TopBuild Corp.

Greetings and welcome to the Top Build Corporation earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will 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 an operator, please press star 0. As a reminder, this conference is being recorded on Thursday, October 31, 2019. I would now like to turn the conference over to Tabitha Zane. 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. We have posted senior management's formal remarks on the investor relations section of our website at topbill.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. Please note that other than it's otherwise specifically stated, the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in the presentation accompanying this call. Please turn to slide three. And I will now turn the call over to Jerry Bolas.

Good morning, everyone. Thanks for joining us today. We're pleased to report another excellent quarter as our team continues to do an outstanding job of generating profitable growth. Before reviewing the quarter, I want to note that based on recently announced starts, strong household formations, and optimistic builder sentiment, a long-awaited acceleration in housing appears to be underway. low mortgage rates, a pivot by builders to more affordable housing, and a strong economy with solid job and wage growth are all factors driving this positive trend. Moreover, the long-term fundamentals, including projected household formations and limited housing supply, point towards continued growth in new home construction. Our third quarter financial results on slide four reflect the strength of our diversified model and our continued focus on improving operational efficiency. Total sales were up 5.4 percent compared to lagged housing starts that were down 1 percent. Our commercial business, again, performed extremely well, and operating margins at both business segments expanded. Moving to slide five, on the capital allocation front, M&A is our number one priority, and our focus remains primarily on our core businesses. which are residential and commercial insulation installers and distributors. The synergies we achieve are significant, and the opportunity to enhance our market share in regions with strong growth prospects is compelling. We're also considering expanding our glass product category that encompasses commercial storefronts and residential bath and showers. This business currently contributes approximately $114 million of annual revenues. Our research and experience validate that this adjacent product category offers many attractive characteristics similar to insulation. While expansion in this area will be independent of our brand's insulation network, we'll be able to leverage our management expertise, customer relationships, and supply chain model. Looking ahead, our pipeline of acquisition candidates is robust, and we expect to bring the best prospects over the finish line in the next couple of quarters. Our second capital allocation priority is share repurchases. In the third quarter, we repurchased just over 364,000 shares and an average per share price of $89.76. Since implementing our share repurchase program in 2016, we have repurchased a total of 4.9 million shares and an average per share price of $56.74. Consistent with our intent to return capital to our shareholders on a timely basis, we announced a $50 million accelerated share repurchase, which we anticipate executing within the next several days and completing in mid-first quarter. This program reflects management's and our board's confidence in the long-term potential of Top Build, our strong future cash flow position, and our firm commitment to optimizing the efficiency of our capital structure. While John will discuss our financial results in further detail, I want to emphasize that our strong operating performance quarter over quarter is the direct result of our uniquely diversified model and the ability of our strong leadership team to manage our business well in any general economic and housing environment. John?

