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 26, 2019.

I would now like to turn the conference over to 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 conditions. 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. Please turn to slide 3.

I will now turn the call over to Jerry Volas..

closing and integrating three acquisitions, including USI, that are expected to generate over $410 million in annual revenue, with significant synergies driving margin results. Completing a $400 million bond offering at 5.625%.

Returning $65 million of capital to our shareholders through a share repurchase program and winning the 2018 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 16 years by working closely with home builders and consumers to create homes that are more comfortable and energy efficient. As we look to 2019, on slide 7, we are optimistic that it will be another year of profitable growth for TopBuild.

The housing market, even if there is a short-term pause, will eventually regain momentum due to strong supply and demand fundamentals. Our enhanced size and scale facilitate strong supplier partnerships and contributes to the outstanding value proposition we provide our customers.

We will continue to drive operational efficiencies, improve sales and labor productivity and leverage our cost base with higher revenue to further improve margins. Capital allocation remains an important component of our shareholder value creation strategy, with acquisitions being our number one priority.

Our pipeline is robust with a primary focus on profitable companies within our two core businesses. As a reminder, we seek well managed companies with solid customer bases that expand our market share in high growth regions.

Cash, beyond what is required to fund internal growth and acquisitions will be returned to our shareholders through our newly authorized $200 million share repurchase program. John let me turn it over to you..

Good morning everyone. As Jerry noted, we finished with a strong fourth quarter, which closed out a solid 2018 for TopBuild. I’ll start by discussing our fourth quarter results, then provide an overview of full year 2018.

In the fourth quarter, consolidated revenue increased 27.6% to $639.5 million, driven by $105.7 million of revenue from companies acquired since January 2018, as well as, improved selling prices. On a same branch basis, revenue increased 6.5% compared to fourth quarter 2017.

Gross margin expanded 40 basis points to 24.7%, compared to the same period a year ago, demonstrating, once again, our ability to recover material cost increases through selling price increases and operational efficiencies. Adjusted operating profit grew 32.1% to $67.2 million, with a corresponding margin improvement of 40 basis points.

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

Fourth quarter 2018 adjustments totaled approximately $2 million, primarily tied to the integration of USI. Fourth quarter adjusted EBITDA was $82.5 million, compared to $57.9 million in 2017, and our EBITDA margin was 12.9%, 130-basis point improvement from fourth quarter 2017. Our drop-down to adjusted EBITDA margin was 17.8% in the fourth quarter.

On a same branch basis, adjusted EBITDA was $65.3 million and our drop-down to adjusted EBITDA was 22.5%, driven by improved selling prices, USI synergies, strong cost control and continued leveraging of our platform; partially offset by higher material costs. Incremental EBITDA related to our three acquisitions was 16.3%.

Looking at our full-year results, total sales increased 25.1% to $2,384 million, principally driven by the three acquisitions we completed in 2018 along with volume growth and increased selling prices. On a same branch basis, revenue increased 8.5% to $2,068 million. USI, which we acquired last May, contributed $266.3 million to our top line.

In addition, EBITDA margin from acquisitions was 14.3%, of which USI was the largest contributor. Adjusted gross margin was flat at 24.2% as there was a delay in recovering first half 2018 material cost increases. The second half of 2018 saw gross margin expansion offsetting the margin compression we saw in first half.

As Jerry pointed out, our operations teams did a great job of successfully navigating three material cost increases during the year. Our adjusted operating margin expanded 80 basis points to 9.8%. Adjusted EBITDA for 2018 grew 43.4% to $283.4 million, and our EBITDA margin improved 150 basis points to 11.9%.

Our drop-down to adjusted EBITDA margin for 2018 was 17.9% and 25.1% on a same branch basis. Moving to slide 9, adjusted net income for the fourth quarter of 2018 was $42.2 million, or $1.20 per diluted share compared to $30.1 million, or $0.84 per diluted share in the fourth quarter of 2017.

Adjusted net income for full year 2018 was $149.3 million, or $4.19 per diluted share, compared to $101.8 million, or $2.78 per diluted share for full year 2017.

