TopBuild Corp.

Greetings and welcome to the Top Built 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 Tuesday, February 25, 2020. 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 as 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 the table included in today's press release and in the presentation accompanying this call. Please turn to slide three. I will now turn the call over to Jerry Volis.

Good morning, everyone, and thanks for joining us today. We were pleased to end the year with a strong fourth quarter with solid top line growth and operating margin expansion in both business segments. For full year 2019, we again demonstrated the strength of our diversified business model and our seasoned management team as we delivered on our objective of achieving profitable growth. In 2019, the U.S. housing industry grew stronger as the year progressed, culminating in a 19.6% increase in starts in the fourth quarter. Our expectation that new residential construction will continue to strengthen in 2020 is based on several factors. Consumer affordability keeps improving. As mortgage rates remain low, wage growth is offsetting home price appreciation, and builders have pivoted towards supplying more entry-level homes. In addition, household formations continue to be strong. Many people who delayed home ownership are beginning to engage, fueling pent up demand. We're also seeing limited inventory, reflecting the slow ramp from the housing bust. All in all, an excellent operating environment for top build. And our 2020 annual guidance reflects our optimism. While John will discuss our financial results in detail, I want to start with a discussion of a few of the overall trends on slide four. Within the context of 90-day light housing starts, which were down 2.3% for the year, our 2019 net sales increased 10.1%, with same branch sales increasing 4.6%. Our commercial business again performed extremely well. with same branch revenue in the fourth quarter and full year growing 11.4 percent and 18.6 percent respectively. Our operating and EBITDA margin expansion are the result of our consistent focus on identifying and implementing operational efficiencies, realizing synergies from the USI acquisition, balancing selling price and input costs, and leveraging our national footprint and fixed costs across the company. all play a role in driving our bottom line, leading to adjusted EPS increasing 31% to $5.49. While Robert will talk about our commercial business plans and outlook in more detail, it is clear from our results over the past few years that our bundled solutions approach for general contractors continues to gain traction. This business now represents approximately 23% of our sales, up from 16% in 2015. And we now have an 11% market share compared to just 6% a few years ago. In addition, our commercial business is an important aspect of our uniquely diversified business model as it helps to mitigate any cyclicality of the residential new construction market. This was clearly demonstrated in the first half of 2019 when lag starts were down almost 7% and our commercial business grew over 23%. Turning to capital allocation on slide five, after pausing acquisitions to focus on the integration of USI, we completed one acquisition in 2019, Viking Insulation. More recently, in just the last week, we have closed on two acquisitions, Hunter Insulation and Cooper Glass. Furthermore, based on our strong prospect pipeline, we expect to close on additional acquisitions this year. And having developed a core competency integrating acquisitions onto our systems and supply chain, we expect to drive meaningful synergies quickly from these deals. As a reminder, our primary focus remains on core insulation companies, though we continue to evaluate a number of glass companies that would fit well with our existing $160 million business in this product adjacency. As noted on our last call, We believe this product category offers many attractive characteristics similar to insulation. While expansion in this area will be independent of our branch insulation network, we'll be able to leverage our management expertise, customer relationships, and supply chain model. Also on the capital allocation front, in 2019, we purchased 1.3 million shares of our common stock for approximately $111 million. This includes the $50 million accelerated share repurchase announced on our last call that should be completed no later than the end of this quarter. Our share repurchase program reflects the confidence of both management and our board 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. John will now discuss our financial results in detail.

