Thank you for standing by. Welcome to the TopBuild First Quarter 2018 Results 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 8, 2018. I would now like to turn the conference over to Tabitha Zane. Please go ahead.

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 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 everyone and thanks for joining us today. Starting with slide 3, we're pleased to report that 2018 is off to a very good start with the completion of three acquisitions, a $400 million bond offering, and strong financial results for the quarter. While John Peterson and Robert Buck will follow with further details, I want to speak to a few of the highlights. As you can see on slide 4, total sales were up 11.3%, with same-branch sales increasing 6.7%, driven by price and volume gains in both of our operating segments. This tracks in line with the housing recovery, which continues to strengthen. Adjusted earnings per share were $0.73 compared to $0.46 a year ago, an increase of 58.7%. The adjusted EBITDA margin increased by 170 basis points to 9.4% and the incremental margin was 24.2%. Material cost inflation was significant but was offset by both higher selling prices as well as improved leverage on all of our expenses. Turning to slide 5, on the acquisitions front, 2018 has already been a very busy year. In January, we acquired Santa Rosa Insulation and Fireproofing, an insulation installer with $6 million in annual sales, and ADO Products, a distributor of insulation accessories with $27 million in annual sales. And just last week we closed on USI, a leading provider of insulation, installation, and distribution services to the residential and commercial markets. USI generated pro forma annual revenue of approximately $375 million in 2017. All three of these fine companies fit well into our established acquisition criteria: profitable, well-managed, solid customer bases in the high-growth regions and earnings accretive. Also, these acquisitions demonstrate our confidence in the ongoing residential and commercial construction recovery and the ability of the TopBuild business model and management team to generate profitable growth within that…

As Jerry noted, we had another strong quarter and a nice start to 2018. At both TruTeam and Service Partners, we saw increased selling prices, organic and acquisition volume growth, as well as operating margin expansion as we continue to successfully grow the top line, manage inflationary pressures on our labor and material input cost, and leverage our established business platforms. Moving to slide 8, consolidated revenue increased 11.3% to $491.4 million, with $20.6 million of revenue earned from companies acquired since January 2017. Gross margin declined 40 basis points, a direct result of higher material cost and some labor inefficiencies due to weather. As we have mentioned on previous calls, there can be some lag between a material price increase and a corresponding selling price increase. However, be assured we are getting price increases at both businesses, 2.3% at TruTeam and 5.6% at Service Partners in the first quarter, with performance improving throughout the quarter. The combination of strong demand and tight labor and material supply creates a great operating environment for TopBuild. And while there may be quarterly fluctuation, we remain confident in our ability to push the full impact of inflationary input cost through selling price increases. Adjusted operating profit grew 33.6% to $38.2 million, with a corresponding margin improvement of 130 basis points. This increase was driven by volume leverage, higher selling prices, and lower G&A spending, partially offset by higher material cost and some labor inefficiencies due to weather and higher amortization expenses. First quarter 2018 adjustments totaled $4.3 million, the majority of which were acquisition-related expenses. First quarter adjusted EBITDA was $46 million compared to $33.9 million, a 35.8% increase and our adjusted EBITDA margin was 9.4%, a 170 basis points improvement from first quarter 2017. Our overall drop down to adjusted EBITDA margin…

Thanks, John and good morning. We're very pleased with our strong first quarter results. Both TruTeam and Service Partners achieved solid revenue growth and expanded operating margins. Upfront, we thank the entire TopBuild team for a great quarter and a strong start to the year and welcome all of our new USI team members. Starting with slide 14, Service Partners' sales were up 10.3% in the quarter, driven by same-branch volume growth, a 5.6% increase in selling prices, and revenue from ADO Products, which we acquired in January. As we forecasted, selling prices of Service Partners continued to improve as material cost for manufacturers rise. Adjusted operating margin was 9.5%, up 40 basis points from first quarter 2017. Looking at TruTeam's financial results on slide 15, first quarter sales increased 13.2%, with same branch contributing 8% of that growth and outpacing lagged housing starts. Quarterly results also benefited from a 2.3% increase in selling prices. Adjusted operating margin was 9%, a 160-basis point improvement from first quarter 2017. Although volume leverage was a key contributor towards this margin expansion, results were also favorably impacted by higher selling prices and continued improvement in G&A expenses. On the material side, there have been two industry announced price increases from the four fiberglass manufacturers thus far in 2018. While the Johns Manville blowing wool manufacturing plant in Indiana is back online, loosefill is still on allocation. Looking out to the rest of the year, we expect fiberglass capacity will continue to tighten as housing starts increase and other manufacturers look to perform maintenance on existing lines. As we mentioned previously, we have relationships with all the major insulation manufacturers and suppliers in all insulation categories, and we're seeing increased demand for alternative insulation material such as spray foam and cellulose. This dovetails well…

Thanks, Robert. We're very confident as we look through the balance of 2018 and beyond. The housing recovery is on track, our business model is solid, and we've demonstrated the execution required to drive profitable growth. Operator, we're now ready for questions.

