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

Michael Wood - Nomura Instinet Philip Ng - Jefferies Keith Hughes - SunTrust Trey Morrish - Evercore ISI Justin Speer - Zelman & Associates Matt McCall - Seaport Global Securities.

Ladies and gentlemen, thank you for standing by. Welcome to the TopBuild Second 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]. It is now my pleasure to turn the conference over to Ms. Tabitha Zane.

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 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. We are pleased to report another strong quarter. While John Peterson and Robert Buck will follow with further details, I will speak to a few of the highlights.

Turning on Slide 3, second quarter sales were up 27.7%, with same branch sales, driven by price and volume gains, contributing 10.5% of this growth. For the first half of the year, total sales increased 19.8%, 8.6% on a same branch basis, outpacing lagged housing starts.

Adjusted earnings per share for the second quarter was $1.03 compared to $0.67 a year ago. Adjusted EBITDA margin improved 140 basis points to 11.6% and the overall incremental EBITDA margin was 17%, 23.6% for same branch. We again saw higher material costs in the quarter with a second fiberglass cost increase going into effect in April.

The good news is we achieved higher selling prices in the quarter, allowing us to pass through a sizable portion of these increased costs. Our continued focus on operational efficiency enabled us to offset the remainder of these higher costs and more, leading to a 60 basis point improvement in our operating margin.

Going forward, we are confident that we will fully offset material cost inflation with higher selling prices. We have, over time, clearly demonstrated our ability to pass cost increases through with selling price adjustments. It is a process of striking the optimal balance and timing, market-by-market, between price and volume.

This enables the strong leveraging of fixed costs, an important lever in our overall margin improvement. John and Robert will both add some additional context in their remarks. Moving to Slide 4, June 30 marked our third year as an independent public company and I couldn’t be prouder of what our team has accomplished in just 36 months.

Today, compared to three years ago, TopBuild is a much more efficient and profitable operation. Our labor and sales forces are significantly more productive. We’ve rationalized our back-office operations. We’ve closed unprofitable branches, streamlined most of our processes and procedures, and enhanced our management team.

This focus on operational efficiency is one of the key factors in the expansion of our adjusted operating margins. Comparing second quarter 2015 to second quarter 2018, TruTeam’s adjusted operating margin has grown from 5.1% to 11.6%, and Service Partners adjusted operating margin expanded from 7.7% to 9.7%.

As shown on Slide 5, we also successfully implemented a capital allocation program, driving value for our shareholders. We completed 10 acquisitions that are expected to contribute almost $500 million of annual revenue and repurchased almost $162 million of our common stock.

In summary, our top-line strength and strong margin expansion over the past three years demonstrate our continuing focus on profitable growth.

As you can see on Slide 6, our latest transformation, just three months ago, was the acquisition of the number three player in our industry, USI, creating a best-in-class organization with a strong platform for growth and continued profitability.

The USI integration is right on track, both from the standpoint of projected cost savings synergies as well as the blending of the outstanding USI team into the TopBuild organization. We now estimate that between TruTeam and Service Partners, we have a 40% plus market share.

No other installer or distributor can match our size and scale, giving us a significant competitive advantage.

Acquisitions remain our number one choice for capital allocation and we continue to seek companies that enhance our customer value proposition; are profitable, well managed businesses; have solid customer bases; augment our product mix; and provide experienced leaders and qualified labor.

Finally moving to Slide 7, we remain bullish on new housing construction, believing it will expand for several more years. Job growth remains solid, housing inventory is extremely tight, interest rates are still relatively low and household formations are increasing.

No surprise that there has always been a close correlation between household formations and eventual housing starts. Census Bureau data on household formations has been very strong for the last couple of quarters, including the most recent June report.

Given limited resale inventory, new homes represent the only choice in town for many consumers looking to buy a house. This external environment shapes up as a big positive for TopBuild. Let me now turn the call over to John Peterson for further insight into our financial performance..

back office efficiencies, branch optimization and supply chain efficiencies. We estimate the one-time cost to achieve these synergies is in the range of $10 million to $12 million, with roughly $8 million to $10 million to be spent in 2018. Through the second quarter, we have recorded approximately $5 million of these one-time costs.

We funded the $475 million acquisition of USI with proceeds from our $400 million 5.625%, eight-year Senior Notes offering and from a $100 million delayed-draw term loan that was available under our existing secured credit facility.