Good morning, everyone. As Jerry noted, we finished with a strong fourth quarter, which closed out a solid 2019 for top bill. I'll start by discussing our fourth quarter results on slide six with comparisons to fourth quarter 2018, then provide an overview of full year 2019. In the fourth quarter, net sales increased 3.6% to $662 million, primarily driven by improved selling prices and volume increases in both residential and commercial. partially offset by a higher mix of multifamily work and an increase in entry-level homes, which generate lower revenue per unit. Gross margin expanded 120 basis points to 25.9%, and adjusted operating profit grew 14.1% to $76.6 million, with a corresponding margin improvement of 110 basis points. Both gross margin and operating margin improvements were driven by higher selling prices improved labor and sales productivity, and synergies from USI, partially offset by higher material costs. Fourth quarter 2019 adjustments were nominal at just under $200,000, primarily tied to acquisition-related expenses. Fourth quarter adjusted EBITDA was $92.5 million compared to $82.5 million, and our adjusted EBITDA margin was 14%, a 110 basis point improvement. Our drop down to adjusted EBITDA margin was 44% in the fourth quarter, driven by improved selling prices, higher volume, strong cost control, synergies from USI, and continued leveraging of our platform, partially offset by higher material costs. Adjusted net income for the fourth quarter of 2019 was $50 million, or $1.48 per diluted share. compared to $42.2 million, or $1.20 per diluted share, in the fourth quarter of 2018. Looking at our full year results, total sales increased 10.1%, $2,624,000,000, principally driven by our USI acquisition completed in May 2018, increased selling prices, and higher volume. Gross margin expanded 180 basis points to 26%, primarily due to increased selling prices, synergies from the USI acquisition, higher sales growth in our installation segment, and operational efficiencies, partially offset by higher material costs. Adjusted operating profit improved 25.8% to $292.7 million, with a corresponding margin improvement of 140 basis points to 11.2%. Full-year 2019 adjustments totaled $3.2 million, including rationalization charges and acquisition-related expenses, the majority tied to the USI acquisition. Adjusted EBITDA grew 26.7% to $359.1 million, and our adjusted EBITDA margin improved 180 basis points to 13.7%. Our drop-down to adjusted EBITDA margin for 2019 was 31.6%, 46.1% on a same branch basis. Adjusted net income for the full year 2019 was $188.9 million or $5.49 per diluted share compared to $149.3 million or $4.19 per diluted share for full year 2018. Interest expense in 2019 increased from $28.7 million to $37.8 million primarily related to the funding of the USI acquisition, which included the issuance of $400 million senior notes and our borrowing of the $100 million delayed draw term loan. Turning to slide seven, CapEx for full year 2019 was $45.5 million, approximately 1.7% of revenue. During the year, we issued $15 million of equipment notes to help fund our fleet acquisitions. Working capital as a percent of trailing 12-month sales was 10.3%, 10 basis points lower than prior year. A reduction in inventory was partially offset by an increase in accounts receivable day sales outstanding driven by the continued growth in our commercial business. Our effective tax rate decreased from 25.5% in 2018 to 24.7% in 2019, primarily due to an increased benefit from share-based compensation partially offset by an increase in state and local taxes. For 2020, we expect our normalized tax rate to be 26%, which is higher than our 2019 effective tax rate since the 2020 normalized rate assumes no benefit from share-based compensation. Operating cash flow was $271.8 million for the year. Total liquidity at year-end was $373.4 million, inclusive of the available balance on the revolver of $188.6 million and cash of $184.8 million. Net leverage at year end was 1.54 times. Moving to 2020 annual guidance on slide eight, we are projecting total sales to be between $2,765,000,000 and $2,835,000,000 and adjusted EBITDA to be between $387,000,000 and $412,000,000. This assumes a range of residential new housing starts at between 1,300,000 and 1,340,000. It also includes the two acquisitions, Hunter Installation and Cooper Glass, which we acquired this month, but no additional acquisitions we may make this year. On slide nine, we've also provided our long-range modeling targets for a number of metrics, most of which are unchanged from when we last provided an interview a year ago. The range for working capital remains at 10% to 11% of trailing 12-month sales. The range for same-branch incremental EBITDA is 22% to 27%, and 11% to 16% for acquisitions, also unchanged. We still project $80 million of revenue for every 50,000 increase in residential housing starts, and our commercial sales growth to average 10% annually. We've lowered our normalized tax rate to 26% from the previous target of 26.5%. Finally, we now project CapEx at 2% of sales compared to the previous guidance of 2% to 2.5%. Building on these metrics, here is what Topfield could hypothetically look like at 1.4 million starts. Starting at 1,320,000 starts, the midpoint of our 2020 guidance, and increasing starts by 40,000 each year through 2022, we project just over $3 billion in annual revenue and EBITDA around $460 million delivering at 15% EBITDA margins. Acquisitions would bolster these numbers, and we expect considerable activity in this area over the next three years. Robert will now discuss operations and segment results.