Good morning, everyone. I'm pleased to report on another excellent quarter of business results delivered by the experienced and talented team to which Jerry just referred. Starting on slide six with consolidated revenue, third quarter results increased 5.4% to $682.3 million, primarily driven by increased volume in pricing at True Team and increased pricing at Service Partners. Revenue for the first nine months of 2019 rose 12.4% to $1,961.8 million, which includes revenue from acquisitions of $126.9 million. Adjusted gross margin increased 130 basis points in the third quarter to 26.3%, and for the first nine months of 2019, expanded 200 basis points to 26%. Adjusted operating profit in the third quarter grew 16% to $80.6 million, with a corresponding margin improvement of 110 basis points. For the first nine months, adjusted operating profit increased 30.6% to $216.1 million, with a corresponding margin improvement of 150 basis points. Both gross margin and operating margin improvements were driven by higher selling prices, strong commercial sales growth, operational efficiencies, and synergies from USI partially offset by higher material costs. Adjusted EBITDA for the third quarter was $98 million compared to $84.3 million in 2018, a 16.3% increase, and our adjusted EBITDA margin improved 140 basis points to 14.4%. In the third quarter, our drop down to adjusted EBITDA margin for our sales growth was 39.1%. For the first nine months of 2019, adjusted EBITDA grew 32.7% to $266.5 million, and adjusted EBITDA margin was 13.6%, a 210 basis point improvement over the first nine months of 2018. Our drop down to adjusted EBITDA margin during this nine month period was 30.3% in total and 46.1% on a same branch basis. Third quarter SG&As of percent of revenue was 14.5% compared to 14.8% in the third quarter of 2018 and 15% last quarter. The year-over-year decrease was primarily the result of lower acquisition and closure costs related to USI. Moving to slide seven, adjusted income for the third quarter was $52.7 million, or $1.53 per diluted share, compared to $44 million in 2018, or $1.23 per diluted share. Third quarter 2019 adjustments were approximately $140,000, primarily related to costs associated with the acquisition of biking installation. Our effective tax rate was 23.2% for the third quarter due to some discrete items captured in the quarter. For long-term planning purposes, we still guide to a normalized tax rate of approximately 26.5%, which is reflected in our adjusted EPS number of $1.53 per diluted share as compared to our reported EPS of $1.60 per diluted share. For the first nine months of 2019, adjusted income was $138.8 million or $4.02 per diluted share compared to $107.1 million in 2018 or $2.99 per diluted share. Adjustments for the first nine months were $3 million and were primarily associated with the acquisition and integration of USI. Interest expense in the third quarter of 2019 was $9.5 million and for the first nine months was $28.7 million. As you can see on slide eight, CapEx for the first nine months of the year was $34.1 million, 1.7% of sales, slightly below our targeted long-term range of 2% to 2.5%. Working capital as a percent of sales for the trailing 12 months was 11.6% versus 11.3% a year ago. This increase was primarily due to the strong growth in heavy commercial, which has longer receivable terms, and a higher mix of installation business from a year ago, which carries higher working capital requirements. We ended the third quarter with net leverage of 1.64 times trailing 12 months adjusted EBITDA. Total liquidity at September 30th, 2019 was $360.2 million, including cash of $171.6 million and accessible revolver of $188.6 million. Operating cash flow was $182.8 million for the nine months ended September 30th. As Jerry mentioned, our number one choice for our free cash flow is acquisitions, and our second is share repurchases. While our pipeline of acquisition candidates is robust, we are also focused on enhancing our capital structure. We have therefore announced a $50 million accelerated share repurchase program, which should be completed sometime in mid-first quarter 2020. Moving to annual guidance, based on the last two months of STARTS data and conversations in the field with our customers and branch managers, we've raised our outlook for housing STARTS for 2019 to a range of 1,245,000 to 1,275,000. Our previous outlook was 1,230,000 to 1,270,000 STARTS. Turning to slide nine, in conjunction with this change and as a result, Of our strong third quarter performance, we've raised both our revenue and adjusted EBITDA outlooks. For revenue, we've raised the low end by $15 million to $2,625,000, and the high end by $5 million to $2,645,000. The low end of adjusted EBITDA has been raised by $9 million to $354 million, and the high end was increased $5 million to $360 million. Robert will now discuss operations.

