TopBuild Corp (BLD) 2020 Q3 法說會逐字稿

Greetings, and welcome to the TopBuild Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Tabitha Zane.

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. 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 obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Please note that, other than as otherwise specifically stated, the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in the presentation accompanying this call.

Please turn to Slide 3. I will now turn the call over to Jerry Volas.

Good morning, everyone, and thanks for joining us today.

We're pleased to report another strong quarter as the TopBuild team continues to perform very well in this environment. Despite the ongoing negative impact of COVID-19 on the overall economy, the housing industry remains a positive story. Our builder customers are reporting very strong traffic and record order growth. In his October homebuilder analysis and forecast report, John Burns cited the environment as the "strongest current housing market condition ever." And one of our builder customers on their third quarter conference call a few weeks ago stated that "demand is through the roof." We recognize that part of this trend is driven by COVID-19 impact, such as buyers looking to escape dense urban environments, work-from-home policies driving demand for more space and active adults seeking to avoid senior residential facilities.

And while all of this is currently having a positive impact on our industry, the long-term fundamentals of the housing industry also continue to remain strong. Most notably, historically low interest rates, increasing household formations and very low inventory. These short and long-term factors are translating into strong housing starts. And our expectation is that this will continue, and we will benefit from this growth. We acknowledge that labor and material will likely be gating factors, elongating the build cycle, which we did see in the third quarter, but our team has demonstrated its expertise in navigating these waters, as Robert will discuss in a few minutes.

Turning to Slide 4. Our third quarter results again reflect the strength of our diversified model and the ability of the TopBuild team to perform well at all points in any cycle. Net sales increased 2.2% to $697.2 million despite delays in some of our commercial projects due to social distancing protocol. We're particularly pleased with the expansion of our adjusted operating and EBITDA margins of 280 basis points and 270 basis points, respectively, which drove adjusted net income to $2.10 per diluted share, an increase of 37.3% over the same quarter last year.

Regarding capital allocation on Slide 5, our acquisition team is back to executing on our top priority as we closed Garland Insulating on October 1. Garland was one of the largest locally owned and operated insulation companies in Texas, having built a strong reputation through 7 years of outstanding customer service. We're very pleased to have this company and their excellent management team as part of the TopBuild organization. Looking ahead, our pipeline is filled with outstanding potential partners, several of which we expect to join us over the next few quarters. In addition to acquisitions, we returned capital to our shareholders through the repurchase of almost 58,000 shares at an average price of $155.63 per share.

Before turning the call over to Robert, I want to remind you that this will be my last analyst conference call as I'll be retiring as CEO and member of the Board effective December 31. I'm very proud of what TopBuild has accomplished since becoming a public company on July 1, 2015, the result of a well-timed spin-off from Masco, our previous parent company. We have significantly increased our national scale with 14 acquisitions and have demonstrated the strength of our diversified business model with both installation and distribution serving both the residential and commercial markets. A culture built around safety, operational improvement and customer service have become fully ingrained in everything we do every day. As a result, we have performed well in many different economic environments and have increased our market cap from approximately $1 billion to over $5 billion today. In fact, on Friday, we were pleased to learn that TopBuild placed 47th on Fortune Magazine's list of the 100 Fastest-Growing Companies.

Most exceptional is the team that will be taking TopBuild forward Robert Buck will be assuming the role as CEO and Director. Since the spin, Robert has been the COO, the primary architect of the numerous operational improvements that have driven our outstanding financial results. Having worked closely with Robert for many years at different stops throughout our careers, I'm fully confident that Robert will be an outstanding CEO and drive further value. Surrounding Robert will be not only John and Tabitha, who you know well from their investor-related activities, but also many other excellent professionals in all areas of the company. TopBuild is in very good hands.

Robert?

Thanks, Jerry, and good morning. To echo Jerry's remarks, TopBuild is performing very well. Our quarterly and 9-month results demonstrate our team's success and continue to drive solid financial performance and focus on operational excellence.

Starting with TruTeam's third quarter financial results on Slide 6. Sales fell 1.2% primarily driven by a decline in the volume of our commercial business, partially offset by increased selling prices of 1.2% and acquisitions, which contributed 1%. Despite this drop in commercial revenue, TruTeam's adjusted operating margin expanded a robust 300 basis points to 17% in the third quarter and improved 170 basis points to 15% for the first 9 months of the year. This is a direct result of our continued focus on improving labor and sales productivity and implementing operational efficiencies throughout the business. Residential housing starts continue to climb, which I'll discuss further in a few minutes. We are very excited about the overall environment for our TruTeam business.

Turning to Slide 7. Service Partners' third quarter sales were up a strong 10.5% driven by a 12.2% increase in volume, partially offset by a 1.7% decline in selling prices as a result of cost reductions in 2 commodity products, gutter coil and spray foam. As you know, we made some important decisions and changes at Service Partners over the past 2 years, including stepping away from some low-margin business and focusing on our mix of customers and product software. We also made some key leadership changes and now have a very entrepreneurial and forward-focused team. We are seeing these benefits of these moves as evidenced by our strong volume growth and our adjusted operating margin, which was 13.4% in the third quarter, a 280 basis point improvement; and 12.5% for the first 9 months, a 200 basis point improvement. We are excited about the prospects for continued growth of the Service Partners business.

