Jason Niswonger - SVP of Finance and IR Jeffrey Edwards - President, CEO and Chairman Michael Miller - EVP and CFO.

Susan Maklari - Credit Suisse Nishu Sood - Deutsche Bank Kenneth Zener - KeyBanc Capital Markets Keith Hughes - SunTrust Robinson Humphrey Phil Ng - Jefferies & Co. Trey Grooms - Stephens Inc. Scott Rednor - Zelman and Associates Matthew McCall - Seaport Global Michael Eisen - RBC Capital Markets.

Greetings, and welcome to the Installed Building Products' First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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, sir. You may begin..

Good morning and welcome to Installed Building Products' first quarter 2018 earnings conference call. Earlier today, we issued a press release on our financial results for the first quarter, 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 meanings of the federal securities laws.

These forward-looking statements include statements with respect to the housing market, our financial and business model, seasonality, our ability to increase selling prices, our ability to manage employee-related costs, the demand for our services and product offerings, expansion of our national footprint, products and end markets, the growth of our window blinds business, our ability to capitalize on the new home and commercial construction recovery, our expectations for the residential end markets, our ability to strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, the impact of Alpha on our revenue and profitability, expansion of our commercial business, our growth rate 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, intend, 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 nor 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 statement as a result of various factors, including, without limitation, the factors discussed in the risk factor section of the company's annual report on Form 10-K for the year ended December 31, 2017, 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 the 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 presentations, 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 Finance 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 first quarter 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 questions.

This year is off to an excellent start, driven by record quarterly sales. The first quarter is typically our seasonally lowest quarter for revenues and profitability, and yet the strong start to 2018 and the improving pricing environment makes us optimistic that this year will be a very good year for IBP.

Over the past few calls, we have provided additional insight into our strategies to transform IBP into a diversified installer of building products.

Two core tenets of our growth plan are product line in geographic expansion, which combined with customer acquisition, are the drivers of our long-term effort to sell more installed products to our growing customer base in an expanding geography.

The 18% increase in revenues during the first quarter demonstrates the success of our growth-oriented strategies. Solid organic growth, the contribution of our recent acquisitions and improvements in the rate of single-family housing completions continue to favorably influence revenues.

While near-term profitability was impacted by the market's recent pricing dynamic, we believe we are well positioned to experience higher levels of profitability in the coming quarters. So let's start today's call by reviewing the positive business momentum that is underway at IBP.

During the 2018 first quarter, we experienced strong growth across all end markets. In the quarter, single-family same-branch sales increased nearly 13%, while total single-family sales increased almost 22% compared to the increase in total U.S. single-family completions of approximately 9%.

Looking at the multi-family market, same-branch multi-family sales increased over 4%, while total model family sales increased over 5%. Combined, new residential same-branch sales increased approximately 11%, while total residential sales increased approximately 19% compared to the increase in total U.S. completions of approximately 8%.

We expect residential end markets to improve towards stabilization of approximately 1.5 million total housing starts over the next several years and our business continues to benefit from the recovering housing industry. During the 2018 first quarter, total U.S.

housing permits increased nearly 7%, builders’ sentiment has been strong and many public builders reporting strong quarter growth.

We believe this points to continued 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. We continue to believe our focus on operating branches and strong U.S.

housing markets enhances opportunities and creates a favorable position for IBP to outpace industry growth. IBP’s current footprint of locations provides us access to nearly 70% of total residential permits. We are committed to further expand our geographic footprint through our acquisition strategy as well as organic branch growth.

At March 31, 2018, 67% of revenues were derived from installation services versus 74% of revenues at the first quarter of 2014. In addition, during the first quarter of 2018, net revenues per total U.S. housing completions were $1,136, an increase of 9% from the same period last year and are up nearly 62% over the past three years.

IBP’s growth in revenue per completions reflects the proactive strategy to diversify IBP’s installation services to complementary building products with similar margin characteristics.

Diversifying IBP’s product mix allows the company to provide more installation services to our customers, expand our end markets and deepen our relationships with builders across the country. Acquisitions play an important part in both our product and geographic expansion strategy.

Alpha is a great example of an acquisition that expanded IBP’s product in end markets. When we completed the Alpha transaction, it doubled IBP’s revenue in the new commercial construction market. As part of IBP, Alpha grew organic sales 13.5% during the 2018 first quarter.

We are extremely excited about the opportunities Alpha provides, and we are investing in new branches to support growth. Another example of how acquisitions are diversifying our business is the window blind platform we are building.

IBP began offering window blind installation services two years ago, and this product category grew organically to approximately $10 million of annual revenue.

In December 2017, we acquired Blind Ambitions, which nearly doubled our category revenue, significantly expanding this product in our existing markets and enhanced our product offering to include shades and custom shutters. In April of 2018, we completed the acquisition of H2H Blinds, which added $7.5 million of revenues to this category.

