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 Tuesday, August 8, 2017. I will now like to turn the conference over to Tabitha Zane. Please go ahead, ma'am.

Thank you, and good morning. 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 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 obligations 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.

Thanks, Tabitha, and welcome everybody. We appreciate you joining us today. We are very pleased to report another quarter of strong financial results. Starting on slide 3. Revenue grew 9.9%, our adjusted operating margin expanded 250 basis points to 8.9%, and adjusted EPS increased 56% to $0.67 per share. Our incremental EBITDA margin, which is a key metric for us was 36.5% for the quarter. John Peterson will follow me with a detailed discussion on the variety of factors driving these excellent results. Moving to the next slide. Since the spin-off 2 years ago, we have emphasized in our external communications the overall strategy and internal initiatives that provide the compass for all of our activities. Staying on course with these initiatives and remaining laser focused on execution has provided our team with a blueprint for action that has resulted in the strong results we have been reporting. Our number 1 initiative is growing our core residential insulation business both organically and through acquisitions. The scale of our national footprint provides advantages in terms of supplier relationships, best practice sharing and general fixed cost leverage. A second, and equally important initiative is converting that top line to the bottom line with constant attention towards improving operational efficiency, throughout our company. This focus has resulted in significantly greater labor productivity, streamlined back office operations, a more optimized footprint and improved process and procedures. A third initiative is expansion of our commercial business, a $4.8 billion market and a very attractive adjacency to our core residential business. We have been active in this arena for many years, but are now focusing on the substantial share gains possible in this large and very fragmented market. Our commercial business is approximately 20% of our total revenue today. A fourth initiative and one that will…

Good morning, everyone. As Jerry noted, we had a solid second quarter and a very strong first half. Starting on Slide 7. In the second quarter, consolidated revenue increased 9.9% to $474.5 million, primarily driven by sales growth -- sales volume growth at both TruTeam and Service Partners, selling price growth at TruTeam and $20.8 million of revenue from companies acquired since August 2016. On a same branch basis, revenue increased 5.1% compared to second quarter 2016. For the sixth quarter in a row, our adjusted gross margin has expanded compared to the same period a year ago. In the second quarter, adjusted gross margin increased 200 basis points to 24.6%. Adjusted operating profit grew 53.8% to $42.2 million with a corresponding margin improvement of 250 basis points. Both gross margin and operating margin improvements were driven by volume leverage, higher selling prices, lower insurance expenses, lower material cost and improved labor and sales efficiency. Second quarter 2017 adjustments totaled $1.4 million, primarily related to a consolidation of back office operations and severance for rationalization actions. Adjusted EBITDA for the second quarter was $48.2 million, compared to $32.6 million for 2016 and our drop-down to adjusted EBITDA margin was a strong 36.5%. On a same branch basis, adjusted EBITDA was $45.6 million and our drop-down to adjusted EBITDA was 59.1%. Performance was particularly strong in the second quarter with regards to same branch incremental margins, due to approximately $1.9 million of unfavorable insurance adjustments recorded in the second quarter of 2016, which did not occur this year. We're also very pleased to report incremental margins of 12.5% related to the seven acquisitions we completed, a 680 basis points improvement from first quarter 2016. As I noted in last quarter's call, the lower incremental margin reported for that period was due…

Thanks, John, and good morning, everyone. Starting on slide 12. To reiterate both Jerry and John's outlook, 2017 has developed into another solid year for TopBuild. Overall, builder sentiment is optimistic and business remains steady, with an improving economy, household formation is going up and new home inventories low, we expect the positive trend to continue as the industry works its way back to the historical annual average of 1.5 million starts. Moving to the next slide. Within TopBuild, daily execution at the branch level continues to improve, our M&A model is yielding solid results and we have built a supply chain that leverages our scale and provides flexibility to meet our customers' ongoing requirements. Combined, these key elements have positioned our company for growth and are continuing to contribute to our strong bottom line performance. Since the spinoff 2 years ago, driving operational excellence and great execution throughout our organization has been and remains one of our most important areas of focus. To start, we locally empower our 240 plus business leaders to run their branches as distinct operations with full P&L responsibility. Business leaders build their teams to include local management, sales and direct labor. It is critical they have a comprehensive knowledge of their respective local markets, including building codes applicable to their region and an understanding of the types of products and services their customers need, which often varies by location. Every branch manager is expected to have strong relationships with their customers and be actively involved within the communities in which they operate. These local relationships help us successfully serve builders and contractors of all sizes and enable us to attract labor and talent at the local level. As TopBuild, we bring national resources to the table to complement these local relationships. This includes operating…

Thanks, Robert. We're very confident as we look to the balance of 2017 and beyond. The housing recovery is on track and providing an excellent external environment for TopBuild. Internally, we are driving hard with execution in all the controllable aspects of our business, resulting in outstanding financial results and a thoughtful capital allocation strategy for our shareholders. Operator, we are now ready for questions.

