Installed Building Products, Inc. (IBP) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Installed Building Products Fiscal 2019 Second Quarter Investor Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.I will now turn the conference over to Jason Niswonger, Senior Vice President, Finance and Investor Relations. Thank you. You may begin.

Good morning and welcome to Installed Building Products second quarter 2019 conference call. Earlier today we issued a press release on our financial results for the second 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 question 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 and industry conditions; our financial and business model; our efforts to manage material inflation; our ability to increase selling prices; the demand for our services and product offering; expansion of our national footprint; products and end-markets; our expectations for our end-markets; our ability to strengthen our market position; our ability to pursue and integrate value enhancing acquisition; our diversification efforts; Alpha's revenue and profitability; expansion of our commercial business; our growth rate 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 anticipate, 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, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.Any forward-looking statements made by management during this call is not a guarantee of future performance and actual results may differ materially from those expressed in 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 effects.The company has no obligation and does not intend to update any forward-looking statements after the date hereof except as required by federal securities law. 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 the 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'm happy to have the opportunity to talk to all of you about our second 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, who will discuss our results and capital position in more detail before we take your questions. The 2019 second quarter was strong across the board as favorable operating performance drove record financial results. IBP continues to benefit from our strong position in compelling markets across the U.S. and improving pricing environment and our business strategy aimed at product and end market diversification both organically and through acquisition.So let's review our record second quarter results, which demonstrate the significant progress we are making and the positive trends underway in our business. Total revenues for the 2019 second quarter increased nearly 12% to a quarterly record of $372 million, which was driven by improvement in price mix, higher volume, end customer and product growth and the contribution from our recent acquisitions. Beginning last year and throughout 2019, we have worked closely with our suppliers and customers to improve our cost structure and recover from the unprecedented installation material pricing environment that occurred last year.The 2019 second quarter reflects the success of our strategies as price mix improved nearly 6% during the quarter. The material cost environment to date in 2019 has been more stable than what the industry experienced last year. With recent manufacture capacity announcements, we believe the pricing environment will continue to be stable for the rest of this year and we believe we will continue to benefit from the strategies we put in place. Looking at revenue drivers for the quarter, single-family same branch sales increased over 4%, while total single family sales increased approximately 10% compared to the increase in total U.S. single-family completions of approximately 6%.When comparing IBP's single-family same branch sales growth to completions growth, it is important to remember that the timing of completions and the timing of installation work IBP complete isn't in exact correlation. This can be further impacted by the fluid nature of the lag between starts and completions, which we discussed last quarter. Second quarter same branch multifamily sales increased 10% over the prior year quarter. This is the second quarter of strong multifamily growth, which we believe is sustainable for the near future as our multifamily business benefits from continued multifamily development in the interior U.S. where IBP has a strong presence.Combined new residential same branch sales during the 2019 second quarter increased over 5%, while total residential sales increased nearly 10% compared to the modest 0.2% increase in total U.S. completion.We continue to outpace overall industry growth, which we believe is a result of our focus on operating branches in strong and diverse U.S. housing market. IBP's current geographic footprint continues to provide 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 remains 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 markets where we are under represented.Additionally, we continue to pursue installers of complementary building products as well as large commercial installers, both of which diversify our end markets and product offerings.To-date, we have acquired nearly $25 million in annual revenue. We are pleased that this year's acquisitions have primarily been insulation installers in new geographies. This includes the 2019s second quarter acquisition of Expert Insulation, an insulation installer serving the Wisconsin, Iowa, North Dakota and South Dakota markets with annual revenues of approximately $12 million.In addition, we acquired a Pennsylvania-based insulation installer with annual revenue of approximately $3.6 million. Based on our announced acquisitions and current pipeline, we believe 2019 will be another good year of acquisition growth.Turning to Alpha, revenue increased 21% for the 2019 second quarter, which reflects Alpha's strong backlog within its new and existing markets. As mentioned in previous quarters, we will open only one new Alpha brands this year in Phoenix and expect this location to quickly ramp given favorable trends within the region.We also remain focused on improving Alpha's profitability at the previously added branches and continue to pursue several opportunities to expand margins. As a result of our strategies, we believe Alpha's sales and margins are headed in the right direction.During the 2019 second quarter, IBP once again experienced strong employee retention, lower turnover, and improved labor efficiency rates. I am encouraged with the continued improvements we are making to empower, educate and motivate our employee.I'm extremely pleased with the record results we reported for the 2019 second quarter and the progress we are making in achieving our business plan. Industry dynamics remain positive across our single-family, multifamily and commercial end markets, and we expect this combined with typical seasonal trends will benefit our results for the remainder of the year.With this overview, I would like to turn the call over to Michael to provide more details on our second quarter results.

