Installed Building Products, Inc. (IBP) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Installed Building Products Fiscal 2019 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Niswonger. Please go ahead.

Good morning and welcome to Installed Building Products first quarter 2019 conference call. Earlier today, we issued a press release on our financial results for the first quarter, which can be found in the Investor Relations section on our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include statements with respect to the housing market; residential and commercial industry condition; our financial and business model; our efforts to manage material insulation; our ability to increase selling prices; the demand for our services and product offering; expansion of our national footprint; products and end market; our expectations for our end markets; our ability to strengthen our market position; our ability to pursue and integrate value-enhancing acquisitions; our diversification efforts; Alpha's revenue and profitability; expansion of our commercial business; our growth rates and ability to improve sales and profitability; and expectations for demand for our services; and our earnings in 2019. Forward-looking statements may generally be identified by the use of words such as anticipated, believe, expect, intend, plan and will or in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, the forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in future. Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially from those expressed and/or suggested by the forward-looking statements as a result of various factors, including, without limitation, the factors discussed in the risk factors section of the company's annual report on Form 10-K for the year ended December 31, 2018 as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission. Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for the company to predict these events or their effect. The company has no obligation and does not intend to update any forward-looking statement after the date hereof, except as required by federal securities laws. In addition, management uses certain non-GAAP performance measures on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share, adjusted gross profit and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer. I will now turn the call over to Jeff.

Thanks, Jason. And good morning to everyone joining us on today's call. I am happy to have the opportunity to talk to all of you about our first quarter results. As usual, I will start today's call with some highlights and then turn the call over to Michael Miller, IBP's CFO; and Jason Niswonger, who will discuss our results and capital position in more detail before we take your questions. 2019 is off to an excellent start driven by record first quarter sales and strong earnings. As we have stated in the past, the first quarter is typically our seasonally weakest quarter for revenues and profitability. Despite this normal seasonal trend within the industry, demand was strong throughout our geographies and our end markets. Over the past few months, the homebuilding industry has experienced a period of softer demand in certain local markets where the pace of housing starts has been sporadic. However, we did not experience the same degree of volatility in our revenue due primarily to the fact that the industry entered the period with an extended backlog of homes that had already been started but not yet completed. This high backlog enabled our installation crews to remain continuously productive during the quarter. Additionally, overall, our national footprint in diversified end market and customer base serves to lessen the impact to us from periodic softness isolated in individual markets. We expect residential and commercial industry trends will remain favorable throughout 2019, and our diversification efforts will result in another strong year for IBP. Total revenues for the 2019 first quarter increased over 13% to $342 million driven by higher volume and customer and product growth and the contribution from last year's acquisitions. Single-family same-branch sales increased nearly 7%, while total single-family sales increased approximately 14% compared to the increase in total U.S. single-family completions of approximately 4%. Same-branch multifamily sales increased nearly 10%. Combined new residential same-branch sales during 2019 first quarter increased 7%, while total residential sales increased nearly 14% compared to the increase in total U.S. completions of approximately 6%. We continue to proactively work with our customers and suppliers to lessen the impact of rising material costs across all our product lines, and we believe we will receive the benefit of selling price increases during the second half of 2019. We continue to outpace industry growth, which we believe is a result of our focus on operating branches and strong and diverse U.S. housing markets. IBP's current geographic footprint provides us access to nearly 70% of total residential permits, and we remain committed to expanding our footprint through acquisitions, organic branch growth and capitalizing on cross-selling opportunities of other product offerings within our existing markets. The market for residential and commercial installation services remain highly fragmented, and we continue to have a robust pipeline of acquisition candidates. Our current pipeline includes insulation installers that expand our footprint and geographic reach into compelling housing markets. Our pipeline also includes installers of complementary building products that diversify our end markets and product offerings. As a result, we believe 2019 will be another good year of acquisition growth. Our acquisition strategy is focused on identifying well run installers that expand both in geographies we serve and the types of building products we install. During the 2019 first quarter, we acquired 1st State Insulation, an insulation installer, in Delaware with annual revenues of approximately $8.8 million. 1st State expands our geographic presence in the markets, which we previously weren't able to effectively serve. Turning to Alpha, revenues increased nearly 7% for the 2019 first quarter. Organic geographic expansion continues to be a key component of our commercial construction strategy. We are opening a new Alpha location in Phoenix later this year, and expect this location to quickly ramp given favorable trends within the region. During the 2019 first quarter, IBP once again experienced strong employee retention, turnover and labor efficiency rate. I'm encouraged with the continued improvements we are making to empower, educate and motivate our employees. I'm also pleased with the launch of the Installed Building Products' foundation, which is led by IBP employees for IBP employees, their families and their communities. Together, we set a goal to donate more than $1 million to non-profit individuals in 2019 through its programs. Initiatives include educational scholarships and employee emergency assistance fund and a fund to support matching grants for employee donations of time or money to their favorite charitable causes. I encourage our investors to watch the video overview of the foundation on our website, and I look forward to reporting on the continued success and commitment of our employee and community outreach. With this overview, I would now like to turn the call over to Michael to provide more details on our first quarter results.