Our blind installation platform currently represents approximately $30 million of annualized revenue, and we believe there are organic as well as additional acquisition opportunities that could grow this business to $100 million over the next several years.

In addition to H2H Blinds, during the 2018 first quarter, we completed three acquisitions, including Rocket Insulation & Coatings, an insulation installer in Long Island, New York, with annual revenues of $5.4 million; Allstate Insulation an insulation installer in Louisville, Kentucky, with annual revenues of approximately $1.5 million; and Custom Overhead Door, provider of garage door, gates, access control systems and maintenance services to commercial and residential customers in North Carolina with annual revenues of approximately $15 million.

Custom Overhead Door introduces a new product into our existing Raleigh market and is an entrance into new markets in Greensboro, Fayetteville and Greenville, North Carolina. So far this year, we have acquired nearly $30 million of annual revenue across multiple product lines and geographies.

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 complementary product penetration. With this overview of the growth drivers, let's look at our first quarter performance and why we are optimistic for the remainder of the year.

As we stated last quarter, manufacturers had successfully increased pricing in 2018, which impacted our first quarter profitability. Historically, insulation installers have relied on material inflation as the real and primary driver of increased customer pricing.

This industry practice has, over the past two years, limited our ability to cover the inflationary impacts of nonmaterial costs and yet remain competitive in many of our markets. The pricing dynamic has changed during the first quarter of 2018.

And as a result of recent material cost inflation, we are actively adjusting pricing with our customers, but we have realized selling price increases at a slower rate than the increases in material costs.

We have been successful negotiating pricing reflective of market conditions with our customers and experienced accelerating price momentum during the month of March. As a result, we believe pricing will continue to improve during the second quarter, which will benefit margins.

And we expect full year incremental adjusted EBITDA margin for 2018 to be between 20% and 25%. So to wrap up my comments before turning the call over to Michael, we are very encouraged with the start of the year and a record first quarter results we achieved.

As the housing market continues to recover, we will continue to focus on improving our customer mix, increasing selling prices and expanding the cross-sale of our other complementary products.

I'm confident the strategies underway will continue to profitably grow our business while our acquisition strategy continues to expand our footprint and product offerings. With this overview, I would now like to turn the call over to Michael to provide more details on our first quarter results..

Thank you, Jeff, and good morning, everyone. For the 2018 first quarter, our revenue increased 18% to $301.7 million. Our same branch sales increased 11.3% due to an increase in volume and favorable improvements in price and mix.

Our same-branch single-family sales growth was 12.6% and our total new residential construction same-branch sales increased 11.3%. Additionally, we continue to experience strong performance in the commercial market. First quarter 2018 gross profit improved 10.8% to nearly $80 million from $72.2 million in the prior year quarter.

Adjusted gross profit as a percent of revenue was 27% compared to 28.2% for the same period last year. The decline in gross profit margin was predominately attributable to the higher material costs and the timing of customer price increases Jeff mentioned.

For the 2018 first quarter, selling and administrative expenses as a percent of net revenue declined to 19.9% as compared to 20.8% for the 2017 period. As a percentage of revenues, administrative expenses were 14.6% in the first quarter compared to 15.4% for the same period last year.

Adjusted selling and administrative expenses as a percent of net revenue improved by 120 basis points from 19.2% to 20.4%. 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 increased 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 noncash amortization expense.

In the first quarter, we recorded $7.1 million of amortization expense compared with $6.4 million in the period last year. This noncash 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 today, we expect second quarter and full year 2018 amortization expense of approximately $7.2 million and $24.1 million, respectively. These figures will change with any subsequent acquisitions.

For the first quarter of 2018, adjusted EBITDA improved to $31.4 million, representing an increase of 19.4% from $26.3 million in the prior year. As a percent of net revenue, our adjusted EBITDA was 10.4% in the first quarter compared to 10.3% in the prior year quarter. As Jeff stated, higher material cost impacted first quarter profitability.

We are actively working with our customers to increase pricing to offset these higher costs. We continue to believe our financial model can return to full year mid-teens adjusted EBITDA margin as the housing recovery reaches stabilization.

Our same-branch incremental adjusted EBITDA margin for the 2018 first quarter was 12.6% compared to 1.2% for the same period last year. The adjusted EBITDA margin contribution from acquired revenues was 8.5% compared to 14% for the same period last year.

The current intuition 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 first quarter net income was $6.4 million or $0.20 per diluted share compared to net income of $6.4 million or $0.20 per diluted share in the prior year quarter. Our adjusted net income improved to $14.4 million or $0.45 per diluted share compared to $11.1 million or $0.35 per diluted share in the prior year quarter.

For the first quarter of 2018, our effective tax rate was approximately 26% compared to 37.7% in the prior year quarter. We typically experience a higher effective tax rate during the first half of the year due to tax valuations related to losses in certain business entities. For the 2018 full year, we expect an effective tax rate of 24% to 27%.