Thank you, Jeff, and Good morning, everyone. Net sales increased to a quarterly record of $371.8 million for the 2019 second quarter, compared to $332.6 million for the same period last year. The 11.8% year-over-year improvement in sales was mainly driven by an increase in price/mix, a higher volume of completed jobs, strong growth at Alpha and acquisitions completed over the past 12 month.As Jeff stated in his remarks, the 2019 pricing environment for insulation materials has been more consistent with historical trends compared to the abnormal environment the industry experienced last year.In addition, we believe a typical seasonal pattern for completions is underway in the housing market. As a result, we continue to believe that in the second half of 2019, we will be fully on top of the material inflation we experienced last year.Second quarter 2019 gross profit improved 12.1% to $107.3 million from $95.6 million in the prior year quarter. Adjusted gross profit as a percent of revenue, increased to 29% compared to 28.9% for the same period last year, representing the positive improvements we've made in pricing.For the 2019 second quarter, selling and administrative expenses as a percent of net revenue was 18.9% as compared to 18.3% for the 2018 period. As a percentage of revenues, administrative expenses were 14.1% in the second quarter compared to 13.5% for the same period last year.The 60 basis point increase in administrative costs as a percent of second quarter revenue was primarily due to lower than historical trends in general liability and medical insurance reserves in the prior year quarter. These accruals impacted the comparable quarter by approximately $1.8 million, but will vary from quarter-to-quarter based on actuarial estimates and trends.We highlight this as comparison to last year and not a structural change in administrative costs. As we have 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 second quarter, we recorded $6 million of amortization expense compared to $7.3 million for the same period last year. This non-cash adjustment impacted 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 third quarter 2019 amortization expense of approximately $6.1 million and full-year expense of approximately $24.2 million. This figure will change with any subsequent acquisition.For the second quarter of 2019, adjusted EBITDA improved to $49.6 million, representing an increase of 8.9% from $45.6 million in the prior year. As stated in previous earnings calls, we expect fiscal year 2019 to support typical seasonal trends, where we experienced improving sales and profitability in the second half of the year.We continue to be encouraged by the momentum in the new single-family construction market, as supported by solid order growth recently reported by the public homebuilders. On a GAAP basis, our second quarter net income was $18.9 million, or $0.63 per diluted share, compared to net income of $16.3 million or $0.52 per diluted share in the prior year quarter.Our adjusted net income improved to $25.9 million or $0.87 per diluted share, compared to $24.6 million or $0.78 per diluted share in the prior year quarter. For the 2019 second quarter, our effective tax rate was approximately 24.6% and we expect a full year effective tax rate of 25% to 27% for 2019.For the six-month period ended June 30, 2019, we generated $52.4 million in cash flow from operations, compared to $33.1 million in the prior year, a 58.2% increase. In the 2019 second quarter alone, we generated $36.5 million of operating cash flow, compared to $27 million for the same period last year. We will continue to use our operating cash flow to fund acquisition, reinvest in our business and opportunistically repurchase shares of our common stock.Capital expenditures at June 30, 2019, were $17.8 million, while total incurred finance leases were $1.8 million. Capital expenditures and finance capital leases, as a percent of revenue, decreased 30 basis points to 2.7% at June 30, 2019, compared to the same period last year.At June 30, 2019, we had total cash and short-term investments of $105.7 million, compared to $100.5 million at December 31, 2018. During the second 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, 2020.Total debt at June 30, 2019, was approximately $464.9 million. Taking into account cash and short-term investments at June 30, 2019, our net total debt was approximately $359 million, compared to $363 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, Michael. I am extremely encouraged by the direction in which we are headed and the positive business and market trends we are experiencing. With the strong first half of 2019 complete, we are positioned to continue our trend of strong sales and earnings growth.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 is from Justin Speer with Zelman & Associates. Please proceed with your question.