As a result, you can see on Slide 12 that our pro forma net leverage multiple at the end of the second quarter was a conservative 2.55 times. And if you include the $15 million of cost savings synergies I just discussed, our leverage multiple would be 2.4 times, within our targeted net leverage multiple range of 2 to 2.5 times.

Moving to 2018 annual guidance on Slide 13, and inclusive of USI, we’ve raised the low end of our outlook for total revenue by $20 million to $2,358 million with the high end remaining the same at $2,398 million.

The low end of the range for adjusted EBITDA has been raised by $6 million to $269 million with the high end remaining the same at $284 million. We are now assuming residential new housing starts of between 1.26 million and 1.28 million, increasing the low end by 10,000 starts.

Our outlook assumes USI cost saving synergies of between $2 million and $4 million this year. Robert will now discuss operations. .

Thanks, John. And good morning, everyone. We are very pleased with our second quarter results. TruTeam and Service Partners achieved solid revenue growth and both businesses did a good job managing rising material costs and achieving selling price increases.

Profitable growth continues to be our primary focus and our teams in the field are doing a great job of keeping this goal in mind as our results clearly demonstrate. Looking at TruTeam’s financial results on Slide 14, second quarter sales increased 33.8% with a big boost from USI’s installation branches.

Same branch sales are up 11.6%, driven by strong volume growth of 8.3%, which outpaced lagged housing starts. Quarterly results also benefited from a 3.3% increase in selling prices. Despite increases in material costs and amortization expense, adjusted TruTeam operating margin improved to 11.6%, a 60 basis point improvement from second quarter 2017.

Volume leverage was a key contributor towards this margin expansion and results were also favorably impacted by higher selling prices and great operational execution.

At Service Partners, shown on Slide 15, sales were up 17.5% in the quarter, primarily driven by a 7.7% increase in selling prices, two months of revenue from USI’s distribution branches and revenue from ADO Products acquired this past January.

As expected, selling prices at Service Partners continue to improve as material costs from manufacturers rise. The local Service Partners teams have done a really good job of managing the fiberglass material allocation while still providing great customer service.

Adjusted operating margin was 9.7%, flat from second quarter 2017, but up sequentially from Q1. Moving to Slide 16, across the country, our teams in both segments have done a nice job recovering the Q1 material cost increases and we currently have great traction recovering the Q2 material cost increases.

On our first quarter call, we noted that by late February, early March, we had begun gaining traction on selling prices. The second cost increase took effect in April, and similar to the first quarter, by late May, early June we again gained good traction passing along these cost increases.

A clear indication of this success is the sequential improvement in price by both businesses. In June, the fiberglass manufacturers announced their third cost increase of 2018 due to take effect late August, early September. The material increase is a function of both tight supply and increasing freight costs.

Again, we are confident in our continued and proven execution to recover any material cost increases. As mentioned on prior calls, we are agnostic in terms of which insulation our customers select. In some cases, the rising cost of fiberglass has made cellulose and spray foam a good option for our customers.

We continue to see spray foam gain share and our volumes have increased at both businesses this year, up 34% year-to-date at TruTeam and up 29.7% year-to-date at Service Partners. Moving to Slide 17, labor continues to be a top of mind in the industry. Labor remains tight.

But at TopBuild, we continue to improve productivity and find new ways to recruit qualified installers. We gained an additional 1,200 installers through the USI acquisition and we are able to share labor, trucks and inventory across our branches, a significant benefit for our customers.

Turning to the USI acquisition on Slide 18, the results of the business and integration process are proceeding better than expected and our teams are very aligned. With similar corporate cultures and a very strong bias by the entire team to make this transition as smooth as possible, we are hitting our milestones and executing very well.

The first wave of USI branch locations to integrate onto our Oracle system went live in June and subsequent waves are happening every month through October. We are also rapidly transferring responsibilities from St.

Paul, USI’s former corporate headquarters, to our Daytona Beach Branch Support Center including the areas of finance, HR, IT and supply chain. We have also started to evaluate and identify cross-selling opportunities and believe there is good potential for incremental revenue.

This includes USI’s glass and window business which generates approximately $90 million of annual revenue with healthy operating margins. And finally, to reiterate what I outlined on our last call in early May, by year end 2018 we will have moved all core branches onto our operating systems, closed the St.

Paul office and moved all corporate functions to our Daytona Beach Branch Support Center, eliminated redundant corporate functions, streamlined back office operations, started to optimize branch operations and started leveraging our supply chain.

As John mentioned, we expect to realize $2 million to $4 million of synergies this year and we are confident we will exceed the $15 million of cost savings synergies within two years of close. In summary, our team is focused on profitable growth through a balance of volume and price.

