TopBuild Corp.

Greetings, and welcome to the Top Build Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach the operator, please press star 0. I would now like to turn the conference over to Tabitha Zain. Please go ahead.

Thank you, and good morning. On the call today are Jerry Bolas, Chief Executive Officer, Robert Buck, President and Chief Operating Officer, and John Peterson, Chief Financial Officer. Please note, we have posted senior management's formal remarks on the investor relations section of our website at topbills.com. As shown on slide two of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial conditions. These forward-looking statements include known and unknown risks, including those set forth in this morning's press release, as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. In addition, we will also discuss non-GAAP financial measures, which can be reconciled to the most comparable GAAP measures in a table included in today's press release. Please turn to slide three. I will now turn the call over to Jerry Vollis.

Welcome everyone and thanks for joining us today. Our first quarter results have top-filled off to a very good start in 2019 with solid growth in both sales and earnings. Before discussing our financial results, I'd like to comment on our view of the current state of the U.S. housing industry. Affordability continues to be an issue, although it has been improving over the past few months. With the Fed hitting the brakes on further rate increases, mortgage rates have decreased significantly from late 2018 when they were approaching 5%. Mortgage rates at that level were one factor of pricing potential buyers out of the market. Fortunately, most of that increase has been reversed and 4% is again in sight. This reduction in rates does a couple of things. First, it contributes to pushing mortgage payments as a percentage of income back down to just below the historical average. Second, the optics signal to those on the sidelines that now is a good time to buy their first house or trade up to a bigger one. This is likely a key reason for new home sales in March increasing 3% year over year and 2% on a trailing three-month basis. Builders are also getting a bit of a break as the price of lumber, a major cost component, is considerably lower than previous levels. That certainly helps them in their question control pricing and footprint size, build more homes that consumers can afford, and still make money doing it. So while housing starts have been disappointing over the last several months, we believe they will climb higher as the year progresses for a couple of reasons. A strong economy with solid job and wage growth and improved affordability are driving new home sales. Builders are increasingly focused on building entry-level homes where inventory is extremely tight. And the recent trend for permits, which provides a forecast for starts, has been strong. In summary, supply and demand fundamentals continue to suggest a healthy construction environment in 2019 and for at least the next several years. Moving to Topfield's results on slide four, the strength and diversity of our operating model was very much on display this quarter as we recorded record first quarter results. Total sales were up 26%, with same branch sales increasing 7.1%. Both residential and commercial performed extremely well. Because our footprint spans the entire U.S., the unusually wet weather in parts of the country did impact a few of our branches, but most reported very healthy results. The conversion of that top line to the bottom line was again outstanding and produced EPS of $1.06 for the quarter. All of the earnings-related metrics were very good, and John will follow me with more detail on those. Driving all this positive news is a continued focus on improving the fundamentals of our business. The diversity of our business model offers numerous levers to manage top-line growth, and our relentless pursuit of operational efficiency drives conversion to the bottom line. Robert will have more to say about this in his comments. Turning to slide five, acquisitions have proven to be an excellent use of capital, and we have developed an effective core competency around selection, execution, and integration. Since 2016, we've acquired 10 companies, generating over $500 million of annual revenue. USI, the largest and most recent of these, continues to perform very well due in large part to cost-related synergies well north of the $15 million we identified a year ago. I want to congratulate our dedicated team of seasoned and talented professionals from both the Top Build and previous USI organizations for turning this significant investment into a financial win for Top Build and its shareholders. Last spring, we intentionally hit the pause button on acquisitions to give our full attention to USI. Today, we have a robust pipeline of prospects that we have identified and are moving through our discipline process. We expect to close on a number of these opportunities this year. Although we see considerable further runway with our current product offerings, we are always considering adjacent product categories that could add to our already substantial growth trajectory. Our approach is disciplined, and boxes to check include margin potential, scalability, and ease of execution. We have learned a few things from our long history in this business. and we'll always find a good balance between adjacent opportunities and ongoing focus on our current core products that serve us and our customers so well. Our second capital allocation priority after acquisitions is share repurchases. The $50 million ASR we announced last November was completed in the first quarter at an average price of $51.37 per share. And we acquired an additional 72,791 shares through March 31, 2019, at an average price of $63.49 per share. We will continue to make use of our current $200 million shared buyback authorization as the year progresses. John, I'll turn it over to you.