Good morning, guys. Thank you.

Good morning

Just a couple of questions tied to the margin profile in terms of the trajectory as we think about exiting this year in particular. But as we think about 3Q and 4Q, should we begin to see some year-over-year improvement on the gross margin side, both on a year-over-year basis and a sequential basis, as we think about the set up into the back half of the year?

Yes. I mean as we have consistently talked for the past several quarters, we believe that, for the second half we will get on top of the pricing cost dynamic that we've been talking about for the past several quarters and we do think that that will particularly, with what we are seeing and anticipate from volume growth -- typical seasonal volume growth in the back half of the year, we feel good about kind of the margin profile of the business going forward, as well as the incremental margins that the business will be able to generate as we go into the back half of the year.

Excellent. And then on the SG&A side, are there any more one-time accrual items to call out as we think about mapping the back half? I guess, how do you think about the SG&A levels going forward?

Yeah. As we've said, Justin, in the prepared comments, I mean, it really was more of a comparison to last year, because based upon the actuarial analysis that we get done in mid-year, it was a kind of an out of trend sort of favorable number in the second quarter of last year which made from a comp perspective the second quarter of last year our most difficult comp. What we would expect and sort of experienced in the second quarter of this year and would expect through the second half of next year is a more continuous sort of moderate environment that we've continued to experience.So again we don't expect anything unusual. Obviously what makes it unusual is that you don't expect it. But right now as we're seeing the back half of the year given the order growth numbers that have come out of the builders from what we're seeing both early in the quarter from a revenue perspective and what we're seeing from our non-publicly traded builders and customers. We feel very good about the back half of the year.

Last question from me is that intermediate term margin destination recognizing that there had been some roadblocks getting margin traction in recent years. Now that looks like that might be in the rear view mirror. How should we think about the intermediate term EBITDA margin profile potential of the business assuming we get to that 1.5 million starts destination and you also mentioned some potential traction at Alpha as well? When you roll it altogether, how do you think about the mid-term margin bogey that you guys have spoken to before?

We feel very good about getting to the mid-teens EBITDA margin when single family reaches stabilization. Quite honestly, what helps our conviction around that is the continued growth in the Alpha business as well as our efforts to continue to improve the profitability level at that business. So all of those things contributed to our conviction around getting back to the mid-teens EBITDA margin over the next several years as the markets continue to recover. Obviously, if we see a pause or a slowdown in particularly in new single-family construction which we don't think is the case that might slow our ability to get there. But from everything we're seeing now particularly for the rest of '19 and even going into '20, we feel very good about those longer-term targets that we put out there.

Excellent. Thank you very much.

Sure.

Our next question is from Trey Grooms with Stephens Inc. Please proceed.

Hey, good morning. So I guess just on the single-family same branch overall up 4% or so I know there is some pricing in there, so volume if we -- you kind of step back and just look at what you highlight in the press release pretty clearly completions up like six or so your volume would have underperformed that. I know, there's a lot of puts and takes there lag between the start and the completion and catch-ups and all of these things. But really the question is more about kind of looking forward, as we look at the back half of the year and into next year with what looks like homebuilders kind of starting to pick up the pace a little bit more. How do you see that relationship between your same-store volume and starts or completions from where we sit today, how we should be thinking about that?

Yes, that's a great question. And in our prepared remarks, we sort of alluded to the timing of starts and completion and we kind of do our work sort of in between. Generally speaking and as the cycle is now shifting towards more entry-level product, we would expect that it's even closer to a start than it would have been in the beginning parts of the recovery because of the time to build from a start -- the time from start to completion that's happening with the builders now.So historically people would say that our work would be done in 90 days after a start. That timeline is getting compressed as we go more towards entry level, so that the starts number in some respects can be even more -- becomes more relevant than the completions number as it relates to sort of our volume growth. That being said and we've said this on previous calls, I think it's important to note that we're looking at total U.S. starts and total U.S. completions and we only have access to about 65% to 70% of that market.So it's a little bit of a tough comparison if you will from that perspective, but also as we've said in the past couple of quarters, given the pricing dynamic that was going on last year from a material perspective and our efforts to increased selling prices, we have definitely favored price over volume. So, we have -- as a company, we want to focus on doing fairly priced work as opposed to underprice work and that's been especially true over the past two quarters.