Thanks, John. Good morning, everyone. Before discussing True Team and Service Partners' financial results, I want to thank our entire Top Bill team for their hard work, dedication, and ongoing push for operational excellence throughout 2019. Everyone's efforts delivered another great year for our company. Looking at True Team's results on slide 10, fourth quarter sales grew 4%, beating LAC Housing Starts. Contributing to this increase were selling price, volume growth in both residential and commercial, and contributions from acquisitions. Our solid results were offset to some extent on the residential side as a result of a higher mix of multifamily, and the move by production builders to more entry-level homes, which have a smaller footprint, resulting in a lower take per unit. For the full year, True Team sales were up 13.4%, 6.3% on a same branch basis, again, beating lagged housing starts, which declined 2.3% for full year 2019. Shifting to True Team's adjusted operating margin, we saw a 90 basis point increase in the fourth quarter to 13.4% and a 150 basis point increase for the full year to 13.3%. Primary drivers were increased selling price, increased sales volume, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs. Since 2015, our first year as a public company, True Team's full-year adjusted operating margin has expanded 820 basis points, a testament to great operational execution by True Team's leadership and our team in the field. Turning to service partners on slide 11, in the fourth quarter, total sales grew 4.3%, led by selling price increases of 2.3% and volume growth of 2%. For the full year, service partner sales were up 5.1%, driven by higher selling prices and a small contribution from acquisitions, offset by a slight 0.8% volume decline. You may recall that in the fourth quarter of 2018, we walked away from some low-margin business, which our team has been working hard to replace. Sales volume did increase in the fourth quarter, and we expect volumes to continue to grow in 2020. As a result of the exiting of that low margin business in 2018, service partners adjusted operating margin expanded up 120 basis points in the fourth quarter to 11.3% and up 90 basis points for the full year to 10.5%. Adjusted operating margin also benefited from strong cost control, increased selling prices and operational efficiencies partially offset by increased material costs. Moving to the next slide, I know one top of mind issue for many is material pricing and industry capacity. The manufacturers announced a cost increase effective late January, and while it's still early in the year, based on recent housing starts and the optimism we are hearing in the field from our builder customers, the increase will likely have some traction. Capacity could also tighten, assuming housing starts continue to improve. We don't expect a situation akin to 2018 where we saw loose fill material on allocation. Additional back capacity has come online since 2018 and additional loose fill capacity is expected to be online by the end of this year and Q1 of 2021. We are confident in our supply chain and our ability to successfully pass through material cost increases as we've previously demonstrated. Just a reminder, labor will remain at a premium in this rising housing environment. One of our strongest growth areas is our commercial business, as shown on slide 13. Sales grew 24% for the full year, 18.6% on a same branch basis. On the heavy commercial side, we plan to green fill more locations this year, which will bring our heavy commercial presence to more than 22 locations. Recent projects have been awarded include Two Penn Plaza in New York City and the George Lucas Museum in LA. We also continue to seek heavy commercial acquisitions, which will expand our market presence and the types of insulation services we can offer to our general contractors. This bundle services approach has given us a distinct competitive advantage, growing our market share of this $5.5 billion industry from 6% just a few years ago to 11% today. Looking ahead, we are extremely excited about our prospects for our commercial business. We have a robust pipeline of potential activity and are already bidding jobs well into 2022. I will remind everyone that commercial revenue can fluctuate quarterly, especially for heavy commercial projects. As was evident in 2018, when sales started out slow for the first half of the year, but increased in the back half of the year. Moving to slide 14, As Jerry mentioned, we completed two acquisitions this month, Hunter Insulation and Cooper Glass. Hunter is a residential insulation company that has been serving the Long Island market for over 80 years, and we're pleased to have the talented team at Hunter join our True Team business. Hunter installs both fiberglass and spray foam and generates approximately $10 million in revenue. This is a great addition for True Team. increasing our market share in this high-growth region and providing strong synergies as the company moves on to our supply chain. Cooper Glass, which specializes in commercial storefront glass, is our first dedicated acquisition in this adjacent product category, where we already generate approximately $150 million of annual revenue. Cooper, which will contribute approximately $9 million in annual revenue, has been serving the Memphis market for 28 years, and we're happy to have the Cooper team join our company. We're excited about the prospects of the glass business and expect to grow our footprint and market share through strategic acquisitions. Before turning the call back to Jerry, I want to talk about one area of operations that gets little attention publicly but is at the heart of our company, safety. As slide 15 notes, putting the safety of our people first is a core value and it guides everything we do at Top Build. We believe safety is a lifestyle both at work and at home, not just a program or an initiative. We strive for a zero accident safety environment at our nearly 300 branches, as well as our Daytona Branch Support Center. Safety training to each branch is conducted monthly, and we ask our employees to sign a safety pledge where they promise to never sacrifice or compromise safety to perform a job and to report immediately any unsafe conditions to their supervisors. Our employees visit over 15,000 job sites every day, and we want them to return home safely to their families every night. In fact, a percentage of management's annual bonus is tied to our safety metrics. As we look out at 2020, we will begin to benefit from the substantial ramp-up in starts as the year progresses. We're further encouraged by our extensive conversations with builders who are reporting solid demand. We're growing our market share organically and through acquisitions, and expect to see continued margin expansion of both true team and service partners. Our team is energized, and we look forward to once again delivering strong bottom line results for our shareholders. All in all, it should be another great year for Top Build. Jerry?