As we look ahead, our builder customers and contractors remain extremely optimistic as they report historically high order rates and continued strong traffic. The acceleration of housing starts we've seen over the past few months is positive for both of our business segments, and our company is well positioned to capitalize on this growth. However, given several constraints in the home building supply chain, we expect these housing starts to be slow coming out of the ground, lagging into the first quarter and perhaps even the first half of 2021. This slower ramp will elongate the cycle and provide a solid pipeline of activity for TopBuild. You can be assured we are ready to service these new housing starts, and we will continue to leverage our operating platform to help drive solid financial results.

Our commercial business, as shown on Slide 8, specifically on the heavy commercial side, continues to be negatively impacted by project delays due to safety protocols related to COVID-19. On a same branch basis, commercial revenue for all of TopBuild fell 6.8% in the third quarter and is down 6.9% year-to-date. While we've seen a few projects canceled, the vast majority of projects we've been awarded continue to be delayed due to social distancing rules, which limit the number of trades on a jobsite. Our long-term outlook for our commercial business is still bullish. Our backlog remains robust, and we're bidding on projects well into 2022. As a reminder, this is a $5-billion-plus industry, bigger than residential reconstruction, and we have an 11% market share. So while we likely see a slower recovery on the heavy commercial side, we see plenty of room to grow, and our bundled solutions approach continues to appeal to general contractors.

As Jerry noted a few minutes ago, we were pleased to acquire Garland Insulating last month. The integration is going well, and our footprint has been significantly enhanced in the high-growth state of Texas. Our M&A group continues to seek out well-managed, profitable companies with strong management teams that will enhance our footprint in similar high-growth regions. As we said on many calls, good acquisitions are a high priority for our company, and we are excited about the prospects in our pipeline.

I also want to touch on a few other areas highlighted on Slide 9 that are top of mind for our customers concerning the homebuilding supply chain. First is labor, which will likely continue to tighten across our industry as we move through this robust housing environment. Our team has always risen to the labor challenge and is approaching this environment creatively, giving us an advantage in attracting and retaining labor. For example, we recently introduced our recruiting program to our 10,000-plus coworkers asking them to invite their friends and family to join our TopBuild team. The high level of engagement having our employees involved to bring their friends and family to our company is a win for everyone, and we're providing an attractive referral bonus to support this program. This program is very well received throughout our organization and is already beginning to yield results. Once we get a candidate installer onboard, we offer a comprehensive benefits package, which helps make us an employer of choice. This includes health benefits, a matching 401(k) plan, tuition reimbursement and a career path, which can eventually lead to a branch management position.

Our installer training program is also comprehensive and covers not only all facets of working safely, but also how to become a more efficient and productive installer. This is important because the majority of our installers work on a piece rate, which means as they get more productive, it creates better earnings power for them and for our company. And an average installer earns $45,000 to $50,000 per year plus benefits, and our top producing installers are making 6 figures. Just a reminder, we have a unique advantage and differentiator with our ability to share labor among our divisions as they are all on the same ERP system. For example, there have been a couple of regions where our competitors have struggled to meet deadlines because of labor shortages. We were hired and brought in crews from 2 or 3 neighboring divisions to insulate 90 to 100 homes in a very short period of time and meet the customer's deadline.

The second issue that's top of mind is building material supply, including fiberglass capacity. As starts have accelerated, capacity has tightened for all building materials. Part of this tightness is due to some slowdown in production lines earlier in the year when the pandemic first hit. We do expect to see capacity -- additional capacity come online next year. Last week, Owens Corning announced they are restarting their Kansas City batts and rolls line, and it should be up and running by the second quarter. And this will add 2% to 3% of the industry capacity. In addition, Johns Manville has informed us they are moving full steam ahead with their new line, and it should be producing material in early fourth quarter. We also understand that Knauf is moving forward with their plans to bring on additional capacity in the second half of 2021. In addition, the manufacturers are also improving their operational efficiencies, increasing capacity with existing lines.

From TopBuild's perspective, as the largest purchaser of fiberglass in the United States by nearly 2x our nearest competitor, we are comfortable with our supply chain. We buy from a wide variety of building material suppliers. And while we have no long-term contracts, we do provide them with monthly forecasts and are confident in our ability to meet the growing demand from our builder customers. As far as material pricing, we saw an increase in September. And Owens Corning and Knauf announced last week an 8% increase for January, and it's likely the other manufacturers will follow suit. We feel very confident in our ability to manage these cost increases as demonstrated in 2018. This is a testament to our strong local division managers and the quality of our partnerships with our builder suppliers and customers.

Before I hand over to John, I would like to make a quick comment on Jerry's retirement end of this year. On behalf of the Board of Directors, management team and over 10,000 co-workers, thank you, Jerry, for everything you've done for TopBuild. Speaking for myself, it's been a pleasure working with you for over 20 years, first at Masco then TopBuild. You've been a mentor and a friend, and I look forward to seeing you enjoy the years ahead.