Good morning, everyone. As Jerry noted, our team continues to execute at a high level, generating strong results in the quarter. At both True Team and Service Partners, we saw solid selling price increases and operating margin expansion as we continue to manage inflationary pressures on our input costs and leverage our established business platforms. Starting on slide six, in the first quarter, consolidated revenue increased 26% to $619.3 million, driven by $93.2 million of revenue from acquisitions, primarily USI, as well as price increases at both business segments and sales volume growth at True Team. On a same branch basis, revenue increased 7.1% compared to first quarter 2018. Gross margin expanded 250 basis points to 25.1% compared to the same period a year ago, benefiting from pricing, commercial volume growth, and continued operational efficiencies. Adjusted operating profit grew 54.8% to $59.1 million, with a corresponding margin improvement of 170 basis points. Both gross margin and operating margin improvements were driven by higher selling prices, residential and commercial sales, improved labor and sales productivity, and USI performance and synergies partially offset by higher amortization expenses and higher stock-based compensation costs. First quarter 2019 adjustments totaled approximately $2.5 million, primarily tied to the integration of USI. First quarter adjusted EBITDA was $74.5 million compared to $46 million in 2018, and our adjusted EBITDA margin was 12%, a 260 basis point improvement from first quarter 2018. Our drop down to adjusted EBITDA margin was 22.3%, On a same branch basis, adjusted EBITDA was $57.2 million, and our drop down to adjusted EBITDA was 32.2%. Incremental EBITDA related to our three acquisitions was 18.6%. Moving to slide seven, adjusted net income for the first quarter of 2019 was $36.6 million, or $1.06 per diluted share compared to $26.2 million, or 73 cents per diluted share in the first quarter of 2018. Adjusted EPS benefited 1 cent due to a modification of our normalized tax rate. With more clarifications now available on the 2017 Tax Cuts and Jobs Act, the effective acquisitions, and some legal entity restructurings, we are lowering our normalized effective tax rate from 27% to 26.5%. Interest expense in first quarter 2019 increased from $2.3 to $9.6 million, primarily related to the funding of the USI acquisition in the second quarter of 2018, which included the issuance of $400 million senior notes and or borrowing of the $100 million delayed draw term loan. As you can see on slide eight, CapEx for the quarter was $10.2 million, approximately 1.6% of revenue. Working capital as a percent of pro forma trailing 12-month sales was 12.1%, 210 basis points higher than prior year. This increase was due to a number of factors, including the higher mix of installation business from a year ago, strong growth in heavy commercial, which has longer receivable terms, and the impact of significant selling price increases. The latter temporarily impacts the working capital percentage to sales calculation and by immediately increased in the numerator in the quarter, but the impact on the denominator is delayed because it includes prior period sales, which didn't benefit from the selling price increase to the same extent. Operating cash flow was $23.5 million for the quarter. Moving to slide 9, we ended the first quarter with net leverage of 2.05 times, using pro forma trailing 12-month EBITDA, well within our comfort zone of 2 to 2.5 times. Total liquidity at March 31, 2019 was $281 million, inclusive of the available balance on the revolver of $182.7 million and cash of $98.3 million. In January, we adopted the new accounting guidance required by ASC 842 on leases, which requires leases to come onto the balance sheet as a right-of-use asset and corresponding lease liability. This change will have no impact on our cash flow or income statements. On slide 10, we've updated our 2019 annual guidance based on our first quarter results and our updated forecast. Our assumptions regarding new housing starts remain unchanged with a range between $1.26 and $1.3 million for the full year. We are now projecting total revenue to be between $2,610,000,000 and $2,670,000,000, up $40 million on the low end and $35 million on the high end, and adjusted EBITDA to be between $330 and $350 million, up $20 million on both the low and high end of our range. These changes are primarily driven by both actual and projected improvements in our 2019 commercial volumes, as well as continued strong operational execution in both segments. As a reminder, our guidance does not include any acquisitions we may make this year. Robert will now discuss operations and segment results. Thanks, John, and good morning.

