Ladies and gentlemen, thank you for standing by. Welcome to the TopBuild earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Tuesday, May 9, 2017. I would now like to turn the conference over to Tabitha Zane, Investor Relations. Please go ahead ma'am.

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 two of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial condition. 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. I will now turn the call over to Jerry Volas.

Welcome and thanks for joining us today. Starting on slide three. As expected, we came off a strong 2016 and moved into 2017 with an excellent first quarter. Revenue grew 6.6%. Our adjusted operating margin expanded 150 basis points to 6.5%. And adjusted EPS increased 48% to $0.46 per share. Our incremental EBITDA margin, a key metric for us, was 31.5% for the quarter. John Peterson will be following me with further details behind this high level financial summary. The trend in our financial results continues to provide clear evidence that our plan is working. Our unique operating structure positions us very well within the ongoing housing recovery. Our internal market share expansion and operational efficiency improvement initiatives are generating top and bottom line growth. And the execution of our capital allocation strategy is providing additional value to our shareholders. Regarding the overall housing market, first quarter 2017 seasonally adjusted housing starts of 1,253,000 are right in line with how we have been viewing the status of the current cycle. With household formations growing and the general economy improving, the demand for new construction is strong and exceeds the current inventory. That equals pent up demand for new construction that eventually will be satisfied with a higher level of starts for the next several years, an outstanding environment for TopBuild. Our primary top line benchmark, 90-day lagged housing starts, was up 11.5% for the first quarter of 2017. While our revenue increase of 6.6% was short of that, quarter-to-quarter fluctuations can be significant, particularly when comparing to the weather driven unusually robust first quarter of 2016. As a reminder, we exceeded the 90-day lagged benchmark for all of 2016 and expect to do so again in 2017. Turning to slide four. TopBuild has a unique operating structure that is serving…

Thanks Jerry. As Jerry noted, we had another strong quarter and a nice start to 2017. Starting on slide seven. We saw volume growth and margin expansion in both business segments as we continue to successfully grow the topline, enhance labor and sales productivity while leveraging our established business platform. Revenue increased 6.6% to $441.4 million, driven by sales volume growth at both TruTeam and Service Partners, selling price growth at TruTeam and $7.6 million of revenue from companies acquired since August 2016, partially offset by a price decline at Service Partners. Gross margin increased 140 basis points to 23% and our reported operating margin was a loss of 0.8%, compared to 4.8% in first quarter 2016. On an adjusted basis, our first quarter operating margin was 6.5%, a 150 basis point improvement from adjusted first quarter 2016 operating margin of 5%. First quarter 2017 adjustments totaled $32 million, primarily related to the legal settlement of $30 million Jerry referred to earlier, $1.7 million primarily tied to a back-office consolidation which we announced on our last call in February as well as costs associated with the execution of acquisitions. With respect to the back-office consolidation, we expect to spend an additional $700,000 in the second quarter and in total, expect a payback in less than two years. As we saw throughout 2016, our margins were positively impacted by increased sales volume, labor and sales productivity, lower material costs and overall higher selling prices. Adjusted EBITDA for the quarter was $33.9 million, compared to $25.3 million in 2016 and our drop-down to adjusted EBITDA was a healthy 31.5%. On a same branch basis, adjusted EBITDA was $33.5 million and our drop-down to adjusted EBITDA was 41.4%. This is the first quarter we have broken out the impact of acquisitions on our…

Thanks John and good morning everyone. Turning to slide 13. As both Jerry and John noted, 2017 should be another solid year for TopBuild and our positive momentum is building in many areas of the business. Our team is working hard and we are focused on profitably growing our business organically and through acquisitions. We are very encouraged by the overall operating environment. Homebuilder sentiment is positive and the spring selling season has gotten off to a great start. Commercial construction also has good momentum and general contractors seem very optimistic about their potential book of business. At TopBuild, we are seeing growth in the vast majority of our markets on both the residential new construction and commercial sides of our business. And despite the difficult comp to first quarter 2016, both TruTeam and Service Partners grew their top line and expanded operating margins. Moving to the next slide. Our entire organization is focused on key growth initiatives and driving operational excellence, including labor and sales productivity. From a growth perspective, our spray foam business increased in excess of 15% in the quarter. This is a result of a more dedicated sales effort to this product as well as the adoption of new energy codes. Q1 also saw our commercial business continue to expand as we gained share in both light and heavy commercial. Our commercial business now accounts for approximately 20% of total revenue. As we have stated before, the commercial insulation segment represents a $4.8 billion opportunity and our bundled solutions create a value proposition that is very appealing to general contractors. From TopBuild's perspective, the commercial business is particularly appealing given that the margins on this business are generally higher than our residential new construction. Let's turn to supply and pricing on slide 15. As we have…