Before opening up the call for questions, I want to briefly mention the announcement we made in January regarding my retirement at the end of the year. Launching Top Build as a public company in mid-2015 and driving outstanding financial results and shareholder value over the subsequent four years has certainly been a highlight of my business career. But it's important to understand that this track record of performance comes from the efforts of a broad team, beginning with Robert and John, extending to those here in Daytona at the branch support center, and most importantly, in the field with our locally empowered branch management. The board selection of Robert as my successor was a thoughtful decision At the end of an organized process over the last couple of years, Robert and I have worked closely developing the company's strategy, and as COO, Robert has executed this strategy throughout our national footprint. He has more than 10 years of experience with our business model, and you can expect the same focus on profitable growth to continue under his leadership. In closing, 2020 should be another year of profitable growth for Topville. With a macro environment of strong residential housing starts and commercial activity, We will continue to focus on growing markets here organically and through acquisitions. Our culture of cost control and operational improvement will translate that top line into further margin improvement. Operator, we're now ready for questions.

Thank you. If you would like to register a question, please press the one followed by the four 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. Once again, to register a question, please press the 1 followed by the 4 on your telephone. One moment, please, for the first question. Our first question comes from Ken Zenner with KeyBank. Please proceed.

Good morning, everybody. Morning, Ken. Jerry, congratulations. Very well done there. Could you guys comment on share gains by business segments? So if starts were down 2.3% for the year, you guys grew 6%. There's probably two or three points of price in there, but can you talk about on the single family, on the residential side, how much share you think you gained there versus what was happening in the commercial market, if you would?

Hey, Ken, this is John. So I think, you know, one of the things we talked about in our prepared remarks was some of the headwinds we had, especially in the fourth quarter, excuse me, on things like the mix of multifamily units and the impact of the more we're seeing more of the entry-level type homes, which obviously affects our revenue per unit. But if you look at our true team units in terms of how we perform, we were up about 3%. in terms of units in the fourth quarter on our true team business, where obviously we have great clarity and great review of that. I think on a full year basis, up about 1.5%. So to your point, I think, you know, if you look at single family starts in the fourth quarter, up about 2.4%. Not sure of the full year number, but certainly from a share standpoint, we feel like we at least held our own for the full year and the fourth quarter. And if anything, picked up a little bit. But as I said, what affects the volume a little bit, too, is that mixed impact I talked about on the multifamily and the take per unit on the entry-level type homes.

Excellent. And as my second question, you know, your incremental EBITDA is, well, it's been very strong, to put it mildly. I'm just, and I know your long-term targets, but I mean, it seems like your M&A incrementals went up. You did mention you walked away from lower margin businesses. So the strength that we saw, unless I, if I typed it in correctly, I mean, you were north of 40% in the second half of 19. I know your guidance is what it is, but what would cause degradation to that 22 to 27% range in the first half, given all the favorable factors you've highlighted? Thank you very much.

You're welcome, Ken. This is John again. Yeah, I think I'm certainly proud of what the team has accomplished last year and the years preceding that. One thing we would point out, 2019 had a couple tailwinds, which are now baked into our 2019 base year, which really are non-recurring. So the first would be the fact that we did have a favorable balancing of price versus our input cost, especially material, versus 2018, especially the first half of the year. So that's now all baked into our comp. And then the other side of that is USI. The acquisition has generated significant synergies. Most of those we finalized early in 2019. So that's now baked into our comp also. So listen, I think if you take the midpoint of our guidance that we provided for 2020, on a same branch basis, we're just about right in the middle. of that long-term EBITDA drop-down that we provide, the 22 to 27. And quite frankly, we'd be real happy to deliver that. But we did have a couple things that are now baked into the comp that we will be comping to in 2020.

You know, Ken, Jerry here, the one thing I would add to that would be that, you know, to all of John's commentary, you know, we want to put a guidance out there that we're comfortable with. We always work really hard to beat that. And, you know, in two of the last three years, we have done that. It's a number we're comfortable with. We have a hard-charging management team here that we'll always try to optimize. That's how we think about it.

Thank you.

Our next question comes from Trey Morris with Evercore ISI. Please proceed.