John?

Good morning, everyone. To echo Robert, Jerry, you will be missed, and we thank you for all that you've done for everyone at TopBuild.

Moving to our financials on Slide 10. We are pleased with our results, particularly our strong margin expansion, again, demonstrating the strength of our diversified business model. Starting with the third quarter, net sales increased 2.2% to $697.2 million primarily driven by increased same branch sales volume, revenue from acquisitions and increased selling prices. Revenue for the first 9 months of 2020 rose 1.8% to $1.996.6 billion. Adjusted gross profit margin increased 220 basis points in the third quarter to 28.5%. And for the first 9 months of 2020, expanded 160 basis points to 27.6%. Gross margin improvements were driven by volume gains, increased selling prices, lower gutter and spray foam material costs, lower insurance costs and continued gains in operational efficiencies.

Adjusted operating profit in the third quarter grew 26.2% to $101.7 million with a corresponding margin improvement of 280 basis points to 14.6%. For the first 9 months, adjusted operating profit increased 18.2% to $255.5 million with a corresponding margin improvement of 180 basis points to 12.8%. Adjusted EBITDA for the third quarter was $119.2 million compared to $98 million in 2019, a 21.6% increase. And our adjusted EBITDA margin improved 270 basis points to 17.1%. Both operating and EBITDA margin gains were driven by the previously mentioned factors impacting the gross margin improvement as well as cost reduction initiatives implemented in the second quarter and lower travel and entertainment and legal expenses. For the first 9 months of 2020, adjusted EBITDA grew 18.3% to $315.3 million; and adjusted EBITDA margin was 15.8%, a 220 basis point improvement over the first 9 months of 2019. Third quarter SG&A as a percent of revenue was 13.9% compared to 14.5% in the third quarter of 2019. The year-over-year decrease was primarily the result of lower travel and entertainment expenses and savings from cost reduction initiatives.

Adjusted income for the third quarter was $69.6 million or $2.10 per diluted share compared to $52.7 million or $1.53 per diluted share in 2019. Third quarter 2020 adjustments were approximately $160,000 primarily related to acquisition costs and COVID-19 pay. Our effective tax rate was 25.5% for the third quarter. For the first 9 months of 2020, adjusted income was $171.2 million or $5.14 per diluted share compared to $138.8 million or $4.02 per diluted share. Adjustments for the first 9 months were $3.7 million and were primarily related to rationalization charges, COVID-19 pay and acquisition-related costs.

Interest expense in the third quarter 2020 was $7.7 million and for the first 9 months was $24.9 million. This compares to $9.5 million for the third quarter of 2019 and $28.7 million for the first 9 months of last year. The decrease in interest expense was primarily driven by lower LIBOR rates and a lower balance due on our term loan.

Moving to Slide 11. CapEx for the first 9 months of the year was $27.2 million, 1.4% of sales, lower than our targeted long-range of 2%. As we have noted on previous calls, at the start of the pandemic, we pared back our planned 2020 CapEx spend. However, we do expect that to return closer to the 2% range in the fourth quarter. Working capital as a percent of sales for the trailing 12 months was 10.1% versus 11.6% a year ago. This decrease is primarily due to improvements in our accounts receivable aging; a decline in heavy commercial sales, which have longer receivable terms and carry higher working capital requirements; and a richer segment mix of our Service Partners business, which carries lower working capital requirements.

As shown on Slide 12, we ended the third quarter with net leverage of just under 1x trailing 12 months adjusted EBITDA. Total liquidity at September 30, 2020, was $704.9 million, including cash of $315.3 million and accessible revolver of $389.6 million. Operating cash flow was $255.7 million for the 9 months ended September 30, 2020.

We remain extremely bullish about the current and future health of the residential and commercial businesses we serve. Housing starts are strong and our commercial backlog and bidding activity remain very healthy. However, there is still some uncertainty over the pace of this growth, which is why we have not given guidance at this time. We hope to have more clarity over the next few months and are optimistic we will be able to provide annual revenue and EBITDA guidance for 2021 at the end of February on our fourth quarter call.

Jerry?

In closing, I want to emphasize that our national scale gives us a significant competitive advantage both from a material and a labor standpoint. Just as important, our diversified business model with both installation and distribution in both the residential and commercial markets gives us the ability to perform well in any environment. Our year-to-date results clearly demonstrate the value of this business model.

Finally, I'd like to conclude our formal remarks by thanking our 10,000 employees for their hard work and commitment to our company. Because of you, my 5.5 years at TopBuild had been one of the most enjoyable and rewarding times in my 40-year business career. Although somewhat difficult to step away, it's a bit easier knowing that the company is in such good hands.

Operator, we're now ready for questions.

(Operator Instructions) Our first question is from Stephen Kim with Evercore ISI.

Strong results. I guess my first question relates to some of the new capacity that you were talking about opening up, JM, Knauf and also see C announcing the Kansas City lines. I'm curious if you could just review for us whether there are any incremental opportunities that you typically see emerge for TopBuild when you have a new plant open up in a local market. And I know you talked about not having any long-term contracts, but my perception was that a big company, given your scale, you usually can be helpful in baseloading that plant volume. And I was curious as to if that's true and if that typically spans a period of a couple of years, 2 to 3 years kind of a thing, as you baseload that plant. So if you can just help us with the opportunity set when you have new capacity open?