Now moving on to our balance sheet and cash flow, for the three month period ended March 31, 2018, we generated $6.1 million in cash flow from operations compared to $15.7 million in the prior year. This decline is primarily the result of working capital requirements to support our growth.

We continue to use our strong operating cash flow to fund acquisitions and reinvest in our business. Capital expenditures at March 31, 2018, were $10.2 million, while total incurred capital leases were $312,000.

Capital expenditures and incurred capital leases as a percent of revenue increased 10 basis points to 3.5% at March 31, 2018, compared to the same period last year. We continue to expect gross capital expenditures and incurred capital leases to trend at approximately 3% to 4% of sales during this part of the housing recovery.

At March 31, 2018, we had total cash and short-term investments of $48.7 million compared to $92.6 million at December 31, 2017. During the first quarter, IBP repurchased approximately 413,000 shares of our common stock for $24.6 million and at an average price of $59.70 per share.

We currently have approximately $25 million available in our $50 million stock repurchase program announced in March 2018. Total debt at March 31, 2018, was approximately $348 million. Taking into account cash and short-term investments at March 31, 2018, our net total debt was $299 million compared to $255 million at December 31, 2017.

Our capital structure remains conservative, and we have considerable flexibility as we continue to deliver on our growth strategy. With that, I will now turn the call back to Jeff for closing remarks..

Thanks, Michael. We continue to believe there are significant opportunities to meaningfully grow revenues and profitability. We remain focused on profitably growing our installation business, while further expanding our services to new geographies and markets and product lines. IBP has a strong platform, disciplined approach and experienced team.

The dynamic material pricing and housing demand environment have resulted in positive momentum, and we anticipate profitability will demonstrate improving trends throughout the year as we benefit from better pricing with our customers.

I'm excited about the record start to the year and our opportunities to grow and create value for our shareholders in 2018 and beyond. Operator, let's open up the call for questions now..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Susan Maklari with Credit Suisse. Please proceed with your questions. .

Thank you. Good morning..

Good morning, Su..

I guess to start out with, if we could just talk a little bit on the pricing side of things. I am sorry, that I missed a little bit of the beginning of the call, but it sounds like things accelerated as you went through the quarter.

I guess can you just talk to maybe how that has been going and sort of your thoughts as we move through the year and some of your partners on the manufacturing side continue to pursue more increases?.

Susan, hi. This is Jeff. Michael may want to chime in on this even too, but obviously, as we mentioned on the call, where you might have missed part of it, the environment has changed. There are certainly -- there have been, as you know, increases announced with varying degrees successfully over the last probably 36 months or so.

But beginning really in the latter part of the fourth quarter or maybe in the middle of the fourth quarter and then through the first quarter this year, things have definitely firmed up. Price increases from the manufacturers are very real.

It's important for us to get out to our customers and make sure that we do what we need to do in order to preserve the profitability of business and get paid for what it is that we provide. So we've been really pretty diligent about doing that. There is a certain -- we talked about kind of be an absolute kind of push through at times in the past.

What I would say, and I've usually tried to kind of say, it's a little stage of rocky, as we said in the call today in terms of the absolute timing.

Ultimately, it comes through, but in some cases, you're either -- you're making contract with somebody or you may be -- they want a period of time and you're only going to get houses probably to get started on this. A lot of intricacies, they're actually pushing it out.

But in general, what we would say is that we are successfully getting price increases in what is a very kind of tight environment in that way..

Yes, we would say that the environment is very conducive both from manufacturers increasing material prices combined with the rising demand environment from the builders, as you know because you follow them. They really have been -- the order growth from the builders has been very solid.

And we believe that will continue to be reflective and end up being probably the strongest spring selling season that we've seen in a very long term..

Okay. And as we sort of think about some of the constraints are out there from a labor perspective as well as from the materials perspective as these suppliers -- as capacity tightens up there.

Can you talk to maybe your ability to incrementally gain share? Have you seen more business relatively speaking slowing towards you just given your base of labor and materials and all those kinds of factors, and how that could potentially change or maybe even build as we look forward and think about some of the growth that's coming through?.

Yes, I mean, we definitely feel good about our ability to both obtain sufficient amount of material to meet our customers' needs and service requirements, and we also believe we've done a very good job of hiring, training and retaining a very strong labor force, which is obviously necessary to service our customers very well.

So over time, and we think that since we've been a public company, we've very consistently have grown at a rate above the overall market opportunity, and we don't see why this current environment will do you anything to not have that historical trend continue..

But, Michael, do you think that the trend is actually accelerating are getting deeper just given some of the constraints that are out there and the fact that they're getting a little bit more intense.

Maybe that's making it harder for the smaller local guide to compete relative?.

We have a lot of very good competitors, both larger and local guys, and clearly having a great team in the field, which we believe we do, helps us compete every day against all of our competitors.

