Greetings, and welcome to the Installed Building Products Fiscal 2019 Third Quarter Investor Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Niswonger, senior VP, finance and investor relations. Thank you, sir. You may begin..

Good morning, and welcome to Installed Building Products' third quarter 2019 conference call. Earlier today, we issued a press release on our financial results for the third 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 meaning of the federal securities laws.These forward-looking statements includes statements with respect to the housing market and industry conditions, our financial and business model; our efforts to manage material inflation; our ability to increase selling prices; the demand for our services and product offering; expansion of our national footprint, products and end markets; our expectations for our end markets; our ability to strengthen our market position; our ability to pursue and integrate value-enhancing acquisitions; our diversification efforts; alpha's 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 2019.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 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 vary 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 31st, 2018, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission.Any forward-looking statements 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 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 third 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 and capital position in more detail before we take your questions.

The 2019 third quarter was extremely strong, demonstrating the power of our business model.Stable end market demand, favorable pricing trends and the benefits of our geographic and product diversification strategies all contributed to our record third quarter sales and earnings.

I'm extremely proud of our third quarter and year-to-date financial performance, which is the direct result of the hard work and dedication of our more than 8,000 employees across the country. So, with this introduction, let's review the progress we made during the third quarter in more detail.

Total revenue for 2019 third quarter increased approximately 14% to a quarterly record of nearly $400 million attributable to improvements in price mix, higher volume and customer and product growth and the contribution from our recent acquisitions.Third quarter adjusted EBITDA increased almost 28%, nearly doubling the 14% growth in net revenue, reflecting our ability to profitably grow sales in a stable housing market.

Specifically, third quarter profitability benefited from our pricing strategies introduced earlier this year, the increasing revenue stream from our complementary products, higher profitability at alpha, and continuation of the normal seasonal trends that typically benefit sales and earnings in the second half of the year.

Third quarter adjusted EBITDA margin was 14.1%, which is the highest we have reported as a public company, and our incremental same-branch adjusted EBITDA margin was 29.4%.

I'm very pleased with our results, and I believe they demonstrate successful execution of our growth-oriented and profit-focused strategies.As we have stated since the beginning of last year, we have been working closely with our suppliers and customers to improve our cost and pricing structure to recover from the unprecedented insulation material cost environment that occurred throughout 2018.

The 2019 third quarter reflects the continued success of our strategies as price mix improved 5.4% during the quarter. We expect the material pricing environment will remain stable for the rest of 2019, and we believe we will continue to benefit from the cost and pricing strategies in place.

Our 2019 third quarter results also demonstrate success of our acquisition strategy, which has diversified our geographies, end markets and products.Our geographic expansion, when combined with our product diversification strategies, provides a compelling growth platform.

As a result, single-family same-branch sales increased nearly 5%, while total single-family sales increased more than 10% compared to the increase in total U.S. single-family completions of nearly 4%.

While favorable pricing and recent acquisitions contributed to this outperformance, I am also encouraged by our third quarter revenue growth from non-insulation products, which increased over 14% from the prior year.I'd like to highlight that that increase in our non-insulation revenue was also accretive to gross margin, further supporting our efforts to grow our other product offerings in existing markets, while increasing margin and profitability.

Our product diversification strategy provides significant value to customers by consolidating their vendors and, at the same time, providing them with the same level of high-quality installation service they expect from IBP.

The benefits from our geographic and product expansion strategies are also evident in third quarter same-branch multifamily sales, which increased 13% over the prior year quarter.

This is the continuation of our trend of strong multifamily growth, which we believe is sustainable in the near future as we grow our multifamily customer base in existing markets where we have not previously addressed this multifamily opportunity.New residential same-branch sales during the 2019 third quarter increased 6%, while total residential sales increased nearly 11% compared to the 2.2% increase in total U.S.

completions. To date, we have acquired over 36 million in annual revenue. We are pleased that this year's acquisitions have primarily been insulation installers in new geographies.This includes the 2019 third quarter acquisitions of Northeast spray insulation, an insulation installer serving the Maine and New Hampshire markets.

Minnesota Spray-Foam, an Insulation installer serving the Minnesota market; and Therm-Con and Foamtech, a fireplace, shower doors, closet shelving and mirror installer, serving the Tennessee, Georgia and Alabama markets.