Thanks Robert. We are very confident as we look to the balance of 2017 and beyond. The housing recovery is on track and providing an excellent external environment for TopBuild. Internally, we are driving hard with execution in all aspects of our business, which will generate topline growth, maximize the conversion of that revenue growth to the bottomline and provide the free cash flow to fund an efficient capital allocation strategy. One quick housekeeping note before opening up the call to questions. On Tuesday, October 3, we will be hosting an Investor Day in New York City. More details to come on that but we wanted to make sure you put this on your calendar. Operator, we are now ready for questions.

[Operator Instructions]. Our first question comes from the line of Mike Wood with Nomura Instinet. Please proceed with your question.

Hi. This is actually Mason, on for Mike. Can you give some additional color on the 31.5% EBITDA conversion margins which were your budget target? Specifically, how much benefit came from pricing cost and what was productivity gains?

Yes. This is John Peterson. Price was about to two-tenth as we talked on the prepared remarks. TruTeam was up about 1.8% but service partners declined about 2.6%. So the bigger pieces we got were great volume leverage at TruTeam and system with last year really good sales and labor productivity at TruTeam and Service Partners. The other thing we announced last year is, we closed some branches at the end of the first quarter and early second. We got a full quarter's benefit from that also part of the transition. And then the final piece that really counts is lower material cost that we got in the quarter versus the year ago due to the over capacity of supply last year and the reduction in material cost in the industry. So the 31.5%, which was the combined, also same branch was 41.4% and our M&A or acquisitions were up 5.7%. So kind of thinking about it going forward, we still really hold to the fact that we at least can deliver at least a 20% drop-down. I think some of the things I just mentioned for instance the closed branches, we got the full impact or the last impact of that really here in the first quarter of 2017. So second quarter, the comp won't have that benefit and again we are going to be a little conservative in terms of our projections. So at least a 20% on a go forward is the way to think about the business.

Okay. Great. And one follow-up. What have the trends been in your labor inflation and how is your scale on shutdown labor help play to your advantage?

Yes. Good morning. This is Robert. Relative to that, we do a lot of things with labor productivity in the field. So just driving continuous improvement in the field, getting folks on the job site quicker, night loading our truck, those types of things. So we have really been able to, there has been some inflation in certain areas, but overall we have done a really good job with our local operators relative to offsetting that with productivity and really driving simplification in the business. So I think as we talk about most of the times on the call here, labor productivity, has surely been in the field at the installer level on the job sites.

All right. Great. Thanks for your time.

You are welcome.

Our next question comes from the line of Matt McCall with Seaport Global Securities. Please proceed with your question.

Thank you. Good morning guys.

Good morning Matt.

Good morning Matt.

So maybe go back to that last one. John, I think you said 20% drop-down and earlier I heard you say or when you guys said that you are going to trend toward low to mid-teens. I am just wondering, is the 20% drop-down organic and the low to mid-teens is the trend for the acquired companies? Connect those dots for me.

Yes. I think the at least 20%, we would say, is for the total business at this point. So what we will see based on the acquisitions, is that low to mid-teens is the full turn. As I discussed on the prepared remarks, the reason that's a little bit lower than the base businesses because in the first year of acquisition obviously we are adding some fixed cost that come with the acquisition targets in selling, fixed overhead and G&A. So we are still comfortable. Even with that drop-down below the 20%, still saying at least 20% for the overall business as we think about TopBuild in total.

Okay. Got it. And then on Service Partners, you talked about you seeing improvements on prices but material cost have moved lower. Just trying to understand what you are trying to say what the relationship, Bob I think it was you, the relationship between material cost and selling prices will continue to align, will pricing still be negative, but your costs are going to more than offset that. Is that what you are implying?