Yes. Stephen, this is Robert. So yes, that's a great question. And so I think that is a real strength of TopBuild given the footprint, given our ability to really forecast demand as well. So as the manufacturing partner is bringing up that new capacity, we'll work with them, one, to be able to provide a forecast as to demand, especially geographically to the location of that plant and where that capacity is coming back. And then we can absolutely help them level load those lines as they're coming back up, as we can provide them ongoing ramp of demand coming into that, of which that demand we'll forecast. And so it's really good for them as they're starting up those lines, as they're testing those lines and as the furnaces are coming up to capacity, that's really a strength of ours. So we'll do that with the manufacturers as they're bringing up those new lines. And then we'll help them level off that line for foreseeable future as they're bringing up capacity because that line may ramp up for awhile. As they continue to get opportunities with the line or they continue to gain efficiencies with the line, which is something I mentioned in the comments here, we see them continue to work their operational efficiencies as well. So definitely a strength of ours. The manufacturers love to partner with us on that, and we love to be partners with them on that new capacity.

Yes. That's encouraging. Once the plant gets to a sort of a steady state kind of situation, do you feel like there are any residual benefits for having been involved in that initial start-up?

Yes. I think so because, obviously, we help them build demand regionally or geographically close to that new capacity. So I think it's good for them and good for us as partners with them. So yes, I think there is residual benefit that goes down the road.

Great. Yes, that's encouraging. I know that you said that you're going to defer holding -- defer providing official guidance on your volumes and expectations for next year until the 4Q call. But just generally speaking, I was curious if you could talk about the outlook, what pieces you can see right now. You talked about housing starts, in particular, having a little bit of a slower ramp, a constrained ramp, which is a good thing into late -- into 4Q and into early 2021.

As we think about what that means in terms of specific numbers because I mean the builders have been putting up some numbers and, in some cases, like 50% up in terms of orders. And so there's just such a huge range of numbers that people are trying to choose from. Was curious if you could help us dimensionalize what your outlook or just what you're seeing right now in terms of plans for single-family housing starts growth over the very near term, the foreseeable future, call it, 3 to 6 months. Are we talking about like kind of a mid-teens growth kind of a picture? Is that what you mean by a little bit of a slower ramp? Or are you talking about something that could flex a little bit more than that? Just help us understand what kind of ramp in growth you're anticipating.

Stephen, this is John. So yes, I think, again, the reason we didn't give guidance was entirely tied to the fact that across the entire industry, all construction, basically, labor material are ramping up to support what we're seeing as a really nice push in orders converting into starts. And we've seen that the last 2 or 3 months, I think the starts data averaging over $1.4 million. So to your point, we are extremely bullish about what's coming. And really, when we think 3 to 6 months or even beyond that period of time, we're pretty bullish beyond that period, too. But all the demographics and everything supporting the growth long term, lower interest rates, we expect to see that for an extended period of time, good pent-up demand, really, really tight inventory both on new and resale. So we think those things are in play for an extended period of time.

I think on the commercial side, I think Robert talked about it in his prepared remarks, we're also very bullish on that. I think the challenge there right now is on the heavy commercial side, it's just a much lower cadence in terms of the work being done and performed because of primarily social distancing. And that will probably be with us until midyear next year sometime. But in terms of giving you numbers, we're not giving numbers out today. Obviously, I think we'll be in a position in the first quarter in February to give you a good look at 2021 from a sales and EBITDA. But we're very, very bullish about the prospects. I think the only question right now is how quickly the industry in general can respond to the growth.

Yes. Okay. And so I guess that's still going to be an outline question. All right. Guys, good job, and Jerry, don't be a stranger.

Thanks, Stephen.

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

Jerry, clearly, congratulations. So pretty amazing results. Robert, John, how -- the gross margins are up about 200 basis points. You got leverage on EBIT across the business because -- closer to $300 million. And I understand you're focused on labor. But how should we think in price/mix and all these items?

But I have kind of two basic questions. Did we see a structural improvement in your business as it relates to operating leverage in terms of how you're actually running the business? I.e., are some of these costs going to come back next year? Or are you just doing it better than you thought you could?

Yes. So Ken, this is John. What we saw really in the third quarter was really an extension of what we saw in the second quarter. I think the biggest differences in the third quarter was that we had better volume. So obviously, volume came into play much stronger and better than we saw in second quarter. And we get great leverage, as you know, off of those volume increases we've had. So that was a benefit. And I mentioned in my prepared remarks that we also saw some improved material costs on around gutter and spray foam, and that was at a higher -- a higher performance than we saw in the second quarter. But we also got the benefit in the third quarter of some line items being impacted by COVID favorably. Travel and entertainment, group health, shop supplies are probably the 3 biggest on our P&L, and that extended into the third quarter. I think the second quarter, we talked about a $5 million benefit. It was roughly $4 million in the second -- in the third quarter. So...

