Ladies and gentlemen, thank you for standing by. Welcome to the TopBuild Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, March 3, 2016. I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Thank you, and good morning, everybody. I'm Tabitha Zane, Vice President of Investor Relations at TopBuild. On the call today are Jerry Volas, Chief Executive Officer; Robert Buck, President and Chief Operating Officer; and John Peterson, Chief Financial Officer. Please note, we have posted senior management's formal remarks on the Investor Relations section of our website at topbuild.com. As shown on Slide 2 of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial condition. These forward-looking statements include known and unknown risks, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. In addition, we will also discuss non-GAAP financial measures, which can be reconciled to the most comparable GAAP measures in a table included in today's press release. I will now turn the call over to Jerry Volas.

Thank you, Tabitha, and good morning, everyone. Beginning with the third slide, the year 2015 was one of significant change for TopBuild. On July 1, we began trading as a public company on the New York Stock Exchange. Our team has worked hard to put the necessary infrastructure in place to operate as an independent public company, while at the same time, identifying opportunities to streamline and improve operations both in the field and in corporate. Moving forward, we will continue to be aggressive in making the changes necessary to optimize the operational performance of TopBuild within the context of any economic and housing environment. Turning to Slide 4. On the financial front, 2015 was a solid year. Sales in the fourth quarter increased 7.1% over Q4 of last year, with adjusted net income per share increasing 27% to $0.52 per share. For the year, sales increased 6.9%, with adjusted net income per share increasing 68% to $1.33 per share. As a reminder, all sales reported in 2015 reflect same branch improvement. Free cash flow continues to be a source of strength for our company and we ended the year with available cash of $113 million. On the next slide, looking to 2016, we're optimistic regarding the U.S. housing environment and residential construction industry. Continued population growth, combined with positive trends, such as employment levels, mortgage rates and credit availability, are driving household formations, which then drives the demand for new construction. And even though 1.1 million housing starts in 2015 represents another double-digit percentage increase over the prior year, it also marked the eighth consecutive year that starts were substantially below the previous 50-year average of 1.5 million. Inside of that big picture are some other trends that continue to play out. Led by the millennial generation, younger people…

Thank you, Jerry, and good morning, everyone. We'll start by reviewing the performance of both TruTeam and Service Partners on Slide 7. TruTeam's results accelerated in the fourth quarter producing 10.9% revenue growth and a 130-basis-point improvement in operating margin to 6.8%. These results were driven by strong execution in both the residential and commercial businesses. For the full year, TruTeam's sales increased 9.8% and adjusted operating profit margin improved 240 basis points. Service Partners saw a relatively flat quarter, up 1% and operating margins declined 20 basis points to 9.1%, mainly driven by higher bad debt expense. Fourth quarter comps were challenging due to the fact that in the fourth quarter 2014, we saw accelerated customer purchases ahead of the fiberglass manufacturer's publicly announced price increase slated for January 1, 2015. The same prebuying did not occur in the fourth quarter of 2015 as it appears the January 1, 2016 increase has been delayed a bit, thus preventing the pull in of volume into Q4. For the full year, Service Partners' sales increased 2.8%. Although we may have given up some minor share in the low margin roofing business, operating margins improved 40 basis points given a better mix of business and strong cost control. As we stated previously, the distribution business is less cyclical and does not track directly with housing starts. Please turn to Slide 8. Labor shortages continued to be an issue, but there was some easing in the fourth quarter. The mild start to the winter allowed for more completions in the quarter and strong finish to the year. Given our employer of choice status, we remained confident in our ability to meet increasing demand as business grows. Since the spinoff at the end of June 2015, we have been focused on simplifying our business…

Thanks, Robert. As Jerry and Robert pointed out, our results for the fourth quarter and full year were solid. Starting with the fourth quarter, on Slide 11, revenue increased 7.1% to $426 million, primarily driven by residential and commercial growth at TruTeam as well as improved pricing across both segments. Gross margin increased 120 basis points to 24.5%. Included in this was a onetime favorable reserve adjustment related to an employee benefit policy change at TruTeam, totaling $9.9 million, of which $6 million was included in cost of goods sold. On an adjusted basis, fourth quarter gross margin was 23.1%, a 90-basis-point sequential increase due to continued pricing improvement. Compared to the fourth quarter of 2014, adjusted gross margin declined 20 basis points, largely due to a $5.2 million favorable insurance adjustment we received in the fourth quarter of 2014, which I discussed on our third quarter call. I want to point out that while we also received a favorable insurance adjustment in fourth quarter 2015, totaling $5.6 million, this adjustment was largely offset by insurance expenses at TruTeam, which were approximately $5 million higher than what the company has historically incurred for these items. Most of the $5 million is tied to insurance transition costs and some legacy claims settled in the quarter. As noted in today's release, we believe the charges related to these items will revert to their historical run rate. Normalizing insurance expenses in both quarters, adjusted gross margin in the fourth quarter of 2015 would have increased 100 basis points compared to fourth quarter 2014. In the fourth quarter, total company operating margin was 10.1% compared to 6.2% a year ago. On an adjusted basis, our fourth quarter operating margin was 7.8% compared to 7.1% in the fourth quarter of 2014. As a reminder, in…

[Operator Instructions] And our first question comes from the line of Mike Wood from Macquarie Securities Group.