[Operator Instructions]. Our first question comes from the line of Michael Wood with Nomura Instinet. Please go ahead.

Hi, good morning. Thanks for taking my question. First on the equation update that you gave with the 50,000 starts impact. Just wanted to clarify, does that reflect just the market share changes post the USI acquisition or is there any other dynamic that's impacting that?

Yes, Mike this is John. Basically that's it. We've had three acquisitions since we actually announced our previous long-term guidance, so it reflects the impact of both ADO and Santa Rosa in January as well as USI, obviously, as of May 1st. So those are the changes primarily at this point.

Thanks and then on the price cost lag, typically I know the distribution business doesn't see as much of a lag as TruTeam. In that price that you had called out, the 5.6%, does that reflect any lag in the quarter or is that representative of the underlying inflation that you saw? And I'm also curious, going forward with additional price attempts in the industry, can you discuss the dynamics as to whether or not the lag would repeat in future price attempts similar to what we saw on first quarter?

Yes, Mike, this is John. I'll answer the first part of that question. The numbers we provided, at least, in our prepared remarks and you'll see it in the MD&A broken out separately I think it is your question, is the price increases for the quarter year-over-year on a comp basis, basically. So I think it was 5.6% on the TruTeam side and roughly 5 points -- I'm sorry, 5.6% on the Service Partners side and 2.3% price on Service Partners. So, that's the entire price improvement year-over-year reflected in the businesses.

And my question was did that...

Go ahead, Mike.

Yes, the 5.6, was that representative of fully recovering the cost inflation that you experienced?

No, we saw some gross profit compression in the overall business. So I think in Robert's remarks, as he said, we started out a little bumpy in the quarter, but as the quarter continued to move on, we had improving price in lieu of those selling -- in lieu of those material cost increases, and we exited the quarter with strong price performance, so...

Yes Mike, this is Robert, related to your question on margin and realizing the price, so there can always be some fluctuations, as we've said in the past. But we would expect that we'd continue to do a great job of recovering the selling price. And on top of that, I mean, there's obviously increases that have been announced for April, May and we're into the busy time of the season as well. So capacity is tight relative to the labor material and the builders are busy. So we would see there could be some fluctuations about rent with the busy time, obviously, of the year.

Great, and just finally on USI, you talked about the geography impact in your business. I'm curious, by end market in terms of new construction or remodeling or size of builders, it bolsters your presence in any of those specific end markets more notably than others.

It's Robert again. So I think mix of the business is fairly similar to our TruTeam business. Relative to geography, there's some -- they absolutely participate in the high-growth markets, which is something that's very attractive. So Arizona, Texas, Florida, Pacific Northwest, the Rocky Mountains, those areas. So great concentration in some of the high-growth areas in the country and where we have a presence now, growing that presence with USI branches and team.

Okay, thank you.

Our next question comes from the line of Phil Ng with Jefferies. Please go ahead.

Hey guys, appreciating that forecasting incrementals are tough on a quarter-to-quarter basis, but certainly very impressive in light of some of the weather-related issues. But just curious, is there anything that we need to be mindful as we kind of progress over the course of the year, just because you're reiterating your incremental for the full year and certainly you've been tracking well above that for the last four to five quarters?

Yes, Phil, this is John. So I think, yes we are happy obviously, with our first quarter performance. A couple things to point out, one, we obviously continue to leverage our fixed cost base, which we talked about since day one as a stand-alone company and that continues and we expect that to continue in the future. And we did talk about the fact we did have a little bit of, obviously, some headwinds on the material cost side. We did improve selling prices, but we did have some compression on the GT side that we talked about. So two or three things helped to offset the impact of that and deliver the type of performance we had in the quarter. One is we had good performance on the insurance side of the business primarily workers' comp and general insurance performed well in the business. And then we did have some favorable comps on the G&A side regarding legal fees and bonus reserves, our bonus reserve adjustments. So as we kind of look forward, some of those favorable comps that in the last pieces I mentioned probably don't exist in the second half of the year. So again, we think our guidance on a full year base, this is very strong. We think it looks like well within the bands we provide on long-term guidance, and we're confident in our ability to deliver it.