We maintain a robust pipeline of acquisition candidates, including geographic expansion in our core residential insulation end market, as well as acquisition opportunities that continue our end-market and end-product diversification strategy.

Alpha insulation and waterproofing, our large commercial business demonstrates the success of our end-market diversification strategy.While alpha's expansion into new markets and operational complexity caused some margin challenges, we are pleased with its recent performance and remain excited by the potential opportunities in the large commercial end market.

For the quarter, revenue increased over 19%, which reflects alpha's ability to perform in both its new and existing markets. Alpha's profitability also improved during the third quarter as recently opened branches came to scale and overall performance improved.

We continue to focus on improving alpha's profitability, and as a result of our strategies, we believe alpha sales and margins are headed in the right direction.As you can see, our acquisition strategy is an important component of our business model, which is funded by strong operating cash flows and available liquidity on our balance sheet.

The favorable pricing structure of our $300 million senior notes offering, which was completed during the quarter, provides us with significant capital to continue to invest in our business throughout the housing cycle, while additionally, staggering our debt maturities.

At September 30, 2019, we had approximately $240 million of cash, cash equivalents and short-term investments, and nothing drawn on our $200 million ABL revolving credit facility.

Our strong capital position, combined with our compelling operating cash flow, provides us with the financial flexibility to support our growth strategies and pursue acquisitions.I'm extremely pleased with the record results we reported for the 2019 third quarter and the progress we continue to make in achieving our business plans.

Industry dynamics remain positive across our single-family, multifamily and commercial end markets, and we expect this, combined with typical seasonal trends, will benefit our results for the fourth quarter. With this overview, I'd like to now turn the call over to Michael, to provide more details on our third quarter results..

Thank you, Jeff, and good morning, everyone. Net sales increased to a quarterly record of $396.4 million for the 2019 third quarter compared to $349 million for the same period last year.

The 13.6% year-over-year improvement in sales was mainly driven by improvements in price mix, higher volume and customer and product growth and the contribution from our recent acquisition.

Same branch sales growth during the quarter was 9.3%, including 5.4% growth in price mix and 2.9% growth in volume.It is important to note that these volume and price mix metrics we report do not include our large commercial construction business, alpha, which grew 19.4% in the quarter.

Third quarter 2019 gross profit improved 21.3% to $118.1 million from $97.3 million in the prior year quarter.

Adjusted gross profit as a percent of revenue increased to 29.8% compared to 27.9% for the same period last year, representing the positive improvements we've made in pricing and margin expansion from the growth in our complementary product revenue.

For the 2019 third quarter, selling and administrative expenses as a percent of net revenue was 18.8% for the 2019 and 2018 third quarters.As a percentage of revenues, administrative expenses were 13.9% for the 2019 and 2018 third quarters.

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 third quarter, we recorded $6.2 million of amortization expense compared to $5.2 million for the same 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 to date, we expect fourth quarter 2019 amortization expense of approximately $6.2 million and full year expense of approximately $24.3 million.

This figure will change with any subsequent acquisitions. In the third quarter of 2019, adjusted EBITDA improved to $55.9 million, representing an increase of 27.8%, from $43.8 million in the prior year.

As we've mentioned in previous earnings call, 2019 has displayed the typical seasonal trends in both sales and adjusted EBITDA through each of the first three quarters of this year.Adjusted EBITDA as a percent of net revenue increased 160 basis points from the prior-year period to 14.1%, as a result of these positive seasonal trends, improved pricing and complementary products growth.

The 14.1% adjusted EBITDA margin is the highest we have reported as a public company.

Our third quarter same branch incremental adjusted EBITDA margin of 29.4% we believe demonstrates the strength of our financial model and reflects the strides we've made in improving our selling prices from atypical material inflation environment in 2018, and the continued demand in our local installation market.

We continue to be encouraged by the momentum in the new single-family construction market as supported by solid order growth recently reported by the public homebuilders, and we believe this highlights the demand in the market for new entry-level single-family housing within the U.S.On a GAAP basis, our third quarter net income was a record $21.2 million or $0.71 per diluted share compared to net income of $15.6 million or $0.50 per diluted share in the prior-year quarter.

Our adjusted net income improved to $29.7 million or $0.99 per diluted share compared to $22.4 million or $0.72 per diluted share in the prior-year quarter. For the 2019 third quarter, our effective tax rate was approximately 26.4%, and we expect a full-year effective tax rate of 25 to 27% for 2019.

