Tabitha Zane - VP, IR Jerry Volas - CEO John Peterson - CFO Robert Buck - President and COO.

Colin Mooney - Jefferies Ken Zener - KeyBanc Capital Markets Rubin - Seaport Global Scott Rednor - Zelman & Associates.

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, February 27, 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 call over to Jerry Volas. .

Welcome, everyone. And thanks for joining us today. As you can see from today’s press release, we had a strong fourth quarter with organic sales growth of 8.3%, handily beating lagged housing starts.

We also expanded our adjusted operating margin 180 basis points to 10.1% and our incremental EBITDA pull-through on a same-branch basis was a robust 35.5%. It was a very good end to a very good year for TopBuild, a year with many significant accomplishments for our Company and John will talk in more detail about the fourth quarter.

Starting on Slide 3, you can see we had a productive 2017. First, we successfully completed six acquisitions that are expected to generate over $83 million of net annual revenue, including four residential and two heavy commercial installation firms.

These companies have bolstered our management team, enhanced our scale, increased our penetration in key markets and augmented our business product mix and capabilities.

Second, we upsized our term loan and revolving credit facility to $600 million, further enhancing our liquidity and extending our debt maturity to May 2022, almost two years beyond our prior loan maturity date.

This additional capital strengthened our ability to capitalize on strategic acquisitions and other opportunities designed to enhance long-term value for our shareholders. We returned capital to our shareholders through a $200 million Board authorized share repurchase program, including a $100 million ASR.

Over the past two years, we have repurchased 3 million shares of our stock, demonstrating our commitment to optimizing our capital structure. We continued to improve labor and sales productivity in our ongoing commitment to profitable growth. We’ve implemented new bonus programs for our branch managers, with operating profit being a key metric.

Our technology tools have enhanced our installers’ efficiency and improved the sales process, and our back-office consolidation initiative has resulted in measurable savings. In keeping with our philosophy, you are what you measure; we improved shareholder transparency with the introduction of annual guidance metrics last October.

We are now providing a forecasted annual range for revenue and adjusted EBITDA which will be updated every quarter. We provided you with a better understanding of the depth and experience of our leadership team at our Investor Day.

They’ve been through numerous housing cycles, they understand what it takes to execute our business plan successfully and they are 100% focused on growing our Company profitably and creating value for our shareholders.

And finally, we were awarded the 2017 ENERGY STAR Partner of the Year for our continued leadership in protecting the environment through superior energy efficiency achievements.

TopBuild Home Services has been an ENERGY STAR partner for 15 years, working closely with home builders and consumers to create homes that are more comfortable and energy efficient.

Turning to our financial results on Slide 4, as you know, our primary benchmark is 90-day lagged housing starts which were up 5.2% for the year, as were TopBuild’s same branch sales. This growth was driven by both volume and price increases at TruTeam and Service Partners.

Total revenue, including contributions from acquired companies, increased 9.4% in 2017. Moving on to the conversion of that strong top line growth to the bottom line, the drop-down to adjusted EBITDA was 32.5% for the year, and 47.7% on a same branch basis.

Last year, on our fourth quarter call, I noted that an important driver of our performance was the operational improvements we had implemented throughout our Company. I also noted that with full-year incremental EBITDA margin at 29.4% we believed there was more to come in 2017. And, as our 2017 results clearly demonstrate, we were correct.

While John is going to talk about the impact to TopBuild of the 2017 Tax Reform Bill, I wanted to announce that we are looking at redeploying a portion of the cash we will save on our taxes to our employees, and our intention is to increase the match on our employee 401K plan.

We believe that this savings plan is very important and providing additional funds to help secure our employees’ future is a meaningful initiative fully supported by our leadership team and our board of directors. As we look at 2018 on Slide 5, we are very optimistic that it will be another strong year for TopBuild.

The economy is strong, interest rates remain low, household formation is increasing and new home inventory is tight. We are seeing more first-time buyers enter the market and, as a result, we believe single family will grow proportionately greater than multi-family, which will only further enhance our top line growth.

