Ladies and gentlemen, thank you for standing by. Welcome to the TopBuild Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 4, 2016. I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Thank you and good morning everybody. 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 Web-site 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. Starting on Slide 3, we had a solid second quarter on both the top and bottom line. We continue to execute well on our strategy, which is driving our core residential insulation business consistent with the housing recovery and supplementing that with market share gains in the commercial space. And most importantly, we are converting that top line to stronger margins with our focus on operational improvement. Total sales in the quarter were up 6.9%, with TruTeam, our installation business, up 8.6%, and Service Partners, our distribution business, up 2.1%. As expected, the year-over-year sales level performance in the second quarter came in lower than the weather assisted first quarter year-over-year performance. For the first six months, sales were up 10.9%, with TruTeam up 12.5% and Service Partners up 6.4%. As a reminder, we benchmark TruTeam sales with 90-day lagged housing starts, understanding that variables such as builder cycle times and single/multi-family mix can impact that comparison in any one quarter. So with 90-day lagged housing starts up 11.5% in the first half, we feel good about our sales performance this year. Our second quarter adjusted operating margin improved significantly to 6.4%, a 140 basis point improvement both year-over-year and sequentially. The second quarter drop down to adjusted EBITDA was a robust 33.3%. While a portion of that relates to easier comparisons to second quarter 2015 when margins were negatively impacted by some imbalance between selling prices and material cost, a significant portion also relates to ongoing operational improvements throughout the business. In previous calls and presentations, we have indicated that a 20% drop-down was a reasonable way to model our business. Year-to-date, after the strong second quarter, our adjusted EBITDA drop-down margin is 28.8%. So, while we are significantly ahead of that…

Thanks Jerry. As Jerry noted, we had a good quarter and a strong first half. I do want to point out that comparisons to second quarter 2015 appear particularly strong as last year we experienced some imbalance between selling prices and higher material cost that negatively impacted our margins. Moving to Slide 6, in the second quarter, consolidated revenue returned to a more seasonal performance and increased 6.9% to $432 million, primarily driven by strong growth at TruTeam in both our residential and commercial lines of business as well as improved selling price. TopBuild continued a trend of gross margin expansion in the second quarter, increasing 140 basis points to 22.6%. Adjusted operating profit grew 41.9% to $27.4 million, with a corresponding margin improvement of 140 basis points. Both gross margin and operating margin improvements were driven by volume leverage, improved selling prices and improved labor efficiency, trends we expect to continue in the future contributing to additional year-over-year margin expansion. Second quarter 2016 adjustments totaled $647,000, primarily related to severance for rationalization actions. For the first six months of 2016, consolidated revenue increased 10.9% to $845.6 million and gross margin improved 120 basis points to 22.1%. Adjusted operating profit during this period grew 85.6% to $48.2 million, with the adjusted operating margin improving 230 basis points to 5.7%. Adjusted EBITDA for the quarter was $32.6 million, compared to $23.3 million in 2015, and our drop-down to adjusted EBITDA margin was a strong 33.3%. For the first six months, adjusted EBITDA grew 71.2% to $57.8 million, and our drop-down to adjusted EBITDA was 28.8%. Compared to last year, performance was particularly strong for the first half of 2016 due to a robust first quarter that benefitted from a mild winter and a weaker 2015 second quarter which, as I mentioned…