For the nine-month period ended September 30th, 2019, we generated $106.5 million in cash flow from operations compared to $68.8 million in the prior year, a 54.7% increase.In the 2019 third quarter alone, we generated $54.1 million of operating cash flows compared to $35.7 million for the same period last year.

We will continue to use our operating cash flow to fund acquisitions and reinvest in our business. Capital expenditures as of September 30th, 2019, were $37.3 million, while total incurred finance leases were $2.2 million.

During the 2019 third quarter, we invested approximately $4 million to purchase the facilities of AFT, the cellulose insulation manufacturer we acquired in 2018.As a result, capital expenditures and finance capital leases as a percent of revenue increased 70 basis points to 3.6% at September 30th, 2019, compared to the same period last year.

At September 30th, 2019, we had total cash and short-term investments of $239.9 million compared to $100.5 million at December 31st, 2018. During the third quarter, we did not repurchase any of our common stock.

We have approximately $61 million available in our expanded $150 million stock repurchase program that is in effect through February of 2020.As Jeff mentioned, we successfully completed the $300 million senior notes offering and entered into a new and increased $200 million ABL revolving credit facility.

I'm extremely pleased with the pricing and structure of our senior notes, which demonstrates our strong access to capital. In addition, staggering our debt maturities provides us with significant flexibility to support our growth strategies.

Total debt at September 30th, 2019, was approximately $572.1 million, taking into amount, taking into account cash and short-term investments.At September 30th, 2019, our net total debt was approximately $332 million compared to $363 million at December 31st, 2018.

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. Third quarter financial results demonstrate the positive business and market trends we are experiencing, positioning 2019 to be another great year for IBP, all of this is attributable to the strength of the team at IBP.

Over the past two weeks, I've had the pleasure of spending quite a bit of time with employees from, throughout the organization.

These office coordinators, salespeople, superintendents, production managers and branch managers have continually impressed me with their commitment, hard work and desire for continued success, exemplifying the talent and depth of our team.And of course, nothing moves forward without the outstanding efforts of our over 6,000 installers.

Our thanks goes out to them for a tough job always done well. I'll close by simply expressing that I'm truly excited for what I know we will accomplish in the future. Operator, let's open up the call for questions..

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

This is, it's a strong quarter for you from a gross margin standpoint back to the highest levels, it looks like, since second quarter 2017.

Can gross margins hold at these levels going forward, go higher? Or is there anything unusual in the third quarter that won't repeat going forward?.

On a gross margin basis, this is Michael. On a gross margin basis, there was nothing really atypical about the quarter other than we certainly benefited from the pricing strategies that we've been talking about for the past couple of quarters. And we also benefited from it being the third quarter, which is typically our best quarter.

So there's nothing fundamentally unusual in the quarter at all.We're glad we're starting to get back to gross margin improvement and the pricing strategies that we've been talking about for the past couple of quarters are starting to get fully baked into the numbers, and we feel good about that..

You also called out a more favorable customer product mix in the release, can you just elaborate on what's driving that?.

It's a combination of the things that we've been talking about in terms of working with the best customers that are willing to pay us a fair price for the quality of service that we're delivering, combined with our continued push to increase the cross-sell of the other products, which grew at a nice clip during the quarter and also demonstrated good margin improvement in the quarter as well..

And finally, are you able to elaborate on how many alpha branches are open? Maybe how long it would take for those to ramp the company average profitability? And where you ultimately see that building out to?.

As we've mentioned in the previous calls, we only opened one alpha location this year. And we're working to, as we mentioned in the prepared remarks, we're working to get all of the new locations stabilized and at higher levels of profitability. They're making good progress toward that in the third quarter.

We expect them to make more progress toward that in the fourth quarter.But as we've indicated in previous calls, we think that we're really expecting kind of the outsized performance from them on a margin perspective as we go into '20 and '21..

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

I wanted to start with your SG&A in the quarter. Similar to Q2, it deteriorated year-over-year as a percentage of revenues.

And last quarter, you highlighted lower than historical trends in liability and medical insurance reserves.And I'm kind of wondering, did that happen this quarter? And if so, is that something that will persist into the fourth quarter? Is there something else that we may need to keep in mind looking to Q4?.

I mean, there's always puts and takes when it comes to insurances, bonus accruals, things like that. So the, this quarter, there's really, I would say there's nothing necessarily unusual to go from third quarter of last year, third quarter of this year. And we would not expect that the trends are going to change dramatically.

