Tabitha Zane - Vice President, Investor Relations Jerry Volas - Chief Executive Officer John Peterson - Chief Financial Officer Robert Buck - President and Chief Operating Officer.

Scott Rednor - Zelman & Associates Keith Hughes - SunTrust.

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, the call is being recorded, Wednesday, November 9, 2016.

And I would now like to turn the call over to Tabitha Zane. Please proceed..

Thank you and good morning, everybody. 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..

Thank you, Tabitha, and good morning, everyone. Starting on Slide 3, I’m pleased to comment on another very good quarter for TopBuild.

We continue to grow our top line beyond the trajectory of the overall housing recovery and the conversion of that top line growth to the bottom line is again very strong, reflecting our focus on operational improvement.

Total company sales in the third quarter were up 5.9%, with sales at TruTeam, our installation business, up 7.2% and sales at Service Partners, our distribution business, up 1.9%. For the first nine months, total company sales were up 9.1%, with TruTeam up 10.6% and Service Partners up 4.8%.

John and Robert will follow my comments with some detail around the sales activity in our two businesses. But overall, within the context of lagged housing starts up only 0.7% for the third quarter and 7.0% for the first nine months, we feel good about our share position in the market.

As a reminder, we benchmark sales, particularly TruTeam, with 90-day lagged housing starts, understanding that variables such as builder cycle times and single/multifamily mix can impact that comparison in any given quarter. The further good news is the strong conversion of higher sales to the bottom line.

Several quarters ago, we increased the intensity of our efforts to improve the operational efficiency throughout our company. The results of our efforts are evident in the third quarter. The adjusted operating margin in the quarter was 8.7%, a 140 basis point improvement year-over-year and a 230 basis point improvement sequentially.

The third quarter EBITDA dropdown was a healthy 35.6%, bringing that year-to-date metric to 30.3%. It is important to note however, that timing of certain events and expense recognition can generate significant quarterly fluctuations, particularly with that dropdown metric.

In addition, the ongoing balance of top line opportunities with bottom line performance can also contribute to fluctuations. Therefore, we maintain that a 20% dropdown is a reasonable way to model our business over the long-term. Moving to Slide 4, we believe that effective capital allocation is important in driving value for our shareholders.

Our operational results will continue to generate cash, providing the opportunity to maintain a strong balance sheet while pursuing both M&A and share repurchase. On the M&A front, as we commented last quarter, we have increased dedicated resources to execute on accretive acquisitions.

Our definition of accretive includes not only sound financial fundamentals, but also improved share in the growing geographies and talent, both of which, over time, will have a halo effect on overall company performance. A few months ago, we announced the acquisition of Valley Insulation, a company that fits well into this model.

And we are actively pursuing additional acquisitions that also fit our criteria. Regarding share repurchase, we have repurchased $11.4 million of our stock since our Board authorized a $50 million program on March 3. We will continue to be opportunistic, particularly when we believe our share price to be on the low end of longer term valuation.

Looking at the housing environment, we continue to believe that fundamentals, such as consumer demand driven by household formations and lagging supply of new construction, will lead to a further recovery that may well last for several more years.

We do recognize that there is now some uncertainty regarding immigration policy as a result of last night’s election. One possibility is a further tightening of the labor market.

Fortunately, TopBuild has been successful in its recruiting efforts and we believe, as the employer of choice in our industry, we will be able to continue to meet our labor requirements. Our diversified model, with both installation and distribution, also serves us well, mitigating some of our dependence on labor.

Most of the factors that drive the shape and duration of the recovery are beyond our control. Therefore, I want to emphasize that we are spending our time, energy and resources on market share gain, cost model improvement and effective capital allocation, all those factors that we can control.

Let me now turn the call over to John first and then Robert for further detail regarding the financial statements and the operations..

Thanks, Jerry. We had a good quarter, particularly on the TruTeam side, which accounts for about two-thirds of our revenue.

Turning to Slide 5, third quarter consolidated revenue increased 5.9% to $453 million, primarily driven by strong volume growth in both TruTeam and Service Partners and increased selling prices at TruTeam in both our residential and commercial lines of business; partially offset by lower selling prices at Service Partners.

For the third consecutive quarter, TopBuild’s adjusted gross margin expanded, increasing 170 basis points year-over-year to 23.9%. Adjusted operating profit in the third quarter grew 26.7% to $39.6 million, with a corresponding margin improvement of 140 basis points.

Both gross margin and operating margin improvements were driven by volume leverage, improved selling prices, lower material cost and improved labor efficiency. For the first nine months of 2016, consolidated revenue increased a strong 9.1% to $1.3 billion and adjusted gross margin improved 130 basis points to 22.7%.