Thank you, Jeff, and good morning, everyone. Net sales increased to a first quarter record of $342.1 million, compared to $301.7 million in the same period last year. The 13.4% year-over-year improvement in sales was mainly driven by an increase in price mix, a higher volume of completed jobs, good growth at Alpha and our 2018 acquisition. Industry-wide construction delays occurred across the country, but especially in the south during the fourth quarter of 2018. These delays were reduced in the first quarter. The extended lag is very visible in the Census Bureau data. The single-family authorized, but not started backlog in the 2018 fourth quarter was 20% higher than in 2017, and it was 30% higher in the south. In the first quarter of 2019, the single-family backlog was up approximately 10% versus last year. The reduction of the backlog in the first quarter favorably impacted our revenue during the quarter, but negatively impacted gross margin as this work did not include the benefits of our efforts to increase selling prices to offset the material inflation we experienced in late 2018 and earlier this year. However, we have made good progress increasing our selling prices and expect that with this backlog conversion during the first quarter and normal seasonal trends, we will see the benefit of our pricing improvements in the second half of 2019. First quarter 2019 gross profit improved to 11.8% to $89.4 million, from $80 million in the prior year quarter. Adjusted gross profit as a percent of revenue was 26.2%, compared to 27% in the same period last year, attributable to the newest construction delays and material price inflation later in 2018. Without these drags, adjusted gross margin would have improved over the prior year quarter. For the 2019 first quarter, selling and administrative expenses as a percent of net revenue improved to 19.2% as compared to 19.9% for the 2018. As a percentage of revenues, administrative expenses were 14.2% in the first quarter compared to 14.6% for the same period last year. Adjusted selling and administrative expenses as a percent of net revenue improved by 80 basis points from 19.2% to 18.4%. We expect selling and administrative expenses, as a percent of net revenue continue to improve over time as we further scale our operations. As we’ve stated in previous earnings calls, it is important to note that as our acquisition strategy continues and as the volume of total acquired business operations become larger, we will incur additional non-cash amortization expense. In the first quarter, we recorded $5.9 million of amortization expense compared to $7.1 million for the same period last year. This non-cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability.. Based on our acquisitions completed to-date, we expect second quarter 2019 amortization expense of approximately $5.9 million and full year expense of approximately $23.6 million. This figure will change with any subsequent acquisitions. For the first quarter of 2019, adjusted EBITDA improved to $35.7 million, representing an increase of 13.5% from $31.4 million in the prior year. On a GAAP basis, our first quarter net income was $8.8 million, or $0.30 per diluted share, compared to net income of $6.4 million, or $0.20 per diluted share, in the prior year quarter. Our adjusted net income improved to $15.3 million, or $0.51 per diluted share, compared to $14.4 million, or $0.45 per diluted share, in the prior year quarter. For the 2019 first quarter, our effective tax rate was approximately 27.5%, and we expect the full year effective tax rate of 25% to 27% for 2019. Now, let me turn the call over to Jason, to review our balance sheet and cash flow.