Strategic acquisitions will remain an important aspect of our projected growth and our number one capital allocation priority. We will also continue to focus on initiatives that drive operational efficiency and improve labor and sales productivity.

While we will focus on top line growth, our team is laser focused on ensuring this growth is profitable and translates into margin expansion at both of our business segments, TruTeam and Service Partners.

In our opinion, the housing recovery has several years to go and TopBuild, with exposure to 95% of all housing starts, unrivaled national scale and buying power, a diversified business model that mitigates cyclicality and a seasoned, energized and cycle -tested team, is uniquely positioned to capture a large portion of that growth.

John?.

Good morning, everyone. As Jerry noted, we had a solid fourth quarter and a strong 2017. I'll start by discussing our fourth quarter results on Slide 6. Then provide an overview of full year 2017.

In the fourth quarter, consolidated revenue increased 12.9% to $501million, primarily driven by sales volume and improved selling prices at both TruTeam and Service Partners, as well as $21.8 million of revenue from companies acquired since January 2017. On a same branch basis, revenue increased a healthy 8.3% compared to fourth quarter 2016.

Gross margin expanded 60 basis points to 24.3%, compared to the same period a year ago. Adjusted operating profit grew 37.2% to $50.8 million, with a corresponding margin improvement of 180 basis points.

Both gross margin and operating margin improvements were driven by volume leverage, higher selling prices and improved labor and sales productivity; partially offset by higher material costs, higher amortization expenses and higher share-based compensation expenses.

Fourth quarter 2017 adjustments totaled $864,000, over half of which were acquisition related expenses. Fourth quarter adjusted EBITDA was $57.9 million, compared to $42.1 million in 2016, and our EBITDA margin was 11.6%, a 210 basis point improvement from fourth quarter 2016.

This margin improvement is a direct result of the transformative changes we have made at TopBuild to improve our operations, increase labor and sales productivity, optimize our footprint and streamline many of our processes and procedures. Profitable growth continues to be a key focus for everyone in our business.

Our drop-down to adjusted EBITDA margin was 27.7% in the fourth quarter. On a same branch basis, adjusted EBITDA was $55.0million, a 31.3% increase, and our drop-down to adjusted EBITDA was 35.5%, driven by improved selling prices, strong cost control and continued leveraging of our platform.

Incremental EBITDA margin related to our seven acquisitions was 13.6%. TopBuild’s fourth quarter SG&A increased $2.9 million, to $72.1 million, but declined 120 basis points as a percent of revenue to 14.4%. The majority of the increase was driven by the impact of acquisitions as well as higher stock-based compensation.

Looking at our full-year results, total sales increased 9.4%. Gross margin expanded 120 basis points to 24.2% and our adjusted operating margin expanded 180 basis points to 9%. Adjusted EBITDA for 2017 grew 36.7% to $197.6 million, and our EBITDA margin improved 210 basis points to 10.4%.

Our drop-down to adjusted EBITDA margin for 2017 was 32.5% and 47.7% on a same branch basis. Moving to Slide 7. Adjusted income from continuing operations for the fourth quarter of 2017 was $30.1 million, or $0.84 per diluted share compared to $22.2 million or $0.59 per diluted share in the fourth quarter of 2016.

Adjusted income from continuing operations for full year 2017 was $101.8million, or $2.78 per diluted share, compared to $74.1million, or $1.96 per diluted share for full year 2016. As you can see on Slide 8, CapEx for full year 2017 was $25.3 million, approximately 1.3% of revenue. Fourth quarter CapEx was $12.2 million, or 2.4% of revenue.

Included in fourth quarter CapEx was over $7 million of vehicle purchases which we have historically acquired through operating leases. As a reminder, on our third quarter call we communicated that we plan to use equipment debt financing to fund our future fleet acquisition instead of operating leases.