Thanks, John, and good morning everyone. Turning to Slide 11, it's clear from both Jerry's and John's remarks that 2016 looks to be another good year for TopBuild and I thank our entire team for their hard work. Overall, builder sentiment is optimistic and business remains steady and growing in the vast majority of our markets. Our strategy to drive performance through local empowerment, operational excellence and the simplification of business processes is yielding solid results. Let me speak to some of the details of the business and improvements we continue to drive. On the residential side of the TruTeam business, where we serve builders of all sizes but are more heavily weighted towards larger production, regional and multi-family builders, we continue to achieve strong operational improvements and gain unit share in all three of these segments. Comparing our mix of residential business to the second quarter of 2015, this year TruTeam completed a higher percentage of multi-family units versus single family units. The business also grew commercial revenue, which includes both light and heavy, by more than 10% and we remain dedicated to our strategy of expanding our footprint and capabilities in this line of business. TruTeam experienced improved pricing performance in the quarter as well. Our focus on labor productivity and increased utilization rates is also driving bottom line improvements. Service Partners, which primarily supplies small contractors who install for custom builders, remains a top performer in the distribution space and the Service Partners leadership team continues to successfully convert top line growth into solid bottom line results. As John mentioned, this segment did see sales growth offset by lower selling prices. This compression of selling prices has been driven by an abundance of fiberglass capacity in the industry which has seen new lines come on over the…

Thanks, Robert. Our strategic plan remains focused on achieving profitable growth through operational excellence and thoughtful and balanced capital allocation. We have been and will continue to be consistent with this strategy. Our diversified model includes both installation and distribution across both residential and commercial. Surrounding all that with energy efficiency expertise and the deepest, most experienced management team in the industry enables outstanding execution, the critical final step of any strategy. Our second quarter results provide further evidence that it's all working. And while we believe the housing recovery has a number of years remaining and provides wind at our back, we want to emphasize that our diversified model will perform well throughout the entire cycle. This will provide consistent and dependable financial results for our shareholders. Operator, we're now ready for questions.

[Operator Instructions] The first question comes from the line of Keith Hughes with SunTrust. Please proceed with your question.

I guess first, a little surprised to hear on the mix between multi-family and single family construction, it seems to be going the other direction. Was this just some individual winds for you, and what's your outlook on that mix for the rest of the year?

This is John. Really, that's really a result of last year. We had, from a start standpoint, a significant amount of starts that were won in the business, and really it's a carryover from a completion standpoint for us in the second quarter. So really on a go-forward basis, we would expect to get to a more normalized mix between single and multi-family.

And Keith, keep in mind that the lag with multi can be very long. And so, to John's point, in some cases these are projects that were started several months ago that just came to completion in Q2.

And those, is multi-family lower margin for you as well compared to single family?

Margin-wise, Keith, it's pretty comparable. It's just that obviously from the take per unit of revenue standpoint, it's a smaller take for us.

Okay. Second on pricing, we've got pricing seemingly moving in different directions within the two divisions. The manufacturers, and several of them now, are talking about potentially tight capacity at some point here in the next 18 months or so. I guess my question is, what is your view on that projectile to your growth, do you think we'll see a tightening situation that could cause pricing and maybe some market availability shortages?

I think at this point in time, so there's always a relationship obviously between the capacity that's available from the suppliers and what was happening on the demand side, largely driven by housing starts. So as Robert commented, right at this very moment, there is some capacity that's been created in the last short term that really probably exceeds what the demand is right now. If you look into the next couple, three or four quarters, popular opinion now would suggest that the housing start trajectory probably is flattening a little bit compared to what it was. So if I had to make a guess, I would say that the manufacturers make decisions on spending money, and it's very expensive, you can imagine the increased capacity, so they make those decisions anticipating what's going to happen with the housing recovery, and the fact that it's probably going to flatten a little bit from prior expectations, what suggest to me is that there probably will be plenty of capacity here for the near term. And if I say near term, certainly the rest of this year, well into next year, would be my guess. As to what happens after that, that's too far to guess. That would be anybody at that point in time. And it relates to us personally, as it relates to TopBuild. We maintain relationships with all the suppliers and we understand that there's a need here over the long term to continue to do that. In spite the fact that we've had a disagreement with Owens Corning on a contractual issue, we continue to do business with them, we've always had a good relationship with them and we would expect to get over this speed-bump and ultimately continue to do a lot of business with Owens Corning. So, that's kind of a summary of the overall supply chain situation.

And that relationship with Owens, the issue is on the installation side not on the distribution side, correct?