For the three-month period ended March 31, 2019, we generated $15.9 million in cash flow from operations, compared to $6.1 million in the prior year, a 161.1% increase. We will continue to use our strong operating cash flow to fund acquisitions, reinvest in our business and opportunistically repurchase shares of our common stock. Capital expenditures at March 31, 2019, were $8.7 million, while total incurred finance leases were $1.1 million. Capital expenditures and finance leases, as a percentage of revenue, decreased 70 basis points to 2.8% at March 31, 2019, compared to the same period last year. At March 31, 2019, we had total cash and short-term investments of $98.2 million, compared to $100.5 million at December 31, 2018. During the first quarter, we did not repurchase any of our common stock. We have approximately $61 million available in our expanded $150 million stock repurchase program that is in effect through February of 2020. Total debt at March 31, 2019 was approximately $454.4 million. Taking into account cash and short-term investments at March 31, 2019, our net total debt was approximately $356 million compared to $354 million at December 31, 2018. Our capital structure remains conservative, and we have considerable flexibility as we continue to deliver on our growth strategy. With that, I will now turn the call back to Jeff for closing remarks.

Thanks, Jason. IBP has a strong platform, a disciplined approach and an experienced and committed team. I'm encouraged by the progress we have made on our selling price increases, stabilizing margins at our new Alpha branch locations and our acquisition opportunities. I believe, 2019 will be another strong year for IBP. Operator, let's open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Nishu Sood with Deutsche Bank. Please go ahead.

Thank you. First, I wanted to ask about the backlog, as you were describing them, had a nice sales performance despite the housing wobbles that we saw in the second half of last year. You mentioned that backlog's actually increased in spite of the weaker start. So wondering if you could just dissect that for us a little bit. Was it non-single-family residential? Was it from multifamily? I would've expected that the construction cycle has actually accelerated a bit for builders, which would've pressured the backlogs downward. So just wondering if you could help us to understand that kind of counterintuitive dynamic, please?

Sure, Nishu. This is Michael. Just to clarify what we were referring to in the prepared remarks is, we were looking at the authorized but not started numbers that are part of the U.S. Census Bureau's permits and starts release. And we looked at basically the averages in both the fourth quarter of 2018, the three-month period, and fourth quarter of 2017, and then the first quarter of 2018 versus the first quarter of 2019. And what you saw there in those numbers is that, as you had mentioned that they were on average about 20% higher in the fourth quarter of the 2018 versus 2017 and actually 30% higher in the south. So there was really quite a bit backlog that was built up. And then also is evident, I guess, I would say, in the completions versus permit and start numbers. So for the last six months, single-family completions were about 413,000 where permits and starts were about 370,000. So you definitely have a situation where -- which is typical and we've talked about this is that, the lag on the completion side, that delta can be fairly significant. But we believe that has started to come down, as it's evidenced by the single-family authorized but not started numbers coming off that fourth quarter -- those fourth quarter high numbers. So from our perspective, the backlog still remains healthy, and we think that the spring selling season is looking to be certainly more encouraging than I think what people initially expected coming into the year. So we feel pretty optimistic about what particularly the back half of the year is going to look like.

Got it. So it sounds like in terms of the significant volatility and demand that the housing market saw in the back half of the year may not -- the backlog effect that you're describing may end up substantially dampening the kind of downstream impact of that volatility on your sales trends?

Yes. That's certainly the case in the first quarter. Obviously, we're only a month into the second quarter at this point. But we're encouraged by what we're seeing from a demand environment perspective. But -- and obviously spring/summer season hasn't come to a conclusion yet. Although, as I said, it seems to be relatively positive or more positive than what a lot of people were thinking as we came into the year. So we think that if there is any kind of pause or indication from the slowdown that happened in order growth in the back half of last year that it has the ability to maybe impact the second quarter, but that the back half of the year should be very solid.

Got you. And the other question, I wanted to ask was about, you mentioned that your margins were still impacted to some extent by the pricing against -- pricing not fully coming through yet against the rate of material cost inflation. When would that lower-price backlog in your business clear? Would it still have an impact in 2Q? And is that how we should understand the deceleration on the price mix number from the 8% range in 4Q to the 4% range in 1Q?