Thanks, John. Turning to slide 10, our strong performance quarter after quarter is a testament to our team's hard work, alignment, and cadence by which we run the business, our ongoing operational efficiency initiatives, our commitment to excellent customer service, our strong customer and supplier relationships, and our insistence that growth and profit go hand in hand. Starting with ThruTeam's third quarter financial results on slide 11, sales grew 7.3%, handily beating lagged housing starts, which were down 1%. Volume accounted for 3.8% of this growth, while selling price increases contributed 3%. ThruTeam's adjusted operating margin improved 80 basis points from a year ago to 14%. Service partners' third quarter sales, as shown on slide 12, were up 3.8%. driven by a 4.4% increase in price, offset by a slight decline in volume. We continue to walk a tightrope between price and volume as we've seen excess fiberglass material flow through to the distribution channels, putting pressure on price. Our team has done a great job managing this balancing act, as evidenced by the 150 basis point increase in service partners' adjusted operating margin to 10.6%. the highest adjusted operating margin reported since our spinoff in June 2015. As we look ahead, the acceleration of STARTS is positive for both of our business segments and is supported by the continued optimism of our builder customers. As STARTS continue to climb, which we believe they will, we will continue to leverage our operating platform to help drive solid financial results. Moving to slide 13, we're extremely pleased with the strength of our commercial business which once again post a double digit growth. On a same branch basis, commercial revenue grew 18.8% in the third quarter and 21.4% year to date. Commercial now accounts for approximately 23% of our total revenue, almost evenly split between heavy and light commercial. As a matter of reference, commercial represented only 16% of our total revenue at the time of the spin. We plan to continue to grow our commercial business through a number of initiatives. We've mentioned before that light commercial is very similar to residential, and most of our branches have the ability to perform this work. Accordingly, we are providing additional resources and tools for our salespeople and branch managers to help them better identify light commercial opportunities and secure additional work. Acquisitions present another avenue for growth in the commercial space. Over the past few years, we've acquired three firms that specialize in heavy commercial insulation, expanding our reach in a number of major cities, including Chicago, Los Angeles, and San Diego. We're also planning to greenfield a handful of new locations specializing in heavy commercial projects. New York is just one of our most recent moves. In these greenfield locations, we are partnering with a general contractor with whom we have a previous relationship. As they start up new projects and new geographies, the work is already there for our company to perform, and the expense to set up a new location is minimal for us and leads to quicker profitability. Looking ahead, our commercial backlog remains robust, and we're bidding on projects well into 2022. Before turning the call back to Jerry, I want to touch base on a few areas outlined on slide 14. First is labor, which continues to be tight not only for top build, But for all the trades in our industry, we believe we have a leg up on the competition by offering a comprehensive benefits package, which helps make us an employer of choice. In addition, our ability to share labor among our branches is a major differentiator and gives us a competitive advantage. We're also investing in new areas that we believe will continue to improve labor productivity. Second is spray foam, which continues to grow, but at a slower pace than a year ago as builders pivot to entry-level homes in an effort to provide a more affordable product to meet the demands of first-time buyers. As a reminder, although a great solution for our customers, spray foam is about twice the cost of fiberglass insulation. Finally, moving to slide 15, our senior leadership team recently undertook an in-depth review of our corporate values and culture. We believe our strong values are a key component of our success, and they will continue to guide us as we move forward. They include putting the safety of our people first, delivering results with integrity, respect, and accountability, focusing on exceeding the expectations of our customers, continuously improving and encouraging idea sharing, aligning as one team and valuing diversity, making a difference in the communities we serve, and empowering our employees to do their best individually and as a team. I am extremely proud of our entire Top Build team for their adherence to these core values and for their focus on working safely to deliver value, quality, and service to our customers. I will now turn the call back over to Jerry for closing remarks.

Before opening the call off with questions, I wanted to mention that in September, We hosted our annual strategy session with our board and key members of our leadership and operating teams. During this two and a half day meeting, we take a deep dive into all aspects of our strategic plan with a focus on both short and long term goals for our company. Our board is extremely supportive and the company's direction and the following key tenants of our plan remain in place. drive top-line growth and increase market share in our core residential and commercial installation and distribution businesses, expand existing product adjacencies through a deliberate and measured approach, improve operational efficiency throughout our organization, and make strategic acquisitions that supplement our organic growth. Operator, we're now ready for questions.

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for the first question. Our first question comes from Trey Moorish with Evercore ISI. Please proceed.

Hey, thanks, guys, and congratulations on another great quarter. Thank you, Trey. Can you talk a little bit about the kind of demand that you've seen? So we've seen a significant ramp from builder orders as housing demand has strengthened over the last several months. And given the magnitude of growth seen by the home builders that are reporting this quarter, it seems like there's a real significant potential for a ramp in insulation demand. And if that happens, we're kind of wondering how quickly could you scale your businesses to capture such growth? And would it be reasonable to assume that service partners would be better able to scale compared to True Team because of True Team's relatively fixed labor component in the near term?