Interest expense in 2018 increased from $20.7 million to $28.7 million, primarily related to the funding of the USI acquisition which included the issuance of $400 million Senior Notes and our borrowing of the $100 million delayed draw term loan. As shown on slide 10, CapEx for full year 2018 was $52.5 million, approximately 2.2% of revenue.

During the year, we issued $26.6 million of equipment notes to fund our fleet acquisitions. Working capital as a percent of pro forma trailing 12-month sales was 10.4%, 130 basis points higher than prior year.

The biggest driver behind the increase is that USI had a higher mix of installation versus distribution business, and the installation business comes with higher working capital requirements. We’ve updated our long-term outlook range for year-end working capital from the previous guidance of 10% to the revised guidance of 10% to 11% of revenue.

In 2018, our effective tax rate finished at 25.5%, primarily due to a one-time beneficial adjustment in 2017 of our deferred tax assets and liabilities to reflect the change in the federal tax rate. Operating cash flow was $167.2 million for the year.

On the next slide, you can see, we ended 2018 with a net leverage of 2.19x using pro forma EBITDA, well within our comfort zone of 2x to 2.5x. Total liquidity at year end was $291.6 million, inclusive of the available balance on the revolver of $190.7 million and cash of $100.9 million.

Moving to 2019 annual guidance, on slide 12, we are projecting total revenue to be between $2,570 million and $2,635 million and adjusted EBITDA to be between $310 million and $330 million. This guidance assumes a range of residential new housing starts of between 1.26 million and 1.3 million.

It does not include any acquisitions we may make this year. We have changed three of our long-term modeling assumptions, including working capital, which I already mentioned.

The other two are a change to our normalized tax rate, which we now project in a range of 26% to 27% instead of a flat rate of 27% and our estimate of residential revenue TopBuild will generate for every 50,000 increase in residential starts, which has increased from $75 million to $80 million.

Robert will now discuss operations and segments results..

Thanks, John and good morning. Before discussing TruTeam and Service Partners’ financial results, I want to thank our employees for their hard work, dedication and ongoing push for operational excellence throughout 2018. What a great year and I could not be prouder of our entire TopBuild Team.

While continuing to work safely and provide outstanding service to our customers, we successfully managed the acquisition, financing and integration of three companies, including USI, which had 38 branches and over 1,000 installers.

In addition, our local teams achieved selling price increases, which more than offset an unprecedented three material cost increases over the 12-month period. 2018’s strong financial performance clearly demonstrates the effectiveness of our energized, very engaged and diverse team of 10,000 plus individuals.

Looking at TruTeam’s results on slide 13, fourth quarter sales increased 36.1% with USI contributing over 74% of that growth. This acquisition continues to perform exceptionally well. On a same branch basis, TruTeam sales were up 8.9% in the quarter, driven by a 5.9% increase in selling prices and 3% volume growth.

For the full year, TruTeam’s same branch sales were up 10.1%, with volume driving 5.9% of that growth, outpacing lagged housing starts of 5.3%. Shifting to TruTeam’s adjusted operating margin, we saw a 20 basis point decline in the fourth quarter to 12.5%.

Primary drivers were the absorption of acquisition fixed costs, mainly from USI, higher amortization expenses and timing adjustments on insurance accruals versus 2017.

On a full year basis, TruTeam’s adjusted operating margin expanded 80 basis points driven by volume leverage, higher selling prices and operational efficiencies; partially offset by higher material costs and USI fixed costs, as well as, higher amortization expenses.

Overall, great operational execution by TruTeam’s leadership and everyone in the field. Our TruTeam branches also continue to grow their spray foam business which is benefitting from increased fiberglass costs, new building codes and consumer education. For the full year, spray foam sales increased almost 39%, 16.5% on a same branch basis.

Turning to Service Partners on slide 14, in the fourth quarter total sales grew 10.7%, led by selling price increases of 7.9% and acquisitions, notably USI and ADO Products; partially offset by a volume decrease of 5.3%. The volume decline was driven by deliberate price volume decisions and the decision to exit some low margin business.