Yes, Phil this is Jerry. The one thing I would add to that is, we've talked in prior calls about growing into our infrastructure when we come out of the spin. And we continue to do that. I mean, we had -- we've always talked about the infrastructure facilitating higher housing starts than we had back in 2015. So as the housing market continues to progress and gets closer to that 1.5 million, we feel like our cost model just continues to become more and more appropriate. So there has been some lift that we've enjoyed and I think we will continue to enjoy that relates to that. And certainly adding USI to the equation just makes that all the better for us. So to John's point, we realize we've been several quarters here over top of the guidance. And it's our job as a management team to continue to make that happen. But we think that guidance is appropriate for the long-term.

Yes, really appreciate the color. And then from a demand perspective, you guys proposed a pretty solid volume in light of some of the weather-related issues, but curious to get your thoughts on how trends are tracking in April, May, any color on order patterns. Just wanted some color, just because obviously the market is nervous about rates, but most companies have reported they've seen pretty good momentum. Just want an update on that end.

Phil, this is Robert. So I think spring selling season, what we hear from the builders and what we see in our bid rates, those are strong spring selling season. If you looked around the country, I'd say -- some of the same markets we've talked about in the past, Seattle, Arizona, Texas, even Central Florida, North Florida are performing well. We're seeing some markets come back that are strongest than they've ever been. So an example would be Vegas, Vegas is extremely busy right now, very strong. So we're seeing some market even continue to pick up in parts of the country. So I think a good spring selling season, we expect a busy summer going into the fall until the fall closings for the big builders.

Got it, and just one last one from me, the USI acquisition seems to be, at least relative to what we thought, a little more accretive, so that's great. Is selling that driven by growth being a little stronger, I just wanted more color on the synergies. You gave some color on this year, but how should we think about the cadence over the course of the year, is it going to be more back-end loaded or pretty equally spread throughout the quarters? Thanks a lot and good luck in the quarter.

Yes, Phil this is John. I think, if you look at the guidance we've given, which is, again, for eight months obviously, May through December, and you compare it to what we provided on a pro forma basis for 2017, it's relatively in line with growth assumptions you'd expect to have in the industry and in the business, basically. So as far as timing of it, I don't think we're expecting anything unique that exist under normal seasonality or normal patterns for where these businesses are located. So from that standpoint, I don't think there's anything to really call out there that's unique.

Yes, Phil one thing I would add to that is, so we talk about getting to the full synergy run rate of $15 million by end of year two, that gives us the time to proceed carefully through this. I mean, what we're finding with USI as we close it or we can change to go [ph], the other thing we see is good news. I mean, when you get behind the curtain and see more things as we have, a strong company, we're impressed with the talent, good process. Our job here as we go forward, particularly with the branch footprint, as we laid their branch footprint over ours and we do it geography-by-geography, there's a lot of intel, a lot of surgery that we'll be doing. And we'll be proceeding appropriately and carefully to make sure that we get that right on the geography-by-geography basis. So that's kind of what's behind the two year timeframe. At the end of the day, we would expect that $15 million to be a conservative number at the end of the day here when we're sitting here several quarters from now.

Okay, thanks a lot guys.

Thank you.

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

Hi, good morning everyone. John, I wanted to ask a question on the incremental margins or maybe taking a step back, as you kind of look at that G&A leverage that you guys have cited multiple times in the release, can you maybe just talk broadly without the specifics of the quarter, but where are the opportunities that you guys continue to find, I guess better leverage beyond just some of the onetime items you highlighted this quarter that are supporting kind of that incremental continuing to trend above the guidance you've given?

Yes, it's -- Scott, this is John. It's consistent with, really, what we've talked about for almost three years now. One is the fact that our locations and our footprints basically just have significant or at capacity growth available within them. So as we grow the industry recovers and stocks recover, commercial recovers, we're not having to put much fixed cost into the ground or anywhere in the country, basically. We're leveraging the base. Obviously, we have to hire installers. And in some cases bring some vehicles on. But -- so that's a significant piece of what you're seeing. And I think the other thing is the back office. So from a back office standpoint, we've also said that our back office operations, both in the field and here in Daytona Beach, can support a much higher level of starts. So that was and continues to be the major areas of the leverage that we're continuing to see in the business.