Okay. So just I guess going down the first part of your comment there, is that it sounds like going forward, we should be looking at a -- or maybe trying to model something closer to the trends and starts in your markets as opposed to the trends and completions in your markets?

Yes I mean it's going to change over time. I mean something that happened in the second quarter is that -- sort of that backlog that we talked about last quarter has really come down quite a bit, particularly on the single-family side which is healthy in our opinion because it means that this extended spring selling season that I think it's pretty well documented at this point given what the public builders have announced from an order growth perspective, we think sets ourselves up and even the industry up to have a very good back half because of that accelerated volume growth coming into the back half of the year.

Trey this is Jeff. But -- and I would also say I mean pretty consistently we've been able to outpace what would be normal kind of start or completion related organic growth and we see absolutely no reason why we can't continue or wouldn't continue to do that. There is nothing in our way in that regards. So, I would agree with Michael's comments we feel very good about the second half of the year and continue to do what we're doing.

Perfect. Thanks for all the color there. It's helpful. And then on Alpha I mean you guys are continuing to really impress there. I understand that that business is lumpy but -- and it sounds like across all your business lines including Alpha you're encouraged with the outlook. But could you give us a little bit more color on kind of what the backlog there might look like and the types of projects you're seeing there.Again understanding that it can be lumpy from quarter-to-quarter, but maybe even more just a general comment about kind of what's in the backlog as you look forward and just the types of projects?

It's a mix of projects. I mean there is some large -- significantly large projects there. Also one of the things that's helping drive the growth at Alpha is we're actually even focusing on doing smaller dollar volume projects that are quicker hits if you will and that also tend to be pretty good margins.So, it took us a while in all honesty to kind of get that one under our belt so to speak but that team now we believe is kind of very aligned with a combination of both profit primarily profitable growth but profitable growth at a high level. So, that business year-to-date has shown good mid-teens -- almost 14% sales growth.We would expect that through the remainder of the year, we improve upon that but 21% is a good number, but we think that it can continue to maintain sort of the double-digit sales growth rate certainly as we've done in the back half of the year and into 2020 because as you know we have pretty good visibility revenue-wise on that business.

And the Alpha team has done a really a great job. The sales growth in the new markets is what you would both want and expect. So, clearly that's good but also as Michael said you know regular basis -- I mean trophy hunting is great on the one hand when you land them; but on the other hand, the smaller jobs where you realize cash profits faster and you can get kind of make your bread and butter, that's not a bad thing either, especially in kind of the core markets, some of the bigger markets that we've you know they started at and you kind of call their base business before they became involved with IBP.

Got it. Make sense. Thank you for taking my questions. I'll pass it on.

Hey thanks.

Our next question is from Michael Wood with Nomura Instinet. Please proceed with your question.

Good morning. This is Ryan calling on for Mike. Just on the Alpha topic here, how does the investment in branch cost at Alpha in second quarter compared to prior quarters and then what's to be expected going forward?

They are fairly consistent. I mean they're up a little bit in the second quarter, but that's because of the new location that we talked about opening, but they're pretty modest when you look at it, particularly because as we've been talking all along, we're focusing on improving the operations of those kind of start-up branches and have only opened up one branch this year and we believe based on the sales growth and kind of what we're seeing there, it was definitely the right decision to do to kind of -- stabilize is the wrong word, but really work on the base hits if you will of the business and making sure that we're all focused on profitable growth.

Okay, great. And then just one more. Some of the recent acquisition you guys have made this year, especially the two in June are focused on installation. Is that a tactical change to refocus on the core business or can we expect this going forward?