As a result of these decisions, Service Partner’s fourth quarter adjusted operating margin expanded 80 basis points to a robust 10.1% driven by improved selling prices and strong cost controls, partially offset by higher material costs and the absorption of acquisition fixed costs and deal amortization expenses.

For the full year, Service Partners sales were up 14% driven by higher selling prices and acquisitions, while volume was flat. Adjusted operating margin was 9.6%, flat versus a year ago primarily due to the timing of material cost increases and the delayed recovery of selling prices throughout the year.

Distribution revenue from spray foam increased 32% in 2018, and 21% on a same branch basis. I do want to briefly discuss material. Fiberglass remains tight with manufacturers keeping a firm rein on supply.

It’s still too early to tell the traction of the January price increase, but we do believe if there are additional material cost increases this year, they will be highly dependent on industry demand and housing starts.

Turning to USI, with the exception of our branch optimization effort, which we expect to finalize by late June, the integration is essentially complete and, as you can tell from our results, USI’s performance has been outstanding.

Our integration team did a great job and we are highly confident we will exceed $15 million of cost saving synergies within two years of close. USI has been a great addition to our company. Our total commercial business grew 28.1% for full year 2018 and 11.8% on a same branch basis, exceeding our long-term target of 10% annual growth.

We continue to drive improvements in this business and it remains an important avenue for growth. Our commercial backlog is strong and our bundled services approach is giving us a competitive advantage. In summary, 2018 was a year of solid execution.

Our disciplined cadence for how we run the business and our focus on improving or shutting down under-performing branches has proven to be a successful strategy. We have built competencies in new products and services, as well as acquisition selection and integration.

We’ve also been focused on continuing to build our talented team and developing our bench strength.

On slide 16, you can see that this year, an important strategic initiative we are undertaking is a deep dive review of adjacent product offerings that will provide value to our existing customers and enhance our relationships with certain supplier partners.

One potential area of expansion, which we’ve mentioned in the past, is glass and windows, a product line we expanded into through the USI acquisition. There are other adjacent businesses we are evaluating as well. However, be assured we will be very deliberate in our approach, putting scale, talent and synergies at the top of our criteria list.

As mentioned last quarter, I am constantly in the field working directly with our customers and suppliers. Builders seem increasingly optimistic that 2019 will be a good year. We are encouraged by our start to 2019 and are pleased to see our customers moving to build more entry level homes that families want and can afford.

Turning to slide 17, even if there is a short pause in housing starts, TopBuild’s model supports profitable growth from a number of vantage points with a continued focus on driving operational improvements through best in class execution; growing our heavy and light commercial businesses; expanding into adjacent product areas; and increasing market share organically and through acquisitions.

Our track record over the past few years of expanding adjusted operating and EBITDA margins speaks to our success and our ability to identify and integrate strategic acquisitions is a distinct competitive advantage.

We believe 2019 will be another solid year for TopBuild and we look forward to once again delivering strong bottom line results for our shareholders. I’ll now turn the call back over to Jerry..

Before opening it up to questions, I want to again emphasize that we look forward to 2019 as another year of profitable growth. The external environment is positive, our strong and diversified business model has produced excellent results and our team executes well. Operator, we’re now ready for questions..

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

Hi. Good morning. First question, wanted to ask about this, in a relatively flattish demand environment for new construction. Would that type of an environment benefit relatively large customers like yourself with having more ability to push out price acceptance on insulation.

Or you know how do you think about your relative positioning?.

Hi, Mike, good morning. This is Robert. So, as we think about that I think one thing to keep in mind is just the importance of labor. That's you know still top of mind to our builder customers and so as we think about you know things were flat or slightly up in the year.

Obviously, we had a bundled solution of material and labor and labor is still very, very valuable in the service that we provide you know to our builder customers or to the general contractors and stuff as well.

So, if there is price to be gained or pricing environment we feel comfortable with our ability to execute day-to-day in the field, at a local level. And I think as we mentioned before we have a very diligent process as to how we do that..