Yes. We -- in that, we've been very consistent since the third quarter of last year and then the fourth quarter and this quarter now as well. And we really believe that we will get on completely on top of the pricing issues that we experienced from material price inflation in the back half of the year. So meaning, yes, we could still feel pressure in the second quarter, to your point. I think it's important to highlight though as we look at the business right now the only pressure point or headwind that we see is in the materials side. The rest of the business is performing extremely well. We continue to be very positive and constructive with the labor environment. And as Jeff mentioned in his prepared remarks, retention has been very and continue to be very good. We're really excited about the initiatives and efforts that we've undergone to create, and enhance employee engagement, and results that benefited us from a retention perspective.

Great. Thank you for the details.

Sure.

Our next question comes from Trey Morris with Evercore. Please go ahead.

Thanks guys. Picking up on -- off that last question and you completely covering your pricing issues by the back half of this year. Is that comment inclusive of the potential for another price increase to happen mid-year? Or if there is a price increase mid-year, do you think that it's possible that it may take a little bit longer for you to get on top of everything, all-in?

We think that there will be a price increase announcement in July most likely. I think, if you look at the commentary that OC had in their earnings call and what we're all sort of seeing and feeling, we feel comfortable that we'll be able to manage through the rest of the year and that the environment is more typical versus the very atypical environment that we had in 2018. I just wanted to add.

Yes, it's fine.

Okay. And then turning to Alpha. Sales growth in the quarter is only up about 7%.

Yes.

And that really compares to a solid double-digit rate in the back half of last year. And it tends to be -- I think you said that you tend to have fairly good visibility into it.

Yes.

So I'm just wondering what was the reason for that business slowdown. Was it just near a gap in your projects? Or is there something that you're going to be running at a little bit lower than that double-digit rate going forward?

There is a little bit of a gap in the projects, but it's also weather-related of the vast majority of the products that we install in the Alpha locations requires that not to be basically raining and for the project to be dry. And as -- it's been well documented, particularly in the markets that you guys are in, in the southeast, it's been a very wet winter, which really prevented them and inhibited them from getting work done. So we feel very confident based on the backlog that we're going to continue to see good solid growth in that business, and it's -- again, it's something that we are excited about not just from expansion of the operations from a physical location perspective at moderate pace, but also we think that our efforts to continue to improve profitability there will pay off.

Okay. Got it. Thank you very much.

Yes.

Our next question comes from Mike Eisen with RBC Capital Markets. Please go ahead.

Good morning. thanks guys for taking the question. I just wanted to follow-up on those previous comments. Can you give us a little more color on what you're seeing from the branches you greenfield last year? And then any expectation in terms of cost and when we can start seeing contribution from the Phoenix operations you've been talking about bringing online this year?

Sure. As far as the Phoenix, we would expect that it'll -- it's not going to be anything that moves the needle but that we would expect by the end of the year, and then for the quarter, I think it will contribute revenue and earnings, but it's not going to be meaningful in any -- to the whole company or even to Alpha in total. The new locations that are continuing on the path towards acceptable levels of profitability, but as we've talked about in previous quarter calls, it's not something that happens overnight. And we do feel that as we particularly look at their backlog and we look at the back half of 2019, we're very encouraged in terms of what the potential is there.

Got it. That's helpful. And then following up on some of the prior comments around January -- or July price increase for -- from the OEMs. And thinking about some of the capacity curtailments and where utilization for the market is going to be at that point of the year, is there anything to note on magnitude of price increases? It seems like it could be a larger price increase, given utilizations. And I know that's something that's been an issue in the past pushing through.

Yeah. I guess, we're estimating that it's going to be aligned with what we've seen in the past and that kind of high single, low double-digit rate. And again, that's what we think will be announced. I think for us right now, from what we can see, it feels that the supply/demand environment is very typical versus the atypical environment we experienced in 2018.

Got it. Thanks for taking the questions.

Sure.

Next question comes from Phil Ng with Jefferies. Please go ahead.