We are driving operational improvements, executing extremely well at the local level and providing outstanding customer service. As always, I thank our entire TopBuild team for their hard work, energy, and unyielding focus on delivering continued strong bottom-line results while operating safely everyday.

I will now turn the call back over to Jerry for closing remarks. .

Thanks, Robert. As you can see from our results, we continue to execute well and generate excellent top and bottom-line performance. We leveraged TruTeam, the largest insulation installer, and Service Partners, the largest insulation distributor, to create both scale advantage and coverage across a fragmented builder and contractor community.

Our business model is now even stronger with the addition of USI to the TopBuild organization. We expect the housing market to remain healthy and TopBuild to continue performing well within that environment. Operator, we’re now ready for questions..

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

Are you able to quantify at least directionally, the amount of unrecovered material and freight inflation in the gross margin this quarter and curious if the lag is shortening with that price recovery as the price gains become more regular in the inflation market and we get into the seasonally stronger period?.

Yes, Mike, this is John. We’re not going to quantify the unrecovered material, I think is the way you put it so, I mean I think it’s a very, very similar story as the first quarter. I think what we said in the first quarter is consistent this quarter.

The first quarter, we fell behind a little bit in terms of recovering the price of the material cost increases. We more than recovered that we think in the second quarter.

But then obviously as Robert mentioned, early April, we were dealing with another increase and again great momentum in May and June as we mentioned and highly confident that we'll recover that in the third quarter. So pretty consistent story as what we talked about last month.

And I say the same type of momentum exiting the second quarter that we had in the first which we think carried well in the margin this quarter..

Michael, this is Jerry. It’s a bit unusual right now, as you well know, just in terms of the magnitude and the frequency of the increase. So that makes this a little unusual but our tried and true process that John and Robert have talked about continues to work well.

And as we track through the numbers, we watch what's happening with gross margin, as you do. We are really confident that we're going to get to where we need to be here as this process works its way through and the balance that I talked about with the leverage that we get on our increase in sales base is also important.

So we always are balancing that, that price volume lever and as you can probably appreciate it, it varies geography-by-geography. And so, doing both of those things simultaneously is a bit of the art that’s involved here. But as John and Robert have both discussed, we will get to where we need to be on the gross margin and the pricing equation..

And given the share magnitude, you talked about these price increases, the historical nature of them, should we think about them weighing on the incremental margin leverage because you're able to pass that through eventually but it's not a profit leverage driven event? And I’m calculating roughly a high teen percentage same branch incremental for second half, is that about what is in your guidance?.

Yes, Mike. This is John, I think the good news is we do provide guidance and I think if you look at the guidance in terms of the incrementals, if you just take the midpoint in total, on an annual basis, it’s just under 17% and that’s what we just reported in the second quarter. So we’re expecting a second half that is a good second half certainly.

I’m not going to give you the split between M&A and same branch except to tell that we’re highly confident of the same branch but the second half is going to be well within our 22% to 27%, if we think of the advertising on a long-term basis so. .

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

Sounds like USI is progressing nicely.

Any thoughts on the integration process and have you started to get some of these procurement savings, at this stage is it mostly just leveraging who had better turns or have you started seeing some that increased buying power?.

Hey. Good morning, Phil. This is Robert. So, yes, we’re very pleased with the integration process through July. Now, we’ve get two waves of branches that have been integrated into our Oracle system, it's going well.

The teams are really working well together and I think we’re seeing in the execution as John mentioned, really happy with the results that we saw through the first two months. Relative to synergies we’re starting to work out the synergies and we say we’re very confident in our guidance around the synergy.

I think Q2 probably didn’t see a lot of that flow through that we expect some in the back half of the year, but all those things are progressing probably better than planned from our perspective and we’re confident how it’s moving head..

Got it. And then your commentary about offsetting higher inflation priced by sometime in 3Q. I assume that accounts for the August increase. If we’re seeing even a full pass through there, could be some percent gross margin compression.

But is your goal to kind of flatten out on gross margin in the back half?.

Phil, the comment really about third quarter was recovering the second quarter increase. We’re not really talking in terms of any third quarter material cost increase. I would say it’s generally too early to really tell what’s going to happen with that one.

But I think assuming something does happen, we remain very confident we will be able to pass through that cost over a period of time that’s relatively tight, similar to first and second quarter, but again way too early to call that at this point..

Got it. And just one last one from me.