In the fourth quarter, we funded our vehicle purchases with cash on the balance sheet. This cash will be refunded in first quarter 2018 from proceeds of the new equipment debt facility to be executed during the quarter. Working capital as a percent of sales was 9.1%, 180 basis points higher than prior year.

This increase is primarily due to a couple of factors. The primary driver was continued growth in our commercial line of business from both acquisitions and organic growth. As we’ve discussed in the past, commercial business typically comes with longer payment terms than residential business.

Another factor impacting our year end working capital balance was a change in normal seasonal sales patterns. Typical seasonal sales show a steeper decline in the fourth quarter leading to a lower Accounts Receivable balance. This year’s seasonality had stronger fourth quarter sales which delivered a higher AR balance than we saw in 4Q16.

As a result of the current and anticipated growth of the commercial line of business, we are adjusting our long term guidance of year-end working capital as a percent of annual sales to a range of 8.5% to 9.5%. Operating cash flow was $113.2 million for the year.

We ended the year with a net leverage ratio of 0.9 and total liquidity available of $359.5 million, inclusive of the available balance on the revolver of $202.9 million, the delayed draw of committed funds on our term loan of $100 million and cash of $56.5 million.

Due to the change in the federal tax laws enacted late last year, we are modifying our normalized effective tax rate to 27% from our previous guidance of 38%.

We are still analyzing its full impact and waiting to see how individual states are going to address the new federal tax law changes with regards to their own business tax rates and will communicate any material changes.

Also, as noted in today’s release, in the fourth quarter we did recognize a one-time benefit of $74.1 million from the adjustment of our deferred assets and liabilities to reflect the change in the federal tax rate.

Moving to 2018 annual guidance on Slide 9, we are projecting total revenue to be between $2,050 million and $2,115 million and adjusted EBITDA to be between $222 million and $242 million. This guidance assumes a range of residential new housing starts of between 1.24 million and 1.28 million.

It does include the two acquisitions we recently announced in January but does not include any additional acquisitions we may make this year. Further, we have not changed any of our long-term assumptions with the exception of working capital and the new normalized tax rate, both of which I discussed earlier.

Let me now pass the all over to Robert, who will discuss our operations and segment results.

Robert?.

Thanks John, and good morning. 2017 was another great year for both TruTeam and Service Partners. Our success is due, in large measure, to the hard work and dedication of our over 8,000 employees.

Their focus on working safely, providing outstanding service to our customers and pushing for operational excellence throughout our Company enables us to grow profitably and ultimately enhance value for our shareholders.

Looking at TruTeam’s financial results on Slide 10, fourth quarter sales increased 16.2%, benefiting from higher same branch volume, acquisitions and a 1.2% increase in selling prices. Adjusted operating margin was 12.7%, a 270 basis point improvement from fourth quarter 2016.

Although volume leverage was a key contributor in the quarter, results were also favorably impacted by higher selling prices and continued improvement in sales and labor productivity. On a same branch basis, TruTeam’s revenue increased 9.2% outpacing fourth quarter lagged housing starts of 2.0%.

For full year 2017, TruTeam’s revenue increased 11.4% and adjusted operating margin was 11%, a 240-basis point expansion from 2016. On a same branch basis, TruTeam’s 2017 revenue aligned very closely with lagged housing starts of 5.2% for the year.

TruTeam’s commercial business grew 23.5% for full year 2017, from a combination of organic growth and acquired revenue. Our commercial backlog is strong and our bundled services approach is giving us a competitive edge in this business.

We also saw strong spray foam growth, which is benefiting from sales execution, new building codes and consumer education. Installation revenue from this product increased almost 18% in 2017. Moving to Slide 11. At Service Partners, sales were up 9% in the quarter driven by volume growth and higher selling prices.

As we forecasted, selling prices at Service Partners improved throughout the year, with a 2% increase in fourth quarter. Adjusted operating margin was flat at 9.3%. For the full year, Service Partners’ sales were up 6.4% and adjusted operating margin expanded 70 basis points to 9.6%.