Is there further runway in some of these additional areas or is there any opportunity for you to continue to take out cost, that's called indirect cost?

Yes, I think there's always opportunities to continue to take out cost. I would say, one of the reasons we're maybe a little more conservative on the look-forward number is the fact that continuing to take out productivity quarter-by-quarter-by-quarter, the levels we've done becomes more challenging. And in some cases, you do have to add some resources and some investment in the business to support levels of growth. But I guess we would argue that even with that 22% to 27%, which on same branches what we will continue to guide to, is pretty strong return for our shareholders and reflects pretty good leverage of the business go forward.

And then just one last one, recognizing post-USI, that was a larger bite that you guys alluded to. Can you maybe talk about the leverage -- debt to EBITDA leverage profile longer term, I mean do you need to go back below two times or can you kind of sustain at that level, now that you've completed that big bite that you guys were looking for?

Yes Scott, this is John again. So I think we've consistently talked about an area of two to two and half that we're very comfortable in on a net debt basis. And that is -- that remains our mantra. Now we've certainly been less than that historically, but we're going to be comfortable operating in that two to two and half range. And as we said in the prepared remarks, we'd expect to be within that threshold well within 12 months at this point.

Thank you.

You are welcome.

[Operator Instructions]. Our next question comes from the line of Matt McCall with Seaport Global Securities.

Thanks, good morning everybody. So John, you said -- the question earlier about the pacing of price, you said you exited the quarter with some good price, I think that was the term or something like that. Was the price in March enough to offset your cost increases and then now that we're up against these next price increases or cost increases, are you expecting your price to be enough to offset that now, basically, has the environment normalized from what we saw earlier in the year?

Maybe I'll take this one. This is Jerry. So it's a very fluid process that's in play here. And I would draw your attention to -- on the material side, we have good relationships with all the major players out there. We negotiate with all of them to the benefit of both of us. We've got -- we have considerable scale, which is a big advantage for them and we negotiate pricing accordingly. So you got that variable that's going on as the year progresses. On the selling price side, same story, so we negotiate with all of our customers, timing of prices changing is different in different situations. So I think it's fair to say that we had some success in the first quarter, we certainly knew that these cost increases were coming, so we didn't want to be slow out of the block and we weren't. And so we did make some progress in Q1. We made a pretty good dent in where we think we need to be and that will continue in Q2, and I would think it will gain some momentum in Q2. So when you mash these two things up, I think over the years we been really good at getting ourselves to margin neutral, if not margin-accretive situations in these inflationary environment. And I would say that this is probably one of the more significant cost inflationary environments that we've seen in recent memory. So our ability to manage both sides of that spectrum that I spoke to is going to really work to our advantage here. And we would expect our margin performance to look pretty good here as the year progresses.

Thanks, Jerry. So I guess the path you set in the past, you had good success and this seems to be a little more significant. Is there anything else about this environment under the timing of January and the success of January was maybe a little abnormal but is there anything else structurally, I assume industry consolidation helped or will help, but what else could have changed either or didn't change that gives you that comfort?

This is Robert. The main thing by far is allocation, materials on allocation, materials in short supply, given some things that happen with manufacturing back in Q4 2017 and so the fact that you had the allocation piece that's driven some capacity issues. Labor continues to be tight in front of mind for the builder as well. I mean that's the difference maker, for sure, and gives the increase a lot of traction. But as we've said, we're also seeing some good progress in other materials such as spray foam would be a good example of that.

And the other thing would be to say that, that from a capacity utilization viewpoint, with the fiberglass guys, I mean, they're starting -- those numbers are getting higher, so they're bumping up against higher utilization numbers. But -- and again to Robert's point, there's other ways to insulate a house. And so the other dynamic that's happened here is things like cellulose, spray foam in particular, are starting to become more prominent. And one of the things that we have always tried to do here at TopBuild is we are installers of all the different installation solutions. And so yes, there are some unusual things happening right now. But we think we're very, very well positioned. I mean, homeowners are going to find a way to insulate homes, and we think we've got the full suite of alternatives available for them.

Okay, very helpful. Last question, the commercial outlook, taking it from 12% to 10%, I know you said so an important part to understand that, but what's behind that, that's a longer-term or I guess secular viewpoint, what changed there to cause you to take that number down?

Matt, this is John. So really it's just that with this update right now, we're just further along in this cycle basically in terms of the commercial cycle. So we're going to temper that growth expectation a little bit. But recognizing 10% still going to be well above what you consider the industry and a very, very important part of the business for us. But it's just the recognition that we've kind of migrated through time here and we're a little further along in the cycle.

