood with Macquarie Research.

First question just on the pricing side, just to follow up as well. How long does that lag typically occur for? And do you think you'll be able to return to 20% incremental margins by 3Q?

Mike, Robert. So typically, it's about a quarter lag there as we're bidding work and then -- actually, that got extended a little bit the first half of this year given the slow start to the year given the weather. Some -- again, as I mentioned some jobs bid for Q1 completion pushed into Q2. So it's typically about a quarter that we look at it from a lag perspective on the pricing side. As always, really strong track record and we ensure that we align that.

Relative to the 20%? Yes, on that I would say that certainly, the 20% as we've talked about on the road show, that's a good guideline for us to think about long term and also for a given year. On a quarter-to-quarter basis, it's really hard to predict or to guide what any one quarter is going to look like. But I would say that coming off Q2, just knowing that the alignment, we believe, will improve on the pricing material cost, we would expect that EBITDA drop down to improve in Q3. As to whether it gets to 20% or not, it's hard to say that. But again, I would continue to reaffirm that the 20% guidance for the full year and for the long-term outlook is a good thing to think about.

Okay, very helpful. And then my next question is just on seasonality, since we don't have a lot of historical information. The $25 million in the first half '14 EBITDA, that was about 28% of full year results last year. Is that a typical seasonality for your business? Or was there anything unusual why the second half of this year wouldn't be proportionate with last year?

Yes, that is typical for seasonality for the business. Typically, we see that type of trend and certainly driven by starts and start build up throughout the country, and the seasonality of the markets we work in, in the northeast, midwest obviously slowed down significantly in the first quarter. And we've seen the trend obviously with starts increasing throughout the last 2, 3 years. That tends to push to the back end some of the volume. So yes, that's a typical seasonality, and we anticipate that same type of performance on an ongoing basis.

Great. Great. My final question, just you mentioned labor in your prepared remarks. In prior cycles, what was the typical rate of inflation you get on labor as housing approaches 1.5 million starts?

Yes, I would say relative to -- if I heard your question, if you can repeat it, I think I heard you say inflation. Was that your question?

Yes, the rate of labor inflation. I mean, that's -- you mentioned it was the second largest part of your COGS. I'm curious given the fact that labor tightens as you approach normalized housing levels, what kind of rate of inflation that you kind of embed in that 20% adjusted EBITDA margin. I'm curious what you typically see in prior cycles.

Yes, I can't really speak to the prior cycles. But I would say what we've done as we look around the country where labor is the tightest, there's been some what I call minor inflation there. We really work mainly, Mike, on productivity improvements in the business. And so given our star crews out to the job site earlier, making them more productive while they're on the job site, that's proved pretty well on that of a workforce. It's peak [ph] rate, so that makes them more productive, increases productivity for the business. So it's kind of a win-win all the way around. So we really work from improving process and productivity perspective.

Your next question comes from the line of Scott Rednor with Zelman & Associates.

Beyond just the starts data, I was curious how your conversations with your builder customers and kind of what you're seeing from a bidding standpoint is shaping your second half view that sales are going to accelerate.

Scott, this is Robert. So I think looking at the, obviously, the starts data that we've seen, which already shows the Q3 numbers, so definitely significant improvement in the housing starts and another leading indicator, looking at permits as well. So those are great indicators for the business as well as what we're seeing from a bidding perspective. That conversation with the bidders -- with the builders is that they're very, I'd say, confident the back half of the year, especially as we're heading into the fall and as we get into a lot of those closings that hit in the October, early November time frame. So I'd say pretty positive overall. Again, leading indicator is positive as well as conversations with builder customers, and I'd say we continue to see nice bidding activity on the multi-family side of the business as well. So I'd say single-family and multifamily.

And then one of the areas you guys highlighted in the slides was cost-saving initiatives. Can you guys maybe just elaborate what that relates to and kind of what the implications are on a go-forward basis?

Sure. A couple things that we've looked at there and typically, we always look for ways to simplify the business and they get more productive, efficient, et cetera, and drive better customer service. So 2 of the key ones that we pointed out in the GAAP to non-GAAP, one would be about the fixed asset disposal where we accelerated depreciation on some old legacy assets that essentially were older -- the technology was older. It was less reliable on the field. So we're replacing that, rolling out new technology which will improve the customer service levels of our installers in the field. So that's one of the one-offs that we had in the GAAP to non-GAAP. The other, we continue to look at the organization and make sure we've got the right structure. And so as part of that, as we evolved and moved up to the spin date, we identified an area of the regional structure and some back office support that we ended up eliminating in the second quarter. So combined with both of those initiatives, we're looking at something over $2 million annualized savings from that.

