Jason Niswonger - SVP of Finance and IR Jeff Edwards - President, Chief Executive Officer and Chairman Michael Miller - Executive Vice President, Chief Financial Officer.

Nishu Sood - Deutsche Bank Ken Zener - KeyBanc Capital Markets Matt McCall - Seaport Global Securities Michael Eisen - RBC Capital Markets Scott Rednor - Zelman & Associates.

Greetings, and welcome to Installed Building Products Fiscal 2017 Fourth Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jason Niswonger, Senior Vice President, Finance and Investor Relations. Thank you, you may begin..

Good morning, and welcome to Installed Building Products' Fourth Quarter 2017 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the fourth quarter, and posted an investor presentation, which can be found in the Investor Relations section on our website.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws.

These forward-looking statements include statements with respect to our financial and business model, the newly authorized stock repurchase program and its potential benefits, seasonality, our ability to increase selling prices, our ability to manage employee-related costs, the demand for our services and product offering; expansion of our national footprint, products and end market; our ability to capitalize on the new home and commercial construction recoveries; our expectations for the residential end market; our ability to strengthen our market position; our ability to pursue and integrate value-enhancing acquisitions; our ability to grow Alpha’s business, the impact of Alpha on our revenue and profitability; expansion of our commercial business; our growth rates and ability to improve sales and profitability; and expectations for demand for our services and our earnings in 2018.

Forward-looking statements may generally be identified by the use of words such as anticipate, believe, expect, intends, plan and will, or in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.

Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially from those expressed in or suggested by the forward-looking statements as a result of various factors, including, without limitation, the factors discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2016, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission.

Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for the company to predict these events or their effect.

The company has no obligation and does not intend to update any forward-looking statements after the date hereof, except as required by federal securities laws.

In addition, management uses certain non-GAAP performance measures on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share, adjusted gross profit and adjusted selling and administrative expense.

You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release, and additional reconciliation for adjusted EBITDA, for earlier fiscal years in our investor presentation, which are available on our website.

This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer. I will now turn the call over to Jeff..

Thanks, Jason. And good morning to everyone joining us on today’s call. I’m happy to have the opportunity to talk to all of you about our record 2017 results. As usual, I will start today’s call with some highlights and then turn the call over to Michael Miller, IBP’s CFO, who will discuss our results in more detail before we take your question.

Our 2017 financial results reflected continued strength of IBP’s growth oriented business model in the platform we have created to differentiate our company within the installation marketplace and drive success throughout all levels of IBP.

While unexpected items impact the profitability during the third and fourth quarters, I am extremely proud of our full year financial results, to sustain growth we have achieved since going public in the direction in which our business is headed.

As our revenue surpass the billion dollars to the first time in our history, I want to start today’s call by reflecting on the impressive growth, we’ve achieved over the past four years and how our recent accomplishments drive our vision for our future success.

Since going public, IBP has rapidly grown revenues 162% to a record $1.1 billion, while our adjusted EBITDA has increased 456% to a record $141.1 million since December 31, 2013. These accomplishments are is a result of IBP’s growth oriented business model, disciplined acquisition strategy and service oriented culture.

In addition, we have successfully enhanced our business platform by diversifying our installation services and expanding our geographic footprint to many of the strongest U.S. housing markets. At December 31, 2017 67% of revenues were derived from installation services versus 74% of revenues at December 31, 2013.

Additionally, we have increased our access to total residential permits from 55% at the end of 2013 to nearly 70% at the end of 2017. This enhanced position allows us to provide more installation services, while deepening the company’s relationships with builders nationwide.

These two core tenants of IBP’s growth strategy product line and geographic expansion along with customer acquisition are the drivers of our long-term effort to sell more installed products to our increasing customer base in an expanding geographic.

The acquisition of Alpha further diversify IBP’s business model effectively doubling our exposure to the new commercial construction market. We are actively investing in the upper platform through organic expansion and back office improvements to support sustainable organic and acquisition growth.

During 2017, we opened new Alpha locations in Denver and Tulsa. More recently, we have added a Tampa location and expect additional organic growth in 2018.

Diversifying our business platform produces a more balanced company in the future that is better positioned to limit the cyclicality of our core residential end market, while increasing the amount of work we performed at construction sites.

IBP’s success is a direct result of the dedication and commitment of our nearly 7,000 employees, which is an increase of approximately 125% from December 31, 2013. As I mentioned on our third quarter call, the labor market for the construction industry is tight.

We are still able to recruit, hire and train new installers, but we have seen higher employee-related cost. This trend negatively impacted 2017 fourth quarter profitability.

We are continuing to work on several key initiatives to improve employee sourcing and increase retention rates of installers, which we believe will help improve productivity and reduce our cost to recruit and train new installers. These initiatives will continue to be an area of significant focus for the management team during 2018.

Reflecting on our commitment and our collective sense to do what is right, last year IBP began offering longevity based restricted stock program and the financial wellness program to all of our employees. I’m extremely pleased that nearly 40% of our eligible employees participated in the financial wellness program, well exceeding our expectations.

As a remainder, the program helps educate participants on key personnel financial management topics including budgeting, debt reduction, saving and getting back to the community. As a result of this program, IBP incurred approximately $3 million of expense in 2017, representing a dollar for dollar match of each participant saving 1000 dollars.

While other members of the executive team joined me in waiving our 2017 bonuses to partially offset the charge, our employees ability to successfully complete the program before the end of the year was a benefit not only to the employee, but also allow the company to benefit from a larger tax deduction prior to tax reform taking effect in 2018.

The expense associated with our installers match, primarily impacted gross margins during the fourth quarter. While IBP’s financial wellness program will be ongoing, we believe the quarterly expense 0.4 will be significantly reduced now that the program has been launched and our base group of employees has been covered.