To echo Jerry and John, we're extremely pleased with our first quarter of financial results. Our consistently strong performance quarter after quarter is a direct result of our team's hard work, our focus on operational efficiency and excellence, our diversified model, our strong partnerships with our suppliers and customers, and our strategic approach to acquisitions and their integration onto our platform. Our operating model cadence and our focus on continuous improvement in all parts of the business enable us to maximize opportunities at every point in the cycle. Looking at True Team's results on slide 11, first quarter sales increased 36.4%, with USI contributing close to 26% of that growth. USI acquisition continues to perform exceptionally well and the integration was completed ahead of schedule. On the same branch basis, True Team sales were up 10.5% in the quarter, driven by a 6.1% increase in selling prices and a 4.4% volume growth. True Team's adjusted operating margin expanded 250 basis points to 11.5%. This was driven by increased selling prices, residential and commercial sales, operational efficiencies, and lower fixed costs as a percentage of sales due to higher sales volume, partially offset by higher material costs and higher amortization expense. Once again, great operational execution by crew teams' leadership and everyone in the field. Moving to slide 12, service partners' first quarter sales grew 8.9%, led by selling price increases of 6.8%, and contributions from acquisitions, most notably USI, partially offset by a volume decrease of 2.4%, an improvement from fourth quarter's volume decline. As we discussed last quarter, we made deliberate price-volume decisions and exited some low-margin business. While those decisions are never easy, they were the right ones for our company, as evidenced by the 60 basis points analysis. adjusted operating margin expansion compared to a year ago. We are gaining new customers and we expect continued solid performance in the service partners business as we drive profitable growth. Turning to the next slide, our overall commercial business performed exceedingly well with same branch sales surpassing our long-term target of 10% growth, yet another demonstration of the strength and importance of our diverse operating model. Our backlog for commercial work is very robust and we're already bidding projects for 2020 and early 2021. This is a $5 billion industry that is extremely fragmented and we believe with only high single-digit market share, we are the industry's largest player, giving us many opportunities for growth. We like this business because it has high barriers to entry, a different cycle than residential, and accretive operating margins. Our growth strategy is to provide general contractors with a strong value proposition that includes expertise in a broad array of products, adherence to strict safety standards, and excellent quality control, all from an established and financially stable company. Both crew team and service partners are also doing a nice job growing their spray foam business, and we continue to see this product gaining momentum in the residential and commercial spaces. Turning to fiberglass on slide 14, most of you know there was an industry cost increase in January for both fast and loose fill, which did have some traction. While a second cost increase is likely this year, the percentage increase and its stickiness will be highly dependent on industry demand and housing starts. While supply remains tight, it's not as tight as it was a year ago. Be assured, we have a high level of confidence in the strength stability, and cost effectiveness of our supply chain. We buy from all four manufacturers and have strong relationships with our suppliers is an important competitive advantage. Finally, moving to slide 15, I want to discuss the cadence by which we run our business every day. Today, we are often asked, how much more efficiency can we achieve? Simply put, more opportunities exist. Since becoming a public company almost four years ago, improving our operating efficiency as well as our labor and sales productivity has been key areas of focus, all of which have led to significant margin improvement. With all of our different branches on a common ERP system, we can compare and rank performance for each business on an apples-to-apples basis. With these systems, our senior leadership team focuses on the bottom quartile and determines What steps can be taken to move them up the ladder, whether it be a change in management, labor, or product mix? In some cases, it might even make sense to close that branch. Regardless, there will always be a bottom quartile presenting numerous opportunities for operational improvement. We are relentless in this focus on continuous improvement, and our entire team is involved. Our decision at Service Partners last quarter to walk away from some low-margin business is a good example of our discipline with this process. Yet, having systems and processes in place won't produce the desired results without the right team in place, and we know we have the best people in our industry working at Top Build. We've brought back talent into the business, acquired new talent, and are continually developing future leaders. Our entire team is committed to be investing class from everything we do in branch management and safety, to supply chain, to finance and accounting, to acquisitions. Our local empowerment culture drives operational excellence and profitable growth. This is what Top Build stands for and what we strive for every single day. Looking ahead to the remainder of 2019, it should be another strong year for Top Build. Builder sentiment is improving, and we expect starts to increase as we move throughout the year. In closing, I thank our entire Top Build team for their hard work, safety lifestyle, and dedication to creating value for our stakeholders. I am proud to be part of this outstanding team. Jerry?