And clearly in a high service business, particularly in a high-demand environment, the better you can service your customer, the more likely you are to get more share of those customers, and we believe that our team is working hard to do that every single day..

Yes, I would say that, this is Jeff again, that we are very well positioned, both in material and labor perspective. We are attempting to pull every lever possible on the labor side.

I mean, ultimately, assuming you have those two things in ample quantities, you are able to service the customer and ultimately if you service the customer, kind of business comes your way without really too much kind of peek mesh on the other side of it.

So I mean, I think every day, our guys wake up -- I'm not going to say certainly that it's not competitive because it is, but ultimately, if you do the right job for your customer and you can get the labor side of this figured out, I think the answer becomes really pretty clear..

Okay, thank you..

Our next question comes from the line of Michael Wood with Nomura Instinet. Please proceed with your questions..

Hi, good morning..

Good morning..

I appreciate the comments on the pricing environment changing in insulation. I'm curious with the lag that you're experiencing in first quarter.

Would you expect that lag to repeat on future inflation price increases? And if you could comment particularly on the Louisville increase in March and May increase here in Baton Rouge?.

So sometimes -- it's Jeff by the way. I said it's rocky, that's not really the way I've described getting price increases before which maybe is accurate or maybe it's not. I kind of referenced on a saw blade. If you look at a saw blade from far away, there are no tines.

There's no jaggedness, there's no ups and downs, there's no bottoms and peaks, et cetera. And that's just not reality though. I mean, what happens is you are getting a price increase from every single builder. Sometimes, you're arguing to get an increase on every single house.

So the idea that, that would be some absolute kind of pure, completely, I guess, gradual almost pablum [ph] type increase is not realistic. Now having said that, that's the way every price increase works historically. It's more than likely the way every price increase works going forward.

The only little bit of difference in this one is debt, because a number of the announced price increases just -- as everybody knows, over the last number of years, have not -- it has taken a while for them to settle out to see what had really happened. There may have been a little bit of hesitancy in making sure how real it was going to be.

So, having said that, with the environment change I would expect that you get out of the blocks faster going forward. But again, you got a win and earn every increase on every household with every builder and that just takes a little bit of time.

And as it relates to March and May, I mean, we have obviously no different opinions as to there -- it being a strong price environment. Obviously, the March won't happen inside the first quarter, the May outside the first quarter.

And I don't -- I think on the supply and capacity side versus the volume, at least on the sales, and from our perspective, it's not weaker again, it's stronger. So it's going to bode for even more stickiness, I suppose, on a go forward basis for the price increase..

Great, thank you for that. And did you experience any weather related inefficiencies during the quarter? I know a lot of other building product companies called it out.

And I'm curious related to that, how does the inflation in freight impacts you as an installer?.

So on the first part, yes, there is no doubt that the weather was pretty -- particularly towards the end of the quarter was pretty tough in the Northeast, in the Mid-Atlantic and even into the south. But we did also benefit from the very positive weather in the West Coast relative to the first quarter of last year.

If you remember, it was quite wet out in the West Coast in the first quarter of 2017. So what we would say is that, yes, we did have a weather impact during the year -- during the quarter. But we benefited from our balanced geography across the country to help offset some of the negatives that we did see from a weather perspective.

In terms of the freight issues that are very highly publicized out there in all industries really from a transportation perspective that is our manufacturers that we buy material from, they pay the freight. So clearly, they are feeling some cost pressure there.

I mean, I think ultimately what ends up happening in all of these instances, it's the end consumer that ends up paying for all those increased costs.

So just like Jeff was talking about as it relates to material price increases that we're seeing and the rigidity associated with that, both on the material side and on the selling price side, I think all of that eventually flows through into ultimately the end consumer paying more for products..

Okay, thank you..

Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your questions..

Thank you. So I wanted to talk about the long-term [Technical Difficulty] for incremental EBITDA margins on same-store sales, the 20% to 25% range. When -- four out of the last five quarters, where you have run below that.

And I know you folks obviously feel confident that, that still is the correct number and that is where the business should settle out. And clearly, you can understand some skepticism from investors given the trend over the last four, five quarters.

What can you tell folks, what's driving your confidence and what's going to get you back to that 20% to 25%?.

Nishu, this is Michael. So we've always talked about the 20% to 25% on a full year basis as opposed to a quarterly basis. And historically, our first quarter is going to be -- as Jeff mentioned in his comments, it is going to be our weakest quarter from both the revenue and a profitability perspective because of the seasonality in the business.

And we would really -- it'll be very unusual to get a 20% to 25% incremental margin on same-branch EBITDA in the first quarter.

So we were very pleased with the result that we had in this first quarter, especially given some of the other things that we talked about, and feel very confident that, particularly with what we're seeing in the pricing environment through the rest of the year, that on a full year basis, this year, we'll be back to that 20% to 25% range that we've talked about..

Got it.