Yes. Robert, again. So we absolutely expect that to align as we are finishing up the first quarter going into second quarter and that's coming from continuing to having to push selling price which the team is doing and then as you know, there was an announced increase that happened in January this year. There is another announced increase in the industry for June 1 as well.

Okay. All right. Got it. And then the last one, I am just curious about the commercial outlook. More specifically, it sounded pretty bullish but can you put any numbers behind that? What are you trying to bake into your plans for the year? Thank you.

We are probably not giving specific guidance on the forward look but I would just tell you, again, this is Robert, but from the general contractor perspective, looking at backlog of work, talking to general contractors all the way up to even 2018, volumes is well. They are very positive about the environment. Again, looking at the opportunity we have of $4.8 billion is really about our team growing share in light and heavy commercial. And they are doing a great job of that. So we are very, very optimistic about commercial and we see that in the field on a day-to-day basis as well.

The other thing I would add to that, Matt, from an acquisition viewpoint, one of our significant acquisitions in January was in the commercial space, that being Midwest. And as we look forward, our pipeline includes commercial players. So as we have been saying for many quarters, we are very serious about the commercial piece of the business. It's very important to us. And it's on the radar from an acquisition viewpoint.

Okay. Thank you all.

Our next question comes from the line of Ken Zener with KeyBanc. Please proceed with your question.

Good morning everybody.

Good morning Ken

Good morning Ken

Focusing on price. Obviously, between TruTeam and Service Partners, they are different metrics. But could you talk about, on the service side, if year-over-year if it's down, what is going sequentially? I apologize if I missed that.

Ken, this is John. Sequentially up a little bit on the Service Partners side. So that 2.6% decline was year-over-year. But we are up a little bit sequentially from fourth quarter.

And then usually, I mean you talked about pricing coming in a little bit and obviously your quarter had some beginning inventory in it, but what would you say the exit rate was of sales price versus let's say, January 1, just so we can get a sense of how much change over the quarter at your inventory?

I am sorry. Help me understand the question, Ken, in terms of --

The pricing, well how much was pricing up by the time you exited the quarter? The pricing, I assume, would have been up more than the average than the beginning of the quarter, simply because price increases and you started to go through you started to use up lower cost inventory. Is there sense of how much it moved by the end of the quarter?

Yes. It's difficult to answer that question.

Versus at the beginning of the quarter?

I don't have data to answer that. Obviously, throughout the first quarter, TruTeam side and Service Partners, prices were increasing. I can give you the timing in terms of how much of that was March versus January, et cetera. But certainly it was on the ramp up throughout the first quarter and obviously ramping up through the end.

Okay. Now as one looks to the volume side on the TruTeam, you talked about a lot of volume leverage, but given that you are under-indexing versus the starts, it didn't seem like you had as much volume as you have perhaps by the time the year ends when you actually outpace the lag start number. Can you just talk about how you would marry those two comments? You have got the volume leverage but it was fairly light and then your idea that EBIT leverage very strong this quarter overall, your outlook is a bit more conservative when in fact your volumes should be a lot better as we move through the year.

Ken, this is Jerry here. I would answer that by telling you that there's a lot of variables when you compare our topline revenue to housing starts lag. And that's why it's always better to look at that over longer periods of time, because any quarter-to-quarter basis, there are lots of variables that can shift that around. Anything from lag times with builders to the unusual quarter we had a year ago. So we rely on longer periods of time. That's why when you look at total year 2016, you see that we did outstrip the lag housing start metric, that's important for us, on a topline basis. And we would expect that to be true again in the 2017. As it relates to the whole dynamic, as I am sure you can appreciate, between topline selling prices for us and our material cost, that is very, very important dynamic for us to align properly. Again, lots of nuance there on the material cost side. We work really hard on our fire-base, that's very important to us. I made a comment earlier, I think that all of our suppliers are very important. And we have lot of scale that we can leverage. And it's very important that we have great relationships with all of our suppliers. That's huge. On the price side, as we go through our geography, each one of our geographies is a bit different than the ones sitting next to us. All with different dynamics across the country. And it's very alive every week, every month in terms of finding that right balance between volume and price. And the only thing about price I would say now is, the manufacturers are out there with price increases. We think there has been some stickiness to the January. We don't know about the June. It's just way, way to early, to Robert's point, to have a comment on that. But we, generally speaking, have a history of doing well from the standpoint of pricing of passing out whatever material cost we incur and make our margins work accordingly. So we believe it's a good situation for us right now.