That is correct, it's on the install side of the business, this is Robert, on the install side of the business, not on the distribution side of the business.

Okay. And I guess final question, the pricing is obviously different between the two divisions. You talk about positive pricing in the installation, TruTeam installation unit. Can you give us some sort of indication of the unit price mix, even just generally, how that contributed in the second quarter?

This is John. So if you're talking TruTeam, Service Partners, TopBuild, which one?

None of the above. Just sort of [indiscernible]

So I think between the two segments, I think if you look at TruTeam, certainly we had very good price performance year-over-year. And as you recall last year, as we talked about in our prepared comments, that we last year were unable to get selling price. At the same time we took material cost increase and had that impact hitting us. So we've been driving price in the TruTeam side of the business in the second quarter and that continued into the second quarter this year. So, recognizing it's a different model, as you said, we're selling a bundled solution to the builder in this case, labor, material, and our building science expertise, as part of that bill. So, looking at TruTeam, good price – if we talk about 3.7% price we've seen in the Q and we had in our comments, volume somewhat kneaded a little bit by the mix issue on multi-family, as we talked about. So again, that's what tempered a little bit the buying piece. On the Service Partners side, the price decrease that we talked about, and then some volume increase, roughly 4%, the issue on Service Partners is we really don't know the mix of units they are selling into because quite often we're not sure where the customers are going to deliver that product. So, not sure about the mix impact there, but on a year to date basis, as we said, tracking very close if not above lagged housing starts.

Okay. Thank you very much.

The next question comes from Mike Wood from Macquarie Research. Please proceed with the question.

Thanks for that information on the near term capacity, but I'm actually curious what your view is on the market's receptivity, from your customers, your builders, consumers, for additional insulation price increases? I know the industry is attempting one in August. So, just curious what you think the market, how all your customers will receive the potential price increase.

Jerry here, Mike. They never like price increases. Customers don't like that and our builders don't like that either. Having said that, the insulation piece of the total cost for a builder is not that large, and as time goes on and as the capacity tightens a bit, that ultimately does, I think that kind of environment would facilitate price increases and I think our builders would be receptive to that. Now, certainly what we do from the standpoint of labor, labor is a big part of the value that we provide to our builders. So, labor availability is still a bit of an issue and we feel like we get more than our share of available labor, and I think that puts us in a good position ultimately if the environment is suitable for us to do well with our builders relative to – continuing to demonstrate our value to them, be the supplier they can count on with available labor, and I think that puts us in a pretty good situation relative to getting a price that we need to offset whatever happens on the material side.

Great. And as I think about housing longer term, what steps can you do now to prepare for that normalized level of housing activity which we may see in a couple of years where, as you mentioned, capacity with the insulation manufacturers could be very tight and potentially even on allocation at a normalized level of starts, what do you do now to secure your supply chain, and just to make sure if it ever was to go on allocation, you guys would be at the top of the chain?

The big piece of the answer to that would be that look at the model that we have. So we like how our Company will perform through the entire cycle, generally speaking. And what I'm talking about is the fact that we have the installation, the distribution business. Commercial is going to be a more and more important piece of our total puzzle. In some cases, the products that the commercial is involved in, is not necessarily fiberglass. So, there is the longer list of suppliers beyond the fiberglass suppliers that really are responsible for the stability of our total Company model. Now, as it relates to fiberglass in particular, again, I think the thing that we do is basically maintain relationships with all four of our suppliers. And fortunately, our scale gives us the opportunity to be significant to all of our suppliers, and that's important to them. I mean, we understand what their model is. They're looking for substantial volume, dependable, and we can offer that. So, there is a good relationship and it's the reason why we maintain business with all four of them. Spray foam is also a significant piece of the puzzle. Again, on the list of current products that we use beyond fiberglass, spray foam is not insignificant and probably will continue to be, if not get more significant, as time goes on. So, long answer to short question, but the diversification of our model is a big plus for us and the scale and the long-term relationships with all the suppliers is what we depend on to work our way through the cycle.