[Operator Instructions] Our next question comes from the line up Sam Doctor with Fundstrat.

I had a couple of questions. First, as you -- could you give us a little bit more color on the growth in TruTeam? If you can sort of give me a sense of how much was the roll-off of essential market share gains. Was this commercial or volume and price mix?

This is John, Sam. So if I understood the question, you're understanding what the growth was in TruTeam?

Right. So TruTeam grew about 9.5%. That's about twice the growth in housing starts. So I'm trying to get a sense of how you would attribute that with residential share gains versus growth on the commercial side or volume or price mix?

So on a quarterly basis, Sam, we're not going to be breaking out individual line of business. But what we can share with you in terms of our share performance, so we're very confident that we at least held our own as a company. And in fact, we think we increased a little bit, especially on the single-family side of the business. So when you look at that growth, it was a nice distribution between both the residential starts impact that we'd expect to see flowing to our residential numbers and great organic commercial growth as Robert indicated earlier.

Okay. And just a follow-up on the commercial side. I mean, obviously when you look at the residential side, your market share is pretty strong across all markets. How does the commercial market share break out? Is it -- it's obviously smaller. But is it more evenly distributed? Or do you see some areas that you're significantly stronger in and there are other areas where there are opportunities for growth?

Sam. This is Robert. So we would say as we look at the commercial opportunity, we'd say that our share is in the single digits there, probably mid-single digits. It's a great opportunity. We participate both in what we call the light commercial, which is similar to residential construction, as well as the heavy commercial, which is more the high-rises in some of the larger metropolitan areas. So we participate in those spots. And again, we see that as a great growth runway for us and the opportunity to do something nationally across the country relative to commercial.

So is the market share in the commercial side low single digits or mid-single digits? Is that relatively evenly distributed across markets? Or do you have some areas where you're really strong and then other areas that you see that there's a lot of opportunity to pick up share?

I'd say it's relatively evenly distributed. There's a few metropolitan areas that we're stronger in. So I'd say the opportunity to grow the business is pretty well distributed across the country as well.

Your next question comes from the line of Ken Zener with KeyBanc.

This is Adam in for Ken. Just a quick question on the pull forward from pricing and distribution. I was just wondering if you could give us -- and apologies if you already provided this number, I was wondering if you could give us a dollar figure from that impact?

Yes, when you say the pull forward, you're talking last year's pull forward?

Yes. So I think you mentioned sales appeared flat because of the Q2 '14 impact from higher pricing. So I'm just wondering kind of what that dollar figure was so we can get a growth figure ex that impact?

Yes, so Ken, this is John. We don't have a dollar figure per se in terms of the actual amount. It certainly was the reason we were flat. As we talked about in the past, Service Partners will not necessarily have the same trajectory as TruTeam. But that was the driver. We're not providing it. We don't have a dollar figure in terms of the actual impact the second quarter.

Okay. And then just second question here. Wondering what that gross margins are looking like across the regions, specifically Texas and Florida, and if you guys are kind of seeing an imbalance between -- kind of on a regional basis.

Yes, so relative to -- Ken, this is Robert. So looking across, obviously, if you look across the border states, if you will, California through Texas to southeast up to the Carolinas, I mean, those are the stronger -- tend to be the stronger areas relative to housing and even multi-family as well. So we see some better performance in those kind of mild states, if you will. And we continue -- the business continues and the teams continue to perform well at a local level. It's such a local business and our businesses are really performing well, especially in those areas where the growth is coming the fastest in the housing ramp.

This concludes today's Q&A portion of this event. I would now like to turn the call over to Mr. Jerry Volas for closing remarks.

I'd like to thank all members of the TopBuild and Masco organizations for their support and commitment during this time of transition to a separate public company. Coming out of the spin from Masco, we have a well-capitalized balance sheet, 20 years of operating experience and a strong governance culture. Our broad-based approach to close operations with both our installation and distribution businesses along with our energy efficiency expertise is unique in the industry, and this business model is proving to be as effective in the commercial space as it has been in the residential space. We expect to take full advantage of an improving housing market to support growth in sales, earnings and cash flow. We look forward to seeing many of you at the upcoming RBC and Zelman conferences. We appreciate your support of the TopBuild team and look forward to the third quarter call in November. Thanks, again, to everyone for joining us today.

And this concludes today's conference call, and you may now disconnect.