In the spear, program is giving back principal, Michael and I will again be waiving our earned bonus compensation in 2018 to further offset the charge.

We agree that this is a valuable program that not only helps address employee retention, but represents the right thing to do in order to help educate and inform our dedicated employees about their financial position and security.

In addition to the tight labor market, the fourth quarter also experienced disruption in installation supply primarily loose-fill fiberglass, which is a result of the catastrophic failure and manufacturer’s facility. Due to the above change in supply, insulation material was sold on an allocated basis through majority of the quarter.

While we have effectively managed through the disruption with minimal impact to our customers, the tighter insulation supply has provided additional support to the current price increases in the insulation market. Historically, insulation installers have relied on material inflation as the real and primary driver of increased customer pricing.

This industry practice in the need to stay competitive have over the past two years limited our ability to cover the inflationary impacts of non-material cost and yet remain competitive in many of our markets.

In light of the current supply disruption and material price increases in the marketplace, we are actively engaged with our customers to increase selling prices for installation services to offset the rising material cost and other inflationary cost.

We anticipate these selling price increases in a rising demand environment will improve profitability as we progress through the year.

Finally, as you saw in our press release this morning, IBP’s Board of Directors approved a $50 million stock repurchase program that will be effective as of March 2, 2018 and will remain in effect until February 28, 2019 unless extending by our Board.

The purchase program reflects our strong financial position and cash flow positive outlook and our commitment to generating shareholder value.

With more than $90 million of cash and investments on the balance sheet and the strong cash flow generation of the business, the repurchases stock is a prudent use of capital and compliments our continuing acquisition strategy. With this overview, we’d review some additional drivers of 2017’s record results.

Solid organic growth the contribution of our recent acquisitions and improvements in the rate of single-family housing completions continue to favorably influence revenues. For the 2017 fourth quarter, single-family branch sales increased approximately 10% while total single-family sales increased to over 18% compared to the increase in total U.S.

single-family completions of approximately 5%. Within the multifamily market, our locations benefited from robust demand and during the 2017 fourth quarter, same-branch multifamily sales increased 25% while total multifamily sales increased 54%.

Combined new residential same-branch sales increased approximately 11%, while total residential sales increased approximately 21% compared to the increase in total U.S. completions of approximately 5%.

We expect residential end markets to continue to improve towards stabilization of approximately 1.5 million total housing starts over the next few years and our business will continue to benefit from the recovery in housing industry.

That’s where Blue chip consensus estimates 1.28 million housing starts for 2018 representing an annual increase of approximately 6%. During the 2017’s fourth quarter total U.S. housing permits increased over 7%, primarily due to a 9.5% increase in single-family permits.

Builder sentiment has been strong with many public builders reporting double-digit order growth during the fourth quarter.

We believe this point to continue its strength in our residential end market and we anticipate that housing will continue to benefit from various factors including improving employment, rising household formations and strengthening consumer confidence.

IBP’s acquisition strategy continues to supplement our organic market growth, while also help to expand our geographic footprint into new markets including Kansas City, Louisville and Las Vegas.

During the year we completed 16 acquisitions, a record at IBP for any single year and representing approximately $172 million of annual revenues at the time of acquisition.

During the fourth quarter, we completed four acquisitions comprised with the Kansas City-based insulation installer and Oklahoma-based insulation installer and installer of window blinds, shades and shutters in multiple locations throughout the Southeast in a rally-based insulation installer.

These four acquisitions completed in the 2017’s fourth quarter represent approximately $18 million of combined trailing 12 month revenue.

So far in 2018 first quarter, we have completed two additional acquisitions; this includes Rocket Insulation & Coatings an insulation installer located on Long Island in New York, but the annual revenues of $5.4 million and all-state insulation and insulation installer in Kentucky with annual revenues of $1.5 million.

Our pipeline of potential acquisitions is robust and we will continue to pursue acquisitions that expand our geographic footprint, diversify our end markets and further our complimentary product penetration.

By many accounts 2017 was a fantastic year at IBP, and I’m extremely proud of how our team responded to several challenges that occurred during the year including hurricanes Harvey and Irma and the more recent impact of higher employee-related cost and disrupted material supply.

However, the 2017’s fourth quarter was a disappointment and does not reflect what I see as our future potential. We are actively increasing pricing on our services to offset the cost pressure and anticipate incremental profitability will improve throughout 2018.

In addition, during 2018 IBP will profit from a lower effective tax rate as a result of the Tax Cut and Jobs Act. We will focus on reinvesting the benefits of the lower tax rate back into our business, by enhancing our growth opportunities and funding our acquisition strategy.

I would like to thank IBP’s fantastic team of experienced, dedicated and motivated employees for all their hard work. Finally, on behalf of everyone at IBP, I would like to also thank our suppliers as well as homebuilding, multifamily and commercial customers.

We appreciate your support and we are committed to providing each of our customers with superior installation services. Thank you. I would now like to turn the call over to Michael to provide more details on our fourth quarter and full year results..

Thank you, Jeff and good morning to everyone. For the full year our net sales increased 31.3% to $1.1 billion compared to $863 million in the prior year, which was mainly driven by higher volume favorable and customer and end product mix and our 2017 acquisitions. For the fourth quarter, our revenue increased 28.2% to $299.9 million.

Our same-branch sales increased 9.4% due to an increase in volume and favorable improvements and priced and mix. Our same-branch single-family sales growth was 9.8% and our total new residential construction same-branch sales increased 11.1%. Additionally, we continue to experience strong performance in the commercial market.