Thanks. And just finally, are you able to frame for us the benefits that you have received from your internal productivity initiatives and how that's contributed to your EBITDA incremental margin performance?

No specific guidance except that as we said on the call, I think the labor efficiency that we called out, [those primarily are on] [ph] the TruTeam side of the business. So as we look at a 33% go through, a big piece of that certainly is from the labor side and the benefits in the changes we made that Robert talked about on his call.

Our next question comes from the line of Trey Grooms with Stephens, Inc. Please proceed with your question.

Quick question really on the commercial side I guess and the progress you're making there. I think you said 10% growth in the quarter on commercial. I'm trying to get a feel for how much of that is share gain versus what you think the market is doing and any kind of color you can give us around your expectations for that going forward? And then, I guess bigger picture, how the commercial business really differs from the residential business from a product perspective, sales approach, and just the differences there and how you go to market and how you're going to win there?

Jerry here, Trey. The commercial space, as we talked about where we actually spend time, is an important adjacency for our Company. Right now I would say from an overall commercial market perspective, it would be a wild guess on my part, I think it's mid-single-digits, is it's probably improving. Our sales in the commercial space are up low double-digits. So, we certainly are gaining share, without question, in that space, and we'll continue to do that. As I said, it's a very, very important close adjacency for us. In terms of the space itself and how does it differ from residential, it's very significant on a number of different metrics. One would be the type of product. So, in the residential space, again, insulation, fiberglass, spray foam and a few other types of insulation; on the commercial side, a much longer list of products other than insulation, so into fire-stop products, expansion joints, air/vapor barrier, there's a list of products that probably get close to a dozen, maybe slightly less than that, that really at a bundle that we are going to develop and be able to provide to the decision makers, and those are general contractors, those could be the drywall contractors. And so it's a broader list of products that requires a lot of knowledge beyond just insulation. And the go to market, as I said, really amounts to connecting with the right decision makers, so that are these general contractors and in some case drywall subcontractors. And then the other thing I would suggest to you, it's very fragmented. The business itself is very regional. There are players that are geographically spread around the country that are in this business and do this work as the commercial business goes up, but we believe there's not really anybody who can do as comprehensive a job over time as we can. So, for us it's a matter of doing this and increasing our share here, but do it in a measured way, because it could be a complicated business and it needs to be done well. The estimating needs to be done well, the execution of the job itself needs to be done well. And so there's a lot to do right and it's a bit more of a complicated business that we believe we're highly able to handle, and over time you're going to see us increase our share there and that's going to present itself and it's going to help us with the diversification of our business.

Great, thanks for that. And then, as you look to expand there, are you thinking more along the lines of kind of greenfield expansions or, given the fragmented nature of the industry, is that an area where you would look to possibly do something on the M&A front?

It will be both. I can pretty much tell you that it will be both as time goes on. As we find, if we can find the right acquisition targets in the right geography, we would be highly receptive to growing that commercial business by acquisition.

Okay. And then just kind of a segue and my last question is, as you think about capital allocation and with the buyback in place, how do you balance or how are you positioning now with capital allocation between buyback and potential M&A? And as you look at M&A, is there anything you could give us, any color you could give us around kind of your focus there and is it still kind of a blend of possible res and commercial, or just any update on that focus? Thanks a lot.