The other thing I would add to that Michael would be our diversified model, what I mean by that is you know installation, distribution, residential and commercial both.

So, we do have some diversity across our total model, which in an environment like the one we may be looking at where its -- we're projecting it to be slightly up from 2018, you know I think the diversity that we have in our model is going to play extremely well..

Great. And thank you for the color on 2019. Is there any guidance or color that you could provide us in terms of first quarter, given the lag decline and starts. I'm just looking in terms of any inefficiencies it might be there on seasonally low demand that you can call out to help us model that cadence..

Yeah, we can't really give you much detail in the way of what's happening with Q1, but what we can say is that we did put guidance out there for 2019 and it is true that over the years there is a bit of seasonality in our business. Q1 is normally not a stronger quarter.

But what I can tell you is that what we're seeing so far in the first quarter is consistent with the guidance that we put out there for the year, so I think that's what we can say and we feel good about it..

Okay. Thank you..

The next questions come from Philip Ng with Jefferies. Please proceed with your question..

Good morning everyone. This is Maggie on for Phil.

Looking at Service Partners, can you talk us through that volume decline and how much of that was driven by deliberate pricing or volume decisions on your side versus a softer demand environment in 4Q?.

Hi, good morning. This is Robert again. So, yeah, I would say really all of the deliberate decisions on our part, I think the team did a good job of making some good price volume trade outs, we actually believe the service that we provide is valuable.

And then I think we also mentioned there were some lower margin business that we made the conscious decision to back away from as well. At the same time, I think we feel very confident in what we're doing at the local level with.

Obviously gaining share with current customers, but the door is always open with other customers and new avenues that we're pursuing as well from a growth perspective. So, I would say it was all driven by deliberate decisions that we consciously made..

Got it. That's really helpful. And then you’ve done a great job on price cost and it may be too soon to talk about how the January price increase is coming through. But what are your expectations for 2019 and then what kind of impact are you expecting from the recent announcement that one of the manufacturers is shuddering some capacity? Thanks..

So, relative to the January price increase that was announced, it’s too early to tell. Its early to see if there's traction with that increase as of yet. As you know the spring selling season just really started a couple of weeks ago. You know early February, if you will. So, little early to tell traction of the January 1 price increase.

As I mentioned earlier, I think the extraction of future material cost increase will be based on demand. And you know what happens with the housing starts which you heard Jerry and John comments on that.

And then relative to we see where there's been some small lines bogged down or some capacity bogged down based on some other public announcements that came out. Not too concerned about that, I mean, material may be, it was higher in the back half of the year as things improve and the starts improve.

But you know at the same time, we see other products, I think we constantly mentioned, we see other products like spray foam that we’re using more and more of, that’s offsetting some of the capacity issues, if you will, on the fiberglass side. So, not too overly concerned about that, but we’re constant communication and talking with manufacturers..

All right. Thanks guys..

The next question comes from the line of Ken Zener with KeyBanc Capital Markets. Please proceed with your questions..

Good morning everybody..

Good morning, Ken..

Very good delivery of price in operating leverage. My question is about FY19 and the comment around price, which you know obviously is a price you would pay to manufacturers. But also the price that you're able to get from the builders. The housing start number that just came out here, looks like it was 1247 for the year, FY18.

If you hold that annualized number in FY18, it means you're basically going to be having a down, you know January through February.

And just kind of on a line basis, is it possible to really have -- is there a circumstance that you can think of where you really had down volume and up pricing within your guys long history in this space? Incremental pricing that is, when volume was falling?.

Ken, I think, this is John. I think Robert mentioned it before those situations were volumes were either flat or down a little bit were labor, obviously comes into play and the availability of labor's critical, would create in some cases an opportunity for some of our branches to drive price.

And we've done that in the past, by the way, around the country in certain timeframes through the past three or four years. So, that really would be the opportunity I think when those options present themselves. Again, labor is a very, very critical [indiscernible] side of the equation..

Right. Just to add on to that, so yeah, we just saw that number, it starts with low. Permits were pretty solid actually I think, slightly above December. So, that in combination with as Robert discussed. He has all kinds of conversations with builders. They appear to be tweaking their strategies.

