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, the call is being recorded, Wednesday, November 9, 2016. And I would now like to turn the call over to Tabitha Zane. Please proceed.

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 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. Starting on Slide 3, I’m pleased to comment on another very good quarter for TopBuild. We continue to grow our top line beyond the trajectory of the overall housing recovery and the conversion of that top line growth to the bottom line is again very strong, reflecting our focus on operational improvement. Total company sales in the third quarter were up 5.9%, with sales at TruTeam, our installation business, up 7.2% and sales at Service Partners, our distribution business, up 1.9%. For the first nine months, total company sales were up 9.1%, with TruTeam up 10.6% and Service Partners up 4.8%. John and Robert will follow my comments with some detail around the sales activity in our two businesses. But overall, within the context of lagged housing starts up only 0.7% for the third quarter and 7.0% for the first nine months, we feel good about our share position in the market. As a reminder, we benchmark sales, particularly TruTeam, with 90-day lagged housing starts, understanding that variables such as builder cycle times and single/multifamily mix can impact that comparison in any given quarter. The further good news is the strong conversion of higher sales to the bottom line. Several quarters ago, we increased the intensity of our efforts to improve the operational efficiency throughout our company. The results of our efforts are evident in the third quarter. The adjusted operating margin in the quarter was 8.7%, a 140 basis point improvement year-over-year and a 230 basis point improvement sequentially. The third quarter EBITDA dropdown was a healthy 35.6%, bringing that year-to-date metric to 30.3%. It is important to note however, that timing of certain events and expense recognition can generate significant quarterly fluctuations, particularly with that dropdown metric. In addition, the ongoing…

Thanks, Jerry. We had a good quarter, particularly on the TruTeam side, which accounts for about two-thirds of our revenue. Turning to Slide 5, third quarter consolidated revenue increased 5.9% to $453 million, primarily driven by strong volume growth in both TruTeam and Service Partners and increased selling prices at TruTeam in both our residential and commercial lines of business; partially offset by lower selling prices at Service Partners. For the third consecutive quarter, TopBuild’s adjusted gross margin expanded, increasing 170 basis points year-over-year to 23.9%. Adjusted operating profit in the third quarter grew 26.7% to $39.6 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, lower material cost and improved labor efficiency. For the first nine months of 2016, consolidated revenue increased a strong 9.1% to $1.3 billion and adjusted gross margin improved 130 basis points to 22.7%. Adjusted operating profit during this time period grew 53.4% to $87.8 million, with the adjusted operating margin improving 200 basis points to 6.8%. Adjusted EBITDA for the quarter was $44.6 million, compared to $35.7 million in 2015, an increase of 25.2%. Our dropdown to adjusted EBITDA margin was a strong 35.6%. For the first nine months, adjusted EBITDA grew 47.4% to $102.5 million, and our dropdown to adjusted EBITDA was 30.3%. Looking ahead to the fourth quarter, while we expect good incremental EBITDA growth, the comps get more difficult as selling price gains should be smaller and a net insurance gain realized one year ago is not expected to be repeated. Moving to our individual operating segments on Slide 6, TruTeam’s third quarter sales increased 7.2% and adjusted operating margin was 10.8%, 300 basis points better than the prior-year quarter. Sales benefitted from improved selling…

Thanks, John, and good morning everyone. Our quarterly and nine month results demonstrate TopBuild’s success in driving profitable growth and focusing on operational excellence. We continue to expand our market share, increasing our commercial business and operating efficiently throughout our organization. Looking at slide 10 and starting with TruTeam, we are excited about the changes and progress we are making in the business and the results continue to improve every month. In the quarter, TruTeam experienced better pricing performance given our continued focus on providing great service and bundled solutions at the local level. Margins in the quarter expanded as a result of improved labor productivity and increased utilization rates. Comparing our mix of residential new construction business to the third quarter of 2015, we completed a higher percentage of multi-family units versus single family units, just as we did in the second quarter. This has obviously impacted our top line growth as the take-per-unit for a multi-family job is approximately one-third that of a single family installs. We expect this trend to begin to reverse itself as the backlog of multi-family units is diminished and single-family starts grow. On the commercial side of the business, TruTeam grew its revenue by over 12%, both in the third quarter and year-to-date. This business is an important component of our growth strategy and our dedicated commercial group continues to forge relationships with large general contractors, resulting in a greater number of projects we are winning. Our backlog for commercial work is very robust heading into 2017. Labor shortages remain an issue for many builders. We are fortunate that we have been able to meet these labor challenges through our investment in broader recruiting and extensive training programs. We are seeing wage inflation in many markets which we expect to continue to successfully…

Thanks, Robert. As you can see from our results, we are taking advantage of the housing recovery, gaining share in both the residential and commercial spaces and operating more efficiently. Our nationwide footprint and diversified business model provide an excellent platform upon which to balance top and bottom line performance to optimize financial results for our shareholders. With almost 18 months under our belt as an independent, publicly traded company, we are hitting our stride as the financial results continue to reflect the changes we’ve made. We have strengthened our operational leadership team, empowered our branch managers, closed unprofitable branches, and implemented a disciplined capital allocation program. We are optimistic regarding the ongoing housing recovery and very confident of our ability to perform well within that environment. Operator, we are now ready for questions.

Thank you. [Operator Instructions] And our first question is from the line of Scott Rednor from Zelman & Associates, please proceed.

Hi, good morning.

Good morning, Scott.