And in terms of the price mix, when thinking about four and 1Q, you talked about -- Jeff, you talked about pricing accelerating in [Technical Difficulty] if that's the case, why are we seeing pricing mix what you described for March?.

Nishu, this is Michael. It was a little bit hard to hear you because there was a lot of background noise. But I think what your question was relative to the price mix in the first quarter and why it's not accelerating.

Is that correct?.

Correct. Yes.

So if the real increase in input cost came in 4Q and accelerated in 1Q, why aren't we seeing faster acceleration in the price mix?.

So there are a lot of things that impact price mix. And I think it goes back to -- in Jeff's answer to one of the previous questions was that the rigidity around the price increase really came through in 2018.

From a market perspective, in terms of the market really accepting the fact that it wasn't going to be like previous price increases on the material side. And which is why when we talked about in our commentary, we saw price momentum really pick up in March.

So we think that we will see some acceleration in price mix as we go through the rest of the year based on that. But keep in mind, I know that people tend to think of the price mix is just price, but there is the mix component associated with it.

So things that impact that are, specifically as our ability to continue to increase and cross-sell the other products, because our other product sales, as they accelerate revenue, bring down the price mix, because the average job price of those installed products are significantly below that of average insulation job.

So I know people like to focus on price mix as just being price, but mix is a big component there. And what we would really point to is the same branch sales growth that we're experiencing overall.

And we think that coming in at a single-family same-brand sales growth of almost 13% is great in the first quarter, given how seasonally this is not typically a very strong quarter..

Got it, thank you..

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

Good morning, gentlemen..

Good morning, Ken..

Your pricing comments are helpful, a bit like deciphering fed statements it seems. So we're going to try it again. And Michael and Jeff, you guys have used different words. So acceleration of price mix, I think, is what you just said, Michael.

Where are we right now in terms of how much price mix we would be seeing relative to 7.3% we saw, recognizes both price and mix? Could you give us some framework there? I mean, when you say accelerating, does that mean that 7% is going to be accelerating or is that 7% accelerated enough that it's going to hold steady for the rest of the year as you see it?.

Yes. So just to be clear, the volume number in the quarter was 7%..

Sorry, I got a flip, right, sorry. 3.6 is what I meant to say..

Exactly. So the commentary was really a historical commentary. In the first quarter, that price mix improved with that, the highest level in the month of March, as we continue to work with our customers to get appropriate selling price increases, given what's going on in the material price environment and also the demand environment.

We, as you know, don't provide guidance and wouldn't specifically say or state what we would expect it to be in the future quarters, other than we did see improving trends in March, and we're very encouraged about what our full year performance will be through the rest of 2018, because we have a very positive backdrop, both from the material price environment as well as a demand environment..

Okay. It's a start. I guess, the words -- writing it down, but your opinion was that the tight pricing environment, which was just accepted in January, it sounds like how you're framing it from the customers' perspective, because there are many increases coming up.

Could you -- it just seems as though there's two elements here, one people are concerned around how much you'll be able to pass it on and say -- you're obviously indicating -- you will in a matter of time, so how much of that price increase actually hit 1Q gross margins? I don't know if you're able to quantify that.

Just so we might get a sense of these many increases are coming through, which sounds like they are obviously happening on the bad side, not just the Louisville side, and that -- just if you could kind of clarify that so we could understand how that 20%, 25% incremental EBIT margin might be more 3Q, 4Q weighted as posed to 2Q given what we're seeing?.

Yes. So historically, the incremental margins are -- on the same-branch basis are highest in the third and fourth quarter because they tend to be our highest volume quarters. And then it would be the second quarter and in the first quarter, we're typically the -- our weakest quarter.

In terms of the first part of your question, we have never provided that kind of granularity in terms of the numbers, and I think you can appreciate why we wouldn't want to do that.

So what I would say is to again reiterate what we've been saying is that we started to see improving price mix through the end of the quarter, and we feel very confident about what the remainder of 2018 is and the expectation of the market for both the firmness of material price increases as well as the demand from our customers and the value of our service in a high-demand environment..

And what I would say is that there are absolutely real from it. I mean, not to reiterate, but there are absolutely real price increases for manufacturers. You can look at our sales, quite frankly. We probably have more than enough sales.

I mean, so our instructions to our guys, the people managing the branches and the salespeople, are pretty clear and that is we're going to get a price increase. Now as you can guess, when you're sitting across the table from a builder, sometimes they say, hey, I'm midstream on this house or wait a minute, I can get this back from my customer.

So some of that goes on, but in general, our sales are strong enough and material prices are real, so we ultimately are going to get these price increase..

We have to..

Right. I guess you used the term rigidity earlier and it occurred to me as you're -- if you have a 150-lot community from a builder that's -- whatever, 140 lots doing on a two year basis.

Would you be kind of on a rolling like four month pricing basis because it's not fair to quote and then change it midstream, but are you kind of always on a rolling four, five month-basis for those new phases that they have or is there a way to characterize that recognizing most of your builders are smaller builders?.