Thanks, Robert. Before opening it up for Q&A, I want to reemphasize two points. First, We anticipate an improving housing market as we move through 2019 and for several years beyond. This will provide an excellent external growth environment for Top Build. Second, our company is diversified across a number of key dimensions, including a business model offering both installation and distribution services, multiple end markets reaching both residential and commercial, product offerings, including all types of insulation and adjacent categories, and geography with our national footprint. We're leveraging this uniquely differentiated business model with a consistent strategy and focus on operational excellence and execution to produce outstanding financial results. The first quarter of 2019 was yet another good example. We look forward to delivering more of the same. Operator, we're now ready for questions.

Thank you. If you'd like to register for a question, please press the 1 followed by the 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for our first question. And our first question comes from the line of Ken Zenner with KeyBank. Please proceed.

Good morning, everybody. Morning, Ken. Morning, Tim. Very strong quarter in terms of the volume, and I think you guys have a unique position, having such a high market share and single family. So your 4% volume gain that you saw, using total starts, not seasonally adjusted, just lagged, and it showed down five that year over year. Can you talk about what you're seeing considering the government shut down? There's obviously a lot of volatility out there in terms of the numbers, and I think you have better data than the government. Does down 5% for the market make sense given you're up four? Or could you kind of just update us on that thought process? Did you gain that much share, or what really happened?

Good morning, Ken. This is Robert. I'll point to two or three things happening and what we're seeing. Obviously, coming out of fourth quarter and into first quarter, you know, there was some backlog in the industry that was being worked. So, you know, as Jerry mentioned, there was, you know, some limited weather impact in some of our markets, but there was also a backlog that was built up that we worked on in Q1. So we think that's, you know, obviously an important part of it. I think as we pointed out, we had some really, you know, strong residential growth and some also strong commercial growth in our business that helped contribute that as well. You know, we absolutely believe that we are gaining share, both in commercial and residential. And then I'd say, you know, as we were in Q1, we definitely saw the sentiment of the builders improve, become more positive. I think, you know, a good spring selling season that we saw the builders kick into as well. So, you know, we're pretty positive about what we saw, and we think that, you know, it started out to be a great Q1.

Good. And then... Thank you. John, the guidance that was raised modestly did have roughly 50% incremental EBITDA. Can you kind of talk to why that happened? Is that really just the price flowing through better or is that margin adjustments that you're making, you know, in the business like you guys talked at service partners? Thank you.

Sure, Ken. This is John. So a couple things on guidance I think I'll point out. I will start with the top line. So certainly, you know, it's a good reflection of the fact that we have a pretty diverse model that we've talked about. So commercial, probably one of the bigger drivers behind our increase on the top line. So commercial in the first quarter and what our expectations are for the year, along with the fact we expect residential to perform well, too. So in terms of our EBITDA expansion in the guidance, really driven by a couple of things. One is commercial is a big part of that growth. And as we've said before, commercial comes with increased margin performance versus our traditional residential business. And then, you know, our performance in the first quarter and what we see for the remainder of the year just suggests that between our ability to manage pricing and our input costs, We expect slightly more favorable results there. And, in fact, from an operational efficiency standpoint, Robert talked about this in his prepared remarks, the teams continue to really perform well in the field, and we're reflecting that now in our projected guidance on a long-term basis. So the combination of all those things really is what rolled up the back door. Thank you. You're welcome.

Thank you. And our next question comes from the line of Phil Hink. With Jeffries, please proceed.

Hey, guys. Congrats on a very strong quarter. Jerry, I think you mentioned from what you can tell, the spring selling season is off to a pretty solid start. I'm just curious, you know, if you could provide any color on order rates and backlogs, how that has progressed over the course of the year. And with this, you know, potential inflection of things kind of picking up and tends to be getting a little better, what type of lag do you expect that to kind of manifest before you see that inflection in your businesses?

Yeah, the only thing I can say, Phil, I'll turn it over to Robert in a minute here. He may have some more color to give to you. But, you know, we see good momentum in the business. I mean, we came in, we came into the first quarter. Our branches were busy. You know, we've done a lot. It's sometimes very difficult to look at, you know, to slice and dice it. But we've done a lot of things with the business here over time. And, you know, the acquisitions have been big. Adding USI to our equation really gave us a lot more, a lot more significance in some really key markets. And so it's hard in any one quarter to say are we gaining share or not. I can only tell you that we see a lot of momentum in the business. Our branches are busy. You know, we do expect, as I indicated in my initial remarks, that the housing start environment is going to improve. We hear optimism from builders. you know, we continue to stay very busy. So, you know, Robert may have a little more to say about anything geographically or anything to add to my comments, but overall, you know, we have a lot of positive thinking about where we're headed here this year.