They're not pessimistic or optimistic about what 2019 is going to look like. And as I said earlier, our guidance for 2019, reflects volumes being up low single digits from 2018. We think it's going to be a good year.

I mean, something's economically – and if the economy remains strong interest rates certainly have changed the picture a bit, as we turned the corner in the 2019. And so, all in all, I mean, we can certainly realized that Q4 was a bit of a rough ride. But we think a number of things have changed here as we go into 2019 and you know, we’re optimistic.

We’re happy with where we’re headed..

Yeah. No, I think that's clear from your results. And on slide 13, you talked about sprays and at the builder show we had extensive dialogs with some of those companies. Can you talk -- you talked about spray foam increasing 39%, 16% same branch.

Can you just give us a context again for how much of your business is spray foam today in terms of either value or units or both? Thank you very much..

Yeah, Ken, this is John. So, on the residential side of the business something just around just around 10% roughly in terms of the units basis and something just under 20%. On a sales dollar basis would be spray foam..

Thank you..

You're welcome..

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

Thank you. Good morning everybody. So you walked away from some unprofitable business and then you've got the USI synergies that are still going to follow through.

Can you talk about the impact on those two items on the assumed organic incremental as we move out into 2019 or what's your organic incremental that you're assuming in the 2019 guide?.

Yeah, this is John. We really don't break out and we're not going to breakout. Certainly, we've got four months worth of 2019, but we’ll still be comping USI versus prior year, where we didn't have the comparison obviously. So, we're not done from a synergy standpoint.

We've done a lot of the work, most of the work complete on the back office, all the work on the supply chain side. But we’ll go well into the third quarter in terms of branch consolidations taking place. So, we'll continue to see those benefits accrue throughout 2019..

Thanks, John. I mean it is safe to say with those items that the soon incremental be it organic or not is going to be towards the high end of the range because I think this year you had a little bit of, I think you spoke about it. The disconnect, the catch up period, price versus cost, it was a little bit of a drag in first half on gross margin.

So, am I thinking about it the right way that towards the high end of the range would be the right way to think about it?.

Yeah, so if you look at our guidance basically, you can do the math of taking our 2019 guidance either low end, high end or make the midpoint. If you take the midpoint on that, you're going to be within our EBITDA flow-through assumptions that we provide on a long term basis, so..

Okay. Maybe the way I’d ask is there is an offset. Are there any negative offsets to those positives that would be incrementally or incremental to the normal, yeah, increment..

Again, really on a guidance basis for 2019, the only thing we're really going to provide is the kind of the guardrails around our estimate, which is the start 1,260 million to 1,300 million. We're not going to sit and break down the elements of cost in price and all those type of things.

So, suffice it to say, I mean, Jerry said it well, we feel real good about that that projection from a guy can standpoint and standby it at this point..

Okay. That's fair. So, maybe if I think about the top line, so you’re assuming, I think, low single digit starts growth, I assume the long-term commercial target of 10% is a good number for 2019. Plus I think you'll get some carryover price, so kind of not depending on what happens in 2019 and some carryover price from 2018 yet.

There's only 4%, I think assumed growth at the midpoint on the top line. Are there same kind of question.

Are there some offsets, am I giving too much credit for any one of those buckets?.

So, again, Matt, we're not going to attempt to break it down by element here. We feel it’s and by the way we don't use our long-term guidance assumptions, modeling assumptions necessarily to come up with our annual guidance so. But certainly, we baked in commercial assumptions, pricing assumptions and some volume growth assumptions.

But again, we feel pretty good about the growth that we're projecting and we think it's in line with the estimate we have around residential housing starts, so..

Okay. Maybe I’ll slip one more in. You’ve talked a lot about labor and labor availability and we’ve seen completions kind of lagged, starts its entire cycle. There hasn't been a period where we’ve worked into the backlog at all.

So, I guess, the question is, is there the potential for some of the builders to work down some backlog and that may help you because you're involved as such late stages of the construction project. Would it help you maybe get through this period of softness or pause a little better than the 90 days lag starts would indicate..