[Operator Instructions] And the first question comes from the line of Mike Wood with Nomura Instinet. Please proceed.

Good job on the margin performance this quarter. First question, just wondering if you were able to get out ahead of the June price increase from the inflation manufacturer. Any color in terms of how the market receptivity is there to -- passing through that price? And how should we think about price in your margin? Should that be a pure pass through? And does that mathematically dampen your incremental margins or is there leverage from like labor productivity on the higher prices that would avoid that impact?

Mike, it's Robert. I'll take the first part of that question around the price increase in June. As you know the manufactures announce usually 90 days in advance. The increases, we absolutely start working with the customers at the local level and that's a lot of individual conversations. So we do feel like the teams did a good job of getting ahead of that as things were steady during the summer months. Obviously we worked those conversations in the contracting business, labor tightened up in the summer months. So we feel like our teams did a really good job of getting ahead of that on the pricing and there has been some good traction on the pricing in June. Obviously there's been another manufacturer's increase announced for September 1, obviously too early to tell about that one, but obviously it's a busy time of year. We think it's the right averment around the pricing environment and I think you can see in the results the teams did a nice job there at a local level.

Mike, this Jerry here. The one thing I would add to that would be, as Robert, talked about in his prepared comments, we run the business, local empowerment is important. Each geography is a little bit different than the one next to it, as it relates to that price volume relationship and we try to play that as well as we can and as I said, each geography is a little bit different. So we do believe this is a good time for pricing to go higher, 3 announcements this year from the manufacturers. So and the business is fairly robust out there in some regions. All that equals an opportunity to move price and we will do that selectively where we think we can.

As a general practice, do you pre-buy insulation? I noticed your inventories didn't go up, they actually went down sequentially.

There is some, it's Robert again. Some pre-buy on the contracting side, on the distribution side, a little but the warehouses are typically fairly small. So I wouldn't say huge ramp-up in the buy of material, Mike.

Great. Just finally, you mentioned in your remarks an elongated build time. Just curious, what you're seeing there in terms of where the bottlenecks are. In the future demand continues to grow, would you expect that sort of to worsen from labor shortages or is that able to rectify itself from just bringing more labor into the workforce?

Jerry here. I would say, I do think the building cycle is getting longer. I would say labor constraints is probably the single biggest thing that the builders struggle with. They have got other issues, but in terms of the cycle time I think bringing labor to the job site at the right time is by far the biggest. So I do believe that the cycle time is getting pushed out compared to traditionally what it's been. We have always said, 90-day lag starts kind of as a benchmark, I think on balance, it's probably getting a little bit longer than that.

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

This is actually Reuben Garner on for Matt. First question is the spray foam business you mentioned 25% growth I think year-to-date and the distribution, in the distribution arm. Can you talk about maybe the economics of spray foam versus that and some of your other products, whether it's dollars per job or margin per dollar? Can you just kind of update us on the difference and is that a, I guess a margin help in the distribution business as we move forward and it continues to outpace?

This is John, Reuben. In both businesses both segments, spray foam is typically 2x to 2.5x the typical what we call take per unit on a job. So certainly from a top line, we get more from a spray foam versus a traditional fiberglass and/or cellulose type of job. The margins tend to be pretty consistent on a percent basis. So obviously the drop down to the bottom line is significant when we see an increase and a ramp in that business from an operating margin dollar standpoint, so.

So there has been a lot of movement in parts I guess the last few quarters, the incremental margin has been pretty strong especially this year. Can you update us on maybe what the core incremental, whether it's EBITDA or gross margin outlook is, whether it's for the company overall or each segment just on our organic revenue growth? And then maybe what kind of self-help or continuous improvement you can have that can be additive to that as we move forward?