Thanks, guys. The first place I want to start is on the Cooper Glass acquisition. You've suggested that you're looking heavily into expanding your glass business. But how do you think about this acquisition specifically and just thinking about potential future acquisitions? What tools do you have or what can you give the team at Cooper to support some fairly sizable growth for a business of that size?

Hey, good morning, Trey. It's Robert. So we think about the glass business a lot like we think about the insulation business. There's a lot of the model fits really well with the with our model at Top Build, especially our in-style business on the True Team side. We've done some work in this space, quite a bit of work in this space. We know there's synergies to be gained as we're building the model there and as we build the scale from that perspective of the business. There's customer relationships that we can leverage relative to that. So we think there's quite a bit of tools to bring. And then when we look at Cooper specifically, Nice market in the Memphis market, well-established business, and something that whenever we look at the acquisitions, we always look at the talent. And there's a great team there at Cooper that we think can help broader in the business. And so that's one thing that attracts us, and that's kind of the filter we go through as we look at the glass businesses. And I think, as Jerry said, we've got a nice pipeline of potentials there.

And then on the – On the service partner side of the business, clearly you've had a tailwind for this year from walking away from low-margin business in late 2018. But how should we think about the underlying margin improvement in that business specifically going forward now with that one-time tailwind, if you will, no longer giving you a little extra boost?

Hey, Trey. This is John. So, in terms of service partners, as we've talked in the past, it's a business that obviously has a lot more variable costs than fixed. So, as we grow that business, we will leverage some of the fixed overhead we have, but from a margin expansion, as we think about the 22% to 27% range on incrementals, it certainly is at the lower end of that, but Yeah, we believe there are opportunities to continue at expand margins based on the growth we see, industry growth expected. But it will be on the lower end of our guidance typically because of the fact that, again, it's a much more variable cost-based business. Okay.

Thank you very much, guys. Appreciate it.

Our next question comes from Michael Wood with Nomura Instanet. Please proceed. Thank you.

Hi, good morning. Good job again on executing this quarter. You talked about the increased multifamily with the builder push towards more affordable supply. With rates low moving lower, are you seeing a mix back up in your backlog, or is the mix down a trend you'd expect to continue?

Yeah, Mike, this is John. So as we think about that on a go-forward basis, and I think you've seen the last three months of start data that have come out, it's been a little more heavily tilted towards multifamily versus single. So we don't see that phenomenon, at least in the near-term or mid-term ending. And then when we think about the take-per-unit impact that we saw in the back half of the year, we'd expect that to continue also. We think, and certainly we see it in our pipeline right now, the size of the footprint is having some degradations decreasing a little bit based on that move to more entry-level homes. As a matter of fact, In our guidance in terms of 2020, we have baked in about a point of degradation on a residential new construction tied to that footprint. So, yeah, I think those are trends that we don't see changing in the near or midterm, and we've really baked that into our guidance at this point.

Okay. As it relates to the conversion margins, I wanted to just ask about technology adoption. Can you just tell us if there have been major rollouts recently, if any are planned, and And if they are largely behind you, you know, where are you in the process of realizing the full benefits of productivity there with, you know, any new technology you've rolled out?

Hey, good morning, Mike. It's Robert. So, you know, we've definitely experienced some in the past of things we've rolled out relative to improving installer productivity, relative to improving sales productivity. But, you know, it's a constant push for us around operational efficiency of looking for new ways. So I'll give a story, kind of a small example here. that we think is impactful. So, you know, we have a fleet of nearly 6,000 that go out every day. And so now we've installed the appropriate devices on our fleet that's going to allow us, number one, to make sure that we are operating under that safe environment that I talked about, how our folks are driving and everything from, you know, speed to fast braking and that type of stuff. So, safety, number one. But then it also allows us better as to how we're using the fleet relative to route optimization, relative to is the fleet idling, that type of thing. So it really just allows us to do a better job of making our fleet more productive, which, by the way, makes our installers and our drivers more productive as well. So we've got constant things that we're working. That would be one example I'd give you that we expect to see some benefit from here in 2020, 2021 years. But we're always pushing and looking for new ideas, and that's just our cadence as a management team.

Michael also realized that as activity levels pick up, housing starts to get bigger, that there's a natural leveraging of even our semi-variable costs, you know, the installation labor, the sales labor. Our productivity goes up naturally as we leverage higher levels of activity. So that's winning our back as well. In addition to all the things that Robert talks about relative to best practices and leveraging that across the footprint.

Okay, thank you.