It's actually Ryan Hunter on for Mike right now. My first question in terms of the incrementals in fourth quarter, I believe, they came in at 8.3%, and for the full year 2015, they are 16.5%. Can you just walk us through what caused the incremental to come in so low when your goal for the year is 20% please?

Yes. So this is John. The 2 major reasons for that were inside the things we just talked through. The one was that year ago, we had a $1.9 million legal settlement credit we received -- that we have corrected in the first quarter of 2015 in an out-of-period adjustment, so that created a tough comp for that item. The other was around the insurance discussion we just took you through in terms of the year-over-year performance. So a year ago, we received a $5.2 million favorable insurance adjustment. In 2015, our insurance in net was a more normalized cost, so it was a very tough comp. If you actually adjust for those 2 items, in the fourth quarter, we would have been north of 30% in terms of the EBITDA pull-through and about 22% roughly for the full year. So again, tough comp in terms of some fourth quarter items from a year ago that we had to compare to.

Jerry here. I would suggest you that going forward, I think, we feel good about the 20%. To John's point, coming out of the spin, some comparables have been difficult, a lot of noise has been rattling around in the numbers. But we expect a more normal kind of environment going forward into '16. And as it relates to the 20% EBITDA drop down, we still feel very good about that as a good way to model the company going forward.

Great. Thank you. And then just one more on pricing trend. You mentioned that pricing improved across both segments. Do you see these trends continuing into 2016? Are you expect to keep gaining price?

Yes, I think. This is Robert. I think that things got started off a little slow, relative to that, given some instability in the market, but say definitely see some traction gaining there.

And our next question comes from the line of Ken Zener from KeyBanc.

Given the -- for distribution, obviously, you didn't have the pull-through that you had, but generally, what type of volatility could we assume would flow through distribution that might be different than the installation side of the business? You mentioned roofing, how much could weather play in and some other products just so we could as we look into '16, just anticipate where there might be volatility given your experience with the company?

I think -- this is Robert again. Any time you look quarter-over-quarter, whenever there's been -- the price increases and potential pull of the volume that something that we look at. If you went back to 2015 and you look, we saw that in Q2, but we saw the recovery in Q3 so that creates some volatility there. But again, we typically see the pull-through in the next quarter. Relative to weather, started out to be a very mild winter, so we expect that to be positive, we saw that in December and carrying forward here. And then, roofing, non-core business, but whenever we look at our core business of insulation, we expect little volatility there. So just something on the non-core like roofing where we evaluate that. Those will be probably the 3 things I point out as things accelerate as we said, distribution doesn't track exactly with the housing starts. And we see that on the decline as well, that doesn't track as well and the drop-off isn't as deep. So just a few things to think about on the distribution side.

We would -- Jerry here. We would certainly view the distribution model as solid as ever. And we expect strength from that part of our business as we move into 2016.

Great. And I asked, yesterday, what is obviously, and other company reported, could you give us -- given that some states have -- and cities have a greater share of mind or the media then perhaps you guys might experience in your business. Could you talk about where your business might be over indexed or under indexed, so for example Texas or Florida, just so we could kind of distinguish what's available publicly from homebuilders that are a little more concentrated as opposed to your business that is servicing some of the smaller, not just the public builders, obviously? If you could go into that, that might give us a little more feel for how you could differentiate versus the national news trends?

Ken, this is John. I mean, generally, the answer is that we're really not over indexed anywhere. We have a national footprint in place today as you're aware. And we have -- and we obviously monitor it very closely, but we have pretty good coverage across the entire footprint, which -- so -- to the extent that parts of the country are percolating pretty well, we do well there. If they're not doing well in certain other areas, obviously, it impacts us in those markets also. But generally, we have a national footprint that touches all parts and pieces of the U.S. and we monitor that pretty closely, like I said.

[Operator Instructions] And our next question comes from the line of Scott Rednor with Zelman.

I wanted to go back to distribution for a second. If we just look annually, your sales growth in 2013 and 2014 was 9% in both years. And then this year, it's 3%. And I would figure, Robert, to your comments on pre-buying that, that normalizes when we look annually, and roofing is a pretty small percentage of overall pie. So is there something else going on there to suggest that deceleration as we look at the annual figures?

No, I'd say that roofing was probably a bigger number in 2015. I'd say other than that, there has been some areas like some low margin business relative to manufacturing housing that we've looked at and considered, again, maybe step back from some minor pieces there, but nothing more than that. Again, typically wouldn't track with the housing like the 10.3% that John spoke to, but we feel like coming out of the year, there's actually been some share, I think, on the positively way on the distribution side of the business. So look like from a share perspective, we're actually probably in the mode of picking up some share there.