Reuben, this is John again. So I think you're right. Obviously, we performed well both in 2016 and the first half of '17 on the pull-through on the organic business. A couple of things contributing to that, which we called out. First of all selling prices on TruTeam have remained strong, really strong labor and sales productivity especially on the TruTeam side of the business. First half of the year, we have seen lower material cost and the other thing that's important that we called out in the prepared remarks was the fact that we saw lower insurance expenses versus a year ago, first half. So all that contributed along with the fact that we talked about the fact that we are going to leverage the footprint that we have pretty well as starts ramp and grow. On a go forward, we don't provide specific guidance, but I would point out a couple of things I think on a go forward basis. So we're going to continue to work those issues around pricing, labor and sales productivity and again leveraging the footprint. A couple of the benefits in the first half probably we lose some of it in the second half, part of it would be that insurance expense comparison I talked about. We don't have any favorable comps like that in the second half. And then the other is that our material cost is increasing. So we are going to see and I think the second half comp in material will be negative versus second half 2016. That said, we expect to have strong pull-throughs, but probably closer in line with the long-term guidance we give in the business which is at least 20%.

And that's EBITDA contributions?

Yes. That's EBITDA, correct.

And then one last quick one for me. Just a clarification I think it was you, John, that said SG&A was -- you were thinking flat sequentially as we move through the balance of the year. Just to clarify that's dollars, not percentage of sales?

Correct. That's dollars. Correct.

Alright, great. Thank you very much, appreciate.

You’re welcome.

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

I wanted to quickly drill in on the Installation growth on a core basis about 4% same-store there? I think you guys called out 20% plus or minus growth on the commercial side, so I am doing the rough math, it would imply that there wasn't a whole lot of growth on the residential side. I was hoping you could maybe speak to that, if that math is similar to what occurred in the quarter?

Scott, this is John. I think the 20% includes our mergers and acquisition activity, so I think the 4 plus percent, you talked about was same branch, correct?

Yes.

So when you get down to it, our same branch basically on the TruTeam side was roughly close to 5% plus on the R&C side of the business side in terms of the growth. Commercial was probably just around 6%, when you look at the same branch growth in terms of commercial growth.

Got it. That’s very helpful. And when you think about the fact that you guys had an easier compare year-over-year and you are highlighting some labor constraints, can you maybe talk about to what you are seeing on the R&C business on an organic bases in 3Q? Are you seeing some acceleration there from some of the tightness, it sounds like you experienced in 2Q?

This is Scott. We would expect it to be strong the balance of the year. I mean it's very fluid, there is a lot of things going on out there, some weather issues on the West Coast earlier in the year. We talked a little bit about the building cycle being extended a bit. All that's happening, we talked about the price volume balance that's we're finding by geography. So you put all that together, there is a lot of factors moving around in the first part of the year. We look for ongoing strength of the balance of the year. We talked about the overall housing environment that we think is pretty strong still. So we expect strength the balance of the year.

Great. And then just lastly, on the distribution side, obviously a nice step up on the incremental margins there as well as the growth. If your view of pricing stabilizing or improving year-over-year continues for the balance of the year, should we think about that business as that's helping the incremental margins as you get better pricing?

Yes, so in the second quarter, what we talked about was strong sequential price growth, Scott. This is John, by the way. Second half, we are going to have to wait what happens here in terms of the price increases, the manufacturers' accounts and how we respond to that. Obviously, a tighter environment allows us -- we're going to absorb higher material cost, but at the same time, we would expect to be able to increase selling prices. Whether we will get margin expansion or not? Really depends on the overall conditions. We always try for that but we'll just have to see how that plays out in the second half.

Our next question comes from the line of Trey Grooms with Stephens Inc.

First question for me is you mentioned I guess it was in 1Q you talked about some weather impact on the West Coast. Can you talk about any types of pockets of geographic strength or weakness you guys are seeing on the 2Q and did weather have any impact on you guys in the second quarter at all?