But as we have consistently talked to this sort of returning to a mid-teens EBITDA margin, we believe we're going to continue to get there based on our ability to continue to improve gross margin and also get SG&A leverage.I mean, it will definitely fluctuate back and forth quarter to quarter.

I mean, some quarters, you're going to get great gross margin improvement, and you may not get as much SG&A leverage. But then, in other quarters, that will change.

We do expect that, as we've talked for the past several quarters, we expect 2019 to be a very typical seasonal year in the sense that it has completely set up that way, where the third quarter would be our best quarter than the fourth quarter than the second quarter and then the first quarter is typically your worst quarter.And we think that this year, it's going to be typical as historically it would be, from a profitability perspective along those lines..

But kind of going back to the root of my question. SG&A actually got worse year-over-year in 3Q this year compared to last year.

So you didn't say anything unique one-offs.So I'm just wondering, why did it have such a negative impact on the quarter?.

I wouldn't say that it had that much of a negative impact. The percentage was consistent with where it was in the second quarter.

So I mean, I guess, if anything, you could say we're, our accruals are in a better place than where they may have been in prior periods, but we feel very confident in terms of our ability to continue to get leverage on SG&A, as well as improved gross margin over time..

And then in fiberglass, we've seen the manufacturers announce that they're both opening new capacity and some are closing or curtailing capacity over the last several months.

And at the same time, we're hearing that manufacturers are preparing to implement a January increase and, more importantly, trying to reestablish a steadier cadence of price increases going forward.

So with those in mind, could you talk about how you view the supply and demand dynamics in fiberglass insulation today and going forward in addition to how you perceive the industry's readiness to return to a steady cadence of manufacturer pricing actions?.

Yeah, I would say, this is Jeff. I would say we view it as interestingly as we should, based on what you just reiterated, because that's exactly what we've heard also. So it's rather interested in it, there's a couple of manufacturers that are adding supply.

There's lines being taken down, as you mentioned.We do believe, though, that we'll kind of return to a more normalized, as you've expressed and they've expressed, obviously, to you or out publicly, that it will be a more normal material pricing environment.

And again, a rising price environment for us is good, although it's a little interesting some of the dynamics that are out in the market right now..

Yeah. And I think the interesting thing on the capacity side as well is that the capacity that's being taken down is back capacity, which there's plenty of back availability and the capacity that's being added is loose full capacity, which is currently a little bit tighter than back capacity.

So we believe the manufacturers are responding very effectively to the demand environment, which is very positive and constructive for us..

Our next question comes from the line of Justin Speer with Zelman & Associates..

Just one follow-up on that SG&A, it delevered 50 basis points in the third quarter, but how should we think about SG&A into the fourth quarter as a percentage of revenues, given typical seasonality?.

So as you know, we don't provide guidance. So, but we would expect that the trends that we experienced really through the year would be consistent through to the fourth quarter and that we would have the typical seasonal seasonality in the fourth quarter that I spoke to a little bit earlier..

And then I wanted to unpack the nonresidential channel with you as well.

In terms of just higher level, what's driving it? If there's like, if you can help us maybe unbreak, or break down the verticals that you're seeing strength in or a project that you're seeing strength in? And what your visibility is there?.

Well, as you know, I mean, I assume you're talking about alpha and heavy commercial business?.

You got, you actually have a couple of, I guess, the alpha business, but your overall picture within nonresidential, maybe breakdown the nonresidential channel, how big it is today as a percentage of your business? And then maybe even drill further in the alpha business as well?.

So I mean, the commercial market for us is about 19%, almost 20% of the overall business. Of that, alpha is about 10 or 11%. So there's the light commercial piece, which is, as we characterize it, it's a structure that would be wood-framed or stick-framed.

In terms of both of those businesses, both the heavy commercial and the light commercial, we obviously have more visibility into those businesses because they are a bit forward and we create backlog associated with those businesses.So we feel very good about the volume growth that we're seeing in that business as you know from the release.

I mean, alpha in the quarter grew revenue a little over 19%. Interestingly, as we pointed out in the prepared remarks, when we disclose our volume growth and price mix growth, that does not include alpha. If you did include alpha in those numbers, our volume growth would have been closer to more like 5%.So we feel good about that business.

We, part of the reason why we're seeing an outsized growth is because we are taking market share in the new markets that we've entered with alpha.