Hi, guys. Your pricing was obviously pretty solid but dip a touch from the 4Q run rate. Can you address what's driving that? And with some of the timing issues you kind of flagged, do you expect that trajectory reaccelerating back to what you've seen in 2Q? And do you expect that price cost to be more neutral in 2Q? Or are you just going to take until the back half where you kind of flip more positively?

Yeah. It's definitely more in the back half where we think we're going to see the full benefit of the price increases that we've not only got in 2018, but also, we're getting in 2019. And I know this is a concept that we've talked about quite a bit on the quarterly calls and it's not one that's easy to understand, but we disclose price mix, and I know people think of that as being just price. But mix has a very outsized impact on that as well. And as you know, we've been growing -- strategically have been growing the other product sales significantly. And those other product sales significantly bring down the price mix. So we feel very good what -- how we're managing the business from a content perspective and our ability to drive an improved profitability. But you guys keep in mind that that price mix number includes mix, and that in itself definitely brings down that reported number.

Got it. That's helpful color. And then from M&A pipeline standpoint, it sounds pretty robust. Can you give us some color what you're seeing out there? Where are some of the opportunities? And how you kind of rank your preferences between your core legacy residential insulation business versus commercial in some of these adjacent market you've been branching out into?

Yeah, this is Jeff. We do -- as you say -- as I have said, we feel really, very good about the pipeline. We've really fine-tuned the focus in the last couple or three quarters to try to find pure insulation or nearly pure inspiration plays that expand our geography, as I mentioned. And we're having a reasonable amount of success in that regard. So that's where we're headed for the foreseeable future. It doesn't mean that we still won't do either bolt-on deals in markets that we're in or product line expansion deals where we think it's appropriate or good in a particular market. But for the most part, we're still far looking like we're going to have good success and kind of expanding the footprint with the insulation teams. That's where we'll concentrate.

Got it. That's helpful. And just one cleanup question for me. This new Phoenix opportunity for Alpha sounds promising. I know your -- when you had a big ramp-up greenfield impacted margins and such. How should we think about this? I know it's not expected to contribute in a meaningful way. But will that have any impact on how we think about incrementals in the back half of the year?

No. This is small operation. We just wanted to highlight the fact that we were opening up a new location, because we had talked a couple of quarters ago about those new Alpha greenfield locations and the impact that they had in the overall results. But this is one location as opposed to six locations. So we don't expect it to be a meaningful contributor to either revenue or earnings any time in the near future, but we also don't expect it to be a drag.

Well -- and it's just as important to realize that it's one location versus six in the prior year, which we did a few quarters ago.

Got it. Appreciate it. Thanks a lot.

Next question comes from Keith Hughes with SunTrust Robinson Humphrey. Please go ahead.

Hi, this is Josh on for Keith. Just had a question, understanding that there was a price increase this year and potential for another in July. How should we think about 2H incrementals in relation to 20% target?

Well, as we've been saying, we feel certainly much better about the second half of '19, especially as we sit here today, and we would've even in -- say, at the end of the fourth quarter or the beginning this year because it does look like there is decent momentum within the spring selling season, so those volumes particularly at the higher selling prices that we've been able to work through. So certainly helped us get back to higher incremental margins in the back half of the year. I don't think given sort of where we see the headwinds still from material price inflation in the first and second quarter of this year is that on a full year basis, we'll be back to 20% to 25%. But we feel very comfortable that we're going to trend back towards those levels, particularly in the back half of the year.

Okay. Great. And then on Alpha, could you kind of talk about -- I know last quarter, you talked about 2018 kind of a headwind there as you get ramped on the locations. When does that kind of reverse in 2019?

We're -- they're at a point now where, while they're concluding the margins at Alpha, they're not really diluting the overall margins of the business, just getting the size of the overall business. And it's a bigger -- it's interesting. So their gross margins are actually lower than the gross margins of the residential business. So they just "drag down" our overall reported gross margin, but their SG&A leverage is better than the residential business. So as a consequence, their EBITDA margin contributions are within the levels of the residential business. And they -- because of what I was talking about before, particularly on the kind of a period of wet weather that they experienced, they had a tendency to hold crews in those situations where on the residential business, we wouldn't. So that kind of impacts their profitability -- I mean impact to their profitability in the first quarter. But it really is not negative still overall IBP's reported combined numbers.