I think we even did mention that we were going to do in prior calls, it was probably two or three quarters ago, if I had to guess that we were going to try to hit -- I mean we would categorize a fiberglass installing acquisition candidate as right straight down the fairway for us.That's not in any way trying to disparage some of the other acquisitions that we've done that are related to other products and therefore, really trying to drive both experience in those products in a market where we maybe are not strong in it and then that leads to kind of high organic growth. But yes, we have, starting about two quarters ago, made a concerted effort to try to find some deals that is straight down the fairway.

Great. Thank you.

Our next question is from Michael Eisen with RBC Capital Markets. please proceed with your question.

Good morning. Thank you for taking my questions.

Good morning.

Just wanted to start off. You both had some interesting comments around price. I mean, I wanted to get a little clarity and more details if you can provide.You stated that for the back half of the year, given what you're seeing from the OEMs you're expecting a price stabilization. So first, just looking to clarify that you're talking there specifically on the installation part of your businesses?And then when you talk about stabilization, are you implying that you're no longer looking for as much of a tailwind and you're looking for flat pricing in the back half of the year? Or do you mean they should stabilize in this mid-single digit level you've got in the first couple of quarters of the year?

Our commentary is obviously fiberglass -- particularly fiberglass installation is the largest of the products that we purchased. But the comment was meant to cover really the inflationary environment for all of the products that we purchased. We feel that we're in a much more historical environment in terms of the level of price depreciation that we're seeing.So it's nothing like what we saw in 2018 and we feel very confident about the kind of the balance that we have between price and cost from a material price perspective. I mean, it's a good market. It's a healthy market right. I think the comment more was to just highlight that the volatility that we saw in that last year is not nearly as present in fact not present as compared to last year this year. That's really what's it's now.

Got it. That's helpful and should be a tailwind for profitability as well. Okay. And then transitioning on talking -- the few of the branches that you've acquired this year, you talked about them being new markets for you all.Can you talk about what made those markets attractive for you? And thinking of the footprint you currently have, are there other markets where you would like to be better indexed? Is there any examples you can give to help us think about where growth is going to be coming from?

Yes, I would say that, I mean, our goal still is to be pretty much everywhere we are not. And when I say that that doesn't mean that there are markets that we currently serve, but we don't serve them as efficiently as we might be able to, if we were located let's say exactly in that market. So what are -- in both instances we just not in those markets. We're still under-represented in a number of markets.So in addition to what I mentioned earlier about kind of a tactical move a bit. I guess, as it relates to straight down the fairway acquisitions, our most desirous deals right now are geography expanding, insulation and installing acquisitions and we've still got – despite, I think you said excess to 65% of permits, if not sufficient access and there's still plenty of really reasonably robust markets where we don't even have much of a presence.So then it becomes more opportunistic. I mean, we're always looking some markets there are acquisition candidates that where their desires and kind of life choices to maybe think about exiting the business, if it's a mom and pop shop which typically is a lot of what we're talking to and the deals that we do.And if that happens all line with us wanting to be there that's when these kind of situations work out.

Understood. And if I could sneak in one more understanding the profitability headwinds in Phoenix as you ramp up that Alpha branch and then it will take some time to get up to speed. Can you give us any details around the branches you opened last year? How the profitability in those is ramping up according to both your plan and relative to the rest of the business?

They are ramping up. They're not quite there yet. But we feel very good about as Jeff said the Alpha team is doing a very good job of focusing on profitable growth and clearly is aligned with the way that we have always looked at growth that and it's not at a high margin and it's not really good growth. And the new locations are clearly working hard to execute on that strategy.Part of the issue there is just getting enough volume to get to that level of profitability, but they're all making good progress getting towards there. As we talked in previous calls about this we ran too fast last year. We've learned from that and we're jogging now and I think it's starting to pay off.

Got it. Thanks for taking the questions.

Our next question is from Matt McCall with Seaport Global Securities. Please proceed with your question.

Thank you. Good morning everybody. Maybe start with the organic incremental I think in the past you guys have encouraged us to look at it on a full year basis and it sounds like you're talking about a return to kind of your targeted range in the back half.I guess the first part of your question is am I hearing that correctly? And then secondly is the way to look at the full year that we'll maybe approach that or we'll fall little short and maybe we should look at it on a probably 4-quarter basis from here after we've gotten past these kind of first half issues?