And that sounds like an SG&A item, John. Is that correct?

It's a combination. It's a combination of the 2. The travel and entertainment touches on primarily SG&A, but then the group health, shop supplies will be more on the gross profit side. So roughly 50-50 split, if you had to split it. So I think you're just seeing a continuation of our teams executing extremely well in the field, managing price material labor, which are obviously the 3 most important elements for us to manage, and then the SG&A bucket and certain overhead buckets impacted by the COVID. And also, we took a restructuring in the second quarter, I think you may recall, and we picked up about another $1.25 million worth of benefit year-over-year from the restructuring. So a continuation of 2Q with some minor adjustments and changes, the biggest being volume and improved material costs.

So just following up on that. I mean it's such a juicy quarter to ask questions. But the volume -- I mean I know you called out commercial. If you could comment on your real ability to take further M&A in commercial, given the environment we're seeing. But the volume you're seeing, I mean it went up a little bit, obviously, $50 million quarter-to-quarter. But you did have down commercial, 6.8%. If we assume that as the same sales mix as you've stated annually at about 23%, that means you were still down on new construction. So the volume gains that you're referring to, could you maybe be a little more explicit? And why did commercial grow so much on that volume? Was there a channel shift? I know that was more than one question, but I apologize.

Yes. So in terms of our commercial volume, I think sequentially, we saw an improvement versus the second quarter in the third quarter, as we did in all of our lines of business, basically. But that improved in the third quarter versus second. The biggest change for us volume-wise was in Service Partners where we had a significant gain year-over-year versus where we're. Second quarter was a good quarter. Third quarter was a much better quarter in terms of those volume gains year-over-year. And Robert touched on those in his prepared remarks, great execution in terms of share gains there in that industry and also getting more of our current customers' pocket, basically. So they are the major drivers I think, Ken, if that answers your question.

Our next question is with Phil Ng with Jefferies.

Guys, really impressive quarter. And Jerry, congrats, really enjoyed working with you and best of luck

Thanks, Phil.

When do you guys expect to see some of these bottlenecks easing and just kind of being able to play catch-up on demand? I know you called out labor and supply chain, which is a bigger issue at this juncture. And do you expect volumes to inflect positively in the fourth quarter on your installation business?

Phil, it's Robert. So if I think about the third quarter and even a little more recent, I mean we saw -- continue to see a gradual ramp every month in the third quarter. So we thought that was positive and just a little bit forward-looking here. We were really pleased with what we've seen in October. So we would -- obviously, you got the winter months coming up here, we expect to be -- see smoother seasonality than we see in years past. So I think we're pretty positive looking forward, as John said earlier, and we like what we've seen, the continued gradual ramp. So a long way of answering your question, I think we're already seeing some of it now.

Okay. Robert, was your volumes in October up for your installation business?

We saw some nice improvements in October for sure.

Okay. Got it. And then some of the strength that you've seen in your distribution business, that's really exciting in terms of the share gain. Is that level of growth sustainable over time? And did you see any prebuys perhaps ahead of the price increase during the quarter?

Yes. I think -- Phil, I think we're pretty positive about the growth in Service Partners. I mean, again, as we mentioned, we've seen this as share growth, better execution by the team, both the sales side, service side piece of the business, mix of customers, products that we're offering, new products that we're offering, that type of thing. So we're definitely optimistic about the future.

Relative to your question around prebuy, I would say it could have been some of that, but I wouldn't put a significant amount on that in that. If you go back to that time period, materials were already getting tight in supply. So there wasn't a lot of, what I'd say, excess material available for a prebuy scenario.

Okay. Great. And then one last one from me. It sounds like from an M&A pipeline standpoint, things are looking quite robust. Any way to help size up some of these deals that you have in the pipeline that could be joining you soon relative to maybe Garland and some of the deals you've done in the past?

Yes. Phil, this is John. I think we're not going to give out specific numbers, except to say that it's a pretty broad spectrum in terms of historically, some of the deals you've seen have been that 5% to 10%, something like Garland at 60%. And quite frankly, there are others out there that are bigger than that, that are right now in our pipeline that we're evaluating. So I think it's a pretty broad range in terms of the opportunities for us. And as we said on the prepared remarks, and we'll say it right now, we're very optimistic in terms of our pipeline and what we think it will deliver.

How are the multiples shaking out in some of these recent deals you've closed on?

Yes. This is John again. So I don't think we've seen a significant change at this point from what we saw historically. So I think we typically talked about that 5% to 6% range on a pre-synergy basis. So that's kind of what we'd expect to see for some of the transactions. Now some of the larger ones that have been in play for us, as you know, USI, et cetera, there might be different economics involved. But I think for the majority of the transactions, that 5% to 6% on a pre-synergy is probably the range.

Our next question is with Justin Speer with Zelman & Associates.

And Jerry, I just wanted to extend my congratulations to you on your retirement. And it's just been an incredible thing to watch your team and you orchestrate just incredible returns for shareholders. It's been an amazing story. I wanted to...

Thank you, Justin.