And switching gears on to the cost actions that you guys announced today. Curious to why today, and what about these 13 branches stuck out that you made a decision today versus last year or 2 years ago?

Jerry here. I would answer that by saying that we always are looking at the efficiency of our model. And you know over the last 6, 9 months that we've been working our way through the spin, getting our feet on the ground as a public company, we've had that ongoing work. But we just came to the decision at this point in time that now is the time to refine the model. And as Robert had commented, this is the result of some redundancy that's been created over time. As you know, back in the day, we did a lot of acquisitions, bought a lot of companies. And so we want to be sure, going forward, that we have our assets, we have our management attention, geared towards locations and a footprint that can make the bottom line work well. And it was time to part company with a few of these branches that we just thought were not performing well, either because of where they were located, we didn't have the scale we needed there, and we really didn't have a line of sight to making that substantially better. So we want to be sure we use our assets efficiently and we're putting them to work and our management's attention to work at places where we can make the financial statement work well for us. And that's -- what it -- was all about. We'll continue to do that as time goes on. You'll see us pursue the M&A strategy that we've talked about before. And it's not out of the realm of possibility that there'll be some additional pruning that will happen over time.

And just lastly, Jerry, on that point, how do you continue to kind of refine the business model, figure out optimal density and balance that with M&A? It could seem counterintuitive to us from the outside in?

Well, we look very carefully, and we have a lot of scoreboarding that goes on by branch and by region. And within the construct of the housing starts -- the number of housing starts in a particular geography, we look at the performance of all of our branches all the time. And if there are some dynamics in play that we think are going to contribute to lack of performance, we're going to address that first. And if ultimately we feel like there's no way to get those locations to where we want them to be, then we'll part company because we want to have the capital, we want to have the cash to be able to dedicate to M&A. And our M&A strategy is to -- in those geographies that we think are a, strategic, and you can define that has high growth, as dense from a population viewpoint, lot of housing starts, potentially high growth going forward, that's our definition of what a strategic location is. And from an M&A strategy viewpoint, we'll be looking at supplementing our current footprint in those areas. And so again, it's all about having the capital and the cash to devote to that, plus other, for example, the share repurchase program that we announced today. I mean that is another piece of the puzzle for us that we want to be sure that we have adequate capital to be able to balance that with our M&A strategy. But, again, all those things fit under the umbrella of operational improvement. That really is something that we are very, very highly focused on right now, because we believe that going forward, well we don't believe, we know going forward, no matter what the environment is, you know, as we said, we still believe that housing starts are going to continue to improve and that's a good place for TopBuild to be. But no matter what happens, no matter how the slope of the line is, what we know is that what's under our control is improving our operations, which we're going to keep doing is paramount, and that is our #1 priority for us.

Our next question comes from the line of Judy Merrick with SunTrust.

This is Judy in for Keith Hughes. You mentioned the labor shortages are easing some in the fourth quarter. For your outlook for the year, do you still expect once you get into the stronger spring selling season for the completions still to kind of lag with starts as well?

[indiscernible] finished up the year, the seasonality kicked in some, so there was the opportunity to catch up, especially back half of November into December. I think as we get into 2016 and the spring selling season going into the busy time of the summer and fall time frame, we could see that extend again -- again a lot of the starts were back-end loaded in '15 around the multifamily piece. So I think if that happens, depending on how that spike in the starts go in 2016, we could see that lag extend again, maybe late summer months into the fall during those busier times.

And kind of just excluding the weather or the season impact were certain regions have more shortages versus others and some stronger than others just in general?

Yes. This is Robert again. So we stated in the past there are certain areas that -- the classic example we always give, which is [indiscernible] Northern California where you get the agricultural piece happening there, you get -- that's been a challenging place relative to labor. Some in the upper Mid-Atlantic areas, have been some challenges there with some low unemployment. So there's absolutely pockets from a TopBuild perspective. We talked about our employer of choice, but we feel like we really done some great things to attract labor really helps us in the ramp-up times and allows us to continue that consistent service for our customers.

Okay, great. And as you mentioned like the multifamily starts, as you're looking at your strategic acquisitions, is there anything in commercial or light commercial that you're looking at? Or how do you view that?

From the standpoint of acquisitions?

Yes.

That's certainly on our radar. I think we have commented before about commercial as a piece of our business that we've been engaged in for a number of years and we continue to grow that. We think that's important to us. And so from an acquisition viewpoint, in addition to residential I spoke to that a few minutes ago relative to what our strategic focus is there, but for commercial, we certainly have the heads up for a potential acquisition that could firm up our footprint there, make us more of a player in commercial because, again, we view that as a very valuable addition to our business model in terms of going forward. So the answer to that is yes.

There are no further questions at this time.

Thanks, everybody, for your support. And please follow up with us if you have any additional questions. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a great day.