Yeah, Phil, this is Robert. So, you know, as I mentioned, we, you know, we did work on some backlog there. I think, you know, the builders definitely spring selling season sentiment did improve and And I think the builders did a nice job, right? So as affordability became an issue back half of the year as they adjusted what they were working on relative to, you know, maybe a little smaller footprint, you know, townhomes, that type of thing, you know, I think they started to increase demand because how they adjusted their approach as well, you know, relative to affordability. So, you know, I think very positive. And as we mentioned before, you know, commercial was a strong performance for us also, and we expect that to continue.

So, Philip, this is John. The other thing I guess I'd add to that just to finish up on that is that we are seeing the needle move a little bit more towards those entry-level type of properties, and the cycle time on those tends to be a little more compressed than the traditional build cycle on, you know, custom single-family, et cetera. So that's also, I think, having some contribution.

Great. And then from an incremental standpoint, obviously very impressive, especially in a seasonally slower quarter. You know, John, were there any, like, one-offs that helped the quarter? I know quarter to quarter, it's always tough to predict. It gets a little noisy. And just given, you know, some of the, you know, better performance, whether it's price, cost, productivity, and maybe the synergies kind of kicking in more fully with USI, could your incrementals kind of shake out more towards the higher end of the range this year? Thanks.

Yeah, so, Philip, this is John. So, I think in terms of our business in the first quarter, certainly great pricing performance. including, obviously, some of that's a big carryover from last year. As you recall, last year, early in the year, we're chasing some double-digit material cost increases, both first and second quarter, and obviously had great successes the year went on. So we had great carryover of good pricing, continued to price well, I think, in the first quarter. Material cost increases, not as significant this year as we saw first quarter last year. So I think all those contributed. Again, the team continues to do a great job in terms of operational efficiency. So I think when I talk about the comps, I think the comps get a little bit tougher as the year goes on because, again, last year, Again, the team did a good job of catching up to those cost increases as the year went on. So I do think the comps will get a little bit more difficult. So I think if you kind of do the math on our numbers in terms of our projections, we're kind of in the middle range of our EBITDA drop-downs for the second through fourth quarter, and we feel pretty good about that at this point.

You know, Phil, this is Jerry. The one thing I would add to that is in Robert's commentary, he talked a lot about how we run the business. And that really, I would probably put that at the head of the class in terms of the effect on our margins on an ongoing basis because we have a constant effort here to analyze all of our branches, particularly those on the lower quartile. And it just, over time, continues to develop an endless stream of operational improvement. And we think that's a big secret. And we have a long list of talented people out in the field who do that for a living. And, you know, it is momentum that continues to build with the company and will always be responsible for us, you know, pushing the margin performance in the company. All right.

Thanks a lot.

Good luck in the quarter. Thanks.

Thank you. And our next question comes from the line of Trey Maurich from Evacor ISI. Please proceed.

Hey, guys. Great job on the quarter. Really, really strong showing there. I wanted to first, Jerry, I think you said in your prepared remarks that you plan to use some of your buyback authorization this year. I just want to understand that when you said that, it sounds like you're almost guaranteeing that you will do some share repurchases this year. Am I taking your comments correctly?

That's right. On that, I would say that it's going to be dependent on what happens with acquisitions and the timing of those. We've always talked about number one priority being acquisitions, and that remains true. And share repurchases is number two. So if I had to make a guess, I'd say we are going to spend some money buying shares fast, but number one priority is acquisitions. So in terms of the magnitude of it, it will be dependent on the timing of when we get some acquisitions to the finish line.

And then a couple days ago, one of your competitors mentioned that they had a headwind on their margin. from work that they contracted in the fourth quarter that they couldn't complete until 1Q due to the sizable builder backlogs. I'm wondering if you saw any type of margin headwind in either your installation or your distribution business because of that similar type of dynamic that you also highlighted.

So, Trey, this is John. In terms of our performance, I think I can just reflect back on what we've been saying the past two or three quarters in terms of our performance, that we have done a great job in terms of working our selling price and our operational efficiencies as offset to the inflationary impact on input costs, material being the best example. And that just continued in the first quarter where the team just continued to execute extremely well in a difficult environment. So again, I only can speak for our numbers in terms of what we've done, but that really, what we saw in the first quarter was a continuation of what really happened throughout 2018 and helped deliver the results we just reported.