Fourth quarter 2017 gross profit improved 19% to $81.3 million from $68.4 million in the prior year quarter. Adjusted gross profit improved 23.2% to $84.2 million, adjusting for the company’s share-based compensation expense and financial wellness program.

For the 2017 fourth quarter, selling and administrative expenses as a percent of net revenue declined to 19.2% as compared to 19.8% for the 2016 period.

As a percentage of revenues, administrative expenses were 13.9% in the fourth quarter compared to 14% for the same period last year, including approximately $1.4 million in non-cash stock compensation expense.

Adjusting for non-cash stock compensation expense and acquisition-related expenses, selling and administrative expenses as a percent of net revenue improved by 70 basis points from 19.2% to 18.5%.

We expect selling and administrative expenses as a percent of net revenue to continue to improve over time as we further scale our operations and benefit from higher sales.

As we have stated in previous earnings calls, it is important to note that as our acquisition strategy continues and as the volume of total acquired business operations become larger, we will incur additional non-cash amortization expense.

In the fourth quarter, we recorded $7.1 million of amortization expenses compared with $3.1 million for the period last year. This non-cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability.

Based on our acquisitions completed to-date, we expect first quarter 2018 amortization expense of approximately $7.2 million. This figure will change with any subsequent acquisitions.

For the full year, we improved our adjusted EBITDA to a record $141 million, representing an increase of 34.6% from $105 million in the prior year and our adjusted EBITDA margin increased 40 basis points from 12.1% to 12.5%.

For the fourth quarter of 2017, adjusted EBITDA improved to $36.2 million representing an increase of 21.5% from $29.8 million in the prior year. As a percent of net revenue, our adjusted EBITDA was 12.1% in the fourth quarter compared to 12.7% in the prior year quarter.

As Jeff stated in his prepared remarks, increased employee and related cost impacted gross profit during the quarter. We are actively working with our customers on pricing to offset higher cost and we continue to believe our financial model can return to a mid-teens adjusted EBITDA margin as the housing recovery reaches stabilization.

IBP’s same-branch incremental adjusted EBITDA margin for the 2017 fourth quarter was 8.4% compared to 20% for the same period last year. The adjusted EBITDA margin contribution from acquired revenues was 10.4% compared to 10.2% for the same period last year.

2017’s full year incremental adjusted EBITDA margins were impacted by the seasonality we experienced in the first quarter, the impact of the hurricanes we experienced in the third quarter and increased employee-related cost in the fourth quarter.

For 2017, same-branch incremental adjusted EBITDA margin was 13.8% and the adjusted EBITDA margin contributions from acquisitions was 13.3%. The current insulation pricing and housing demand environment supports our belief that our financial model can produce full year same-branch incremental adjusted EBITDA margins of 20% to 25%.

On a GAAP basis, our fourth quarter net income was $10.8 million or $0.34 per diluted share compared to net income of $11.1 million or a $0.35 per diluted share in the prior year quarter. Our adjusted net income improved $16.6 million or $0.52 per diluted share compared to $13.9 million or $0.44 per diluted share in the prior year quarter.

During the fourth quarter, we recorded a $3.4 million one-time non-cash gain related to our deferred tax liability as a result of the tax rate change in the 2017 Tax Cuts and Jobs Act. Adjusting for the one-time impacts of the 2017 Tax Cut and Jobs Act, our full year tax rate was 33.6%. For 2018, we expect an effective tax rate 24% to 27%.

Now moving on to our balance sheet and cash flow. For the 12-month period ended December 31, 2017, we generated $68.8 million in cash flow from operations, compared to $73.3 million in the prior year. This decline is a result of an $18.6 million increase in the income tax as receivable.

We continue to use this cash flow to fund acquisitions and reinvest in our business. Capital expenditures at December 31, 2017 were $31.7 million, while total incurred capital leases were $4.4 million.

Capital expenditures and incurred capital leases as a percent of revenue declined 40 basis points to 3.2% in 2017 compared to 2016, despite 31% increase in 2017 revenues. We continue to expect gross capital expenditures and incurred capital leases to trend that approximately 3% to 4% of sales during this part of the housing recovery.

At December 31, 2017 we had total cash and short-term investments of $92.6 million compared to $14.5 million at December 31, 2016.

Total debt at December 31, 2017 was approximately $348 million; taking into account cash and short-term investments at December 31, 2017 our net total debt was $255 million, compared to a $137 million at December 31, 2016. Our capital structure remains conservative and we had considerable flexibility as we continue to delivery on our growth strategy.

During the fourth quarter, IBP successfully re-priced its existing 7 year $299 million term loan DE facility. The re-pricing is leverage neutral and reduced the interest spread by 50 basis points.

In addition, the capital expenditure covenant of the term loan DE facility was increased from $50 million to a $100 million, which provides IBP with greater flexibility to support growth. With that, I will now turn the call back to Jeff for closing remarks..

Thanks Michael. As we start the New Year, there continues to be significant opportunities to meaningfully grow revenues and profitability. We remain focused on our core insulation installed business, while further expanding our services to new geographies end markets and product lines.

IBP has a strong platform, disciplined approach and experienced team and while challenging this past year, our performance and growth in 2017 is encouraging. I continue to be confident and excited by future opportunities to grow and create value for our shareholders. Operator, let’s open up the call for questions..

Thank you. [Operator Instructions]. Our first question is coming from Susan Maklari of Credit Suisse. Please go ahead..

Hi, this is Chris [ph] on for Susan, thanks for taking our questions.

First question is on insulation pricing, I was hoping you could give us an update what your expectation is coming to 2018 and given how quick you expect to kind of recoup the higher cost from manufacturers?.