Distribution revenue from spray foam increased 24% at Service Partners in 2017. On the material side, we saw three price increases in 2017 and there is a January 2018 fiberglass price increase currently in play. We’ve also seen fiberglass supply tighten over the past 12 months and we continue to see labor constraints in the industry.

As you can see from our margin performance in 2017, our local teams did a great job managing labor productivity, logistics and material cost increases to improve margins across both businesses in 2017. We expect our teams will continue to manage these issues very well in 2018 and margins should again expand for the full year.

Speaking of labor, we are always focused on talent management and developing the next generation of leaders. As you can see on Slide 12, in July, we introduced a new program, TopBuild’s Manager-in-Training program, or MIT, that is focused on developing current talent within our company and attracting new talent to join our team.

The objective of the MIT program is to provide on-the-job training for future branch managers. We want to build a bench of well qualified individuals who are ready to seize new career opportunities that arise in our company. The MIT program exposes the individual to all facets of our operations.

For the first four to six months they are out in the field, learning day-to-day operations from the ground up, installing or distributing products and learning how to lead a team. They then move to production and inventory management, field sales, as well as safety and leadership training.

Each MIT is assigned a mentor who guides them through the process and ensures they are meeting the program’s goals and objectives. We are very excited about this program and already have a group of recruits out in the field learning on the job.

Turning to acquisitions on Slide 13, we are in the process of integrating the two companies we’ve acquired so far in 2018, ADO Products, a distributor of insulation accessories, and Santa Rosa Insulation and Fireproofing, a residential and commercial insulation company.

ADO, our first distribution acquisition as TopBuild, is a great addition to Service Partners with its strong and long-standing customer relationships and experienced leadership team. It also expands our geographic presence and distribution reach.

Santa Rosa will increase our market share not just in the Miami region but throughout Florida, an area of the country we believe that will continue to experience healthy growth. The Santa Rosa team also has strong customer relationships as well as an experienced labor force with demonstrated foam insulation and fireproofing expertise.

Combined, these acquisitions are expected to contribute almost $32 million of net revenue in 2018. We feel very good about our pipeline of M&A opportunities and deals we are looking to close. Before turning the call back to Jerry for closing remarks, I want to again thank our TopBuild team for their hard work and dedication to our Company.

We remain focused on profitable growth and believe 2018 will be another successful year of moving our Company forward and driving continued improvements.

Jerry?.

Before opening it up to questions, I want to again emphasize that 2018 should be another year of profitable growth for TopBuild. The external environment is positive and our team has demonstrated that it knows how to execute well. We look for continued M&A opportunities which will further add long-term value for our Company.

Operator, we are now ready for questions. .

[Operator Instructions] Our first question comes from the line of Phil Ing with Jefferies. Please proceed. Your line is open..

Hi. This is actually Colin on for Phil. Good quarter. I just want -- had a couple of questions. In terms of your sales guidance for 7% to 11% growth.

I was just wondering how much of this attributable to acquisitions that you guys are already made versus organic growth? And do you have any price increases baked in there to offset some of the manufacturing increases in the market?.

Yes. This is John Peterson. We are not going to be giving a lot of additional guidance. I think what we provided in our talking points was the fact that from a booking standpoint we had starts at $1,240,000 and we had the low end we started at $1,280,000 in the high end.

You are right in assuming there are absolutely acquisitions there I think we just announced two acquisitions this year and if you -- you took the press release on that basically on those two it is about $34 million worth of revenue that's in that total for those two acquisitions which will impact 2018.

And then there is carryover of last year's acquisition which is falling into that total, so that's lower numbers. So, yes, there is -- there are acquisitions impacts in that total. Obviously more they driven by the same branch organic growth. .

Okay, great. And then just in terms of what you guys are seeing in the cost side. Obviously, there is definitely a lot of price increases out there by the manufacturers.