You're welcome. Great job. I wanted to really unpack the SG&A for a bit and look into the margins because you guys have done such a great job for not just this quarter, but for many quarter on the margin side. But recognizing that there may be some like temporal things going on here with the SG&A side, I guess from the SG&A piece of the equation that is controllable. I guess how much of a tailwind from that travel and an entertainment piece that may or may not be sustainable? I guess how much -- maybe quantify it for us and maybe how long you think that could sustain into next year.

Yes. So looking at SG&A on the overall company, a big piece of it was travel and entertainment, and we put that number in the third quarter probably roughly a couple of million dollars, Justin. I mean there's other things, too, obviously, though. Again, we took restructuring in the second quarter. So we've been managing our salary wages, benefits line very well, too. But the T&E, it's really difficult to say when that's going to come back and how quickly. We saw a little bit of an increase in third quarter versus second quarter levels. And I think we'll continue to see that over time. Whether it will ever truly normalize what we had historically, I think the onus is on the company right now to evaluate how much of that gain or benefit can live through after things kind of get back to normal. But yes, we'd expect to see that number start to ramp -- continue to ramp up as the -- as COVID hopefully gets behind us over time here.

For sure. I guess maybe another way of thinking about it is it's been -- you've managed it very tightly. Should we consider that maybe that will grow more in line with underlying demand as you consider all the moving pieces? Is that a reasonable way to think about it? Or do you think you can maybe gain some scale there as you look to what could be decent growth next year, notwithstanding the supply chain headwinds?

Yes. I think we can certainly leverage the costs that we have in that bucket. And again, we're not going to see that. As demand recovers, we will see some additional T&E and other line items that have been disproportionately lower come back. But I'd say travel and entertainment, specifically until it's safer out there, I think you're going to continue to see that lower than we've had historically. And again, as we get into 2021, we will be evaluating what we can do to keep as much of that benefit as possible on the [P&L] on a long-term basis.

That makes sense. And then separately, we're back in kind of the mode of suppliers, manufacturers, particularly fiberglass manufacturers and other suppliers, with these price increase announcements. I know historically, inflation is not a bad thing for a distribution-like model. But maybe remind us how you're kind of thinking about not only the announcements, but maybe the magnitude of the announcements and your ability to absorb them.

And then also as a follow-up to that, what's the right mid-term EBITDA margin potential for this model? Because you guys have done such a good job, pulled forward some of the I think ambitions that were maybe articulated in years past. You've been very successful with the USI integration. How should we think about normalized margins for this model under a scenario where we eventually do achieve $1.5 million starts?

Justin, this is Robert. I'll take the first part of that question around the material and the suppliers. So I think a few parts to that question. I think it's obviously going to be supply and demand. I mean material is tight right now and labor's tight. If I think about from a distribution perspective, labor and the level of service we're able to provide is key for our customer base. And so we feel comfortable, as we've demonstrated in the past, with appropriately passing along those increases. On the install side of it, obviously, it's the labor and material combination of the 2, which are both extremely in high demand right now. So we feel comfortable and confident in both businesses.

I think back to the supply and demand, I think if this ramp in housing continues to happen, then I think we can expect to see definitely multiple increases in 2021 from the manufacturers. I think you see some of that capacity come back. But again, if we continue to see that ramp, I think the materials tight supply and labor will as well. And overall, we feel comfortable with our ability to pass that along, and I think we've demonstrated that on a pretty consistent basis in the past.

So Justin, this is John. I'll take the second part of that in terms of your question around what does margin look like in the future from an EBITDA standpoint. So I'm not going to give you a specific number. But starting with third quarter, if you take the -- I think the 17.1% we achieved, I mentioned, about $4 million of that was tied to what I'll call COVID-related expenses, which were -- is lower than we historically would have seen due to COVID. So if you back that out, you're probably close to 16.5%. And I'd say on a go-forward basis, we feel great about the prospects on a go forward. I think we've already got great evidence of the fact that we can leverage the footprint. And we think there's plenty of room to leverage, as we've said many, many times in our history, up to 1.5 million starts and beyond. So I think that's in our favor. I think there's always continuous opportunities on the labor and productivity side. And again, we've got pretty good evidence of delivering that. From an M&A standpoint, certainly, very accretive margins, and we think there's many accretive acquisitions out there for us to continue to playing that way out into the future.

So we're pretty bullish about the prospects. I think next year, we probably have some challenges from a comp standpoint due to the fact that we've had some of this COVID benefit that we'll be comping up against. But beyond that, we've always talked about a 22% to 27% type of pull-through number for the business. And we're still as bullish about that number on a go-forward basis as we have been in the past.

Excellent. I really appreciate it, guys. And again, Jerry, congratulations.

Thanks.

Our next question is with Adam Baumgarten with Crédit Suisse.

Just -- Service Partners volume growth has been outpacing TruTeam now for the last 4 quarters. Maybe if you could walk through some of the drivers there. Is there less commercial exposure maybe there? Is there more residential remodel? Just kind of curious about the divergence there.

Adam, this is Robert. So I'd say, I think there's multiple fronts to that answer. Number one is the very conscious effort by the team and our direction there. If we went back a year or 2 ago and you thought about some of the conscious decisions we made there relative to stepping away from some volume and stepping away from some -- from customers, we've obviously got the team there focused on the right mix of customers, right mix of products and complemented by great service across the country as well.