Adjusted operating profit during this time period grew 53.4% to $87.8 million, with the adjusted operating margin improving 200 basis points to 6.8%. Adjusted EBITDA for the quarter was $44.6 million, compared to $35.7 million in 2015, an increase of 25.2%. Our dropdown to adjusted EBITDA margin was a strong 35.6%.

For the first nine months, adjusted EBITDA grew 47.4% to $102.5 million, and our dropdown to adjusted EBITDA was 30.3%.

Looking ahead to the fourth quarter, while we expect good incremental EBITDA growth, the comps get more difficult as selling price gains should be smaller and a net insurance gain realized one year ago is not expected to be repeated.

Moving to our individual operating segments on Slide 6, TruTeam’s third quarter sales increased 7.2% and adjusted operating margin was 10.8%, 300 basis points better than the prior-year quarter.

Sales benefitted from improved selling prices and higher commercial and residential volume with some offset tied to a higher mix of multi-family units worked on during the period. Looking at the first nine months of the year, TruTeam sales were up 10.6%, outpacing lagged housing starts during this same period.

Adjusted operating margin improved 360 basis points to 8.1%, driven by volume leverage, improved selling prices, lower material cost, improved labor efficiency and strong cost control. At Service Partners, shown on slide 7, sales were up 1.9% in the quarter and 4.8% for the first nine months.

Service Partners’ third quarter sales saw volume growth offset by lower selling prices. Selling prices were largely impacted by additional fiberglass capacity that came on line in 2015 causing downward pressure on pricing.

For the quarter, Service Partner’s adjusted operating margin declined 100 basis points to 8.9% and improved 20 basis points to 8.7% for the first nine months. TopBuild’s third quarter SG&A increased $5.2 million or 8.2% to $69 million, primarily as a result of higher stock-based compensation and higher performance bonuses.

As a percentage of sales, SG&A was 15.2% compared to 14.9% a year ago. For the nine months, SG&A as a percentage of sales was 16.1% versus 17.9% a year ago. This decrease is a direct result of lower corporate expenses, increased sales volume and benefits from the cost savings initiatives we’ve implemented over the past year.

Moving to slide 8, adjusted income from continuing operations for the third quarter was $23.8 million or $0.63 per diluted share compared to $19 million or $0.50 per diluted share a year ago.

On slide 9, you can see CapEx for the first nine months was $10.1 million, 0.8% of sales, and working capital as a percent of net sales for the trailing 12 months was 8.9%.

The working capital percentage grew 190 basis points versus third quarter 2015, largely due to a decrease in accounts payable resulting from temporary changes in timing and mix of supplier payments and the timing of purchases within the quarter.

We expect to see a more normalized working capital performance in the fourth quarter at approximately 7% of 2016 annual sales, slightly higher than 2015 year-end due to higher accounts receivable driven by higher commercial business and the timing of purchases year-over-year and the resulting impact on accounts payable.

Operating cash flow was $27.9 million for the nine months and cash on the balance sheet was $104.5 million. Our effective tax rate for the first nine months of 2016 was 37.1%, and the effective rate for the third quarter was 35.2%.

The third quarter rate was favorably impacted by the early adoption of Accounting Standard Update 2016-09 related to the treatment of stock compensation. We continue to believe that a normalized effective tax rate of 38% is more representative of our on-going rate and that is what we recommend using for those modeling the company.

I’ll now turn the call over to Robert..

Thanks, John, and good morning everyone. Our quarterly and nine month results demonstrate TopBuild’s success in driving profitable growth and focusing on operational excellence. We continue to expand our market share, increasing our commercial business and operating efficiently throughout our organization.

Looking at slide 10 and starting with TruTeam, we are excited about the changes and progress we are making in the business and the results continue to improve every month. In the quarter, TruTeam experienced better pricing performance given our continued focus on providing great service and bundled solutions at the local level.

Margins in the quarter expanded as a result of improved labor productivity and increased utilization rates. Comparing our mix of residential new construction business to the third quarter of 2015, we completed a higher percentage of multi-family units versus single family units, just as we did in the second quarter.

This has obviously impacted our top line growth as the take-per-unit for a multi-family job is approximately one-third that of a single family installs. We expect this trend to begin to reverse itself as the backlog of multi-family units is diminished and single-family starts grow.

On the commercial side of the business, TruTeam grew its revenue by over 12%, both in the third quarter and year-to-date. This business is an important component of our growth strategy and our dedicated commercial group continues to forge relationships with large general contractors, resulting in a greater number of projects we are winning.