Yes, it's really builder-specific..

I would say, any possible scenario, you can almost pickup in your head, it's just somewhere in one of our cities with one of our salespeople at one of our locations almost. But the other side of that is that there is also a great deal of business that we get that we were able to get a price increase on virtually immediately.

So really, what comes out of this is this mixture of the reality of pushing something like this out across your entire footprint to all of your customers..

Thank you very much..

Our next question comes from the line of Keith Hughes with SunTrust. Please proceed with your questions..

Thank you. I just want to ask on Alpha. It looks like a very good quarter with the growth.

You talked a little bit more about that business, but what's going well and is this kind of growth rate sustainable the next remainder of the year?.

Sure, Keith, this is Michael.

Yes, they did have good organic growth in the first quarter, which we're very pleased about, and I would say we've said this on previous calls as well with the Alpha transaction is that we are very pleased with the operational team there in terms of the local branch management team, the regional management team, their operational discipline, their ability to get jobs and really meet service needs of their customers, and they grow the organic branch network within the framework of our existing branch networks.

So we're pleased and believe there continues to be good organic opportunity there. Is it going to be a 13.5%? We don't provide guidance, but we think that it can certainly stay within the range of our organic growth rate as well..

And there's acquisitive growth obviously too in that business, but by virtue of the way that business works in their footprint, they are kind of two degrees new locations kind of baked in the cake already, so obviously some of this organic growth was baked in the cake a little bit already when we closed with the Alpha, and that's really the model is to just grow outward from where they're already doing business.

But at the same time, it will be measured growth and it needs to be profitable growth..

Okay. And second question. Give us metrics on your dollars per house and the lower concentration of insulation in terms of your mix of business, I was just reading your comments on the margins on the non-insulation, it's comparable to insulation.

Could you just talk a little bit about why that is? I don't think you buy direct on those products like you do an insulation, how do those dynamics work?.

So, Keith, with your question about just the us accelerating the sales per completion and the margin on the work that we're doing to accelerate that consistent with insulation..

Yes. Well, I think you had made a comment in some of the non-insulation businesses that you moved into. For example, you did the Alliance and Chatter deal. The margin on those products are similar to insulation. One of the elements is buying direct from the manufacture, sell them the installation.

Are you doing there on those products and how does that workout..

Yes, we work consistently on all of the products that we purchased to buy direct from the manufacturers. That being said, there is still some stuff that we buy out of distribution.

But the vast majority of the products that we buy, particularly, the core component of what we install, we are in all instances, working very hard to make sure that we're buying that direct from the manufacturer..

That's true on the blind with some of the -- after playing with stuff you do in the bathroom, thinks like that?.

Yes..

Alright, that’s all. Thank you..

Thank you..

Your next question comes from the line of Phil Ng from Jefferies. Please proceed with your questions..

Hey, guys. With your largest competitor acquiring a big player out there as well, can you talk about some of the puts and takes for IBP? There certainly going to have a little more scale now, and but is that an opportunity for you pick up some market share, does that kind of enhance pricing discipline for the market as well? Thanks..

Yes, thanks for the question. We think that any competitor that focuses on profitability and running a better and more profitable entity is good for the overall industry, and it's good for us. We will always look for opportunities to improve -- profitably improve our market share in particularly markets where we have an under penetration.

So that's just par for the course for us as a company and we're going to continue to do that, regardless of what's going on with any single one of our competitors..

I mean, our parameters around doing work obviously have really nothing to do with kind of that transaction. I mean, we want to work for good customers, who treat us fairly and we treat them fairly, and do to work on a profitable basis and get paid.

Clearly, though, in a situation like this, to the extent that there is overlap, and we're all certain obviously that there is, any single customers where they -- both sides, the USI side and other [ph] side would have been doing -- sharing the work for a single customer that a lot of times is not a situation that the home builders find tenable.

So obviously there will be potentially opportunities for some owners, house or others, even to be typically what would be a second or maybe third supplier to some customers. And if the right circumstances present themselves in those way and they meet our criteria as customer clearly, that could be an opportunity..

Okay, sounds exciting. And then from a SG&A standpoint, you saw pretty good leverage there, and I think Michael commented that that's an opportunity going forward.

Can you kind of help us think about it from a percentage of sales and what that operating could be for next year?.

Yes, sure. If you -- we've talked consistently about getting the business back to mid-teens EBITDA margin as we approach stabilization. And if you look at sort of where we are on an LTM and on an full year basis, last year, we were kind of just below around 12.5% or so.

So that would imply that we still have 300 to 400 basis points of margin improvement to go. And we would expect that given where we are in this cycle, we would expect more of that to come from S&A -- or SG&A leverage, if you will.

However, one thing that does over time help improve gross margin is the current environment brand, where we're seeing greater demand, we're seeing rising material price environments.