How you guys are enable to manage this and on quarter-to-quarter basis, it's tough to predict, but do you think you will be able to hit your longer term incremental margin target this year just given this inflationary back up?.

Great question there. So I would say that we feel really good about and particular when we look at annual period and so the guidance that we put out there for 2018 were very, very strong about that. Two ends of that equation.

One is the relationship, the partnership that we have with our suppliers which is never going to better shape, and our ability to partner with them and negotiate well with them took to the benefit of both of us.

And then on the sales price side, we do have thousands of customers out there that we work really hard with on pricing to get that right both in terms of amount and timing. But on a quarter-to-quarter basis historically there has been some volatility in terms of matching things up. We have been very, very good historically at managing that.

And we feel like we will continue to be able to manage that really well. Quite frankly, we believe as the capacity utilization continuous to tighten from a manufacture viewpoint which facilitates higher pricing in the marketplace.

We really believe that plays to our strength, in terms of our ability to manage that and our ability to turn that into excellent financial results. So we feel real good about how we are positioned right now from that perspective. .

Our next question comes from Ken Zener with KeyBanc. Your line is open. Please proceed. .

Good morning, gentlemen. John, question for you.

And I asked this you at Analyst Day; I am going back to EBITDA incrementals which you guys have kind of laid out at 22% to 27% range ex any price, correct?.

Yes. The 22% to 27% assumes the certain relationship between pricing and material that we would hold margin essentially manage that so. .

Yes. So realizing your M&A has lower incrementals, I am fine with that. I am just trying really to understand how that 22% to 27% could for FY18 would price way up labor tightening, given what we saw in FY17 where your incremental margin was higher than that.

Could you just kind -- was that -- if you did 32% for the year not picking on any one quarter, why that was above the 22% to 27% range and why some of those same wouldn't dynamics persist in FY18..

Again say I think there is always going to be dynamics here year-to-year that are different. In 2017, when we talked about this on prior call, I'd say the first half of the year we had some very good dynamics going on in terms of material cost and pricing on the TruTeam side. And so that's one example.

Obviously, there is always one offs and things, cost reduction which are non-recurring and we said from day one that, I think if you look at our total pull through on same branch basis in 2017 we were at 47%. And we are not going to sign up for 47% pull through each year as you know.

In terms of the guidance, we've given, you are right there are differences between M&A and same branch which we pointed out. And I think if you do math in terms of what we provided, we are within the guardrails we provided in terms of our pull through certainly at a lower expectation, lower than we have in 2017.

But again I don't think it was anybody's expectation that we are going to continue that type of performance on a go forward basis so. .

Yes. It is interesting because everything keeps getting more favorable for you. And if I could just transition, you guys had a lot of perspective on the industry.

There are manufactures out there, their common price, I don't want to you get specific but if you could just give us a larger by way of insulation, your contacts for the three increases we saw last year, obviously, the last two were more stronger than the first one.

But this year, the January price increase what is normally March or June announcements or, there is not lot of activity in January. So it seems like we are seeing prices pretty sticky. What is your view about prices when it is usually most realized from the manufactures to the customers you guys and then you out to the market.

Because it seems like it's much more of spring early summer event not January. So the fact January sticking seems to be very bullish for pricing, as well as labor demand. .

Yes. Ken, good morning. This is Robert. So you are typically right that spring as we come out of spring selling season to get into the busier time that is better time of the year. But there is an important dynamic that happening right now the industry with capacity and material.

So relative to loose fill material that on allocation and so there has been tightness of material happening I think everyone in the industry is aware of that including the builders. And so that's what driving the usual term stickiness of the pricing right now which we are seeing.

So there are short-term capacity things going on with different manufactures, I see that drives the ability relative to price and what's happening in the dynamic right now. Coming out of Q4, very strong here in Q1 and that's probably going to be 2018 type of event base on work up capacity and talking to the manufactures. .

And our next question comes from the line of Matt McCall with Seaport Global. The line is open. Please proceed. .