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

Hey, Jerry. It's been a pleasure working with you, and congrats on the new role, Robert. Thank you. I guess to kick things off, your starts forecast for 2020 implies about 2% year-over-year growth, notably softened in some... what the public builders have been reporting and some of the forecasts out there. So just curious, what are you hearing from your customers? And do you have any concerns that bottlenecks such as labor is going to constrain growth?

Hey, Phil. Good morning, Robert. So John now kind of tacking this. So I'd say our builder conversations are definitely very optimistic. They're very positive as to what's going on. You know, they're seeing strong demand, strong foot traffic, good selling season here in the spring. So very positive coming from the builders. You know, I think as we said, we expect the ramp up in housing to happen throughout the year as a lot of these starts have come here in the winter months. We think it will be a ramp through the year as this goes so that the industry can ramp up as well. But I'd say in general, the builders are very positive and, you know, they're reporting good demand as you're hearing and reading as well.

Yeah, and Phil, the only thing I'd add to that, this is John, I'd add to that is that you mentioned that the actual starts numbers up about 2.5% roughly. Certainly from a lag start standpoint, we expect that to be a little bit better, and that's baked into our guidance too because, as you know, the fourth quarter 19 was significantly better than the fourth quarter 18 starts, and that's the first lag that goes into the next year. So that's baked into our numbers. Again, we feel good about it at this point, so. Got it.

And then on some of the comments you just made, Robert, it'd be helpful to kind of help us think about the shape of the year, because you were just talking about a lot of the starts happen during the winter months, and it's going to take some time to build, and appreciating you have some tough comps on the commercial side. Any color to kind of help us think about the shape of the year would be really helpful.

Yeah, I mean, I think it's a good question, Phil. So I think the first thing we would point to is the lag. I mean, we think especially given the timing of the starts and stuff that we think that lag will extend and is extending today. You heard John obviously talk about the mix of multifamily has been very rich as well. So we think it's a nice steady ramp through the year when all happened here in Q1, but we'll see that ramp up throughout the year. And then I think the lag will extend. We're seeing that, we're hearing that as we think about 2020. I'd say, you know, we are, again, I'll just point to builders are optimistic. I would say, obviously, we're busy right now. So we expect it to be a good 2020 as the ramp happens. Got it.

And just one last one for me. You noted the manufacturers are seeing some traction on this giant increase and could go for a second increase. How have your conversations been on pricing with your customers? And, you know, you've done a fabulous job managing this price-cost dynamic, but any risk, at least for a quarter, you could get squeezed a little bit? Thanks.

Yeah, I think at this point, from a manufacturer's standpoint, we're in good shape. We had a good heads up, obviously, in terms of this first quarter price increase that was announced back, I think, early fourth quarter. We'll be well prepared, as we always are, to have conversations with manufacturers if another increase comes. And certainly with a pretty robust year expected, I'd say there's a good possibility of that. But we're always confident of our ability to pass through that cost bill. And I think, again, we've got great evidence of that. historically in our results.

Phil, this is Robert. I would add on to John's comment. With the builders, given the rampant stuff, labor is top of mind. That's something they're very focused on, which by the way, we think is a great top build advantage as to how we can move labor around, how we can move our assets around. We think that service model that we have is the best in the industry given our integrated systems and our ability to really leverage our footprint and stuff as well. Um, you know, so it's, it's, it's the common topic with the builders, uh, is obviously labor in there and wanting to make sure we can service them, which we're confident we can. Thank you for the color.

Our next question comes from a Sheldon Clark with Deutsche bank. Please proceed.

Hey guys, thanks for the question. Um, so we've seen a pretty significant acceleration and reported starts last couple of months and into January. And obviously, I think there's some noise in that data. So could you just give us a sense of how you think your underlying demand or volume growth is sort of trending for the first quarter?

Sheldon, this is Jerry here. You know, kind of per Robert's previous comments, I would describe that as saying that The direct alignment between housing starts reported and our revenue has never been perfectly linear. There's always a variety of factors that move around, the lag, the mix between single and multi. The commercial, which is an increasingly big part of our business, marches to a different drummer completely. But having said that, we have a lot of optimism relative to ongoing improvement in the business and higher volumes as 2020, you know, progresses quarter over quarter. It is true that, you know, the biggest starts improvement impact happened late in Q4. So, you know, is that going to impact us positively in Q1? It will, but more so later in the year. So, you know, the best we can do is to tell you that we are very optimistic for all the reasons we talked about. You know, builders, you know, are pivoting, as we said, towards smaller footprints. That's going to drive up the volume for sure in terms of units. And, you know, John talked a little bit about some headwind, not a big headwind, but some headwind relative to take per unit caused by more multi than single, smaller footprints. But overall, it's a very, very good picture. And, you know, that's why we're as optimistic as we are with our guidance for 2020. And, you know, we think that 2020, quarter over quarter, as the year goes on, is going to get better and better as it relates to volume.