Okay, thank you that’s a great question. This is Jeff Edwards. As you’re probably all aware, this has been a time nearly over the last six months where material pricing and both supply have firmed up really versus prior years.

So, there was a late last year increase in terms of material pricing, there was also price increase in January of this year and while some not be aware there is actually currently, which is scheduled to be effective at the end of March, a loose-fill fiberglass price increase currently announced by three of the four manufacturers in the neighborhood of 9% to 10% out there.

So, without doubt as I think all of us expected and predicted as we become, come closer to being at stabilization and as the manufacturers continue to find demand strong, where we find ourselves in a rising price environment.

Honestly and ultimately that’s a situation that we obviously need to deal with, but, in a lot of ways really welcome, we faced challenges as anybody might know or might be able to guess as it relates to labor and other cost inside of the business.

Historically, as I mentioned earlier, this is a business that, an industry that really rallies around from an installer perspective around material price increases from manufacturers in order to raise our prices to our customers.

So, we are vigorously in the marketplace raising prices, there as you might guess, depending on the customer from time stake, some short period of time to take effect, but in general we know that’s job number one for us right now. Frankly, as both our leader and as American citizen, the fact that we’re seeing wage increases is not a bad thing at all.

But ultimately, we also understand that we have a responsibility to our investors and that we need to make a fair profit on our services.

So therefore, the idea and the concept of living wage and supporting and/or at least beginning to try to stem the gap or the bridging of the gap is something that we as a company support, we just need to get paid for the service we are providing to our customers and we’ll make sure that we do so..

Thanks that’s very helpful.

And then just taking a step back for my second question, how are you guys weighing, your potential M&A opportunities between commercial and residential given priority to diversify the business? And then, what are some things that you guys have on differentiation of your product lines on the residential side?.

I don’t know that we absolutely make a differentiation between, you didn’t exactly say the attractiveness of commercial versus residential opportunities, I don’t know that we make really that comparison per se, I think we analyze every opportunity basically on the merits of that opportunity itself not whether it’s one or the other and I guess I would say, and I mentioned earlier we continue to have a lot of acquisition opportunities and robust, opportunities in both segments.

Clearly, we are doing a lot of work with Alpha in terms of creating the platform that we believe we bought and making sure that our commercial group with Alpha and kind of that’s the core and is the lead, by putting them in a position that be able to both grow organically as we’ve said, but also through acquisition.

So, I don’t know that we necessarily weight those, clearly because of the penetration we have on the residential side from a geography perspective versus the penetration we have on the commercial side from the geography perspective, clearly there is probably more room on the map as it relates to commercial, but I don’t know that I had weighed them one or another, against one and another.

And then I’m not sure, I exactly understood your question or the point, as you are differentiating ourselves or maybe not ourselves maybe you meant our products or install from others. But, we have always and we believe that we provide a better and higher level of service really to all of our customers; I mean that’s what we do.

We don’t tend to be the absolute low cost provider and in general and as you can probably tell from our numbers, we believe that if you look our organic sales growth, you look at our penetration into the national builder market and our growth in those two segments.

As an example that, we really do believe we do a better job and we differentiating ourselves based on service..

Chris, this is Michael and I would also highlight that we completed 16 acquisitions last year and we feel very confident in our ability to both commercial and residential transactions both from a team perspective and integration perspective and also capital perspective. So, we’re looking at both opportunities very strongly..

Thanks that’s very helpful.

Thank you. Our next question is coming from Nishu Sood of Deutsche Bank. Please go ahead..

Thank you. I also wanted to just talk about the price versus input cost inflation, you folks have been very successful through insulation, inflation in the past couple of years passing on price.

And so, I want to understand little bit more about what changed in 4Q 2017 that, limited your ability to pass it on, because, insulation price have been rising for sometime here.

Is it the, you’ve called out the allocation on loose-fill, what percentage of your products that’s you’re putting in is loose-fill, was that alone the reason or where there, was there some late of change in other products you are installing as well that caused, kind of breakdown in your ability to pass on price this quarter?.

Hey Nishu, this is Michael and thanks for the question. We actually do not believe there is any fundamental change in this quarter, particularly as it relates to material price.

The material price inflation that we’ve been discussing and talk about in the third quarter and I think that even Owens Corning talked about in their earnings call as it relates to 2018.

The pressure that we saw in the fourth quarter relative to our same-branch incremental margins really came from three areas, all sort of equally weighted, it was higher workers comp expense, higher fuel usage and higher medical cost. So, those things were not impacted by the material price.

Why Jeff spent so much time talking in his comments about the material price and allocation is because, that provides an extremely supportive environment for us to get material price depreciation, first to get selling price increases and we firmly believe that the market has accepted a large percentage of the announced price increases in 2018 from the manufacturers.

And that’s sticking if you will or that acceptance by the marketplace was really increased by the loose-fill allocation that happened, as I think everybody is aware Johns Manville will experience the catastrophic event at their loose-fill facility, which is quickly coming back online.

But that really added a lot of regality if you will to the announced 2018, January 2018 price increase..

Loose-fill to your question represents approximately 40% of our fiberglass installer. So, it is a meaningful component and it also tends to be more meaningful towards the end of the year, because loose-fill is what we flow into add extra and its one of the last things that we do before the house gets sold and close.

So, you see loose-fill demand increase towards the end of the year..

Got it, got it. So, the impact on incrementals in the fourth quarter is more related to the rising costs you mentioned, the compensation cost and the transport cost. What cause those to spike then, in a way that it, limited your incremental, your ability to capture margins in the fourth quarter.

I mean what caused that rate of change?.

So the workers compensation, a lot of that is just adverse development that occurs in that, I mean that changes year-to-year, quarter-to-quarter depending upon against sort of how claims come through.