Yeah. So what we are implying is that and this is consistent what we talked about for the past several quarters is that, getting fully on top of the price cost dynamic would allow us to get back into that kind of 20% to 25% range that we've talked about on the incrementals.We think it -- just mathematically, it would be pretty hard to get on top of it for the full-year, because of some of the headwinds that we experienced in the first half of the year.But I think if you did then all things being equal and if the market continues to improve as I think most of us are expecting. If you did look at it in the four-quarter basis starting from the third quarter on a full year basis, we definitely think there is a high probability that we would be in that 20% to 25% range. So that would be using third quarter 2019, fourth quarter 2019, first quarter 2020, second quarter 2020.

Okay. Got it. And then so getting fully on top of the price increase, is that -- just to understand what you're saying there, pricing is getting better, cost will remain the same or costs are getting maybe easier because of some of the capacity moves that we've heard about?

Former.

Former price, okay. And then I guess the last question is on SG&A. If I adjust out the insurance accrual, it looks like there is still a little bit of deleveraging in the quarter on a year-over-year basis. Can you talk about what some of the items were and I'm sorry if I missed on, but what some of the items were that maybe drove that. And then just to clarify, how we should think about SG&A as a percent of sales relative to the year-ago period in the back half?

Yes, as we said earlier to one of the other question is that I mean our toughest comp this year was without second quarter it has a very good second quarter of 2018 I think we had a great quarter a record quarter second quarter 2019, but it just made some of the comparisons a little bit more difficult. But if you look at kind of where we are trending through the first half of the year, obviously we'll have incremental SG&A as we believe sales will improve under their typical seasonal trends in the third and fourth quarter. But what that would lead to is that higher sales and the SG&A don't come in at nearly the same rate that the higher sales would. So we would expect that we would start to see improved leverage in SG&A as we go into the back half of the year.

Okay. All right. Thank you all.

Our next question is from Trey Morrish with Evercore ISI. Please proceed with your question.

Thanks very much. So you've talked a bit about price cost, but I don't think actually I've heard you say if you were actually price cost positive in the quarter. And then could you just remind us how you were trending on price cost in the last couple of quarters as well.

So we didn't specifically say, but what I would say is that as we disclosed that the price mix and keep in mind, mix has a big impact on that number, but that price mix was up 6% and that the cost environment has not been nearly as volatile as it was last year. And as a consequence, it's allowing us to do what we've been saying for the past several quarters and that is to get fully on top of the price cost dynamic by the back half of the year.

Okay. And then last call I think you point out that you expected 3Q gross margin to likely be the peak for the year how it can happen seasonally like that. Do you still expect the 3Q gross margin to be the peak number for the year?

I think the way that we talked about it was more just seasonality of the business and that historically the third quarter is our best quarter from a volume perspective and from a margin perspective. And there are things that influence gross margin, not only price/mix or product mix, but also regionally where our sales growth is coming from because the different regions have different gross margin profiles.So I don't remember that specific comment that we made -- that we said, but really it should be in the context of EBITDA margin not just gross margin. So that historically -- and 2018 was not a historical year from this perspective, but we would expect historical seasonal trend in 2019 where we do see the greatest margin benefit in the third quarter and within the context of the year. So I'll say it again we -- as we said in the prepared remarks and I think we said a couple of times now. We would expect sales and profitability to trend positively in the back half of the year.

Okay. And then going back to price/mix I'm just wondering what do you consider mix? What's the dynamic in mix? Are you talking about selling of different products that are higher priced for similar jobs or is it more something like selling the same product but through a different channel to where you can get a little bit of a higher price for it?

It's the different types of jobs. So the other products that we install are much lower dollar value than our primary product which is insulation and as a consequence, they weigh down price/mix. And we've seen excellent growth in the other products, which is part of our strategy that we've been talking about for several quarters to increase the other product sales, because we know from experience and we have a lot of data points for this that a branch that has more product penetration that we have -- end product penetration that we have within a market, generally speaking that tends to be a more profitable market.So we believe that the business benefits over the long-term by having greater product diversification and market diversification and customer diversification over time. But we also believe that having multiple products with an existing customer allows or creates more stickiness with that customer by providing those additional products. We're installing those additional products assuming they're products that meet our characteristics of being able to buy direct from the manufacturer and they're installed by our employees at the job site.