Thank you, good morning. It's actually Rubin on for Matt. So just quickly on the contribution guidance, I want to make sure I understand it correctly.

Can you -- if you said that I apologize, did you breakout what's your expectation was for inorganic incrementals for 2018 versus organic?.

Rubin, this is John. No, we haven't. And we are not going to breakout again the individual components from a guidance standpoint.

Again, we will give the kind of high end guardrail around the residential starts but suffice to say that they baked there certainly some M&A both in terms of the acquisitions we did in January and the carryover from last year which we will obviously have lower pull through than as a normal same branch that we receive.

So that's baked in there and the only -- I just said on prior question was that I think if doing a math basically you get within our long-term guidance that we provide in terms of EBITDA pull through, you are within the parameters on that if you look at the low end and high end so. .

Okay, perfect. Let's see, so product on allocation I guess can you talk about maybe if you had any issues getting product and this sort of environment I guess can help you guys relative to the industry given your size and scale.

Can you just talk about that dynamic?.

Yes. So, Rubin, this is Robert. So, obviously, we have relationships and buy from all the manufactures across the business so we have that relationship ongoing discussions.

It is in allocation, sometimes we have to pull supply from other sources but generally between both our contracting and our distribution business actually we are working directly with the manufacture so there is some lines coming back to have some maintenance stand of last year. Those will be back up March, April timeframe.

So there will be some short-term dynamics that will happen there, but I think overall we feel really comfortable what we are doing and how we addressing allocation working closely with our supplier partners. .

Our next question comes from Scott Rednor with Zelman & Associates. Your line is open. Please proceed. .

Hello, everyone, good morning. John I had a question, John, the 401K match, I was hoping you guys could maybe elaborate what has changed? Meaning what was the prior approach to that? How you guys are changing that now and then what's financial impact? I would imagine that's diluting some of the flow through intentionally in 2018.

So I was hoping you could maybe kind of walk us through those various pieces. .

So, Scott, this is John. So we haven't finalized all the specifics around that. But the expectation is that ultimately we are going to increase the company match from an employee standpoint. Our best estimate right now will be that number is probably into $2 million to $3 million range in terms of impact of the business.

And that assumption right now is baked into the guidance that we provided. But again not finalized but range wise you can probably kind of go with the numbers I just shared. .

And I just want to make sure everyone is clear on the -- maybe this is best for Robert. Just recognizing that on the loose fill side, it's on allocation and that facility is not going to go come up until 2Q. I mean are you guys feel comfortable with the margin guidance annually that you are going to see now the expansion in 1Q as well..

Good question, Scott. I think building on what Jerry said earlier, there is all of our conversations are happening with customers started in Q4 and Q1 here. And there can be some lag there some fluctuations but overall for the full year we feel very, very confident in our guidance.

We are very comfortable and confidence in the statement I made earlier, where we are going to see expanded margins in 2018 across the business. So, yes, we feel very, very confident in that. .

Okay, great. And then just one last and kind of acquisition story, just maybe a little specific but just hoping to get little more color. When you guys talk about Santa Rosa just as one example, you already have I think 9% of your installed branches in Florida.

So can you maybe help us explain why you needed to in that example increase your penetration in Florida? How that kind of one plus one equals two?.

Yes. That's a great question, Scott. The Santa Rosa pretty long standing company; headquartered Miami, good relationship across Florida. I'll give you two direct things to your question. Number one, great commercial presence in Miami like downtown Miami which is expanded market penetration for us.

And then second, Santa Rosa goes all the way into the Keys and so relative to the rebuild from [Indiscernible] -- we did reach before, that given their relationship we will be doing a lot of work in the Florida Keys and the rebuild that's happening down there. So we think its win, win all the way round Santa Rosa and the value they bring to TruTeam..

I am showing no further questions registered at this time. .

Thank you for your support and all your interest in TopBuild. And we look forward to our Q1, 2018 call in May. Thanks again. .

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..