Hi, good morning, Trey. This is Robert. So I'll start answering the question. So, you know, relative to demand, I think, you know, you can see in our Our volumes in Q3, I think we were happy with what happened on the residential side, even though we worked on more multifamily units in the quarter. We also saw an increase in single family units in the quarter as well. And then as you know, as we're getting into Q4, we're seasonally busy as a company, as the public builders are driving towards their closings before the holidays here. So I'd say we're very optimistic. The sentiment that we get from the builders is very positive as well. And we look forward for definitely a positive flow for the future. Relative to your second question, looking at our footprint and then looking at both businesses, I think we're very comfortable with an appropriate ramp in volume and residential and how we could service that. So I'll start with your last one on distribution. Looking at the network around the country, and where we can service some stuff, absolutely ramping up and continuing to service contractors around the network. We're very comfortable we can do that. But I would say we're also equally as confident on our contracting side and on the true team side of the business. I mean, I think one of the great things about our model and about our business is how we can share labor across the footprint and how we're constantly working on both ends of getting new labor into our network, but then also constantly improving the productivity of the existing labor that we have. So we're very confident and comfortable with our ability to ramp. And I'll just give you a little short story, which I think is a good one, relative to that ability that we have. And that is, I could give you an example of a large public builder recently that were looking to push their closings in about a five-day period. And they were looking to push about 90 to 100 closings. And we were the only contractor that could pull together from about five different branches in this geography. And quite honestly, we got their houses closed in two days versus the five to six days they were asking us for. So that's the power of our network. It's the power of how we can share labor, share equipment, share material, share inventories as well. So I think just summary, we're very confident in our ability to handle the ramp up.

Hey, guys. It's Steve Kim. I just wanted to jump in here with sort of a broader question. Over the past few years, we've seen some pretty notable choppiness in the trajectory of manufacturer pricing as new lines have been turned on and such. And you guys have done a great job, obviously, navigating through any choppiness using your scale and breadth and driving margins higher. That said, we're hearing that virtually all the insulation guys, manufacturers are preparing to implement a January increase. And more importantly, seem to be focused on establishing a steadier cadence of price increases going forward. And so regarding that, I had two questions. One is, in your opinion, are the industry conditions right now in place that would allow for greater consistency in manufacturer pricing? And two, if a steadier cadence were to emerge, could this enhance your company's competitive advantage even further?

Sure. Jerry here, let me take a crack at that. So I would say that, you know, what happened last year was unprecedented from the standpoint of the significance and the frequency of the increases. I think it probably does, and I'll caveat this with saying that, you know, we can't speak for the manufacturers, what they're going to do, what they want to do. But I think it's probably a fair comment to say that a steady, more predictable, if you want to call it, schedule of increase is probably good for everybody. As you commented, we're very confident in our ability to stick handle whatever happens. But I probably would say that a steady schedule of increases is far better than the rapid fire we had a year or so ago. And also keep in mind that Robert and his team do a wonderful job of ongoing relationships with suppliers. It's constant conversation. So as it affects our business directly, Yeah, there can be choppiness externally in terms of what's announced, but the relationships that we have, long-term relationships with all the suppliers, you know, really kind of smooths that out internally for us. So, Robert, I don't know if you have anything to add on to that commentary.

Yeah, thanks, Jerry. So, Stephen, I would agree with everything Jerry said. I think it's obviously supply and demand, right, as we come out of the year, head into next year. From that perspective, we haven't seen anything, any public announcements, but we wouldn't be surprised if there is an announcement from the manufacturers. And I think, you know, the one thing that we keep pointing to, we think there is ample supply. And just a reminder, two of the large manufacturers have announced additional capacity coming on late 2020, early 2021. So that's how we think about it.

Great. Thanks very much, guys. Appreciate it.

Our next question comes from Phil Eng with Jefferies. Please proceed.

Hey guys, congrats on another very strong quarter. Great to see you raise your starts forecast. That's pretty encouraging and lines up with some of the comments from the public builders. Appreciating there could be a lag, but do you expect to see your improved outlook on housing to start showing up as soon as fourth quarter? Or is this more of a 2020 event?