Perfect, okay, thank you guys.

You are welcome.

Our next question comes from the line of Ken Zener with KeyBanc. Please go ahead.

Good morning everybody. I wonder if you could just -- with USI, and I know there's been some -- depending on how you define the market, I wonder if you could kind of just go over where you think your guys' market share is now. And I assume part of that assumption of that is the -- you're saying, sales per start, right, we could apply your incremental sales, your revenue per start. But if you could give us a sense of market share, I think the idea of white space is something that hadn't been much more of a conversation lately?

Sure, Ken, this is John. So I'll keep it at generally high level here in terms of the discussion. So when we think about it, and this is on residential new construction that's basically this feedback is. So we look at total U.S. housing starts, so that's the denominator for the number. If you look at the total business now with USI in it, we believe we're north of 40% in terms of either distributing or installing insulation material to those starts. And we place the install side of that at north of 30%. So those are the rough numbers, as we sit here. Now those numbers, obviously, haven't flowed throughout the year. But rough numbers, total business, north of 40%, and from an install standpoint, north of 30%.

Okay. And with your ability to get good operating leverage, obviously a big focus, and then you comment that you have more room to go in your branches, and I'm thinking about your installation branches as it relates to that market share that you highlighted, how do you think you're doing versus the broad industry, I mean, are your guys' installation branches ahead of, kind of where you think the industry is or you're actually kind of below the line, that's why you have such confidence in the incrementals that you're still able to generate from those existing branches?

Yes, this is John. I think the big, big difference between us and our competitive set is the fact that we have a national footprint already. It's been in place for a while. So that's where I think the leverage is really occurring is the fact that we have an install base out there and a distribution base, quite frankly, that was set up just for a higher level of housing starts than we've seen in the past eight or nine years. And so I think the difference between us and our competitors, potentially, is that competitors have to acquire either Greenfields or companies coming, fixed cost comes along with that. We don't have to do that as much and I think that's the primary difference between us and our competitors.

The other perspective, Ken, that I would offer would be to John and Robert's point earlier, I mean, we have a full footprint. We're going to continue to look for acquisitions in the right geographies. So our pipeline still has quite a bit in it and we're going to continue to do that. Although having said that, I think we commented for the balance of the year, we're going to be concentrating pretty heavily on those things that we've done already, i.e. namely USI. As it relates to white space beyond that, commercials import -- the fact that we've changed our guidance from 12% to 10% as much as anything else just kind of reflects the arithmetic, the base that we're multiplying that percentage on is a much bigger number now due to our success in the last couple of years. So there's nothing more going on than that. So commercial remains important and then 70 -- roughly 70% of our action is insulation, the other 30% is gutters and some other things that we do. So we'll be looking as times goes on for adjacent product categories but we're going to be pretty careful about that. We're going to make sure that what we get into or what we do more of is going to be something that we have enough scale to be able to be effective on the purchasing side, but then we also have the ability to install it well. We're pretty diligent as you can tell relative to doing things that are cost-effective and doing things that provide margin. And that really is the way we look at our entire business across the whole landscape. And that's what I think has been kind of one of the reasons why our performance from margin side has gotten better and better as time has gone on.

Thank you.

Thank you.

Our next question comes from the line of Keith Hughes with SunTrust. Please go ahead.

Thank you. You had referred to a $14 million and $18 million amortization number, I just want to put that in context, is that the amortization associated with USI transaction or does that include more acquisitions?

No, that's specifically related to the USI transaction. So over the next coming months, we'll be coordinating that and fine-tuning that number with our auditors and others. But that's a strictly related to the USI transaction.

Is that on a full year basis or for the remaining part of the year you'll be owning the --?

That's on a full year basis. If you look at our package we've sent out today behind our press release, we do give some guidance in terms of D&A on a 2018 basis full year, and baked into that number is a portion of that amortization basically.

Okay. And then final question, as you look out for the remainder of the year, the guidance for the year, will there still be some margin drag in the second quarter as we kind of ramp up to what this EBITDA is going to be for the year?

Keith, this is John. We don't give specific quarterly direction or guidance and we're not going to start in this case. Again, I think we'll leave here with the fact that we feel very good about the guidance we've given, obviously. And I think we felt good exiting the quarter based on our selling price improvements and performance and our material cost increases.

Thank you.

You are welcome

And there are no further questions on the phone lines at this time.

Thanks to everyone 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 lines.