Yeah, Matt its Robert. So, sure, I mean, there could be some working into the backlog for sure. That's not uncommon in Q1 that there is some working in the backlog. And if you maybe go back a couple of years, I think maybe coming out of 2016 into 2017, there some of that for sure that was noted.

So, that can always be the case, working with that backlog piece..

Yeah, I think the other thing, this is John, to add to that, keep in mind 20% of our business is commercial and that commercial backlog as we’ve talked about in the past has a much longer tail on it. So, the solid business to work on there obviously..

Okay. Thank you all..

The following question comes from the line Trey Morrish with Evercore ISI. Please proceed with your question..

Thanks guys. I was wondering, if you could talk a little bit more about these adjacent product offerings that you talked about.

Are these products that you would think to add to your existing branches? Or are these somewhat separate businesses that you’re looking to get into get into initially through acquisitions and then roll into your existing footprint?.

Hey, good morning. This is Robert. So, yeah, so we talked about glass and windows, we're looking at other businesses that -- I think the main make thing is we have a very deliberate diligent process that we're going through here. We definitely learn from some of the past years without making just how to make these businesses very successful.

And I think to your question about existing branches, new branches. I’d say both. We never want to distract from our core business, that's something we're very, very focused on. If it takes in as a robust market that we’re into, it could be a separate branch or separate business that we start, we have to leverage some fixed costs there.

But we would never distract from our core business, that's something that we're very, very committed to and do not move to average stock from our core business. I think we've done a good job of showing that we don't do that, even acquisitions that stay with things, stay very focused on the core business..

Hey guys, it's Steve Kim, also from Evercore. Just general question here, you said that we've heard that you've shifted from your TruTeam business from one of your major suppliers.

And that their capacity curtailments were actually taken in a response to that to drive industry utilization rates for all the other manufactures into the high 90s to give a very sort of a bifurcated situation in terms of the capacity on the supply side.

Generally, your strategy has correctly assumed kind of rational behavior from the supplier and so, if someone has extra capacity, you can buy it at a discount given your scale. I was curious though, if you have a lot of that capacity or probably all of it in the hands of one supplier.

Is it possible that your ability to purchase at a discount -- to continue to purchase at a discount might be become more dependent upon supplier to actually greenfielding new capacity in the future? And how quickly could that come on if they did?.

Jerry here. I would say on that one that one of the things that we do really well and its, because of our size and scale in the long-term relationships that we've had with our suppliers. I mean, we do business with all four of the major fiberglass manufacturers and because of our size, we're able to be significant to all four of them individually.

And you know we work with these folks Robert and his team, you know I would say every week we're on the phone with discussing this and that. And it's always a very fluid situation with all four of them. And we have our objectives, they have their objectives. We find a middle ground and that that continues.

So there's an ebb and flow always relative to what we're doing with any particular supplier. With the one you're talking about we do a lot of business with Owens Corning. They're the ones that that announced that we saw that have shutdown on the west coast. We do business residentially, with commercial, all across our footprint with those folks.

So, that that's fine, I can’t give you more details than that, but we think that each of these suppliers are their individual businesses. They make their own decisions on capacity, and I'm sure that they'll be looking out into the future. I think generally speaking, they probably do the housing trajectory longer term the same way we do.

So, ultimately I think the capacity will be rightsized as time goes on. And it's not just about fiberglass, it’s about spray foam and other kinds of insulations. Fiberglass is not the only way to insulate a house.

So, I think all those factors are relevant and I believe that our business model affords us the ability to handle it really well, which we’ll continue to do..

Great. Thanks very much guys..

Trey Morrish:.

The following question comes from the line of Keith Hughes with SunTrust. Please proceed with your question..

The question on spray foam, more rate growth in the quarter on a product. The builders are clearly mix shifting down to lower priced down to small footprints. Particularly in a lower priced homes, there’s probably going to be some pressure on mix and products. So, that's my question on spray foam.

Do you anticipate that growth to slow down given what the builders are having to do to move units? And if that's the case, does that matter to you which products they use?.