And we continue to see that as an opportunity, because those branches, those newer branches still are not up to the scale that we would like to see them, but they are starting to contribute to profitability. So we think, as I said earlier, 2021 will be good, we think, we're encouraged, that they should be pretty good years for alpha..

So, if you could give us some context on that opportunity, that midterm opportunity on your existing footprint? Can you maybe paint the picture based on getting to scale, what kind of growth and margin opportunity that could give you within that piece of the business as we look out the midterm view like you're speaking to now?.

Yeah. I mean, it's, again, as you know, we don't provide guidance, particularly on a particular aspect of the business. But it's 10%, 11% of the overall revenue.

So, I mean, as it continues to ramp and grow is what we think would be at a higher rate than the overall business, and as we hopefully continue to improve margin at that business.Obviously, it's going to be incrementally better for the business. But, yes.

I mean, we're very encouraged with the opportunity that's there, and not just to grow and scale better the new operations, but to also start potentially adding other at a measured pace, adding more locations, both on a greenfield basis and also from an acquired basis..

And last question, if I could squeeze one more in. Just in terms of that longer-term or that midterm margin goal, that 15% goal, you just mentioned, assuming 1.5 million start scenario, I think that's been in plan, your plan for a while now.

But now you're back on track on price cost there, and now you've got this commercial business, does that, does this commercial business maybe change the potential, that midterm potential of 15% definition? Or do you think it's more supportive of it?.

It's definitely more supportive of it, particularly as we continue to try and make progress in terms of growing their margin profile. So, yes.

I mean, we're very encouraged and very, more confident about getting to the mid-teens EBITDA margin that we've talked about, based on, not just the results this quarter, but the trends we're seeing in the industry.

And I think everyone on this call fully well understand or appreciate that order growth that the builders admittedly coming off of an easy comp in the second half of '18.But order growth from the builders has been very good, which is a key indication of future demand for us in new single-family business, which is 65% of our revenue.

And we've also been able to grow the multifamily part of the business at a very good clip, so with 13% growth in the multifamily business, we're just, we're very encouraged across all end markets and end products for the business right now..

Our next question comes from the line of Mike Bajo with RBC Capital Markets..

Hey, guys, It's Mike on.

I had a follow-up question on the margin side, and just thinking about the complementary products and the strong growth there? I think you alluded to that the higher gross margin product category, or a set of product categories? So just curious in terms of potentially offsets that or how we should be thinking about it? Is that also a higher cost of service? So maybe that's contributing to SG&A? Or just any quantification you could give on, from an EBITDA margin standpoint, where complementary sits versus insulation?.

Yeah, I'm really glad you asked that question, because it allows me to just clarify something. When we talked about the margin improvement in the other products, it was within those products, the margin improved nicely.

But they still are, as we've continuously or have discussed in previous calls, those products tend to have lower margins than, lower gross margins than the insulation product line.

But because they are leveraged, that you get good leverage on an SG&A basis with those products, the EBITDA margin contribution tends to be somewhat similar to the insulation products.So we know from experience, our branches that have higher penetration of other product sales tend to be some of our highest margin locations.

So the strategy of continuing to outpace the insulation growth with other products growth and continuing to penetrate our existing customer base with those other products we know is a well-proven strategy of improving profitability over time..

That makes sense and thanks for the clarification there. And the second question is, on the M&A environment, I know you said that there's good opportunity across the products that you're playing in and looking to expand.

But most recently, it has been skewed a little bit toward Spray-Foam or complementary, and so I'm just wondering if you can give us a little more color on your M&A pipeline? A couple of different ways, maybe, a, in terms of just kind of the nature of the pipeline, how it's shaking out in terms of size of the target opportunities, like average revenue size? And then from a mix standpoint, just if you're thinking about near term opportunities, how many are kind of in core versus complementary?.

This is Jeff. Happy to answer that question. As we've said, I mean, we continue to have a robust pipeline.

And as I think we mentioned a couple, maybe even three quarters ago, we have made an effort to try to kind of do some deals that we consider kind of straight down the fairway shots, which would be kind of geography-expanding insulation installing locations, so we have made a concerted effort to try to stay kind of in that niche of the market on an acquisition basis.And I think the pipeline is reflective of that, it continues to be.

And as you probably know, some of the more recent deals have been more of those straight down the fairway acquisitions. In terms of size, I would say that, on average, the current deals in the pipeline are larger than we would look at kind of historically.