On the fuel usage, a lot of it believe it or not is impacted by cold weather; particularly we experienced fairly cold weather in the South and you tend to have a lot more ideal time in a truck when that occurs. So, our fuel usage increase, fairly significantly during the quarter.

And then also on medical claims, again it’s a question of experience and we’ve actually done a very good job of maintaining in a very high rising medical inflationary environment, maintaining our medical cost.

But in the fourth quarter, we again sort of experienced the adverse development within the claims, which tends to be typical towards the end of the year, people tend to spend a lot of dollars before they have to go back to meet their deductibles again. So, it was just much higher than we have experienced in prior fourth quarters.

So, it’s really those three things that impacted the same-branch incrementals in the quarter..

Got it, got it very helpful. And also wanted to ask about the share repurchase program, your just coming off of your most successful year in acquisitions, since you went public and obviously your track record is very well established in terms of successfully integrating acquisitions.

Why a share repurchase program been, when you’ve been so successful and clearly have that venue for allocating capital?.

We firmly believe we have still plenty of acquisition opportunity and even with the $50 million share repurchase program, we still as Jeff indicated, as we indicated we have over $90 million of cash in marketable securities on the balance sheet.

If we for the right transaction needed to take leverage higher, we were very comfortable that we would be able to do that.

And our confidence around the company’s ability to continue to increase free cash flow, particularly with the lower tax rates, in our minds it makes a lot of sense for us to, return capital to shareholders in this way, rather than having very high cash balances sitting in our balance sheet, earning 1% to 1.5%, we believe that an investment in the company makes superior financial sense.

And is will not, in our view inhibit in any way our ability to fund acquisitions on a go forward basis..

Okay, thank you..

Thank you. Our next question is coming from Ken Zener with KeyBanc Capital Markets. Please go ahead..

Good morning gentlemen..

Good morning Ken..

Good morning..

Just given what I’m saying in the stock here, if we could just go through this again, because I’m not sure if I’m missing it or if you guys are communicating in a way that people are less hearing.

The workers comp you will, as oppose to something structural in your business is what hit fourth quarter incrementals and I just was thinking of first quarter when you guys did often, you guys talked about the flow through for commercial and, for acquisitions basically, is that, that’s what you are saying correct.

I mean these items first quarter it was Alpha, sometimes your incrementals are off, but it’s not tied structurally to your ability to realize price, increased?.

Correct, I mean the first quarter was really more relative to the comp to the first quarter of 2016 which I think we talked a lot about in the first quarter call. When I was speaking about the workers comp, medical and fuel usage that really related to the organic incremental margins that we experienced in the fourth quarter.

As it relates to Alpha, that business from an operational perspective is performing as we expected and the growth rates that we’re seeing there are consistent with the organic growth rates that we’re seeing in the business overall.

As Jeff mentioned, in his prepared remarks, I mean we are investing heavily in opening new locations organically there; we’ve already opened three new locations since they will become part of our team and we’re looking at more locations to open there.

Just to give you a sense of kind of a reference point, the cost between $300,000 to $500,000 and kind of startup cost if you will for each of those locations and as Jeff mentioned in his prepared, we’re investing heavily in their back-office operations to make sure that they are ready to be the platform business that we believe it can be as we do additional commercial acquisition.

So, we’re making a lot of investments in that business and we’re excited about the prospects that are there, particularly the organic opportunity that’s there and the acceptance that we’re receiving and seeing that their customer base is receiving them as they go into those new markets.

So, we’re excited about that opportunity, as I think we’ve always been very clear, we believe it’s a long-term strategy as oppose to a quarter-to-quarter strategy there. And we’re excited about what they are going to bring, continue to bring to the table in 2018, 2019, 2020 and beyond..

Well, this is Jeff. But, in any assumption or presumption that we’re unable to get price from our customers, really frankly probably couldn’t be further from the truth and we’re seeing good traction there regard builders clearly, they are willing to pay for service and for contractors be able to get the job and get the job done.

Obviously, we are in a rising price environment on a number of fronts, particularly as I mentioned earlier labor, but also, now in a more stanch way material, and we have no reason to expect that this industry and our segment particularly won’t be able to go ahead and get price increases in kind of the normal way at this point.

So, as the market get bigger, we get busier..

That’s what seems to be and Jeff, I was just looking at your 2Q comments when you said clock environment from price right now is positive, it’s been for a long time, Michael, you are commenting on the upcoming September increase, seasonally the strongest time of the year.

So, could you put in context, how rare it is to really see this type of traction in January versus, being price realization, I guess from September, because it seems to be substantially higher in January from price realization basis, i.e.

what you are paying, but then you will be on the charge from what we saw the prior quarter and just seems so unusual for to happen in January. But that would seem to actually be very bullish..

Ken that’s right, you are absolutely right, it is very bullish, and it is very unusual. And I think there were a couple of things driving that, one is the loose-fill allocation that clearly drove purchase demand for insulation material, number one.

And number two, is overall demand from builders right, when you are seeing most builders that have released their fourth quarter order numbers that are very strong and that, 15% to, in some cases 20% order growth for the fourth quarter, all indications that we’ve seen and we’ve heard or that the spring is the only season that shaping up to be one of the strongest we’ve had in a very long time.

And there is a lot of justifiable confidence, we believe within builders and within our ability to get price increases with our builders based upon, their - how busy they are and the activity that they are seeing..

I mean it sounds a little phosphorus today failure in one plant on the loose-fill side with one manufacturer at this case in Richmond, Indiana was enough to kind of really throw this wing into a different gear. But, it really kind of it wasn’t and I guess what you would need to know in order to understand that this is it, couple of few things.