Okay, that's helpful. Thanks. And I think you touched on this earlier, but I just want to get some clarification. If commercial growth surprises to the upside, can you just talk about what that means for your organic incremental EBITDA margins?

Yeah, this is John Feld. And so generally our commercial business in aggregate, both light and heavy commercial, is pretty comparable to resi. So not a significant change, plus or minus, versus what we see on the residential side. So from an incremental standpoint, really still within that 22 to 27 and not a really significant impact versus the overall top bill of results.

Okay, appreciate the questions. Thanks, Seth.

Thank you.

Our next question comes from Keith Hughes with SunTrust. Please proceed.

Thank you. You talked earlier about the growth in your commercial business. I think you said it was 23% of sales. Can you give us a rough breakdown of where you stand right now, commercial versus new residential, multifamily, remodel, things like that?

Keith, this is John. You're talking about in our overall sales volume? Overall sales volume, yeah. Yeah, so commercials about 23% of the overall number today, okay? And then if you look at our residential new construction within the business, which is, I believe, somewhere around 68 plus percent, somewhere in that range, 68 to 70% of the rest, that's about 70-30. So it's about 70% single family and about 30% multifamily in terms of units, okay? And on a revenue basis, you know, it's obviously a different split than that since multifamily is about 40% to 50% of the value of a single-family unit. So hopefully that helps you.

Okay. So you're saying 70-30 of the remaining 77%. Is that what you're saying?

Well, the remaining 77, maybe seven or eight points of that is R&R. Okay. Okay. So then you're down to a 68% to 70%, which would be RNC, and that RNC split from a unit standpoint split about 70-30 overall between single and multi.

Okay. And shifting to service partners with you, you've made your comments on the price increase in insulation. Where do you think channel inventory stands there? Has there been a pre-buy ahead of this, or what have you seen?

Hey, good morning. Keith, this is Robert. So I'd say, you know, given supply and demand, maybe there have been some slight pre-buy. I would just, you know, remind a lot of those contractors and stuff don't have huge facilities to buy up too much from that perspective. So there may have been a little bit that we saw in like, you know, early this year. The increases were mainly effective towards the end of January, but I wouldn't call it significant.

Okay. Thank you.

Our next question comes from Ryan Gilbert with BTIG. Please proceed.

Thank you. Good morning. I appreciated the hypothetical on the, you know, around revenue and adjusted EBITDA on the 1.4 million starts. And I'm wondering if you feel like your company as it currently sits today is positioned to maintain or take market share. If we do see housing starts at 1.4 million, Or do you think you need to add more people or, you know, make additional investments in the business to support that 1.4 million starts range?

Yeah, this is John. So certainly with growth in starts and our growth in commercial, the obvious area we're going to have to add capacity will be direct labor. So that's an area that, again, we've shown great capability to do over the recovery period here. I think I point out We pointed out before, and it's worth pointing out again, I think we have a distinct advantage versus most other insulation contractors in that we are able to routinely, and we do it all the time, share our labor back and forth across our footprint and the start, step, and flow around the country. So that would be the obvious area, certainly equipment to support that growth. But I think Jerry mentioned before, and I think it's worth noting again, that we always get some point of leverage, certainly on the fixed side, but even on the semi-variable and the variable side, which You have seen, again, good evidence in our results as the industry recovers. So, yeah, obvious things we're going to have to invest in. I think we've also pointed out that from a CapEx standpoint, for instance, we average about 2% of our sales growth gets reinvested into CapEx to support the business, so rather nominal. Yeah, again, great evidence for the past, you know, six, seven years to perform at that level, and we're confident to go forward with it. We can continue to support the investments in the business to grow.

But, Ryan, there is no big step function investment to make, if that's one of your thoughts.

Yeah, I think that's kind of where the question was headed. It seems like we could potentially hit $1.4 million either this year or first half next year on a trailing basis. So that's helpful. Thank you. And then just as builders shift their mix more to entry level, is there a preference for – Or has there been a substitution in different types of insulation, so between BAT, loose fill, or spray foam? Anything you could add there would be helpful.