So let's talk about areas of strength first. Pacific Northwest is extremely strong right now, probably one of the top markets in the US Seattle, Portland, that area. North Florida is strong as well. Areas that we talked about before Nashville, some areas there as well, Northern Texas. So those are strong areas, continue to be strong. Denver is obviously another area that we pointed out previously. Relative to Q2, there is quite a bit of pent-up demand, what we called out, specifically West Coast, even get a little more room. We're pretty meticulous about the details relative to looking at the markets. They're really is California and a lot of pent-up demand in California coming out of the wet first four months of the year so we know there's pent-up demand, pent-up units coming in California, so that'd be the specific area that we'd call out that impacted Q2 and we are seeing that trend reverse as we are heading into the back half of the year. So definitely pent-up demand that's coming through there in California.

And then on the commercial business, I think you said same branch is up, was up 6% in the quarter. Is that, was that on the, just for clarity, was that on the distribution business or install or combined?

Robert again. That's combined tray overall.

And do you feel like that's kind of where the market was in the quarter? Do you feel like you may have gained any share, anything on that side of the business through 2Q?

I'd say based on what we see on kind of average commercial reports. We said we probably picked up some in Q2 there relative to overall commercial growth in the industry.

Our next question comes from the line of Ken Zener with KeyBanc. Q - Ken Zener John, you made comments and I understand you guys want to guarded, conservative, not get ahead of yourself around pricing. Obviously there was announcements of sequential pricing of up 100 basis points maybe a little more sequentially. If you could comment on that. And then more broadly, I realize you're not going to give explicit second half guidance. Normally when volumes are increasing, labor's tight, supply from the manufacturers is tightening. What variables could limit your operating leverage? I realize you don't want to give guidance, certainly you don't know what pricing is going to do, but what variables could keep it from happening, given that it's pretty normal for that scenario to reach a higher EBIT leverage.

Ken, so just to clarify. The first part of your question, repeat that again?

You add up, peers in your group talked about insulation pricing up sequentially, roughly 100 plus basis points. Would you be willing to comment on that? That was the first question.

So, are you referring to the Service Partners, sequential performance?

Yes. Just kind of what you are seeing there in the pricing to your customers [indiscernible].

I am not sure we saw 100 basis points, I am not sure where that came from. But we did see sequential price improvement, certainly. And that is directly tied to the fact that in the market, the cost of fiberglass material in particular is increasing sequentially. So as that occurs, we are able to push that through to the market because the rest of the industry obviously is seeing the same type of performance. In terms of what could mitigate that, from a leverage standpoint, the ability to drop all that price, it would be, if we had to make investments in certain things to deal with volume growth and growing the business. Those are things that would mitigate it to some degree. We haven't seen that at this point, again tied to the discussion around the fact that again that we think we're set up for a much larger footprint, much larger housing start volume. So as we have been able to gain price, we have been able to drop most of that through to the bottom line and that's what has helped our performance in terms of the margin expansion we have seen.

[Operator Instructions] And our next question comes from the line of Keith Hughes with SunTrust.

When you look into the third quarter, you discussed that your contribution margin would probably be less than what we saw here in the second, where the numbers here were just outstanding in the second. Would we see a greater contribution margin at TruTeam versus Service Partners as Service Partners passes through some higher prices?

Keith, this is John. I think typically, you should always count on a better contribution margin at TruTeam, just by the very nature of the business. Obviously, a couple things, one is what, we're pricing labor and material as part of it. And as we've said many times a higher fixed cost footprint on the TruTeam side of the business, which means we are going to typically pass down more. So I think on a go forward, that's a very good way to think of it.

And from an inventory standpoint, what kind of inventory does Service Partners hold in fiberglass insulation versus TruTeam? In terms of number of days or weeks, or however you want to do it.

Typically, Keith, I think the answer to that is you might look at something like 17, 18 days on the TruTeam side. You're probably looking at a little over 1 month plus on the distribution side of the business.

Final question, you briefly discussed weather, just summarizing did weather -- it seems like it wasn't really a help nor a hindrance on total, is that a fair statement?

Keith, it's Robert. So yes, definitely held some demand back, especially probably in April if you will and again we see some of that pent-up demand being released now.

Would that be southeastern region where it would impact the most?

No, we've had a little bit of, if I take Florida and rain to happen. So a little bit there, but I say still more of that coming out the first 3 or 4 months in California.

Okay, thank you.

You’re welcome.

And we have no further questions at this time. I turn the call back to you to continue with your presentation or closing remarks.

Thanks to everybody, for listening today and supporting TopBuild. We look forward to reporting our third quarter results in early November.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.