Phil, this is John. So I think Part of it shows up in the fourth quarter because, you know, I think the last two months we probably have averaged about $1.3 million in terms of seasonally adjusted. So one of the reasons we bumped up our full-year estimate, our full-year guidance, I should say, is driven by that. But, you know, we've remained pretty bullish and optimistic in terms of obviously the long-term impact in residential and commercial. So, yeah, a little bit of the increase we saw was driven by the optimism it starts. And we'll come back to you in February with our 2020 outlook. at that point.

Got it. And then to be clear, I mean, your volumes are generally outpaced, lagged housing starts pretty noticeably. Any color on what's driving that upside? I mean, certainly commercial has been very strong, but have you been accelerating share gains this year?

Yeah, so I think, you know, we talked about it in the prepared script and, you know, 18, 19% increase in terms of commercial growth, which, by the way, is a little bit less than we experienced First half from a comp standpoint, but we talked about that on previous calls, that the comps get a little more difficult the back half of the year. So certainly commercial has been a big part of that. Having said that, residential new construction, I think, despite the fact that we're seeing a, I'd say, a little bit more of a mixed shift to multifamily versus a year ago, our residential new construction on the True Team side has been very strong. We do think we probably picked up a little bit of share in the True Team side. And then there was a partial offset, as we talked about, in terms of down slightly on service partners. Most of that driven by those late 2018 actions we took in terms of price discipline.

Bill, the one thing I would add to that is the acquisitions that we've done over the last couple, three years, not just USI, but all the other ones as well, the job that we do integrating these acquisitions into our footprint, as time goes on, that really pays dividends. Because what that does is that strengthens our position in key geographies. And as time goes on, you know, the integration job that we do really pays dividends in terms of our ability to service our customers.

That's great. And just one last one for me. I think you mentioned on the call there's excess fiberglass supply out there. It's had some pressure on pricing for service partners, but you've managed that quite well. But curious, has that led to better buy on your end from True Team, and has that helped on the price-cost front this year? Thanks a lot.

It fills us, Robert. So, you know, we're constantly working with the manufacturers, talking with the manufacturers relative to, you know, whenever they have excess capacity and stuff. So it's an ongoing discussion with us, with folks. I think, you know, I'd point back to we haven't seen significant, you know, selling price declines, and our teams have done a really nice job of balancing that in the field. And I think, you know, that the term that we use is really good price discipline, selling price discipline in the field, and we'll keep that up for sure.

Okay, great. Good luck in the quarter. Thanks.

Thanks, Phil.

Our next question comes from Ken Zenner with KeyBank. Please proceed.

Good morning, everybody. Morning, Ken. Another boring quarter for you guys. Steady EBIT leverage. John, if we go back to this 1%, you guys, excuse me, the... You know, the share gains you're having on the installation side, I think you were highlighting that was a mix of residential where you did gain a little share, I think is what you said, as well as commercial. Is that correct? Correct. I don't want to try to do the math right now because I'm going to mess it up. But, you know, if you have about 75%, 77%, of your business is single family, that really suggests your commercial, you know, if the market's down 9% or it starts, let's say, you were down 5%, I mean, your commercial is really firing on all cylinders there. When you sat down at your guys' review that you mentioned in October, I mean, are you still thinking commercial is going to be, let's say, a quarter of your business, you know, in two or three years, given what we're seeing in new construction? any M&A you do in new construction for residential versus commercial taking a larger share? Because this is probably what distinguishes your business model going forward versus people's impression of just new residential firms.

Ken, this is Jerry here. So, you know, obviously the numbers in terms of the percentage that commercial becomes our total business will depend on what happens with residential. But I can say that We're happier than ever with the development of our commercial business. It's been a deliberate, disciplined ramp-up. It's a bit more challenging, complicated business and requires some different attention and some things going on in the job site, so... So we did some acquisitions here last year that we really have done a nice job of integrating, and our footprint's growing. Robert spoke a little bit in his prepared comments about some green filling that we're doing. That's also very effective. So, you know, we really are assembling some scale there now, and the headroom that we have in the commercial business, we spoke to that before, is huge. As a matter of fact, that sandbox is even bigger than residential, and, you know, our share there is ramping up And there's a lot of headroom. There's a lot of headroom, and we're really happy with the capability that we're developing. And, yeah, we do see that continuing to grow and continue to add momentum. And, you know, will it get to a quarter of our business? Who knows? But that's – it's getting there almost now. We're very close now. And, yeah, I do see it probably happening. Okay.