Our backlog for commercial work is very robust heading into 2017. Labor shortages remain an issue for many builders. We are fortunate that we have been able to meet these labor challenges through our investment in broader recruiting and extensive training programs.

We are seeing wage inflation in many markets which we expect to continue to successfully offset with selling price increases. At Service Partners, top line growth for the first nine months of 2016 was almost 7%, excluding price degradation. This demonstrates that the business has done a good job of growing along with housing starts.

Results this year have been impacted by decline in material selling prices, which has impacted top line growth although operating margins are up year-to-date. Given the flow through of inventory, it is not unusual for material decreases to lag selling price decreases on a quarterly basis.

It is important to remember that this business, in many ways, is a bellwether for fiberglass pricing and there has been excess fiberglass capacity in the market in 2016. Much of this can be attributed to new lines coming on over the past 18 months.

Service Partners is a solid business that generates good cash flow and we expect this growth to accelerate as we bring a stronger sales and operational focus to the business. Service Partners has a strong leadership team who have been with the company for many years and who have built strong relationships with our customers and suppliers.

With the resignation of Mark Moore, I will be serving as the Interim President working closely with the Service Partners team to enhance and grow the business. I do want to take a moment to comment on overall pricing as we look ahead to 2017.

Fiberglass manufacturers have announced January price increases, which combined with positive housing trends and a continued tight labor market, create an overall environment for rising selling prices in 2017.

Turning to industry trends and moving to slide 11, on the demand side of the equation, while fiberglass continues to comprise the majority of insulation in residential new construction, we have seen a strong increase in the use of spray foam on both the residential and commercial side.

We believe spray foam now accounts for about 15% to 20% of the market. There are a number of reasons for this strong growth including product innovations, higher awareness by consumers, more interest from builders and perhaps most important, the value perception given changing building codes.

We expect spray foam’s growth to remain strong, particularly as new building codes are implemented, most notably in Texas and California where new codes go into effect next year. Spray Foam is another solid growth area for both TopBuild businesses.

Turning to slide 12, as Jerry mentioned earlier, we were pleased to announce the acquisition of Valley Insulation which had a $4.5 million of revenue for the trailing 12 months ended June 30. The business has a strong customer base of regional and custom builders and does significant spray foam volume.

The integration process was smooth and completed quickly and we are already reaping benefits from this addition to TruTeam. We are excited about the additional acquisitions we are working to close that will be accretive to the business. As 2016 draws to a close, we are pleased with our progress in leveraging our existing network of branches.

We continue to make operational improvements throughout our organization as our teams drive for growth and profitability. I thank the entire TopBuild team for their focus on working safely to deliver value, quality and service to our customers. I’ll now turn the call back over to Jerry for some summary comments..

Thanks, Robert. As you can see from our results, we are taking advantage of the housing recovery, gaining share in both the residential and commercial spaces and operating more efficiently.

Our nationwide footprint and diversified business model provide an excellent platform upon which to balance top and bottom line performance to optimize financial results for our shareholders.

With almost 18 months under our belt as an independent, publicly traded company, we are hitting our stride as the financial results continue to reflect the changes we’ve made. We have strengthened our operational leadership team, empowered our branch managers, closed unprofitable branches, and implemented a disciplined capital allocation program.

We are optimistic regarding the ongoing housing recovery and very confident of our ability to perform well within that environment. Operator, we are now ready for questions..

Thank you. [Operator Instructions] And our first question is from the line of Scott Rednor from Zelman & Associates, please proceed..

Hi, good morning..

Good morning, Scott..

If we could talk about that adjusted EBITDA flow-through, one, John, you said the expectation that fourth quarter wouldn’t be as strong.

So I was hoping you could maybe contextualize what kind of range you are alluding to? But then longer-term, now you guys have been running substantially above that target, is there something in here that's not sustainable? Or are you guys sticking to your guns and there's more cost improvement to come but it may be lumped as we see it from externally?.

Sure, Scott. This is John. The comment was really directed – you're right year-to-date I think we were about 30% pull through, we delivered I think north of 35% in the third quarter. And so as we look at the comps in the fourth quarter, a couple of things I pointed out.

One is the fact that part of our gain this year have been on the pricing side as we comp against a year ago. And I think you remember in the second quarter primarily, we had a difficult time delivering pricing. We corrected that throughout the end of last year and marginally this year.

So as we look ahead to the fourth quarter, the comp on pricing improvement is a little more difficult for the business and delivering that type of gain I think is going to be – 2.7 on TruTeam side for instance is a difficult comp to comp against and I think it will be lower than that in the fourth quarter.