No. I think that is case of all. Does there tend to be a little lag if pricing does go through? Probably a year-and-half ago, it seems like I recall that from you where there would be a little less if pricing comes through stronger than let's say we expect. Would there be a little bit of lag on your ability to pass through to customers, therefore a little less EBIT leverage? Is that something that we should be thoughtful of if pricing does come through better which I think is ultimately good for you, but it could be a quarterly hiccup from the leverage perspective? Is that something you would be sensitive to?

Ken, this is John. So typically we have got a good line of sight in terms of material cost increases of when they are coming. So we reflect that in our pricing on jobs that are basically execute the same time as material cost are coming in. So I would say, generally we feel pretty good about the ability to match up the material cost increases with our selling price increases. On occasion, there are some inventory to flow-through, et cetera. There is different things that happen depending on the cycle and depending on the lag in the industry. But overall we feel pretty good about the timing of the ability to recover that incremental material cost in our selling prices at the same time.

Thank you everyone.

You are welcome.

[Operator Instructions]. Our next question comes from the line of Keith Hughes with SunTrust. Please proceed with your question.

Thank you. Two questions. First on slide 15, you refer first of all, sufficient capacity to meet ongoing demand. What kind of timeframe, given what you see in this world, is there sufficient capacity? I guess my question really is, when is the first situation where it could get tight?

Yes. Good morning Keith. It's Robert. So I think given our local housing starts for this year, we think that capacity is in a good place for 2017 here. I think folks are looking at 2018 at what the environment may be there as well considering capacity and starts and the needs there. So I think we are in good shape here in 2017 and I think people look at the operating environment for 2018. And the last thing I would just point out that we talk a lot about is just what's happening on the spray foam side of the business. Spray foam is continuing to gain share. We are seeing that in our business. We are seeing that with builders being much more interested in that product. So I don't think we can make it just a fiberglass discussion. It has to be total solutions discussion including spray foam.

Okay. Second question on TruTeam on the volume of approximately 2%, excluding acquisitions. I know that your numbers don't always match up with completions. It's good they are below completions. So is there anything specific to your geographic mix or any other things you can call out in the quarter that put pressure on that number?

Keith, again Robert. We feel really comfortable and confident in that number looking across the country. So if I look at census regions across the country and I think about the Northeast, we are right on top of the Northeast numbers. The South, if you look at Midwest single family compared to multifamily, we feel very confident there. But if you look at multifamily Midwest, a big part of the growth percentage in the starts in the first quarter were multifamily. And then if I go to the West Coast, I think West Coast starts are up plus or minus, I am going to call it about 30% in the West, California been specific. By far, two thirds of that is multifamily. So it has a longer lag. So we are seeing our business. And then give California, obviously it was a wet start to the year in California. So we see that again with the builders as they are starting up their prep work and stuff as well. So we feel really comfortable with the Q1 number and then we look at by multifamily single-family and how that may affect the lag across the country. That's what we saw and that very much aligns with the census data.

Okay.

Through all the noise, we look very carefully. We have a lot of granular data relative to share. So the important thing for us to understand and we do, through all the noise and the different variables that impact trying to compare lagged housing starts to our topline is that we are maintaining a growing share. And we believe that to be true.

And just on California, is that you are overweight or underweight in California where it's percentage of the national housing picture?

No. I would say we are about compared to starts, we are about on the average in California and in the Pacific Northwest.

Okay. Thank you.

Our next question comes from the line of Blake Hirschman with Stephens, Inc. Please proceed with your question.

Yes. Good morning. Thanks for taking my questions. First one for me, I was just curious if you could touch on the cadence to growth that you saw throughout the quarter? Just kind of from the beginning to the end, what the level of growth? If it picked up, stayed the same or even if it slowed down a little bit? And then also you touched on the spring selling season being off to a great start. I was wondering if you could provide some commentary on how the month of April looked?