I mean, it seems like, John, I know you took up the single start guidance and builder orders are, you know, doing well, but it really seems as though if you look at the units in 3Q, it seems like more of the beat came from the commercial versus the reacceleration and residential. Is that a fair observation?

Yeah, Ken, without question. Commercial was a bigger piece from a percentage standpoint as we set up about 19% in total. So... But, again, residential and construction, very strong on True Team, despite the fact that we've got some slight headwinds in terms of, like I said, that mix of multi- and single-family and even a slightly smaller footprint, which drives a lower revenue per unit for us. But, yeah, we're real pleased with the volumes that we had in the business, in both lines of business, residential and commercial.

All right. I think there's a lot to talk about in commercial. I'll get off. Thank you. Thanks, Ken.

Our next question comes from Matt McCall with Seaport Global Securities.

Please proceed. Thank you. Good morning, everybody.

Good morning, Matt.

Maybe I'll continue on the commercial theme. It seems as though maybe some of the macro indicators are slowing a bit. I'm curious about, I guess, any indications that you're seeing of slowing activity and maybe what the some of those company-specific growth opportunities, are they to the point where the cycle matters less if there is any type of softening?

Hey, Matt, this is Robert. I'll take that question. So, you know, relative to commercial, you know, as I said, pipeline is robust. We're bidding jobs well into 2022 right now. And whenever we think about it, I mean, I'll build on what Jerry said. You know, it's a very big space in the commercial side of the business and you know 23 of our revenue we feel like we have great share gain opportunities there we're capitalizing upon that right now but beyond that you know we're we're green fielding locations we got the opportunity for acquisitions growing our core current heavy commercial locations as well so you know we're only we're only in that ballpark of 11 to 12 share from the commercial perspective And we see a lot of runway there. So, you know, we don't see it softening. If it did, we think we'll continue to, you know, capitalize on the initiatives that we're putting in place and gain share in the commercial space.

Okay. Okay, thanks, Robert. The next question, I guess, John, the organic incremental, I remember last quarter you talked about some of the items Excuse me, that we're going to impact the trend, I guess, from what you report in Q2 to what you're going to report in Q3. I think you talked about USI and commercial, some other maybe sources of pressure. Can you talk about the outlook, maybe just as we talk about or we think about Q4? I don't know if you want to make any comments about next year, but any other items you should call out to make us understand, you know, what the trend should look like as we exit the year?

Sure, Matt, sure. So, you know, if we go back to second quarter, our same branch pull-through was about 76%, if I recall. So we've reported 40%, which we're ecstatic with both, obviously, but pretty consistent with what we've been saying all year. The comps got a little bit tougher and will continue to get a little bit tougher in the fourth quarter for us. So when we think about the 40%, you know, I'm going to start with, you know, great operational performance both at the branches and and in the branch support center. So we continue to perform really well both in the field and here in Daytona Beach. In addition to that, you know, again, tied to the significant material cost increases we saw a year ago, the first, second, and into the third quarter, the comps on that have gotten a little bit easier throughout the year for us because last year, as you know, we were chasing that, did a pretty good job of catching that the back half of the year. But looking ahead to the fourth quarter on that one, that comp gets more difficult, too. I think the other thing, we do expect a strong commercial, but even a year ago, our commercial performance in the fourth quarter was probably our strongest of the year, so that comp gets a little more difficult. And then USI synergies, the last piece helping to drive that 40%. Same story, I think in fourth quarter a year ago, we were starting to deliver those synergies in a greater cadence, so fourth quarter, the comp gets a little more difficult. Having said all that, if you do the math on our guidance in the fourth quarter, we still have roughly a 24 to 25% pull-through on our incremental revenue at the midpoint of our guidance. So, you know, we're happy with that. We'd be happy to report on that when we get to our fourth quarter call. But that's kind of the way it's going sequentially and how the comps look year over year.