So while maybe six months ago, we would have said or nine months ago, we would have said it would have been very heavily weighted towards selling and that margin improvement would've been very heavily weighted towards SG&A leverage.

We believe now we have an opportunity for that to be a little bit more balanced given what's going on in the current pricing environment. So I didn't give you very much specificity there, sorry about that, but we do think that there's still room to grow on both the gross margin front and on the SG&A side on a full year basis..

Got it, appreciate the color. Just one last one for me. Good to see you buyback your stock in the quarter. How will you project going forward? Is that can be more opportunistic and how we balance that with M&A? And any color on multiples for acquisition target in light of multiples for the group probably coming in a bit..

Yes, so it will be opportunistic. And obviously, we have a lot of confidence and I hope we've expressed our confidence in what we think our performance is going to be going forward. So we think it's a good investment to continue to invest in the stock.

And as I mentioned in my prepared remarks, we believe we continue to have a very flexible conservative capital structure that gives us the flexibility to both continue stock repurchases as well as maintain an appropriate pace of acquisitions, particularly given the level of free cash flow that over time and on a full year basis that the business generates.

So we feel confident about our ability to do all that. And in the second part of your question, we really haven't seen any substantial or significant changes from a deal kind of multiple perspective really in the last 12 or 18 months at least..

Okay, fair enough..

Our next question comes from the Trey Grooms with Stephens. Please proceed with your questions..

Hey, good morning..

Good morning, Trey..

So, Michael, you talked a lot about mix and the impact on the price mix there.

Has the trend of seeing more entry level homes being built, has that helped or hurt that mix at all or do you expect any impact either way from that going forward?.

I think clearly an entry-level home is a lower price -- selling price for us than the custom home. But having -- we much rather have that demand than no demand at all. But yes, I mean, over time, it does way on price mix, because if you're doing a $300,000 house or $250,000 house versus a $1 million house, obviously, that affects the price mix.

But from our perspective, it's good volume. And we think that the overall market benefits from this trend, which I think is very visible now, this trend towards more affordable entry level housing, because we believe that's the only way to get to a stabilized housing environment, particularly on the single-family side.

So it's demand, it's good demand. The incremental margins on that business is good, even though it's a lower price point, but it does weight on price mix for sure..

Trey, this is Jeff. I just want to add to that. It's also important to note that the demand for entry level housing isn't taking demands from the move up or custom homes that's coming out of the multi-family. And even on an entry-level home, our selling price per unit will be 2 to 3 times that as a multifamily unit.

So certainly adding that demand does also benefit based off of the end market..

Okay makes sense. Okay, that’s it for me. Thanks, guys..

Thank you..

Our next question comes from line of Scott Rednor with Zelman. Please proceed with your questions..

Hi, good morning..

Good morning..

I wanted to ask on the top line. The single-family sales of close to 13% same branch were some as strongest in what looks like close to 2 years. And Michael, you mentioned weather. I know Easter is unfavorable year-over-year.

Is there anything there that was -- you pulled forward or is not sustainable going forward?.

No. If anything, I would say that the weather impact probably had a negative effect on that. And as you know, the order growth from the builders has been both the public and the privates looks to be very solid. So we feel very good about the single-family demand environment going forward..

Great. That's very encouraging. On the -- I know there's been a lot of discussion on kind of the insulation pricing. In the past, you had mentioned the product availability just relative to your ability to get some of the product that's particularly tight.

Has that changed at all since we heard from you guys a couple of months ago?.

Not appreciably, I would say..

Yes. Material is still tight, there is still allocation. But I think now that both the industry has sort of absorbed or sort of dealt with it and redirected resources to manage the tightness better. That combined with the fact that the JM plant that went down is up and producing material and selling material helps as well.

As you probably know, the cut-off line is not fully producing or not selling material at 100% yet. But we feel good about our ability to continue to work with all four of the manufacturers to make sure that we have adequate supply..

We don't have any national footprint, and we're currently buying from all four manufacturers. Obviously, that same situation or set of circumstances is not true for all that many other insulation contractors.

So it's a little tougher I think in some cases if you're dealing with one specific supplier, maybe two at most if you're a smaller contractor, let's say, and you're also subject to any kind of geographic constraints.

One plant's completely full out and from a freight perspective, it doesn't make sense for manufacturer to get kind of back to the markets, it's gets harder with things like that, but I think because of our footprint and the fact that we buy from four or maybe we have a little better time to navigate our way through this..

And I guess, Jeff, just to follow on that last comment there.

As you guys are obviously attempting to get pricing, the feedback from your field guys, is the competitive response any different or is anyone acting irrational from best you can tell?.

Not in any way that would bubble all the way up to me.

Let's just put it that -- there's always people that either make a mistake or -- that's the game that everybody always plays, right? The other guy's always wrong and always crazy, right?.

But in general, we think it's a pretty logical market that's reacting in the way in a big sense to the way the market would react given the circumstances, like labor and rising material price..