Okay. Great. That’s it from me. Thanks.

Thanks.

Next question comes from Trey Grooms with Stephens Inc. Please go ahead.

Hey good morning.

Good morning.

Congrats on the good quarter.

Thanks.

Thank you.

Just a couple left for me. One is just kind of on the size of the homes coming shrinking and with more entry-level. And I understand you guys, with your exposure to homebuilders and quite a few of the larger homebuilders that are kind of transitioning more into a smaller-spec homes, that sort of thing. What does that mean for you guys as far as -- or are you guys doing anything to kind of transition or move into benefiting from these smaller homes or getting more exposure to certain builders and certain geography? Just if you could comment around that at all.

Yes. I mean, we've had good exposure may be not, we've had good penetration with the big national builders for quite an extended period of time, and we like that entry-level production builder work. And I think we've talked about this on calls before. While -- that the gross margin -- both gross margin and gross profit dollars are going to be less on that work, it is extremely efficient work. So it allows you to get -- from a selling and administration perspective, to get better leverage. So that worked as we think very beneficial. And very importantly, just from a macro perspective, we think it's necessary in order to get back to those stabilization rates. So we think that market is -- it took a long time to where this recovery has been, but we think that the market getting back to a better balance between entry-level versus the total housing market is overall positive. And we have good penetration with those customers and much better penetration than we'll probably ever had with the production builders, and we think it's very positive. It’s kind of our bread and butter.

Right. And also, I guess kind of the follow-up to that is just on some of these ancillary products and with the direction kind of going to more spec, I guess, assuming that it -- is there opportunity for you guys to expand or maybe increase your kind of share of the wallet with some of these more ancillary products, and that they've been in sales more to the direction of the fact that the homes that we're seeing go now?

I don't know that that necessarily would be the case. But obviously, the overarching plan is exactly what you said in terms of us getting a bigger share of the wallet and having a larger sale with each -- with the builders, really. And they do -- to your point, they're probably -- it's probably ultimately potentially low, but a little bit easier of sale as opposed to 1 or 2 let's say, the kind of work with some of the larger builders on these other products and kind of take a significant part of that business in the market.

And I think it is, without a doubt, for a builder. That's building an entry-level home and building more spec, selling up on time, getting the job done right the first time. So the service aspect of our business becomes more and more important to them, especially if it is low-dollar-value project. And they can have one subcontracted that they can rely on to multiple products. That's a benefit to them, because they still have to manage, even though it's the $350,000 house versus the $650,000 house. They're still managing that process, and they want that process to be managed much more efficiently as the smaller dollar value. And we get significant SG&A lift out of these extra sales. We talk a lot about the margin and gross margin and the potential drags, albeit, somewhat smaller sale. We don't like to do things that, we clearly would decide that don't do things that we decide on for kind of our profit motivation on the one hand. But on the other hand, clearly, these extra incremental product sales – other product sales definitely help us, give us lift at the SG&A level.

Got it. That's – it's good to hear. Again, that's the point, what I was getting on other products and things like that on the ancillary side as well. So – and one last one for me. Delaware, I know you guys entered that market, I think with the new market because with diluted or acquisition you did maybe a few months ago. Any other new geographic markets that might make sense as you're kind of looking at Dallas' footprint?

Yes, this is Jeff again. One slight clarification, we were in Delaware with previously or still with a – another location. Its 45 minutes to an hour away or so. The customer base was different. The new acquisition does a significant amount of work along the shore in kind of bigger, more custom-like homes and actually the product line too. But the – and the other location was due to primarily more – different geography, and it's still a little smaller. So it was largely at different things as far as we were concerned in terms of coverage, and it really about tripled, quadrupled our sales there. In terms of other geographies, we continue to not have the presence we would like in the Southwest United States. That continues to be an area, where we'll look as hard as anywhere to find potential acquisition candidates as well as working on the operations that we do have there, feeling like it's a good growth area for us. Clearly, some other parts that are west and not necessarily southwest, pure west, let's say, they remain to be places where good markets that we get them a foothold in. There is still some holes really in central kind of America to Central America, essentially United States. But so – and it's surprising, we’ve said this before, but you – depending on the market, you can be is probably isn't traffic, really. You can be as close to 30 or 40 miles away and in that – if not be doing work in a particular area. If it's really kind of high-traffic, hard city to get around let's say, for instance, San Francisco. So those continue to be places that we work on to.