Okay.

As far as 2020, we're not at the point right now where we're going to provide guidance on that. We will on our fourth quarter call sometime late February. Okay. But, yeah, we'll be prepared to talk about that in specifics then.

Okay, that's great. Thank you.

You're welcome.

Our next question comes from Justin Spear with Zellman & Associates. Please proceed.

Good morning, guys. Thank you for the time. I have a few questions. I wanted to start with that USI integration comment. Just curious if you can give us some context on where your synergies are now. or how much you've accrued thus far, and maybe how much is left in that pipeline, and if possible, where those underlying EBITDA margins are for USI in the third quarter.

Yeah, so this is John. So we'll talk a little bit about the guidance we provided originally at that deal with $15 million of synergies kind of broken evenly between supply chain, between, you know, branch consolidation, and also around corporate costs or the corporate back office expenses at their branch support center in Minnesota. So as we said on previous calls, we've significantly delivered much more than that at this point, and we've done it much more quickly. We are at a full run rate. Kind of in the second quarter, we were pretty much at a full run rate in terms of those synergies. So really, from this point on, we're not really delivering incremental. In fact, It's almost impossible for us to really determine exactly what would be USI because we've done, you know, low double-digit type of branch consolidation between our true team and the USI branches. But suffice to say, we've delivered a lot more than we originally anticipated, and we did it quicker. If you go back to our first and second quarter reporting, We did break out acquisitions, and I believe we had roughly a 19% EBITDA margin on about $135 million worth of sales that were incremental year over year. So that gives you kind of the flavor of the type of performance we have on USI, because that was all USI. So obviously a great transaction for Top Build, great shareholder returns, and you're seeing that lift through on our results at the back end for this year.

And you mentioned that you're at full run rate in the second quarter, but that implies on a year-over-year basis that you still have, as you look to the third and obviously the fourth quarter, and even the first quarter, you still have some year-over-year carryover good guy to think about as potentially an offset to any unexpected headwinds. Yeah, Justin, that's correct.

I think, though, as we get to the fourth quarter, that number gets – significantly smaller. As we get to the first, it's really not significant at all because we've done most of our – we did the back office consolidation early, early January. A lot of our branch consolidations towards the latter part of last year and the early part of this year. So not near as much supply chain, obviously, with consolidate early third quarter 2018. So really not much more in the fourth from a comp standpoint. And as we get to next year, really not much at all.

Justin, as we said earlier, as time goes on, because of the strength of the integration, the way we do it, it becomes part of the strength of our ongoing business, and that's part of what you see relative to the overall top load results.

Makes sense, and it's been just a tremendous hit for you guys, and I appreciate that color. The next question I have is just the pricing across your business. in terms of the sequential trend for you and how that looks across the competitive landscape in view of the manufacturers, at least recently, having become a little bit, I guess, sequentially degrading their pricing back, I guess, removing the January price increase from earlier this year. I guess, give us a sense for what you're seeing and if that manufacturer price is leading to any kind of competitive types of pressures on your business.

Yeah, I mean, the only thing I'll talk about on pricing, I think, you've seen our pricing results. We break that out specifically as a line, and you've seen that on a comp basis drop year over year. I think, you know, early in the year, we were at a much more significant number, probably closer to something like a 6% improvement, roughly, at a place like Service Partners, like just under 6, 6.5% in total. That number was closer to 4%, I think, in the third quarter. So, The reason for that is because of that phenomenon we talked about a year ago where we were chasing that cost increase, that material cost increase we saw very significant in the first half of the year. As we talk about this year, we've seen some material inflation, but nowhere near a year ago. So I think sequentially we have seen some price increase, but it's been very minor across the entire business. Most of what you're seeing in our price is the comparison versus a year ago results. So You know, as far as material cost increases, like I said, we did have a first quarter manufacturer cost increase we talked about. We absorbed that. And, again, our sequential increase is rather moderate this year in both segments.

Perfect. And if I can squeak one more in, the commercial pipeline, you mentioned being robust with bidding into 2022. Really love to get your thoughts on where you're seeing that in terms of the core verticals or even geographies. Is it office? Is it education, healthcare, industrial? Where are you seeing such strength?