Some of the public builders have talked about potentially modest deceleration of growth due to tight labor dynamics, particularly in the west I believe but curious what are your thoughts on your backlogs and what’s your expectation for pace of growth in the second half of the year?.

Hey, Phil, it’s Robert again. So spring selling season was very robust and strong which we heard from our customers. We saw it in our bidding. We’re extremely busy.

Right now we’re coming up on seasonally the busy time of closings that will happen with public builders in September, October and the first part of November and I think we’re seeing that busy time across the country. I know that there’s been comments made about California but I think you saw last week D.R.

Horton came out and said it’s their busiest and strongest market right now in California and California is performing well, so nothing from our perspective. Again, there was a good spring selling season. We expect that to carry into Q2 and into the closings for the public builders..

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

Within Service Partners, can you just give us -- what was the organic growth within that business?.

Yes. So the organic growth including price was about 10.7%. If you back out price, it was about a little over 3% I think in the quarter..

And the pricing was a little bit higher in Service Partners versus what you saw in TruTeam, talking about their different dynamics there..

Yes, Keith. So I think that’s really a fundamental of the fact that material makes up a higher piece of the cost bucket than it does on the install side of the business. So certainly there’s an inflationary pressure on material costs, you have to drive a higher selling price percent to maintain or expand margin. .

And within gross margin of the Service Partners, did it still see the pressure in there -- I think I believe you were talking about TruTeam on this call, was there a gross margin compression there as well in Service Partner?.

Yes, Keith. We don't provide gross profit by segment, but I’d say generally the relationship between material and selling price wasn't dramatically different between the two segments for second quarter..

Our next question comes from the line of Trey Morrish with Evercore ISI. Please go ahead..

So I wanted to touch on the -- your growth in spray foam that you talked about. Year-to-date, you're up 34% at TruTeam and somewhere around 30% at Service Partners.

Can you talk about in what degree you believe that the rising costs in fiberglass are attributable to such a strong growth that you’ve seen year-to-date?.

Yes, good morning. This is Robert. So absolutely the rising cost increases in fiberglass has driven options relative to spray foam and other materials and IR team has done a good job of working with our customers.

Our customers have selected that option and we see that happening around the country, but then I’d also just say that as coach change and as consumers and builders become more familiar with fiber -- with spray foam versus fiberglass they continuously gain momentum.

We have relative to -- there’s been good product from a sealant perspective and air barrier perspective, that type of thing, people are becoming comfortable with those benefits of spray foam. And so we do see the natural demand picking up and the fact that other costs are increasing.

It doesn't hurt that demand curve and people being interested and asking more questions and our salespeople providing that as an option to our builder customers..

Thanks for that. And then you talked about a build up of inventory at service partners and also you said that you haven’t really tried to go after any of those procurement benefits yet with USI or at least haven’t been any material benefits from those yet.

Why don’t you choose to go and try and build up inventory at Service Partners now rather than wait a quarter or two and then really when you’re getting those purchasing leverage, you’re seeing of the more benefit in quarter or two from now?.

Trey, this is Robert again. So a couple of things. One, on the synergies piece and the USI branches, those branches get serviced directly from manufacturers that really don't go through Service Partners for that material. So that’s a direct through manufacturer shipments, nothing going through distribution relative to that.

More directly to your question about the buildup on Service Partners’ inventory, we did that for a couple of reasons. Number one is, we always push service in that business and so we see some new products we are getting into that we want to make sure it proves our service to whenever there’s new customers.

And then number two, some of that buildup is where we’re taking current Service Partners’ branches and gotten them into the gutter business about I’m going to say five or six branches and we build up some inventory to get them rolling into the new business and there in the region, so that was by design..

[Operator Instructions]. Our next question comes from the line of Justin Speer with Zelman & Associates. Please go ahead. .

A couple of quick questions. In the install business the 3.3% increase accelerating about 100 basis points quarter-over-quarter.

I was curious as you think about graduating what you've already achieved into next quarter and into the balance of year, how that pricing looks and what you think you’ll need to do in order to offset a prospective third increase in terms of incremental pricing?.

Yes, Justin, this is John. So we don't give specific guidance in terms of projections for future price, et cetera.

But sufficed to say obviously, we expect to see very good comps year-over-year in terms of our pricing performance in both segments, certainly while the first half of the year has material cost increases going into the third quarter and then again yet to be seen in terms of what happens with third quarter fiberglass cost increases and other products.

So remains to be seen but I think the simple answer from us is also that we’re very, very confident that whatever it takes to either recover that through selling prices or through productivity gains that we’re confident that we will do that for at least maintaining the margin levels.