Thanks, that’s all for me..

Our next question comes from the line of Matt McCall with Seaport Global. Please proceed with your questions..

Thanks. Good morning guys..

Good morning.

How are you?.

Good. So I think I get the cost environment change over the last 36 months, I get that. Maybe can you talk about previous periods of inflation, give us an idea of what have made it before you went public, talk about the similarity, the differences this period versus previous inflationary period.

I can imagine that industry consolidation's obviously one important positive change.

Are there any negatives? I'm just trying to understand the comfort level based on previous history rather in the last 36 months?.

Yes. I think Jeff had said in one of his earlier answers about kind of the saw tooth nature of it. Historically, a rising price environment has been a good opportunity for us to get a fair price for the services that we're offering our customers, and we believe that's going to continue.

The uniqueness -- and we talked a lot about this in the fourth quarter call, the uniqueness about this situation was that given the catastrophic failure at the Johns Manville facility, at the Louisville facility, it just created rigidity in January that even in a typical rising price environment, you would not have seen in January.

And I think to some extent, that caught the -- both the contractors and our builder customers by surprise a little bit because it was obviously unexpected and unplanned for event. So while other times when it's been a rising price environment, I'll continue to use Jeff's analogy.

The saw may not have been as jagged, I think this situation's a little bit different, but now that we've gotten through the beginning of the year, I think everybody realizes the rigidity that is there in the manufactures' material price increases and the necessity of us to be able to get selling price increases from our customers to cover that increased cost..

Well, somewhat I guess admitting on the face of it, I mean, the closer you get to absolute full capacity utilization, the tighter it gets. Not just from an availability perspective, but in terms of the lock -- kind of the locked step-on prices and that's the reality of the last one.

At the last strong market, literally, there were shortages to the point where houses were beginning to go uninsulated for a period of time. That's not going on at this point by any means. We'll see where the market goes, but clearly, as long as the market continues to improve, the ability to get price from a manufactures' standpoint gets (inaudible)..

And so I guess the comfort in the full year incremental, is it kind of tied to the similarities of what you expect to happen to what used to happen and not necessarily what just happened, meaning we don't have that manufacturing if you -- that kind of gives that strengths during that period.

This looks more like historical periods, therefore, you feel more comfortable with the pace of the capture?.

Yes, we were in a more historical rising price environment now than we were in the beginning of the quarter. I think that's your question..

Yes, it is..

This recovery is so different than any of the -- really, both the decline and the recovery are so different than any -- than it was really remembered in any recent history.

I think let's just face it, all of us found our businesses to be in a place from a profitability standpoint that we didn't want them to be, both manufacturers, frankly installers, even home builders.

And so, across the board, we were all trying to get to a different place, right, and the fundamentals may not have been what they would normally be in terms of allowing you to get to that different place that they would have been in a normal recovery because this was such a hard recovery..

Got it. Okay, thank you, guys..

Thank you..

Our next question comes from the line of Michael Eisen with RBC. Please proceed with your questions..

Good morning, gentlemen. Thank you for taking the questions. Just looking at the kind of growth you guys have done on revenues per completions basis, you guys laid out some targets of some of your adjacent businesses over the next few years.

Do you have any sort of metrics on how to think of where the revenues per completions could go and kind of the puts and takes between some of the smaller footprint, smaller priced homes you talked about earlier and kind of the trajectory that we've seen recently if it's sustainable throughout the rest of this cycle?.

Yes, that's a very good question, and we have not put out sort of targets for revenue per completion number, although I would say, as you can tell from the investor presentations that we presented, we have consistently grown that at a very solid rate, we believe, and we clearly believe that, that history will continue, and it benefits from our strategy to continue to expand not only the products that we install, but to install them -- to spread that installation throughout the rest of our geography.

So we have a lot of opportunity, particularly in the south and the western part of United States to increase the cross-sell of our other products, which will help improve that revenue per completion number over time.

So it's definitely something that we are focused on as a business in terms of increasing that product diversity and also the geographic expansion..

Understood, and it's helpful color. And then thinking over on the commercial side of the business and what you guys have done without some success there, thinking of the growth on that business.

Is that -- the organic strength that we've seen, is that kind of a strategy from this point forward or is there a bigger market opportunity to plug into the M&A platform to help accelerate growth on the commercial side as well?.

Yes, there is absolutely a bigger opportunity. I mean, there is opportunity on both, but there is definitely a very interesting acquisition opportunity there as well. And that as well as to increase geography and increase product install..

Got it. Also very encouraging. And then just one last clarifying question.

The full year 20% to 25% that you guys continue to talk to, that's inclusive of the current pricing action that is in the market and kind of your expectation of how that plays out?.

Correct..

Understood. Thank you and good luck..

Thank you..

Mr. Edwards, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments..

Thank you for your questions, and I look forward to our next quarterly call. Thanks, again..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..