As Michael has mentioned, a lot of times, those acquisitions are lumpy.And so sometimes they take a little longer to get done than others, you expect to get them done sooner than later. Things get in the way and it becomes lumpy. But we feel very good about it.

There were larger than normal, and they're the kind of pretty straightforward insulation installing deals..

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

All the hard work has paid off and you delivered some pretty impressive margin expansion. There's obviously some rumblings of potentially January insulation price increase by the manufacturers.

So my question is, in the improving housing backdrop and, let's say, measured fiberglass price increases, is that an environment you could sustain your long-term incremental margin target for next year?.

Absolutely. This is Jeff..

That's, yes?.

But again, the key is, and we've always spoken to it in these terms, is that that 20 to 25% is on a full-year basis. And as I said earlier, I mean, you always have the seasonality of the third quarter being the best quarter than the fourth quarter than the second quarter and then the first quarter.

So again, as we look at it on a full-year basis, that 20 to 25% should be achievable..

And then as you kind of mentioned, the public builders have reported pretty strong orders, I think, anywhere in the mid- to high-single-digit range.

Do you have a sense what the lag is from orders to end demand for you? In the conversations you're having with your customers, are they echoing a similar outlook in growth trajectory?.

So on the latter part of that question, yes. I mean, I think there's a lot of encouragement coming out of the builders that they're continuing to see good order growth. And obviously, we, it's been well discussed, this pivot toward entry-level is turning out to be very real and has also its profit demand.

I think one of the things that we're very encouraged about has been the ability of builders to not only increase their order growth, but also to be able to deliver the land to build and the lots to be able to build the homes on.In terms of how quickly orders become sales for us, I mean, obviously, it depends upon the builder and it depends upon the product type.

But when it is an entry-level product that's being built, the order to close time is much faster than, as you would expect, and it is with either move-up or custom.

So we believe that, barring kind of any really severe weather events, that a lot of the order growth that we're seeing in the third quarter will benefit us faster than it normally would be, particularly because the backlog has come down fairly significantly.

As you remember, or as you may recall, in the first quarter, we talked about the fact that the backlog has been built up in the back half of '18, actually benefited us coming into the first and second quarters.And now the order growth that we're seeing from the builders, we think, is going to have a positive impact as we, and when I say we, I mean, the entire industry, we're building products going into the first half of '20..

And then just one last question for me. In a lag housing start environment, where it's going to be down low single digits this year, your volumes shaking out organically up 3 to 4%, that is quite impressive.

I'm trying to gauge that 3 to 4% range.How much of that was driven by the strength that you've seen on your commercial side? And you talked about share gains there.

And how much of that was really on the resi side? Because you've alluded to share gains in commercial, I'm just trying to gauge how your resi business held up? And were there some opportunities there on the share gains front as well?.

Yeah. I mean, the residential business has been solid. Just to again clarify, the volume growth and price mix growth that we report is basically just the residential business, or it excludes alpha. So those numbers that you're talking about come basically from the residential business.So we feel good about where we are.

I mean, we've said on multiple calls that we are a profit-focused business, and we focus on profitability and not volume.

But at the same time, we believe that, as Jeff said in his remarks, I mean, our 6,000 installers are out there every day, working hard to really provide excellent service to our customers, and we think that shows in both the volume growth and the price mix growth..

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey..

A question back on acquisitions. You talked about doing some straight down the fairway.

Do you think the acquisition types are going to start to be more varied as you go into 2020 based on the backlog you have right now? I know you wanted to do that for some time?.

Keith, this is Jeff. No, I actually think it, I mean, kind of looking at the pipeline, they're kind of more of a straightforward insulation deals, and we've made a concerted effort in a few instances to kind of expand the geography too, which is particularly exciting for us.

When we were in that kind of spurt of doing some rather larger other product install bid acquisitions, they were kind of concentrated in regions where maybe we didn't have yet, quite yet what we felt like was it a bit of a platform to build off of in those regions.

And that was obviously some inducement to do so.It didn't mean we didn't know how to install those products as a company, overall, but clearly, we've, over the years, said, it's better for us to enter a market, a lot of times by buying a business instead of trying to go in and lead with price, and that's true, not just to fiberglass in a Greenfield location.