The other side was that, last year, if you recall, we had a net insurance gain. We had a big actuarial gain on one side offset by some what we call timing adjustments on the negative side. So the one variable on that we were confident probably is not going to recur is a favorable actuarial investment.

So it remains to be seen in terms of any insurance claims etc, but we think the net gain there probably won't be as much.

I think as we look forward to answer the other piece of the question certainly we are comfortable as Jerry said in his prepared remarks talking about long-term at least 20% type of drop down, I think the operational gains although we expect to continue to work that and deliver that obviously become a little more difficult as we move into 2017 and beyond.

But we're still bullish and again we are sticking to our guns right now in terms of at least a 20% drop down on a go forward..

And then John I think exiting last quarter you might have mentioned that some commentary around July that I think it was pacing similar to 2Q.

So thinking about the cadence of sales during the quarter, is there anything notable and maybe you could give us some flavor for how October trended?.

Sure, Scott. This is Robert. So looking at fourth quarter, as everyone is pushing for their closings, we expect to see volumes continue to be healthy here through mid-November we have a lot of public builders who have pushed for the closing. So I'll mention the commercial work, the growth continue to be strong there, the pipeline is robust.

So we feel pretty good here heading into fourth quarter and expect the trend to continue to remain healthy from a housing perspective as well..

Thank you..

[Operator Instructions] There are no further questions from the phone lines at this time..

Thank you for listening today..

We do have a question from Keith Hughes from SunTrust. Please proceed..

Thank you..

Hi, Keith..

Hi, thank you. Sorry, I was already logging in. I guess questions around – as you go into next quarter, we don't have a lot of history of your numbers as an independent company.

Would you normally from the seasonality expect sales just on the gross number to be lighter in the fourth quarter? I’m kind of balancing that with – because we clearly have a backlog of homes to be insulated and built in the market right now..

Yeah, I think – Keith, this is John. I think if you look at a year ago, we were kind of flattish, I think, from quarter to quarter in terms of our revenue. A little bit different this year. And I think there is – the one thing you seen I think is the starts hasn’t been quite as robust.

So if you’re looking at last year, we had a second and third quarter that had a pretty robust starts with the backlogs were getting pushed, that the lag was increasing, et cetera.

Although this year by no means thanking it all, I think, the performance year-over-year is a little different because the third quarter is a little bit weaker in terms of the lag starts [indiscernible] fourth. But we don't expect a dramatic change from a year ago, but I think holding it flat may be a little more difficult than it was a year ago..

Okay..

Also the business tends to decline in November and December, so, yeah, sequentially..

Okay. And assume the same one is true in the first quarter of next year, we have….

Yeah..

…assuming [indiscernible] would grab the same effect, probably a little bit more in the first quarter growth..

I think that's a good way to think of it, Keith. I think that we all recognize across the industry and certainly affecting TopBuild, we had a first quarter that weather-wise was very unprecedented.

So, assuming that doesn't happen again and we get back the more seasonable weather, I think the first quarter comp obviously is going to be a very difficult one..

And within TruTeam in the third quarter, basically in your comments it appears as though price was up, mix was a headwind, can you give us anymore clarity on the magnitude of those two?.

The price we provided obviously in terms of the TruTeam side, I think, it was up 2.7%.

We haven't given guidance and we won’t on the multifamily side, which is really the headwind you're talking about on the mix side, very similar to what we saw in the second where we saw year-over-year a slightly higher mix of multifamily units rolling through our business mix. We do expect that to level out in the future.

Always difficult to say exactly when that’s going to normalize, but I’d say looking forward we’d expect a favorable mix to more single-family as we move into 2017..

2.7, is that a price mix number or just a price number?.

That's price..

That’s price, okay..

Yeah..

And then final question, you talked about an increase from the fiberglass manufacturers in January had been announced.

They haven't had a good track record of getting these through for a while, is there anything that’s changed in the market that you think that would be more successful or the industry will be more successful in 2017?.

This is Robert, Keith. I think you hit on a key point if you look back over the past couple of years, but I think given the continued positive housing trends as to what’s happening, there has been some of the capacity used up here in 2016 as well. We do think it's going to be a better environment for that as we look forward in both businesses.

So I think the positive housing trend is definitely helping that and just given what’s happened in the last couple of years. So I think we feel pretty positive there should be that.

And then from – if I think about from the TruTeam perspective, labor continues to be tight, so that facilitates somewhat of the pricing dynamics to happen on the contracting side..

Okay, thank you..

There are no further questions at this time..

Thank you for listening today and we appreciate your continued support. We look forward to our fourth quarter call..

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. Thank you..