So I think that's absolutely driven the share gains that we've seen in the Service Partners business. There were probably -- if you look backwards, probably some weaker comps compared to last year. But the team has absolutely done a great job there really energizing the field and really running great from an operational improvements perspective as well. So just really, really good job there from a Service Partners side. And again, as I mentioned before, I think we're excited about what that business can do in the future as well.

Okay. Got it. And then just -- you guys called out gutter coil and spray foam cost as deflationary. Can you give us a sense, were your fiberglass installation costs also down year-over-year?

This is John. So no, we -- basically, the driver behind material was entirely gutter and spray foam. So really, the rest of the product lines, including fiberglass, were pretty much treading water compared to prior year.

Our next question is with Seldon Clarke with Deutsche Bank.

When you think about the relationship between insulation volumes and starts and the typical sort of 3-month lag, and I know you talked about a number of supply constraints, but you're seeing there over the last 3 months single-family starts are up sort of 16%. So could you give us a sense of if you could possibly quantify like how much you think supply will be a constraint in the fourth quarter? And just help us think about the relationship now versus starts compared to how it trended historically.

Yes. That's a difficult -- this is John. That's a difficult question to answer only because when we talk about material constraints, we're talking about many different product lines versus insulation, one of them, certainly. But across the broad spectrum of all the materials and parts that going to build in the house, I'd say most are challenged right now and in the mode of coming back. And they will. I think the question is how quickly will those individual pieces come into play and how quickly will they ramp to support the growth that's not only coming, but it's here.

So it's just difficult for us to peg that, which is exactly why we didn't give guidance on this call. But we are confident that we're all going to figure out. We talked about insulation specifically on this call. And I think all the other trades and product lines will do the same. But it's just very difficult to pin a number on that at this point.

Is there any way you could just give us some context around maybe where October is trending? I know you said insulation was up or better in October. But -- and maybe just like gauge us on the distribution side as well.

Yes. We're not going to give specifics. I think what Robert said is we saw a nice continuation of growth. So we may call it average daily sales, as an example, was improving throughout October as it had been in the third quarter. And I think that's just an indication to us that -- and by the way, we think from a labor constraint or a material constraint, TopBuild is in as good a position as anybody in insulation and probably anybody in any other product line or trade group at this point in time. The issue is, obviously, there's a lot of pieces that go into building a house that determine how quickly it's built.

So I think we're bullish about the fact that it's going to come back. I think October, we saw the industry continue to ramp and grow. And as Robert said, I think our expectation is in November, December, we're going to see improved seasonality versus what we typically would -- than historically would in a fourth quarter time frame.

Okay. That's helpful. And if this elongated construction cycle or recovery sort of plays out for the next 12 months or so, how does that change your ability to efficiently manage your fixed cost base to leverage those opportunities? Does the increased visibility or sort of more steady ramp in demand help your incremental margins? Or is there not much of a difference to how you can manage the business?

Yes. I think as we look forward, we obviously expect volume to continue to grow and improve. But our expectation is that we're going to manage our fixed costs very, very tight. In fact, we're constantly looking for ways to reduce costs and become more efficient, whether that's in the branches, specifically with their fixed overhead or whether it's here at the branch support center. And again, we've got 4 or 5 years now of very, very good evidence that we can leverage not only the fixed costs, we have obviously improved the productivity, reduced costs appropriately, which we did in the second quarter.

So I think we expect volume to continue to ramp and grow, but we don't expect there to be a significant amount of pressure on increasing our fixed overhead. And that's just been the way we've run the business since day 1, and that's going to be the way we're going to go into the future. So...

Our next question is from Keith Hughes with SunTrust Robinson Humphrey.

Just a question on commercial, you've broken that out in the press release. But in general, how much of the commercial business is housed in TruTeam versus Service Partners?

I'd say it's about 50-50 in terms of the split. In terms of total dollars, hang on for just a second. Do you have that data there?

[I can't see a percentage right here.]

Yes. It's not of my fingertips, Keith. If we can get back to you on that in terms of the exact numbers.

Okay. And as we think about the demand patterns between those 2 business, will they be fairly similar? Or because of the install aspect in TruTeam, could there be a mismatch as business moves up and down between the 2 segments in commercial?

Yes. Keith, this is Robert. So I think as we see the starts come out of the ground, I think you may see a more proportional ramp on the install side of the business. And I think what we've seen, which we're really excited about on the Service Partners side, has been that share gain that we've been able to accomplish on that side of the business. I think you'll see an inordinate amount of ramp as starts come out of the ground on the TruTeam side, if you think about it that way.

And Keith, back to your question real quick on commercial. Of roughly about $150-plus million -- almost $160 million of commercial revenue, roughly 2/3 of that is in TruTeam and about 1/3 in Service Partners.

Our next question is with Ryan Gilbert with BTIG.

First question is just on material costs. I guess looking to the fourth quarter, do you think the magnitude of the lower gutter and spray foam costs that you saw in the third quarter is enough to offset the 4% price increases we've seen announced for fiberglass?