Hi, Ryan. Good morning, Robert. So I would say, you know, relative to, you know, shift, you see a little bit less spray foam as the entry-level homes have become more in demand and as the footprint has shrunk some there to the more entry-level and the builders have focused more there. So, you know, obviously headed more back towards fiberglass, both materials That and blow. So it's probably taken a little bit back from the spray foam side for sure. But spray foam continues to grow, and we're seeing a lot of spray foam being inspected on the commercial side of the business. So as we always say, we do all products. So we're seeing the spray foam continue to grow in demand on the commercial different types of applications there.

Thank you.

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

Thank you, guys. I just wanted to better understand this volume deceleration in the installation business because you were doing a fairly soft start setting, roughly 4% volume growth in previous quarters, and that really decelerated to less than 1% in the installation business. So I really wanted to have, I guess, a better understanding of how much of that deceleration is tied to the mix issue versus perhaps share loss in the quarter.

Sure, Justin. This is John. So the two things I pointed out that were the call on the headwinds in the fourth quarter, one would be the mix of multifamily and kind of the pivot or the movement towards more entry level. Probably on a year-over-year comp basis cost us about $10 million fourth quarter, 19 to 18. Okay. So that's, from a quantification standpoint, probably the best I can give you at that point. And again, you know, any type of go-forward impacts baked into our guidance at this point that we've provided. And the other thing I'd point out, I think commercially, and I think we've talked about this on previous calls, we had a good quarter in the fourth quarter, but when you looked at our first, second, and third quarter versus the prior year comp, we were up substantially. So although a strong fourth quarter, not quite the growth that we saw last year over year in the previous three quarters, albeit a very strong quarter commercially.

Okay, that makes sense. That helps. And then the other thing I just wanted some help understanding is in terms of managing around the price increase slated for early 2020, how much price mix is embedded in your 2020 estimates? And does that account for this first price increase, at least the January price increase?

Yeah, so 2020 guidance, and we usually don't break it down into too much detail. But at this point, what I'll share with you is that we have about, so I'll start with the fact we got about $20 million in acquisitions in the total at this point. And that's, of course, the four-year impact of the biking acquisition we did third quarter, and then the two acquisitions we recently announced. We obviously gave you the starts threshold in terms of what we're projecting at this point. The only thing I'd share with you is we really assume from a couple other areas, multifamily, relatively the same mix that we saw in 2019. And then on a TPU basis, revenue per unit basis, on our residential new construction business, down about a point on the residential construction, just tied to the fact that, again, more entry-level homes in the overall mix that we're going to see come forward. Beyond that, we'll really not give any more details around the guidance, and obviously we will update it quarterly throughout the year.

That makes sense. And then last question for me, just as you look across your business, if you could give us any context around the cadence of activity regionally and maybe some of the dynamics you're seeing at a regional basis across your portfolio.

Hey, good morning, Justice Roberts. So if you think about the residential side of the business, you know, we're busy. I think I mentioned that earlier. And if I look regionally across, I'd say the south especially. So if I think about southeast, northern Florida, if I think about Florida, mainly northern Florida is very strong right now. Texas, the southwest, all those areas are strong. I mean, we're seeing good demand there. across the country, but those would be those regions, southwest, Texas, southeast, and northern Florida would be the areas I'd point to specifically. Commercial-wise, as I mentioned, we have a good backlog and good bidding that we're doing. As we say, there can be fluctuations quarter to quarter, but we expect a good flow from commercial as well as we go through the year.

And then just last question for me is just on the price increase. I know historically it's been like a two-per-year kind of cadence, and traction would be maybe dictated by underlying tone and tenor of activity. What's your view on the prospects of that typical kind of cadence, given what you're seeing in your backlogs today?

Yes, I think there's definitely, you know, if you look at the starts and the demand pattern and what we're hearing from builders, I think there definitely could be a second increase this year. I think depending on how the starts go coming out of the spring and in the summer months, could that mean something in the fall? I think potentially. And I think one thing we mentioned in the prepared comments is depending on that ramp, could there be some, you know, tightness in material? Potentially there could be depending on how steep that ramp is in the starts. I would just go back to, because we offer the bundled solution, the one thing I would go back to is just the labor. I mean, the labor's at the premium. It's top of mind for the builders and stuff as well. So it's a bundled package of material and labor.

Thank you, guys. Really appreciate it. Thanks, Justin.

Mr. Wallace, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thanks everybody for joining us today. We look forward to our next call when we report our first quarter results in early May.

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.