Sure. Certainly 'balance' is the key word there. As we're always looking at available cash, we're looking at what the pipeline from an acquisition might look like, we can't predict timing as to what will happen but both John and Robert did allude to ramping up our dedicated resources relative to looking for and executing an acquisition. So I think that's indicative of the fact that we're very serious about the M&A piece of the equation. It's impossible to predict what and when, but the space that we'll be looking at will be both residential and commercial. Commercial I spoke about already in terms of how we would approach that. And on the residential side, it's really fit of the right target. We're looking for additional partners for our business on the residential side that are in the right geographies where we think there's high growth potential, given what housing starts could do there. So we look for the right geographic fit, we look for talent, we look for people who are running those business that can join our team and have a bigger impact for us. So, if there is going to be some M&A, it's going to take some time. I don't know exactly when, it's hard to predict when these things will get to the finish line, but we're very, very serious about it both on residential and commercial end. And we always have to make an estimate as to what the capital needs are going to be for that and it's lumpy and it's hard to predict. And we balance that with [indiscernible] stock prices. That is also a factor. We think our stock price has plenty of room to run, but as it ramps up, that's also an additional factor that we put into the mix relative to making the overall decision.

All right. Thanks for taking my questions. That's it for me.

Our next question comes from the line of Scott Rednor with Zelman & Associates. Please proceed with your question.

Curious, July to date, or if you want to talk about the end of the quarter, have you guys seen acceleration from the 2Q growth rate of 7%?

This is John. So far this quarter, in the month of July, I would say it is a consistent performance with kind of where it's been. Housing starts we believe in Q3 and Q4, seasonally as you know Q3 and Q4 are better quarters. That's when completions generally ramp up for all builders. We would expect that to be the case again this year. As it relates to the overall Q3, we don't provide guidance as you know going forward on a quarter. So I can't give you a specific number there, but all I would tell you is that the previous seasonal patterns that we've seen in prior years probably will continue to be in effect.

Jerry, just to clarify that, are you above or below 2Q, because on one hand you guys said that the mix should improve more to single family, which will be positive, but if you looked at lagged housing starts, it would imply a pretty big deceleration in your 3Q, so I was hoping you guys could clarify that?

This is John. I think what we're seeing is we're seeing nice, I'll say steady, growth from what we have through the second quarter continuing into the third. So, we haven't seen an impact, a negative impact in terms of 2Q starts. Recognize, last year 2Q starts, which we're comping against, I think you're looking at, was pretty strong coming off a pretty bad winter, but I think in third quarter we're seeing nice steady growth. Parts of the country, parts like Florida, is slowing down a little bit than Northeast, but overall I'd say that we're seeing steady growth throughout the first month of the year and we expect that to continue through the end of the quarter.

The acceleration of catch-up from Q1 to Q2 was somewhat predictable. We talked in Q1 about weather assisted relatively much stronger than usual first quarter. So what we saw in the second quarter, of course we couldn't predict that in terms of what the magnitude it was, but it was pretty predictable that we would have a bit of the acceleration, but hopefully we gave you as much guidance as we can give you as to what's going to happen going forward.

Thank you for clarifying that. The other question, more longer term, on the housing market, you mentioned a couple of times and it was in the release that starts now may grow at a slower than previously expected rate. I was hoping you guys could talk a little bit more about that because while the multi-family side might be slowing down versus three or six months ago, the single-family side is accelerating, and just given that that's more impactful for your business, I would think that you guys would be more optimistic about the outlook three to six months ago than currently where it kind of speaks to maybe more tempered expectations about the overall market.

Internally here, we're rather bullish on housing. I believe that, as I commented, the fundamentals relative to tight supply right now for a number of reasons and I believe household formations continue to build, I mean [indiscernible] relative to the magnitude of what housing is going to do. But there are certainly others out there in the marketplace that forecast housing starts that have begun to gently flatten that curve a bit. So, we certainly are aware of that. We tune in, as you can imagine, to what other experts are thinking is going to happen with housing, but our point of view is that it's going to continue to be a pretty good story here for a number of years to run, and we're planning resources and everything else internally with that expectation. And as it relates to the mix of single and multi, I think you're right, there certainly is a move right now that's leaning a little heavier towards single versus multi compared to what we've seen over the last couple of years, and I think that may well continue.

And then just lastly, recognizing where your incremental margin is year-to-date, is there any reason that you guys won't be materially above the 20% for just 2016?