Justin, this is Robert. I would say across the different areas that you mentioned, the answer applies to yes. Relative to commercial growth, again, this is where we're capitalizing on opportunity in major markets. So You know, we're very strong in California. We're very strong. I talked about a green field, and we've got some already existing businesses in the northeast, including, you know, D.C., Philadelphia, New York. You know, we're seeing growth in Florida. For example, I would tell you, I'll give you two or three examples that maybe will help. I work in a lot of stadiums, so if I think like sports, entertainment stuff, we've got several big stadium jobs that are either happening now or that we're – going to start working on in 21 or that we're bidding for 22. The second thing I'd mention is a lot of distribution centers. So if I think about Amazon, we're working on a lot of Amazon distribution centers across the country. And then the third, which I think is infrastructure related, we're either working, either getting ready to start or bidding several airport jobs, whether doing terminal expansions or new terminals. So a lot of work in airports, I'd also say. Perfect. Thank you so much.

Our next question comes from Megan McGrath with Buckingham Research. Please proceed.

Good morning. Thanks for taking my question. I wanted to follow up a little bit on your commentary around the excess fiberglass supply in the market. Just curious if you have any thoughts on the extent of that and if you think the recent improvement in starts is enough to absorb that supply Or is part of your guidance in the fourth quarter assumed some incremental pricing pressure as that continues to plague the market a little bit?

Yeah, good morning, Megan. This is Robert. So I'll answer that from a couple of different angles. One, I would say that we do see ample supply, even though we're in a seasonally busy time, could tighten up a little bit. But there's, I would say, ample supply. If you think about what's happened the past 12 to 18 months, And back to your first part of your question about excess. So excess supply has been more in the BAT side of the fiberglass that's filtered somewhat into the distribution channel. But I'd say that also relates to, if you look back in the past 18 months, that's where the excess capacity has come online, has been with BAT insulation as well. So I think given where we are, given capacity that folks have both owned, And looking forward, I think we feel like there's ample supply right now. And again, we would point towards there's others bringing back additional capacity in late 2020 and Q1 of 2021.

And is that incorporated into your guide for the remainder of the year? Sure.

You're talking – Megan, this is John. You're talking – the product coming on, obviously, in late 20 or early 21 has no impact right now.

Sorry, no, the excess is in now. Sorry about that.

Oh, yeah, I mean, that's – we've incorporated that as part of our guidance, obviously, and so we haven't seen it, I think, in the past quarter or so, and we wouldn't expect to have significant material inflation.

Right. And then my follow-up just on the potential for expansion of your glass business, could you give – Any more color there? You talked about having some similar characteristics to insulation. What exactly is making you think that's an attractive business?

Yeah, Megan, Jerry here. Just to repeat, we've been in the glass business for a while. I mean, it's not new to us. We have some experience. And then with the USI acquisition, we picked up a couple more branches that have been real stars in terms of their performance. So Some of the characteristics relative to glass that mirror insulation have something to do with the size of the opportunity, which in glass is substantial, multiple billions of dollars, and the fact that it's a relatively fragmented business that would have some advantages if we were to scale it up relative to not only our relationship with suppliers, but also the talent that we could have across the network that we do in insulation. And, you know, there's some commonality relative to the supply chain. There's commonality relative to the fact that it's installer-centric. In other words, our ability to manage labor, and we have decades of experience doing that on the insulation side, looks very similar on the glass side. So the capability from a corporate standpoint that's driven the insulation success over the many, many years, there are a lot of comparables and a lot of similarity in the glass business. And as I said, you know, this We spoke before about product adjacencies and how we would do it on a very disciplined basis. This is a great example of that because, as I've said, we've been in this business before. We're not just stepping into something we know nothing about. We've done the research, and we continue to work hard on it, and we think it's very promising.

Great. Thank you very much.

Sure.

There are no further questions at this time. Please continue with your presentation or closing remarks.

Thank you again for joining our call, and we look forward to reporting our fourth quarter and year-end results at the end of February.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.