One, the ideal capacity that’s always talked about in terms of the manufacturers and what’s out there from a fiber glass perspective, really is grouped around and globbed around almost entirely that product not the blowing wool, because of a shift in the amount of blowing wool that’s used kind of on average in a home or in different applications, over the years as gone up and as a result of that when -- from a capacity perspective, the manufacturers were closer to being tied, far closer to being tied on loose-fill, in terms of kind of where we were in overall capacity, at the end of the year than otherwise.

We also happen to be in the blow season as it was mentioned and then when you had this failure it was enough to really tighten things up so quickly, it was hard, it was an impetus, I mean it just was, it was an impetus that drives an increase that otherwise might have been tougher to push probably at January..

Thank you very much..

Yes, I mean we’ve always been very clear that we’re supportive of the rising price environment, because historically we have benefited from that..

Yes, so I mean is price, if you are seeing 8%, I’m just, that does make this up or you’re seeing 2% or 3% bad, I mean is that the proportionality of price gains or realization, that you are seeing on these headline announcements?.

Well, you’ve probably seen and know what manufacturers come out to us with and its always well the exception is last one, it’s a bad, and a blow price increase, and pick your increase whether its 8 on bad and 12 on blow or whatever it had to be for one of these last two or three announced increases.

This last blowing wool price announcement which again was exclusive only to blowing wool was its - so far there are three manufacturers out, where there was one manufacturer that is not, two of the manufacturers were announced a 9, one is announced a 10 that’s on loose-fill.

When we got to our customers for the most part, we are raising prices, at one consistent level basically for our services, its typically not or most never differentiated, between bad and blow its that’s two finer point, I would guess, I would say..

Is that because, you are doing Phase I, Phase II, Phase III in terms of when you hit the building up?.

No, I think it’s more to do with just the fact that, when you typically would come to, I mean, as we’ve said before we’re providing them installed service. So, it’s a little bit less differentiated I guess at the product levels than a manufacturer is, because they are selling you absolutely bad or absolutely blow let’s say.

And our instance since we’re selling an installed service it just, it makes sense to us, but raise our prices which would be for both applications and our all applications that we’d use vibrantly..

Thank you very much..

Sure..

Thank you. Our next question is coming from Phil Ng of Jefferies. Please go ahead..

This is actually Colin [ph] on for Phil, I was just wondering if you could quantify the headwinds from the labor cost that you saw in the quarter and what portion do you think will continue into 1Q 2018 and 2018 altogether, which is of the, sounds like the medical cost might have been more 4Q related? And then if you could just about, your ability to get back to that 20% to 25% organic incremental EBITDA range in 2018 and how quickly you think you can get there?.

Yes this is Michael, that’s good question. I mean we feel as we stated in our prepared remarks and we’ve been very consisted in saying that, on a full year basis we should be in a 20% to 25% incremental margin basis. As we continue to realize price increases throughout 2018, we believe that blend support to being back to that 20% to 25%.

So, we feel comfortable that on a full year basis for 2018, there is certainly nothing that we see right now that would prevent us from getting to that 20% to 25% range.

And again on a full year basis, now getting selling price increases, because we have so many customers it doesn’t happen day one, it takes time, but we feel very confident that over the course of 2018 that we’re going to have a very solid year and we are actually, I mean when you think about what’s going on from a material price perspective in the fiberglass industry, it’s really been fairly and this is we’ve talked about this, I mean Owens Corning have talked about this, it’s been a fairly benign price environment up until this point.

And as Jeff mentioned, in his prepared remarks, the industry historically has relied on material price inflation to get installed service price depreciation. And despite that we as a company have been able to get good price mix growth despite the sort of headwinds of non-material price inflation.

We believe we’re going into 2018 with our continued ability to improve price mix combined with material price inflation that we haven’t seen in a while, which will be believe help to offset any other headwinds that we have in other cost of the business..

Great, and then I guess just following up on the product mix and customer mix. In the press release you only talked about customer and product mix, driver for that 3.5% year-over-year growth in price mix.

I just wonder if you saw any like-for-like pricing in the quarter and then just going forward, how much more run rate do you think there is on the customer mix and product mix side of the equation?.

I mean it, so in the quarter and we do only talk about only price and mix and not specifically price. But, a lot of it was mix related as oppose to price related. And as we said, in the third quarter call, I believe that really the story this year has been more mix related than price related.

And as I just said to, your earlier, your question we do think that going into 2018 we have the benefit of both price mix combined with the rising price environment associated with higher material cost.

So, again there is nothing that we see that would limit our ability to improve price mix in 2018 and going forward, as demand for new residential construction particularly on the single-family, we believe is, the environment is very supportive..

Great and then one last question.

Just given you have 90 days just start lag, 90 day lag start to attract, and how do you expect seasonality there really by 2018, could you see a little bit of a slow down just given the difficult comps that you guys are going to face in the first quarter when you stack them for two years?.

No I think if anything I mean ideally and some of this will be weather related, but given the strong order growth that builders experienced in the fourth quarter, which is the ahead of the spring selling season.

And given the demand that we believe foreseeing relative to the spring selling season, we’re hopeful that what happens in 2018 is that the seasonality actually of the business smoothes out a little bit as oppose to being as typically seasonal as it is in terms of being weighted most towards the third quarter than fourth quarter, than second quarter, than first quarter.

Just because of that demand environment that is out there. So, we don’t and we think that would actually be good, because what that means is as you don’t have then the high fluctuations in labor for all trades within the industry and you create greater stability within those trade which is the positive for the industry..

That’s great. Thank you for taking my questions..

Sure..

Sure..