Hi. So good morning. It's Robert. So pretty consistent across the quarter. The only thing I would mention is out west, we started out a little bit wet in January and February. But other than that, we were consistent throughout the quarter and what you expect in Q1 of the year and fairly decent weather across the rest of the country. Relative to spring selling season, obviously we have great relationships with the builders at the corporate level and at the local level. And I would say, the builders, as they are coming out of spring selling season and preparing for the summer months and the fall months, people across the country in majority of markets are very optimistic. As you have seen, the entry mid-level homes are doing well. And that's what we see with our large production regional builders. And then the custom builders are gaining momentum as well. So coming out of spring selling, all the factors point towards a really robust 2017 housing here.

Keep in mind though that I believe the builders that we talk to would still say that from a cycle viewpoint, they still struggle building as many homes as they think they could sell. Hence the fact that the supply of new homes aren't there as well compared to what the demand is. So availability of labor, some of the cost challenges that they have, those are all things that I think builders continue to face as headwinds. And for us, to look at the lag time, that certainly is a nuance and that's a complexity in terms of us understanding what the lag times are from the start to completion.

Got it. That's helpful. And that will do it for me. I will hop back in queue. Thanks.

Our next question comes from the line of Scott Rednor with Zelman & Associates. Please proceed with your question.

Hi. Good morning.

Good morning Scott.

So I guess just to clarify the couple questions that have been asked. Based on your view that you should catch up to what we see in starts data and your view from your builder customers, is there any reason why your sales growth, if you look organically, should not accelerate through the rest of the year?

Good morning Scott. This is Robert. No, I think we feel comfortable and confident with that. Jerry pointed, he mentioned earlier, there's things that can affect lags. As you look at multifamily in certain regions of the country, that could affect lag or something. But at the overall, we feel good about the sales growth rate organically that will see here in 2017. No concerns from that perspective.

Okay. Great. And then John, not to piece out your words too tightly, but if you are now saying 20% including acquisitions in terms of that EBITDA flow-through, it would imply that you raised the core. So maybe could talk to that, your confidence that the core businesses is running above that target? And then as you look to the balance of the year, it sounds like distribution margin should see better improvement year-over-year. So what's the offset relative to what was a much stronger 1Q flow-through than many of us were expecting?

When you say what's the offset, Scott, do you mean, why would it drop from the levels we have seen down to the 20%?

Yes, exactly.

Yes. A couple of things I mentioned. One as the fact that we did get a nice benefit over the past four quarters and it kind of ended the first year on some closed branches we executed on. That's one. Two is, we have gotten great labor and sales productivity across the platform and it's not that we can't continue to deliver strong performance there, but there is some diminishing returns basically you get over time. And so again, we are being very conservative in terms of that. You are right. We kind of being a little bit by saying that by including the M&A discussion in the 20% and again M&A should typically be under that level. That by definition that the core, the organic business has risen a little bit in our estimates, which I think is consistent. I think part of that is just the fact that we now have almost two years under our belt in terms of performance. And we are always going in remain conservative, Scott, but I think generally we feel good about our ability to continue to deliver at least 20% on a go forward basis and we don't expect that to end anytime soon. If anything, we see right now on the second quarter and beyond, indicates that we will be up a little over that.

And then just on the settlement side, respecting that there is some confidentiality you can't disclose. But does that in any way reflect your concerns about your ability to get product?

Scott, Jerry here. No. And you are right. There is a strict confidentiality wrapped around the settlement. So my ability to add any color on that is extremely limited. But as we have always said, we felt good about our supply chain before, both from the standpoint of flexibility and cost effectiveness. We, as you can imagine, believe that this settlement for Capital was in the best interest of our company going forward. So we are very happy to remove the distraction and put it all behind us. And again, as I indicated, having a good relationship with all of our suppliers, I emphasize the word all, is very, very important. And so that really helps us right now. We have got significant scale here to offer to all of our suppliers and that's why having a balanced approach is really important to us and we are happy to have this behind us.

Great. Thank you.

There are no further questions at this time. I will now turn the call back to you.

Thanks to everybody for listening today and supporting TopBuild. We look forward to reporting our second quarter results in early August.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.