Okay. Thanks a lot for taking my questions. Good luck.

Sure. Thank you.

Next question comes from Matt McCall with Seaport Global Securities. Please go ahead.

Thank you. Good morning, everybody.

Good morning.

Good morning.

Maybe I'll start with the other segment or – and the impact of kind of price mix. So you did price mix of 4.1% on a 3.6% comp. The comps get a little tougher, and they've got pricing expectations. Obviously, the continued impact of mix shift from – specifically to the other. So how should we look at price mix through the year based on all those things? Seems like maybe it should moderate a little bit or – on a net basis or is it flattish around 4%, the right way to think about it.

If you look at 2018, I mean, we did have outsized price mix in the fourth quarter, but we really trend around that 4% to 5% range kind of price mix basis. And as I said earlier in the Q&A, in the call, the mix – we can't underestimate or we can't under emphasize, excuse me, the impact that makeshift on price mix. So that 4% to 5% price – that price mix range over the course of the year seems pretty consistent from what we've been doing when you factor in most selling price depreciation combined with our continued emphasis on the shift in the mix.

Okay. Okay. Maybe adjusting for the strength in Q4, is that the one thing to keep in mind?

Yes.

Okay. You brought up OC earlier on their call. They discussed being more competitive to maintain current – their current chair position. Have you seen any changes in manufacturing behavior around pricing and – pricing efforts since the January increase? Are there any opportunities maybe just to secure better pricing than you anticipated when we last spoke?

Let me go back to what we said about it being a somewhat benign environment, and that we think it's much more regular way than it was since 2018. And I think that, we're – I hate to say this, but whatever it is, it will be back to normal. We're back to this operating environment that we're accustomed to have, let's say that we had 2016, 2017. So we do expect there to the price deceleration. We don't expect to see anything like the price increases or acceleration that we saw in 2018 far in any unforeseen change in the capacity landscape, like we saw in late 2017.

There's no change in the competitive behavior of those manufacturers, at least thus far?

No. That's right, no change.

Okay, last one. You talked about the organic incremental like if I heard you right, Michael it's going to trend back toward the 20% in the back half. It doesn't sound like you're going to sell to get there. And I guess the question is, in the release, you talked about the Q1 organic incremental being kind of in line with normal seasonal patterns or expectations. What is it that would cause the rest of the year to be abnormal, if you kind of got things back to normal in Q1? What is it that's holding back the normal seasonal pattern as you move through the rest of the year?

I think, speaking for Michael Miller, that the realization of all the price increase -- increases that we put out there across all the work, it maybe being done and previously contracted, not contracted for but let's say, committed for pricing. With that shift, we should be able to move back to normal.

In the back half.

In the back half of the year.

Okay. Maybe I misunderstood the answer. So okay. So to get back to that range in the second half. Okay. All right. Thank you all.

[Operator Instructions] Our next question comes from Just Speer with Zelman & Associates. Please go ahead.

Hi, guys. I have a few questions. First, I recognize that the back half feels better, but just kind of nearer term, just looking at the second quarter in terms of volumes and margins, do you still expect or are you expecting the overall volumes and overall margins will expand in the second quarter based on what you see today? Are you expecting for filtered through?

Yes. So -- we would expect the second quarter to be more typical in terms – probably just typical in terms of seeing higher volumes in the second quarter and as a consequence, margin improvement. I wouldn't say though that as you look back at 2018 and 2017, our second quarters, we've talked heavily about them at that time, we're very -- will be very difficult comps for us in the second quarter of 2019 because we had very strong dynamics for a number of different reasons in both 2017 and 2018 in the second quarter. So I would call those out as being a typical relative to the entire year, but we would expect that this second quarter would be sort of more typical like we experienced in other years. We're certainly going to see the benefit of improvement in the weather, typical seasonal growth that we see for building perspective. And we believe on the production builder side that the pivot towards -- and I think this is fairly well documented at this point, as they pivot towards this entry-level work, it definitely decreases the cycles time on sort of start to completion. And that in itself brings more volume important to us sooner than it may have been has the market is not adjusted to the demand environment for entry-level.