Thank you. Our next question is coming from Matt McCall of Seaport Global Securities. Please go ahead..

Thanks, good morning guys..

Good morning..

Good morning..

So, I think Michael, you talked about the three items that kind of hurt Q4 incremental EBITDA on the organic side, what workers comp, diesel, medical, forgive me if I’m wrong, but I think most of this which is going to be on the SG&A line, gross margin was actually down as well, can you talk about some of the pressures that you saw in the gross margin line specifically and the outlook for those pressures as we move into 2018, I know you talked about price cot and price mix and I just wonder kind of tied altogether..

Yes, I am really glad you asked that question, because both at least within our financial statements both workers comp and fuel are in gross margin, they are in cost of goods sold, the only one that’s ends up in administrative expenses is medical. So that definitely put pressure on gross margin.

Also something that happened in the quarter that would put pressure on gross margin, but that helped our selling and administrative expenses is, we did see during the quarter greater growth in the West and South regions of the country and those markets tend to have higher EBITDA margins, but lower gross margins, because they have a higher proportion of their business with production and track builders.

And as we’ve talked before, those customers tend to have slightly higher gross margin, we saw even lower gross margins, but they do have lower cost of service. So, we end up getting good leverage on the - in the selling and administrative side. So, that definitely influences gross margins as well..

Okay, and so then as we look out into 2018, those three items specifically anything else and I would talk about price mix, I’m just trying to, I guess piggyback on the last question or what is it take to get back to the 20% to 25%, how much it is, items that won’t recovery, you talked about Q1 getting hit by seasonality, Q3 about hurricanes, Q4 employee costs.

Is there a situation where some of these items that hit 2017 don’t recovery and therefore you’ve got some of these ability into getting to that 20% to 25%, I think you said you’re comfortable for the full year getting there.

I’m just trying to understand some of the items that we can identify today?.

I think it’s a combination of things, particularly with our ability to realize price increases our customers and also continue to improve price mix. And when we talk price mix, it's not just the job price that we're installing and the type of products that we are installing.

But it's also doing work for customers that are paying us a fair and reasonable margin for the work that we're doing particularly in a high demand environment.

So it really is focusing in on all of those things and also making sure that we're doing everything we can to control costs and make sure that any cost inflation that we're seeing in any aspects of our business that we mitigate as much as possible.

But as we sit here today and we look out for 2018/2019, well, clearly you can always have fluctuations quarter-to-quarter on a full year basis. We don't believe any of the headwinds that we saw in the same branch business in the fourth quarter are going to necessarily on a full year basis in 2018 impact 2018.

Because we do feel confident in our ability over the full year to get price increases to more than offset what we're seeing in material price increases in some of these other items..

Okay. And then, the price mix guidance you've given in the past I think is at mid-single digit type numbers, is that the way to think about price mix in 2018 given all the [times] [ph] you talked about.

And I'm curious, the impact of the strength in multifamily on your price mix in the quarter because you seem to have continued to outperform there?.

Yes. Multifamily have continued to be a very good story for us both organically and in an aggregate basis. And as we've talked in previous calls, the multifamily story like the single-family story is very market driven and we're confident in our ability to continue to grow that business organically.

That mid -- as we've talked about sort of the mid-single digits on price mix, we believe that that continues to be supportable things that influence that are our ability to continue to cross-sell other products which ironically actually hurts the price mix because of the average price of our other products tends to be considerably lower than our installation selling price per product or per perm, if you will.

But again, we still feel reasonably confident or confident around kind of that mid-single digit price mix growth as we go into 2018. There's nothing that is changing our view relative to that..

Okay.

Just one other, did you quantify the expected 2018 tax rate, if I missed it, I apologize?.

Yes. We talked about a full year tax rate of 24% to 27%..

Okay. Thank you, guys..

Thank you. Our next question is coming from Michael Eisen of RBC Capital Markets. Please go ahead..

Good morning..

Good morning..

Following up on some of the comments you guys have made about the demand, what you're seeing on the demand side of the equation especially on single family, it sounds like there's a really good tailwind going into 2018. There's a lot of great indicators from the builders from the start.

But as we look at 2017 results, there's been a steady deceleration of completions.

Can you guys talk what you're expecting to see from there, should we expect kind of a real acceleration based on comps throughout the year or is there still limiting factors on the supply side of housing that could limit same branch growth throughout 2018?.

Yes. That's a great question. And clearly as a reflection of -- obviously, the completions growth or deceleration completions growth is clearly a reflection of the backlog that had been created there.

We believe that again going back to new order growth that the builders have announced what we're seeing with our non-public builders, what we're hearing and seeing about relative to the spring selling season, are all very strong positive indicators that completions growth will accelerate throughout 2018.

That being said, we never want it really -- the U.S. Census Bureau data is highly variable month-to-month and gets revised significantly. So we don't necessarily put a huge amount of confidence on a month-to-month basis in that data. But clearly, the backdrop is very, very supportive particularly on the single family side.

And I'll emphasize that on the single family side and I'm talking about this on a macro level that single family completions and starts and permits should be solid through the 2018 and we believe in 2019.

There's been a lot of talk about rising interest rates and how that's going to detract or derail the single family residential growth in the country. And we believe that it's more about affordability and availability. And if you look at long-term historical trends, affordability is still below those long-term historical trends.

And on the availability side, I mean it seems as if at least every week you get more information relative to the availability of mortgages increasing significantly and there's still hasn't been a significant pivot towards adjustable rate mortgages and other ways to reduce the impact of overall rate.

So where we sit and from what we see from our customers and what we hear from surveys, we feel very confident that the new residential single family market is going to have a very good year in 2018..