Good. Thanks very much.

Our next question is from Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen.

Morning Ken.

Morning Ken.

My questions for you, I think you are in the right categories right. Insulation that is showing to be good growth, new construction versus trends I think we'll see in R&R. Commercial you're seeing the top-line growth as are other companies. So my question is more about the execution and I think everyone's, obviously, beating around the price cost dynamic as it relates to your longer term incremental EBIT.So I'm going to ask you to look at it this way if you could. Many other categories have experienced inflation and have recovered it faster than you have. Could you just walk us through since it sounds like we're on the cusp of price cost neutrality, why it took you so long? I mean, is it because you're doing M&A and is the operations down to the branches? Or obviously it was unprecedented last year yet in many other categories we've seen that price cost recovery. So could you just talk about since you're -- it sounds like you're about to go into price cost neutrality, why it took you so long when you're looking back on it right now? Thank you.

Quite frankly looking back on it, we -- and we've spoken to this in other quarterly calls. We as a company look for the long-term nature of our relationship with our customers and one could argue that we could have pushed through a lot harder and a lot faster the price increases, we chose the long-term approach of working with our customers, giving them time to adjust to the volatility that was experienced in the market to basically protect jobs that were already sold from their perspective houses, that were already sold, and we believe that by doing that we continue to demonstrate to our customers the long-term nature of our relationship and the long-term nature of what we're willing to do for them and work for them and that it makes sense to continue to work with us and pay us a fair price for what we're doing.Could we have taken a different approach and not care so much about our customers and jam through the price increase faster? Probably yes, but we don't think about managing the business quarter-to-quarter. We think about managing the business over the long-term. As you know we've all been here for a very long time and we're looking at the end game not quarterly earnings.

Right. So do you think that longer-term focus with your customer, I mean is leading to market share gains? Or I mean, how would you expressed -- if it's not economic the goodwill benefit of that choice?

We believe what it's allowing us to do is to improve the mix of work that we're doing with specific customers. So to the extent that we were doing lower margin work they are allowing us to do higher margin work and get lower margin work to other competitors.

Interesting. I appreciate that insight. And then Michael, you used the term under the belt as it related to Alpha and Jeff, I think, you mentioned this idea that you're not going after trophy or -- and more focused on bread and butter. Could you -- given that that's suggesting a different approach than earlier, how do you think the initial approach was developed and now that you're executing it obviously you're kind of changing your tack. Can you just talk about how that process developed internally in terms of assessing the risks and rewards which now you think obviously the bread and butter is better than the trophy? But how did that shift occur as you got into that commercial space initially? Thank you.

Yeah, I won't say that we've shifted. We just -- we reminded the organization and they reminded themselves that there is a whole lot of other work out there that is not trophy. It's very obtainable, accessible, profitable. They still -- I mean a salesperson wouldn't be a salesperson, if they weren't interested in landing trophies, right. We just are not speaking to that specifically and there's still plenty of very large jobs that Alpha is working on. This is just -- don't forget the singles and doubles. It was -- it's more of the common.

Exactly.

Understood.

And that -- profitable growth I mean that is the key is that just continued focus on highly profitable growth.

Thank you.

[Operator Instructions] Our next question is from Keith Hughes with SunTrust. Please proceed.

Thank you. Back to Alpha again as they talk to customers they get a little bit farther lead time than you do in your historic business. Are they seeing any changes in backlog for quotations and activity and things like into 2020?

Our backlog looks good in both the Alpha business and actually in the multifamily business as well.

And how far in advance can you kind of reliably see what's coming from those businesses?

I mean easily -- I mean obviously things change and as we talked earlier in the call that that business can be lumpy just because of weather delays and some of these trophy projects can easily get delayed a couple of months, but we feel generally good about the visibility we have there sort of a year or more out.

Okay. Thank you.

Yes.

This concludes our question-and-answer session. I would like to turn the call over to Jeff Edwards for closing remarks.

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

Thank you. This concludes today’s conference. You may disconnect your lines at this time. And thank you for your participation.