Okay. Thanks very much.

You're welcome.

Thank you. And our next question comes from the line of Keith Hughes from SunTrust. Please proceed.

Thank you. As you look forward for acquisitions, the primary use of cash flow, Do you have a sense of where this is going to go versus – I mean, you talked about commercial area you want to be more in. Moving into installation of non-insulation products, is that a focus? Any sort of detail on that topic would be helpful.

Keith, Jerry here. You know, we're going to concentrate on our core business for sure. You know, we're never going to lose focus on what we do really well, and that's our core insulation business. But, you know, I think we talked before a little bit about some of the product categories that came with the USI acquisition. One of them is the glass and window business. And that's an example of one that we're looking at closely. We believe that, you know, if we're going to expand ourselves meaningfully into some other adjacent product categories, we want to do our research carefully and we want to make sure that those boxes that can be checked that I mentioned in my comments relative to the margin potential, scalability, ease of execution, that we have an excellent opportunity to perform well with it. So it's not going to be scattergun, ever. I also mentioned in my opening comments about learning some things from the history of the company. Way, way, way back, more than 10 plus years ago, we did get into doing a lot of things very quickly, and we saw what the execution challenge was that related to that. So we're very disciplined in the way we go about it. And all I can tell you is that in the pipeline, we have a number of companies. Many of them are in our core business, whether it be installation, distribution. A couple of them are outside our historical core business. But again, we're going to do a lot of work here relative to being sure we understand the dynamics of those businesses before we step into anything that's outside of our current core.

Okay. Second question on USI. I think you said you've completed the integration. Does that include all branch rationalization moves you're going to make?

Hey, Keith. It's Robert. So, yeah, integration systems-wise, all that supply chain, back office, corporate office, all that's complete. Relative to branch consolidation, we finished and completed plus or minus seven or eight. We got a handful in the range of five to six more that we're looking at considering their You know, the team's just doing a great job, and we always look at it market by market. And I think the great work that's been done thus far on the seven or eight I've mentioned is really we've seen no dis-synergies. I think the, you know, careful approach that we're taking, the very thoughtful approach that we're taking to them is paying off, which is kind of you've seen throughout the whole USI integration piece and the performance.

Okay. Based on these numbers, I would agree. Thank you. You're welcome. Thanks, Pete.

Thank you. And our next question comes from the line of Matt McCall from Seaport Global Security. Please proceed.

Thank you. Good morning, everybody. Good morning, Matt. Good morning. So maybe start with the volume side and installation. You made several comments about strength in commercial. I think maybe it sounded like that drove some upside in the quarter and in Europe. But can you talk about maybe relative to expectations what residential volume looked like? And then I know you gave your starts outlook, but you've clearly been outperforming starts. How should we look at the full year volume expectations in your guidance for resi?

Yeah, so certainly in the quarter, Matt, you know, commercial was really strong, and it exceeded our 10% long-term guidance that we give. But residential, however, particularly on the single-family home, was in pretty good shape. And, you know, the comments that we've had earlier in the call here, you know, we were busy pretty much across the board in Q1. Now, we certainly are not oblivious to the fact that housing starts, reported at least, have been pretty low here over the last three or four or five months. So, you know, we certainly understand that we're on a lag basis. But I have to tell you that the sentiment out there in our branches continues to be strong. What we're hearing from builders continues to be optimism from And as I said, you know, we've added a lot to the texture of the company here in the last 12 to 18 months relative to acquisitions, relative to diversity in the commercial. So in total, we're pretty optimistic about where we're headed here in Q2 and beyond. And, you know, our guidance upgrade reflects that. You know, we take that really serious in terms of what we do there because we know that signals our intent here for the year. And, you know, You know, we certainly have attached that to a housing start environment, the million 260 to a million three. And, you know, we think for all the reasons we talked about, it's going to get there. But I think what I want to leave you with as much as anything else is what's under our control is what I feel really good about in terms of what we've been able to accomplish as a company and the kinds of things that drive our results are largely under our control. And that's why I would say to you that we have the confidence that we do.

So the starts outlook didn't change, but did your residential growth outlook change, or was it all the upside driven by commercial?