That's true, in some cases, of these other products now. But mainly, the larger ones were, in fact, to kind of create a platform within a region to kind of jump-start those sales within that region..

And from an insulation perspective, what regions, as you stand right now, do you think you have an opportunity to add more business?.

I mean, we're still probably most under-penetrated in the Western United States in what are some pretty high-profile of markets and regions. Southwest, particularly. So although we have presence there and are in many of the cities, we're not upscaled, not nearly the scale we'd like to be.

There's a number of other major markets really that we're not participating in currently.So that's probably the least penetrated most opportunity for us..

And obviously, the West is a big place..

Yeah. And as we said before, some of our even most profitable locations are in cities that you wouldn't consider, they don't make the top list. It just depends on kind of what kind of share you have in those markets, and we do work very well in places like Northwest Indiana..

Our next question comes from the line of Trey Grooms with Stephens..

So, most of my questions have been addressed, but I did have just a couple more. On the 14% growth in the non-insulation business, which, I guess, that's about 35, 36% of your revenue.

Is there any, I know there's a lot of different products going on there, is there anything, any specific products that are really driving that outperformance, where you really see yourself taking more share than in others? Just any other color you can give us on that outperformance there?.

I mean, one of the things that, and we've spoken to this on previous calls is that the window blinds business for us has been growing at a fairly high clip, which is really, it's almost as if it's a new product, because builders have just started providing that with the house as opposed to it being done DIY after the house closes.

So we've seen really good growth in that product line. And quite honestly, we've also seen good gross margin improvement in our product line as we've gained more scale in it and have become, not just better at buying, but also better at installing and getting that product line priced properly.

So that's helped.But really, we've seen, as with insulation, we've seen continued, a continuation of valuing our services, the quality of our services by getting a fair price from our customers for those services.

And as they continue to see higher demand and higher order growth, particularly at the entry level, which is very time-sensitive in terms of getting it done, the value of our service, particularly for these low dollar value nuisance products, becomes more important to the builder..

And then noticing a few Spray-Foam acquisitions here, with kind of the tick up in more entry level homes, and seeing the size of the home coming down a little bit, where that might be a little bit of a headwind for Spray-Foam. Does, seeing you do more acquisitions in that space.

Is that, does that speak to your outlook for maybe a pickup here or maybe for Spray-Foam to kind of pick up steam? Or just any indication of your outlook there?.

No, it's really more opportunistic in terms of that. I mean, you're absolutely right. I mean, with the smaller house size and entry level, that's not typically where Spray-Foam would go. But we think long term, spray-from is, it's still a very good business..

It still speaks to a growing market cap on part of that business..

Yeah. I mean, it's, we believe that the market has continued to, is going to continue to grow. You will see outsized growth in the entry level, but you're going to continue to see growth in other parts of the market, we think, as we go into 2020..

So you think the demand for Spray-Foam still, it improves in '20, even though the mix of type of home that's going to be built is going to be a little different, that still allows for growth there?.

Yeah. It's just that we believe that fiberglass will be improving at a higher rate than Spray-Foam..

Our next question comes from the line of Ken Zener with KeyBanc Capital Markets..

Michael, you don't need to be dour about the incremental margins for Q3. I always want to take the cool delay. I just want to work, I just want to work a little bit on some of the broad numbers that you guys have in the presentation, so I apologize.

The 28% share that you have, could you talk about, just to be clear, that's just for installation, therefore, it's excluding other products? So what is that kind of your take per start, I just want to kind of look at how your share is going to be compared to others on that assumption? Are you including this insulation when you do your 20%? And what is the dollar value per start?.

Ken, this is Jason. On that market share estimate, that is based on residential insulation. And we actually convert our segment of that business from a sales perspective based off the jobs we complete, and we calculate that based on the market completions so we don't make any assumptions around the industry's average price..

All right. Interesting. A little different, I think, than in the past.

Michael, you're being clear, and I think, certainly, what I've come to conclude is that, your guy's business model, along with others, actually might be materially different, because of the commercial opportunities.And I understand what you said about alpha not being in the volume number, correct?.

Yeah, that's correct..

And you said it would be, the volume would be --.

Be closer, in the quarter, it would have been closer to 5% if we had included them in our volume growth would have been closer?.

Correct. And I think you said alpha.

So that's, you got like 19%, I believe, is what you're saying in your release for alpha, and if it's about 11% of sales, that's how one would get to that calculation, correct?.

Correct..