Hi, Keith, this is Robert. So, we're -- let me start with your last question. We're pretty agnostic, so we do everything. We do all varieties of installation based on what the need is and the different solutions we give the customer and then also maybe feed into your first question.

If you know what's going on with building codes, so you know there are codes that are driving this, whether it’d be smaller homes, larger homes. Obviously, the bigger concentration of spray foam is with the custom builder and a larger regional builder, if you will. So, I think you're going to need to see it.

I think there's opportunities in certain markets, I could pick on Southern California, where you can leave content out of their homes some with the HVAC and other things, which made you know spray foam a much, much more attractive offering in those types of homes.

So, I think we feel confident, and then last thing I’ll just mention is, we're seeing to expect more and more on the commercial side of the business as well. So, there's adoption, residential and commercial, so I think we feel comfortable, that is continuing to move ahead.

And I would also say the suppliers are doing a great job of some innovation in the product, better yields in the product and stuff as well. So, we continues to gain efficiency from that perspective as well..

That product tends to move around on price based on the underlying chemicals.

Is pricing now, has it come off from some of the highs we saw when crude moved up or you still kind of feel where that stands?.

There were some minor, I would say, Keith, some minor fluctuations in 2018, but nothing significant from that perspective..

Okay. Thank you..

The following question comes from the line of Megan McGrath with Buckingham Research. Please proceed with your question..

Thanks, good morning. Just wanted to catch a little bit on capital allocation with your share repurchase announcement.

Maybe give us a little bit of an insight into how you're thinking about the share repurchases versus potential M&A and the timing of getting your debt ratios back down into your comfort level?.

Megan, Jerry, here. Acquisitions continue to be our priority and we feel good about the fact that we’ve proven our ability to select and integrate those. And so, you know more than ever we believe acquisitions is the number one priority. They are very lumpy going forward.

I mean, we can never really quite, go about exactly when these acquisitions are going to occur and how big they will be. We always have a number of them on the burner in any given time. But when they get to the finish line, it’s always an unknown. So, on the buyback side of things, that will be dependent on where we go from acquisition standpoint.

We have the authorization out there that extends out quite a bit of time. We always want to have the ability if the acquisitions are not getting to the finish line, quick enough and we think that it's a good time to buy our shares back, we want to have the authorization out there.

So, that's really what that was about because that's our second priority from a capital allocation standpoint behind acquisitions..

Great. Thanks. And then just wanted to circle back a little bit on your conversation around getting into potential new product lines. Maybe a bit of a history lesson and for those of us that have been around a while, I think you're trying to reassure us that you know that past mistakes weren’t going to be repeated.

But maybe it will be helpful to talk about when you were a part of Masco, you added a lot of product lines, ended up sort of getting rid of a lot of those.

So, what were the lessons learned there? What are the things you don't want to do as you move into new product lines again?.

Good question. Yeah, I understand all the history as do Robert and John. And I would say, the lessons learned, Megan, at that point in time, probably were don't try to do too many things too fast.

And we find that at the branch level, the more focused we can keep our operators on the core business, the batter we’ll execute and that is one of the primary lessons we learned.

And I would say the other thing is, as we step into and as we consider some of these adjacent product categories to Robert’s point earlier, we’re going to be very diligent about the criteria. And so the criteria is things such as, is there an adequate level of business to be had, can we scale it up. Can we scale it up to significance.

And the second thing would be is that the elements of the business, do they enable us to make money? We want to have adequate margins that are accretive to our business, when we’re adding something on. And then the third thing is, can we execute it. Is there any synergy with our current business.

Do we feel like we have the talent either in the house or a talent that we can acquire that can execute it well? And so I would say, if those three boxes can be checked and you know we have the balance sheet to be able to extend ourselves a little bit into some of these categories. We'll be thinking about doing that.

But to your point Megan we’ll be far more careful than we were at one point in time in our history. And we’ll be stepping carefully because you know we don't want to lose track of the core business that we are very good at that. That's something we will not do..

Great. Thanks very much..