Yeah, this is John. So as I mentioned in the prepared remark, most of the increase in terms of our guidance was driven by our commercial business. And both our first quarter and what we're seeing now through the remainder of the year, as you know, a lot of that's heavy commercial. Those projects tend to be pretty chunky, and what we're seeing is builders or general contractors, I should say, you know, accelerating in some cases some of the work that we had in our backlog there. So I think that's what's driving the majority of the increase in our guidance that we just projected.

Okay, and then last one. Robert, you mentioned the Q1 help from working through some backlog. Can you talk about how much maybe – how much of a buffer that backlog gives you, how long you can kind of benefit from builders working through the backlog, you know, given that starts have remained a little soft.

Yeah, Matt and Robert. So, I would say, you know, for the first quarter, I'd say a couple months there, two or three months, and, you know, maybe a little bit of the, you know, buffer that was created because of the weather, some of that could be buffered into Q2 as well. So, I think coming out of there with that strong backlog was good heading into the first quarter. Then as John mentioned before, as the builders have adjusted the entry-level homes and stuff, that does compress potentially some of the cycle time on some of the homes as well. So I think maybe a combination of that too, but definitely some good backlog as we headed into Q1 this year.

Okay. Thanks. I just want to sneak one more in. You talked in service partners about gaining some new customers. the year-over-year decline there from a volume perspective eased from last quarter. Should we expect that trajectory to continue? And I guess I'm trying to figure out how much of a benefit these new customers are going to be relative to the business you walked away from.

Yeah, Matt, Robert. So, you know, we're really highly confident in our performance and service partners and conscious decisions that we made there. And we, you know, as we've brought on some new customers and stuff as well. You know, we expect the solid performance to continue to improve there.

Thank you all.

You're welcome.

Thank you. And our next question comes from the line of Justin Spear with Zillman & Associates. Please proceed.

Good morning. Thanks, guys. I wanted to start off just broadening out. I wanted to broaden the picture out a little bit as we think about this 1.5 million start scenario, this normalized scenario that you're painting, maybe in a few years. With this combined business with the USI and with your commercial strategy, as that inferrals in the model, what's a good normalized EBITDA margin for you in your mind?

Yeah, this is John Justin. So we haven't given that level, other than the modeling metrics that we provide, which, you know, you can do the math, and I think it all depends on when you think a million and a half starts is going to occur, because in there, baked in there, we obviously have commercial growth, too, which is happening at the same time. So really, you know, the modeling on that has to be dependent on when people believe we're going to get back to that normalized margin level. But certainly – You know, the numbers we modeled historically, and if you use the model and assume even a 2022 timeframe, you're talking something north of 14% easily in terms of EBITDA margins and probably approaching the 15% target range.

Okay. And just unpacking that commercial, were there any large projects that explained the strength in thinking about the full year, just the mix of business and commercial? in 19 versus 18 that you expect?

Hey, Justin. Good morning. It's Robert. So, you know, we saw a nice momentum growing the commercial business all through 18. And, you know, there's always big projects quarter by quarter. I mean, we're working on some big projects on the West Coast right now, working on a big project in Las Vegas right now. There's always big projects that are completing and new big projects that are starting as well. But We've just seen some really nice momentum grow in the commercial business, and as everyone's mentioned, a really solid Q1 performance above the guidance of the 10%.

But in terms of a mix of business that's going to be commercial this year versus last year, I'm just trying to get a sense for how big that is in your portfolio.

Yeah. Justin, this is John. We don't break our numbers down from a guidance standpoint between residential and commercial. The 10% we give is for long-term planning purposes. But suffice it to say, we absolutely expect to continue to gain share in commercial at a more rapid pace. I mean, I'll take you back to our spin timeframe. It was roughly 15%, 16% of our business. It's probably approaching now 21% in terms of the overall, and I think you'll continue to see commercial, you know, the share gains much more rapid because, as you know, we have a largest player in high single digits but in a much more fragmented market. So the share opportunities there are pretty robust.

Last question for me is just in terms of the capital allocation strategy. What are the going rates? What are the multiples that we should expect on EBITDA for residential relative to commercial in terms of prospective M&A?

Yeah, so I think this is John, Justin. So if you go backwards, obviously, we talked about in the past four and a half to six times. We obviously haven't taken a deal over the finish line since USI, so I can't really comment exactly on what what deal multiples are, but I wouldn't expect them to change dramatically from that total at this point. But, again, we'll have to see how that plays out and how successful we are this year.