If we could talk about that adjusted EBITDA flow-through, one, John, you said the expectation that fourth quarter wouldn’t be as strong. So I was hoping you could maybe contextualize what kind of range you are alluding to? But then longer-term, now you guys have been running substantially above that target, is there something in here that's not sustainable? Or are you guys sticking to your guns and there's more cost improvement to come but it may be lumped as we see it from externally?

Sure, Scott. This is John. The comment was really directed – you're right year-to-date I think we were about 30% pull through, we delivered I think north of 35% in the third quarter. And so as we look at the comps in the fourth quarter, a couple of things I pointed out. One is the fact that part of our gain this year have been on the pricing side as we comp against a year ago. And I think you remember in the second quarter primarily, we had a difficult time delivering pricing. We corrected that throughout the end of last year and marginally this year. So as we look ahead to the fourth quarter, the comp on pricing improvement is a little more difficult for the business and delivering that type of gain I think is going to be – 2.7 on TruTeam side for instance is a difficult comp to comp against and I think it will be lower than that in the fourth quarter. The other side was that, last year, if you recall, we had a net insurance gain. We had a big actuarial gain on one side offset by some what we call timing adjustments on the negative side. So the one variable on that we were confident probably is not going to recur is a favorable actuarial investment. So it remains to be seen in terms of any insurance claims etc, but we think the net gain there probably won't be as much. I think as we look forward to answer the other piece of the question certainly we are comfortable as Jerry said in his prepared remarks talking about long-term at least 20% type of drop down, I think the operational gains although we expect to continue to work that and deliver that obviously become a little more difficult as we move into 2017 and beyond. But we're still bullish and again we are sticking to our guns right now in terms of at least a 20% drop down on a go forward.

And then John I think exiting last quarter you might have mentioned that some commentary around July that I think it was pacing similar to 2Q. So thinking about the cadence of sales during the quarter, is there anything notable and maybe you could give us some flavor for how October trended?

Sure, Scott. This is Robert. So looking at fourth quarter, as everyone is pushing for their closings, we expect to see volumes continue to be healthy here through mid-November we have a lot of public builders who have pushed for the closing. So I'll mention the commercial work, the growth continue to be strong there, the pipeline is robust. So we feel pretty good here heading into fourth quarter and expect the trend to continue to remain healthy from a housing perspective as well.

Thank you.

[Operator Instructions] There are no further questions from the phone lines at this time.

Thank you for listening today.

We do have a question from Keith Hughes from SunTrust. Please proceed.

Thank you.

Hi, Keith.

Hi, thank you. Sorry, I was already logging in. I guess questions around – as you go into next quarter, we don't have a lot of history of your numbers as an independent company. Would you normally from the seasonality expect sales just on the gross number to be lighter in the fourth quarter? I’m kind of balancing that with – because we clearly have a backlog of homes to be insulated and built in the market right now.

Yeah, I think – Keith, this is John. I think if you look at a year ago, we were kind of flattish, I think, from quarter to quarter in terms of our revenue. A little bit different this year. And I think there is – the one thing you seen I think is the starts hasn’t been quite as robust. So if you’re looking at last year, we had a second and third quarter that had a pretty robust starts with the backlogs were getting pushed, that the lag was increasing, et cetera. Although this year by no means thanking it all, I think, the performance year-over-year is a little different because the third quarter is a little bit weaker in terms of the lag starts [indiscernible] fourth. But we don't expect a dramatic change from a year ago, but I think holding it flat may be a little more difficult than it was a year ago.

Okay.

Also the business tends to decline in November and December, so, yeah, sequentially.

Okay. And assume the same one is true in the first quarter of next year, we have…

Yeah.

…assuming [indiscernible] would grab the same effect, probably a little bit more in the first quarter growth.

I think that's a good way to think of it, Keith. I think that we all recognize across the industry and certainly affecting TopBuild, we had a first quarter that weather-wise was very unprecedented. So, assuming that doesn't happen again and we get back the more seasonable weather, I think the first quarter comp obviously is going to be a very difficult one.

And within TruTeam in the third quarter, basically in your comments it appears as though price was up, mix was a headwind, can you give us anymore clarity on the magnitude of those two?

The price we provided obviously in terms of the TruTeam side, I think, it was up 2.7%. We haven't given guidance and we won’t on the multifamily side, which is really the headwind you're talking about on the mix side, very similar to what we saw in the second where we saw year-over-year a slightly higher mix of multifamily units rolling through our business mix. We do expect that to level out in the future. Always difficult to say exactly when that’s going to normalize, but I’d say looking forward we’d expect a favorable mix to more single-family as we move into 2017.

2.7, is that a price mix number or just a price number?

That's price.

That’s price, okay.

Yeah.

And then final question, you talked about an increase from the fiberglass manufacturers in January had been announced. They haven't had a good track record of getting these through for a while, is there anything that’s changed in the market that you think that would be more successful or the industry will be more successful in 2017?

This is Robert, Keith. I think you hit on a key point if you look back over the past couple of years, but I think given the continued positive housing trends as to what’s happening, there has been some of the capacity used up here in 2016 as well. We do think it's going to be a better environment for that as we look forward in both businesses. So I think the positive housing trend is definitely helping that and just given what’s happened in the last couple of years. So I think we feel pretty positive there should be that. And then from – if I think about from the TruTeam perspective, labor continues to be tight, so that facilitates somewhat of the pricing dynamics to happen on the contracting side.

Okay, thank you.

There are no further questions at this time.

Thank you for listening today and we appreciate your continued support. We look forward to our fourth quarter call.

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. Thank you.