The final question comes from the line of Justin Speer with Zelman and Associates. Please proceed with your question..

Hey, good morning guys. Thank you. Just a few questions; one on the intermediate term roadmap. I know you mentioned I think here on the call 75 million to 80 million now for every 50,000 changing starts. Just wondering, what goes into that.

Then as you unpack that thinking about that mid-cycle margin view, I think you originally liked 13.5% mid-cycle at 1.5 million starts.

So, with USI and some of these other acquisitions in the equation, does that change the calculus on where you think you can take revenues and ultimately operating margins in a 1.5 million some area in the next few years..

Yeah, so the first question again, was just –.

You mentioned that your product category for every –.

75 to 80. Right for every 50,000 starts, so we did bump it up to -- we did the 75 million at the timeframe we did the USI acquisition, we had bumped it then. So, really the $80 million reflects primarily the increase in pricing that we've seen in the industry on the residential side of the business.

So, what we don't do is make any forward projections behind the current timeframe for any price adjustments up or down that would impact that number. So, that's what makes it up.

The other thing we say about our long-term modeling $80 million, if we assume kind of a constant level of units from a single and multi-family standpoints and a real change in mix between the two.

In terms of where we think that can take us, certainly, the long-term modeling we’ve given will provide, the tools you need to do the projection, it all really depends on where we think we're going to get back to that 1.4 million, 1.5 million starts.

But we have done the modeling and if you take it out to the 2021 timeframe, 2022 timeframe we're going to be in that 13% to 14% type of EBITDA margin number, as a business in total, so..

Perfect. But no changes, as opposed to USI, 13 to 14 still looks salient and good that's a correct point. The next question I have is just a follow-up on available fiberglass insulation capacity at the manufacturer level.

Just looking at the capacity there, based on your math, how much capacity do you think is available in the industry under your 2019 starts assumptions?.

This is Robert. So, hard to tell, I mean, we would say, the industry is partly running at 90% plus, obviously, from a capacity perspective. But hard to tell, obviously, with the recent announcement for Owen Corning.

I know we feel very confident and comfortable with our supply chain, the forecast that we have out there, the conversations with all the manufacturers. I know we feel very comfortable for the year, no doubt about it. You've been looking into 2020 and then probably just reiterate the point. You know we see some shifting of products and stuff as well.

So, as we see other products gaining share. I think last call, Q3 we talked about cellulose and what’s happening there. We talked about spray foam, most calls, so you know there's other products. I think Jerry said it earlier that you can insulated the house with and we’re seeing builders take advantage of some of those other products..

Okay. And then last question for me in terms of spray foam. What was the revenue, I don't know if it was 2018 or fourth quarter 2018 those metrics you provided in those slides. But what was the fourth quarter growth for both of the businesses for spray from in the year-to-date growth..

Including acquisitions, the numbers on the TruTeam side, this is Q4 year-to-date full year was 39% growth on the TruTeam side, again, including acquisitions. Service Partners up about 32% on full year basis..

And then in terms of the economics there, can you help us understand the economics today of spray foam versus fiberglass versus relatives to history. And its certain what your assumptions are for 2019 for fiberglass..

Yeah, so in terms of our call, I’ll answer the last one first. We're not going to give you specific guidance in terms of fiberglass, spray foam for 2019, if that's the question. But if you're going back to what the economics are typically on a job, it's double the revenue on a like-for-like job between spray foam and fiberglass.

And the margin percentage is roughly even from a percent standpoint. So, certainly we drop more bottom line dollars on the spray foam here versus fiberglass..

But in terms of the economics itself it's still about 2x with the fiberglass price increases.

The economics have narrowed, but not materially necessarily and relative --?.

Well, again, keep in mind about three years ago, three plus years ago, it was roughly 3x. So, they certainly have narrowed, but yeah still roughly 2x today..

Perfect. Thank you very much guys. I appreciate it..

You're welcome..

And we have no further questions at this time, sir. I’ll turn the call back to you..

Thanks everybody for joining us today and we look forward to our Q1 2019 call in the spring..

And 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..