Scott, this is John. I think right now, again we don't give specific guidance, I think that the comments we made on the call about the first half of the year, the comps were easier for TopBuild certainly, first quarter being a very strong quarter because of seasonality, the weather impact, et cetera. Second quarter, the comps for us a year ago were the much easier ones. So third and fourth quarter, I think our best comment we can make is, we expect to have more normalized comps as we go forward. Again, we don't give specific guidance about where we're going to end up in a calendar year in terms of our EBITDA drop-down and pull-through, but the third and fourth quarter again, we'd expect a more normalized look.

And the only thing I would add to that is, as Robert's comments indicated, we are working very hard on our business as it relates to the margin, and we want to build a machine here at TopBuild that enables us to make good margins no matter what housing starts are and throughout the cycle. So we're doing a lot of ground level work that Robert talked about to get us as lean as possible and to get us as focused on the customer as possible, and to enable us to perform as well as we can throughout the cycle.

Okay. Thank you very much.

Our next question comes from the line of Ken Zener with KeyBanc. Please proceed with your question.

Obviously I think operationally you're doing very well in terms of the industry supply of insulation, I think that's a very constructive framework for you guys in terms of being the largest buyer, being able to pass your price and having the labor. I wonder, given your comments around the growth of housing, these starts, one of the things that has really surprised me this year is the composition of the growth, for example Tennessee has added as many starts as California, pretty much LTM. How do you guys think, not to get a regional report card from you at all, I know you talked about Florida and the Northeast, do you see that really exceptional growth that we've seen from these kind of the Midwest, mid-Atlantic parts of the south I think you guys are very well indexed to versus the public builders that aren't, I meant I think that's part of the reason you guys are growing so well, is there any shift that you see there in terms of not only the single/multi but in terms of where you're seeing that growth from, kind of when you think about slowing growth, because I think you guys have a lot better data on new construction activity than many of the national forecasters?

We try to hedge our bets really well, as you know, and to have our model as it is where we're indexed really pretty evenly around the country, we think that's a big plus. But to give you my point of view there, I would suggest that what's happening right now, where starts in the West, in the South appear to be stronger than the Northeast and the Midwest, that that makes sense to me that that may continue. But things can turn on a turn of a dime, and you know, we're not really organizing ourselves necessarily with where we put branches or what we do anticipating more than a couple of quarters of things moving one direction or the other. We really want to continue to have ourselves pretty evenly indexed around the country so that we can do well no matter what the trend line is in any given area. But I would suggest that West and South probably are the places that will continue to do well.

Okay. And then related to that, realizing that you're installing in homes and the home prices are different, and you're not a huge piece of the cost relative to lumber, do the EBIT margins that you get really – how would you say, is that really related to your scale within a market? And then if I were to think about 2% in a house in Ohio is different than 2% in a house in California, how can we think about that 2% swinging around in terms of the cost as well as on an EBIT basis, are you higher really tied to your share within a market? Thank you very much.

This is John. So to make sure I understand the question, so the EBIT share within a market based on the 2%, which is the insulation content of the home?

Yes, I mean are your shares higher, I mean is your EBIT really tied to your level – so if you have 50% in a market or more or less, I mean is that what really determines your EBIT margin? And then how we should think about EBIT dollars per house, is it really just a function of 2% of whatever the price is? Thank you.

Really hard to answer that question because it's based on really the local economics in each and every market we sell into, and that could be influenced obviously by supply and demand economics, it can be influenced by competitive issues, it can be influenced by the type of builder and/or commercial work that's in that market, so really hard to answer that generally. Obviously the 2% that you're talking about is not a significant piece of the homebuilders or not as significant as the other areas, as you mentioned, like lumber, et cetera, but it does get attention obviously from our customers even though it is relatively low. But again, difficult to answer just because of the fact that that is a local issue that drives the benefits on those factors I mentioned.

Understood. Thank you.

There are no other questions at this time.

Thank you all for listening to today's call. Your continued support is important to us and we appreciate your trust in our team. We look forward to our third quarter call in November. 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.