Now in total, though, you say your commercial is about 19% of sales, which means 19% minus 11% gets you to that 8%.

Is that light commercial that has wooden structures? Is that correct?.

Yes. The non-alpha….

If we want to understand that business because you're going to be breaking at alpha.

I mean, should we think about the nonresidential growth, could we say your total 19% is similar to alpha? Or should we think about that 8% as having a, different?.

Yeah. The alpha having heavy commercial business is growing at a higher rate than our other commercial business, although it's obviously growing well as well..

Is it growing, is your other commercial business growing faster than alpha? Also, could you give us some idea about how to model that business? Because it seems like those are going to be different growth rates prospectively?.

They, yes, we would expect they would be, or at least historically, they've been at different growth rates, where alpha has been growing at a higher rate than the other light commercial business. But that business continues to perform well.

So as I said earlier, I mean, we feel good about all of our end products end-to-end markets right now, whether it's light commercial or heavy commercial. So clearly, there's a heavier emphasis on alpha right now in terms of their sales growth and profitability. But we feel….

Just going back to, go ahead, Jeff..

I would say that it was not meaningfully accretive or destructive of what we're reporting as residential growth..

OK. And because this EBITDA operating leverage, which you surpassed, hopefully, this quarter was a drag for you guys for quite a while.

Michael, you always said, look, you're not going to give quarterly guidance, yet the alpha branch investments, which I think the calculation was like $750,000 a quarter, so I mean, that type of stuff, because you invested, you didn't get the growth, that's what the issue was on the operating leverage, not residential? That was a position you took for a long time.

As we look forward, I mean, there's nothing in terms of early investments in commercial, whether it's alpha or light that would necessarily disrupt your annual expectations for FY '20, correct? In terms of the EBIT leverage..

Correct..

Our final question comes from the line of Matt McCall with Seaport Global Securities..

So, I want to go back to, I was trying to understand the SG&A trends a little bit more, Michael. If I just look at admin costs, it looks like admin costs on a year-over-year basis, I'll start there, we're up 19%, sales were up 14%.

And then sequentially, there was, I think it was pretty well matched up with sales, I think it was 6.5% for sales growth and 6.5% for admin costs.

So can you maybe talk about what the changes were on a year-over-year basis that drove it up higher? I listen to the [indiscernible] I don't really hear anything that change on a year-over-year basis, but I would expect that to be a source of leverage, I'm not really seeing evidence of that, either sequentially or year-over-year?.

Yeah. As I've said previously, I mean, we would expect that, to get back to our mid-teens EBITDA margin that we've talked about, it's going to come both from gross margin and SG&A leverage.

I mean, on a quarterly basis, you can, particularly, within administrative expenses, I mean, accruals, whether they're for insurances, for bonuses, keep in mind that at the higher level of profitability, we're obviously accruing higher level of bonuses for our field team, because they're performing extremely well.

So there are a lot of puts and takes within a quarter that can kind of impact that leverage.But there's nothing fundamentally that's changed within the business at all.

And again, we feel even more confident as we sit here today in terms of our ability to get back to that mid-teens EBITDA margin and to get it by a combination of both improving gross margin and improving administrative leverage..

So, is it, do you think it would be helpful if maybe I understood the fixed variable breakdown a little bit better, would that give me a better indication of what the leverage opportunity is over time and understanding there can be movement within quarters? But can you break it out that way? And maybe what you think that the fixed variable components are?.

I mean, the way, as you know, because we've talked about this before, I mean, we look at the business as being pretty much all variable cost. It's a question of whether they're directly variable or lagging variable in terms of our ability to either increase or reduce those costs.

So the majority of G&A expenses, or said a different way, when you think of this business, in general, cost of goods sold and selling expenses are pretty much almost all directly variable to revenue, whereas G&A is, has the more lagging variable components to it, whether that's up or down.

So there's, it would be hard to characterize it in a sense of, particularly within a quarter, the percentage that is going to be purely variable within G&A.G&A, clearly, though, it's a combination, our increase in G&A is a combination of both the acquisitions that we're doing.

And as I said, I mean, the dollars that we're talking about here are fairly small when you look at them in context, such that changes in accruals for insurance and/or bonus accrual changes can modify kind of that SG&A leverage..

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Edwards for any closing remarks..

I'd just like to thank all of you for your questions, and I look forward to our next quarterly call. Thanks again..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day..