And I think on a longer term basis we again feel good about the ability to expand them so. .

And thinking about kind of the other side of the equation, you have a pretty good visibility with your distribution now as well. And thinking about these price increases and it’s fairly typical to get three in a year at the manufacturer level.

Probably give some context on the potential risk of pull forward of volumes and how that works through your particular channels in terms of pull ahead of demand?.

Yes, I think the simple answer for that one is based on the fact that the quantities and supply in the industry remains very, very tight for everyone. The ability to pull through is not really a viable option in this staying age at least at this point.

So I think there's folks that would probably love to do that, but quite frankly, at this point it’s just really isn’t an option based on the real tight fiberglass supply there’s in the industry today, especially [in install]. .

That's very good context.

And is there any in terms of loosening in terms of new capacity and incremental capacity as you look into next year, are there any changes in market dynamics that you think may incrementally loosen things up at least for a period of time versus current run rate?.

Yes, this is Robert. So, hard to say about next year, I would say for the remainder of 2018 there is some maintenance that’s taken place on lines in the industry. So to John’s point about being tight, we fully expect that for the rest of the year here in Q3 and Q4 given that maintenance just happened on some of the existing hot lines in the industry..

And then next question -- just last question from me, thinking about the USI, relatively new in the portfolio, any risk of revenue dis-synergies or is that accounted for in your full target of revenue dis-synergy risk from that deal as you consolidate a large player?.

Yes, this is Robert, again. So I am sure there’s going to be markets where that potentially could happen. But if we look at the upside in other markets, we talked about some of the cross-selling opportunities across those businesses, we think that's going to more than offset anything where we might see a dis-synergy of revenue in one or two markets.

So, we think the upside is much greater than any downside that we would experience..

One real positive Justin that we’ve seen is the quality of the operators in USI world is really good and the cultural match between us and them is really good. And our teams have worked extremely well together and it's our -- there's a lot of art involved from market-to-market and our teams together are doing great job at that.

So to Robert's point we really believe for good reason that the upside will far exceed any downside that may happen. It would be an anomaly for dis-synergy to happen, but we’re -- the way it’s working right now, the way the integration is happening, we’re very comfortable..

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

On the -- so the strategic build of inventory at Service Partners, just I think I heard the answer but just wanted to clarify, was there -- is there any opportunity from that inventory build to maybe help mitigate some of the impact of any success from the Q3 increase on residential insulation?.

Matt, it’s Robert. So that build is really more around gutter products and some accessory -- insulation accessory products and then fiberglass itself too.

I think John mentioned earlier, supply is tight especially with some lines being down for maintenance here in the summer and some lines going down in the fall for maintenance, so that build up really wasn’t fiberglass insulation related. It was really gutter material and some of the accessory products..

So the SG&A leverage is just a little stronger than we expected this quarter.

Can you talk about what’s -- or I guess the way we should look at the back half or maybe what assumption is in the outlook as a percent of sales?.

Yes. So Matt, this is John. So again we don’t provide specific guidance for individual line item, again we’d give total guidance.

But I think what you saw in the second quarter is pretty consistent with what you've seen quite frankly in the last three years and that we have absolutely been leveraging both our national footprint in terms of our branches but also leveraging our back office.

And as we said from day one, we’re really set up for a starts level that's much higher than even today at 1.250 million plus.

So in terms of the expectations going forward, I think baked into our guidance is the assumption we’re going to continue to leverage this business well through the end of ‘18 and certainly beyond that as we kind of ramp up to that 1.5 million starts over time so. .

Okay, that's helpful, John.

And the follow-on I had was, can you talk about that the impact of mix in the quarter really either business good or bad, I know you broke out price and organic volume, but what about the impact of mix overall, any commentary you can give us?.

Yes. This is Robert. I wouldn’t read too much on the TruTeam side of business. Service Partners, we manage the allocations so maybe there could be some relative to fiberglass volume in the mix a little bit there but that’s probably the only part I would mention on that.

And again, as we look at the organic growth on Service Partners and the price, we think the teams are doing a great job of managing allocation, and as they’ve managed it with our customers and stuff we think a great job by the teams in the field on that..

We have no additional questions registered at this time. I will turn the presentation back to you. Thank you..

Thanks everyone for listening today and supporting TopBuild. We look forward to reporting our third quarter results in early November. .

Ladies and gentlemen, that does conclude today’s presentation. We thank you all for your participation and ask that you please disconnect your lines..