So the volumes due -- in terms of the just unpacking that volume, do you think the volumes will hold back in terms of the growth? Will it be consistent at low single-digit type of growth cadence even though the comps that you mentioned earlier are increasingly difficult as we look in next couple of quarters?

Yes. It's particularly the second quarter and that is the difficult comp. I mean if -- as you know, we don't provide guidance since we're only one month into the quarter, but we feel reasonably good about the trajectory that the business is on.

Next question I just -- thank you. The next question for me is just in terms of just high levels just getting your thoughts. In terms of the price negotiations with builder customers, I know not every customer is saying, but generally the tender and tone of those price discussions are they any different. Have you had to -- and have those discussions elongated? Or have you lost some business, or maybe they consciously decided to walk from business overpriced?

We have consciously decided to walk from business overpriced, and we think that that is absolutely the right decision to make. I would say that in a lot of instances we have done that before. We have a tendency to win back all of our portion of that business over time because at the past we’ve always talked about the service part of our business is pretty critical. And our ability to retain our employees and reduce the turnover, we think it even improves that service level more. So we think those are the right decisions to make for the long term. In terms of the price discussions, I think justifiably so just like we're tired from hearing from the manufacturers, I think our customers are tired from hearing from us about price increases. So we're very encouraged that we feel we're in a much more regular way than not like inflationary environment right now. Now we just have to do the job of continuing to service our customers and fully realize the price increases that we instituted in both 2018 or early 2019.

Excellent and then last question from me, on SG&A. That's one -- yeah, because you levered that really nice in the quarter. And last year you did as well, just wanted to say that because last terms, we involved 40 basis points on that leverage despite the workers comp and healthcare benefits. That's harder for us to really identify, or in terms of the trends, we don't know what those are doing. But how much of that factored into the SG&A, leverage in the first quarter? And how should we think about the sustainability of those types of contributions?

Yes that didn't factor all into the SG&A. And in fact, workers' comp is actually a part of cost of goods sold. So that would have impacted the leverage there. No, it was really a combination of volume and trying to make sure that we're effectively managing kind of the cost side of the business at the branch level. I think it is important to note. And I made a sort of a slide reference to it earlier in the call, but it is interesting how over time the business is developing, because we're seeing very good growth in certain segments and areas of the country. And just by the nature of those markets given their size and given their product and customer mix, tend to be a slightly lower gross margin markets for us, but very good EBITDA flow though because they have the scale and size and the SG&A leveraging those branches. And as I've mentioned earlier in the call, Alpha has the same way, because margins are a little bit tighter. But I think EBITDA and margins are good. So it's really -- yes, that's just kind of mix of overall portfolio of the business, which I know makes it difficult from your perspective when you're trying to kind of build out your models and look at the business. But it's exactly the direction we want to take the business. We want to make sure that we have a very well-diversified business across all of our end markets and our geographies. And that we're really working to maximize profitability at the EBITDA level from our footprint and from the business.

Excellent and if I could just speak one more on perform and just how that trended in the quarter and what you're expecting there.

It's been consistent with our expectations and as a business that we continue to like. As we've talked about, I think in the last quarter call. Historically, it's very common fact than a product that will go into the entry-level home. It's just too -- it's not cost-competitive. But we feel comfortable with what we're seeing in that business. And the margins are good. And we're continuing to look at markets to add comps where it makes sense. But we don't do it currently. And we're very comfortable with that business.

Okay, thanks guys.

Thank you.

There are no further questions. I would like to turn the floor over to Jeff Edwards for closing comments.

I'd like to thank all of you for your questions. And I look forward to our next quarterly call. Thank you.

This concludes today's conference. Thank you for your participation.