And, Jeff and Jerry here, it always depends on a bunch of other factors that play into it, you know, relative to the profitability of the organization, the talent that we're inheriting, what's the geography, the size of it. So there's a bunch. And, you know, we do a lot of analysis on our own internal rate of returns, which is kind of the summary metric that we use that kind of puts all that on one page. And so, yeah, there's nothing going on here right now that would suggest that the multiples we've historically paid are going to be a whole lot different going forward. But, again, it's highly specific, you know, dependent on the acquisition that we're talking about. Appreciate it, gentlemen. Thank you, and congrats on a great quarter.

Thank you.

Thank you. Ladies and gentlemen, to register for a question, please press the one followed by the four on your telephone. And our next question comes from the line of Megan from Buckingham Research. Please proceed.

Thanks. Good morning. Just a couple of clarification questions. In terms of the distribution business, the headwind on volume from walking away from business, Is that a carryover from last quarter, or are you continuing that process as we move through the year?

Good morning, Megan. This is Robert. I'd say it's a carryover from, you know, back half of last year, so Q3 and definitely Q4. And as we said, that was about a 5.3% decline in Q4. That went to 2.4% in Q1, which I think says we've, you know, We've brought on those new customers and some new business that we were, you know, absolutely consciously targeting.

Okay, great. Thanks. And then just a follow-up question on the pricing environment in residential. I know you don't like to give, you know, a specific breakout on pricing and volume assumptions, but in your guidance, are you assuming a second price increase? and have your assumptions around the pricing environment changed at all in the last few months?

Yeah, Megan, this is John. To your point, we don't give out specific breakouts on our guidance other than the parameters on starts that we have as kind of the guardrails for that. So nothing I can share with you there at this point in terms of what our individual pieces are in terms of pricing and material cost increases and things like that.

Maybe if I could ask it a different way. You talked about the compares getting a little tougher. So if we want to think about how the year might progress and if we want to assume, let's say, no additional price increases, how should we think about maybe the cadence of pricing as we model things out for the year?

Well, the carryover pricing from last year, obviously, if you go to last year, we got hit with double-digit material cost increases first and second quarter. And as we documented last year, we were chasing that, especially the first half of the year. So the point I was making in terms of the comps is that last year, and especially if you look at our gross profit numbers, we had compression the first half of the year, expansion the back half of the year. So that's why I say that the comps get a little bit more difficult. So in terms of how this progresses throughout the year, I'd say second, third, and fourth quarter, it becomes a little bit more difficult comp. For just that piece, now there's a lot of other variables that come into play, but for that piece, they get a little bit tougher as each quarter goes along.

Okay, great. That's helpful. Thank you.

You're welcome.

Thank you. And our next question comes from the line of Adam Bumgard from Grape Group. Please proceed.

Hey, thanks. Good morning. On your 1Q results, do they reflect a full quarter of the benefit from your recent supplier changes in fiberglass?

Hey, good morning, Adam. This is Robert. So, you know, whenever we look at Q1, you know, we buy from all four suppliers. We have significant volume with all four suppliers across really the entire business and stuff. We're always looking to leverage the scale. So I'd say there was nothing, you know, out of the ordinary in Q1 from our normal supply chain execution and how we, you know, look at our supply chain. I would just point to, you know, the vast majority of our improvements, And our results in Q1 are really the operational performance in the field and just driving the efficiency and something as I try to talk about the cadence by which we're just constantly focused on that and keep the pressure on that.

Got it. Thanks. And then just on the USI synergies now being well above 15 million, can you put a new target on that? And if not, maybe just walking through which types of those synergies are coming in well above initial expectations?

Yeah, Adam, this is John. So, yeah, we're not going to give a new target. Suffice it to say, the numbers are larger than we projected and are happening quicker. I think probably, you know, the biggest areas would be around the corporate consolidations and the different cost buckets that we were able to work on and take cost out of. And so that would probably be the largest one, but we're not going to continue to break that down on a go-forward basis. We've got one more month to comp here on, but You know, suffice it to say, it's been an excellent acquisition where we've overachieved in terms of our synergy buckets.

Great. Thank you.

You're welcome.

Thank you, and there are no further questions at this time.

Thanks to everyone for joining us today. We look forward to reporting our second quarter results in early August.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.