Very encouraging. And then just following up on the same supply side way of thinking. When thinking about all the commentary from the builders and from other people in the channel about labor constraints being the limiting factor with capacity becoming so tight and being so supportive of pricing.

Have you guys started to seen any of your markets where availability of product is shifting to be the main reason for any sort of limitations in growth?.

Not so much limitations in growth, but certainly our ability to be -- very particular about who we do work for and also rigidity around the selling price increases..

Sounds like a good problem to have. And then, one last if I could sneak in, when thinking of the multiples that you guys are seeing and deals that are in the market and in your pipeline and the thought of the repurchase program coming into play.

Have you guys seen a material increase in what asking prices are and what valuations are in the private market?.

No. We haven't. Our business is as usual in that way..

Understood. Appreciate all the color and good luck next year..

Great. Thanks..

Thank you. Our next question is coming from Scott Rednor of Zelman & Associates. Please go ahead..

Hey good morning. And Michael and Jeff, it's very admirable that you guys are doing on the comp side. So just wanted to say that in a public forum. I had a question for you guys on the demand side.

Within the quarter you talked about disappointment Jeff, but you guys didn't really talk about the top-line and you had single family accelerate and multifamily was again 20%, 25%.

So why wasn't your overall same-store sales grow stronger?.

We actually felt good about the same brand sales growth. I mean one thing that we've talked about this and even though it's a small percentage of our overall revenue in the repair and remodel business definitely is not growing at the rate that the rest of our businesses are growing at. So that brings it down a little bit.

We did have a slight weather impact particularly in the Northeast and Upper Midwest as it relates to the organic business. But we felt reasonably good about a 9.4% same brand sales growth relative particularly to what happened from a completions growth perspective. So….

So I think you guys got impacted by the storms in 3Q and saw a pretty material slowdown in September, so why would 4Q not be stronger.

I think that was pretty much expectation in the market?.

That might have been expectations, but it's certainly not -- was in our expectations because we never thought of this storm as being an impact for us.

And I think we talked about this on the call that it was going to significantly impact our revenue in a positive way either in the fourth quarter or the first quarter of 2018 that a lot of the work that or a lot of what happened there was more of ability to get to job sites slowing down versus opportunity for us to do install work in damaged locations.

So I mean if you look quarter-to-quarter we still had -- and again, fourth quarter was typically weaker than the third quarter we still had sales growth relative to the -- from the first quarter to the third quarter..

And just realizing you guys are a sixth of the way through the year and Michael that commentary that price cost wasn't a headwind in 4Q, the stock nosedived since you made those comments that was some other cost.

Can you maybe give us a feel for how you're running now that -- your two thirds of the way through the quarter?.

I would reiterate our confidence around full year 2018 in our ability to get selling price increases more than offset material price inflation and other cost increases that we've seen in the business..

But what I mentioned earlier I mean we're getting traction around our price increases to our customers and we feel obviously very justified in driving those prices.

Obviously, based on both the material price increases which provides the backdrop for us to go out and ask, but also the other increases that asset rise and material price environment as we've mentioned are tough to get after labor or some of these other expenses we talked about, medical et cetera.

So we feel good about it and want to get paid a fair price by our customers. We think we're doing a well enough job for them on service side to be able to ask for it or justify it. And I would say that the reaction from our builders is justification that I think we are doing that..

Okay. Thank you..

To be clear we look at it as a full year 2018 event and not necessarily just all about the first quarter..

Yes. Understood. Thanks..

Thank you. Our next question is coming from Blake Hirschman of Stephens. Please go ahead..

Hi, guys. This is actually [Trey] [ph] hopping on here. Didn't realize I was going to be able to be on the call..

Good morning..

Thanks for all the color and I don't want to beat a dead horse here at all, but the last thing for me is, I know this has been touched on a couple different angles, but labor obviously became more of an issue for you guys in 4Q.

But the point that I think is maybe being missed a little bit here is that I mean and correct me where I'm wrong here, but you guys are installers, right? I mean that's what you do. I mean you manage labor largely.

And so this hit in the 4Q, I mean -- is this anything unprecedented in your mind or a big surprise? I mean obviously a little disappointment, but or is this something that as normal part of business you guys get over and move on as far as that cost is concerned in any -- you seem confident in that, but you do say it's an 2018 kind of recovery back to the margins.

Just making sure I'm thinking about that right number one and any kind of color on the cadence to getting back to that number 2..

Yes. You're absolutely, right. It was not a surprise. It was a disappointment for sure. I would say that our -- the main way that we look at labor specifically -- labor cost specifically on the install side because you're absolutely right. We're an installer and really one of the main things we get paid for is managing that labor.

Our direct labor percentages have been consistent quarter-to-quarter throughout the year. So really what we spoke to the higher worker's comp costs, higher fuel usage and the medical costs were a fourth quarter event that were disappointing.

And it definitely impacted our same branch incremental margins, but we continue as Jeff said in his prepared remarks. We continue to be able to retract to attract retain installers. We continue to be able to have enough labor to support the opportunity that's out there. We feel very confident in our ability to continue to do that.

And we believe that for 2018 that it's setting up to be a very solid year given both the positive backdrop of continued price mix gains combined with real material price inflation that the market has typically relied on to get price increases.

And what we're seeing with our customers from a selling price appreciation perspective and the overall core single family residential new construction market. It's an extremely supportive environment in our opinion going into 2018 and it's why we in the Board have a lot of confidence about investing in the company right now..

Absolutely..

Thanks for summing it up Michael. Appreciate that and good luck in 2018..

Thanks..

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments..

No. I'd just like to thank all of you for your questions and I'll look forward to our next quarterly call. Thank you..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day..