Talking specifically, in the third quarter, we talked about the fact that the material gains were in gutter and spray foam. And those numbers, we expect probably the most positive gain we ever gained in the third quarter from a comp standpoint. Those -- both those commodities are normalizing as we enter the fourth quarter and beyond.

In terms of the impact from a fiberglass standpoint, obviously, we don't share specifically what our negotiations are, what our pricing is. So I really can't give you any guidance on that. But again, we're confident we'll be able to manage that as we have in the past.

Okay. Second question is just a point of clarification on your commentary around commercial. It sounded like when you said the commercial projects have been delayed, my interpretation is it's not that the commercial projects have -- it's not that the starts themselves have been delayed but rather, it's just slower for these construction projects to get to the insulation stage. And I'm just hoping you can either confirm or just add a little more clarity there. Have the starts themselves been delayed? Or is it just slower to get to insulation?

Ryan, this is Robert. So number one, the projects we're already working on, on the jobsite, those are slower due to some of the social distance stuff that's on the jobsite. As far as new projects, we've seen very few projects canceled, some of them slower to get started. So there may be a delay in some start-up some projects, but very few have been canceled. But we're seeing new projects start up on a weekly basis, but some of them are slower to start than if you'd asked 8 months ago, as an example.

(Operator Instructions) Our next question is with Ken Zener with KeyBanc Capital Markets.

I want to clarify what seems to be the tone of this conversation, which is growth is slower because there's some channel issues and costs are inflating and you have lots of onetime benefits. First, growth. Can you talk about delays? Given that you have 30 to -- including distribution, 40%-plus share in the U.S., you have the best insight in the U.S. housing activity of anybody in my view. What is the traditional delay from start to insulation? And where are you now? If you could give us some perspective to quantify this "delay," not a number, but a time delay.

Okay. Your question is around the time that a start occurs to when we do our work on it?

Yes. So it's usually a quarter lag. What are you seeing and how much is delay? So I think that's part of the concern that people are thinking about on the top line. That's my first line of question.

Yes. I mean I think we're seeing that improve, by the way, as obviously, we walked through the third quarter and into the fourth quarter through October. I mean third quarter is a good example where I think lag starts were down 14%, and yet our volume was up proportionally on a positive mode. So it's a very, very strange relationship now between lag starts and when we get on the job. And as you know, orders turn into permits, permits turn to the start, starts turning to work for us over time. It's just that the traditional lag is off, but it's improving.

We're seeing it improved across all of our locations. If historically, maybe it was 2 to 3 months, historically, on average, it might be, I'd say, 2.5 to 3.5 months or something like that, it may be a month extension right now. But that's starting to compress over time here and really depends on the location you're talking about between the labor and material constraints. But we expect that obviously to continue to play catch-up, but I think it's in the mode of doing that right now.

All right. So the time delay, the second derivative is improving. The worst is past us in terms of that is what I heard you say?

Yes. I think we're pretty confident that in both labor and material across all construction trades and industries, we're going to continue to see that improve.

Right. And now here, the other thing about the margin leverage, and I apologize about that. Just kind of surprised at how I think the tone has been on this conversation. In 2018, there was rather robust price increases due to loosefill plants being shut down, allocation, that's kind of followed. So while you talked about this 8% increase from Owens Corning, traditionally, as I look at 2018, for example, you guys were able to get price and margin expansion. You've always talked about industry dynamics and pricing.

Are you calling out the insulation because you think there's a different relationship than you saw in 2018 in terms of price and your ability to recover it? Or within the context of gutter and some of these other input costs that deflated, do you think that's going to be an unrecoverable headwind? Because it seems people are questioning your ability to reprice your input costs like you did in 2018 when they were much higher. Just -- can you expand on that to clarify what people seem to be hearing in the conference call?

Sure, Ken. This is John. So yes, we certainly didn't mean to send any message like that at all. We remain as confident today as we did back in 2018 in our ability to obviously negotiate and manage our material input cost and then appropriately price it. And again, we've got a good 5-year history of doing that. And so we don't see any change on a go-forward basis. I think the only difference between '18 and now, '18 certainly was a surprise -- with that, came upon the industry and TopBuild as a major surprise overnight. So there, as you recall, we took a little while. We took about a quarter and a half to get our pricing and material in balance, but we did. And certainly, the back half of '18, we had great evidence of that. I think we feel great about the ability to manage what we see right now, which is we have advanced notice. Obviously, the January increase, we'll be talking to all 4 suppliers, and we're in the process of doing that right now. We appropriately expect to be able to manage that into our bids prior to that first quarter time frame. So we feel great about the ability to continue to manage both labor and material input costs in our selling prices and continuing to drive margin expansion as we have in the past.

Yes, Ken. This is Robert. So to add on to that, if you think about '18, right, 20% of the capacity went out the industry overnight from one issue in a manufacturing plant. So there wasn't really any planning. There wasn't really any looking forward type of thing. That was 20% capacity in one night. Here, one, how these starts were ramping up. Number two, labor is even at more of a premium today. Number three, as you see, these announcements are coming out in advance, it's not an overnight type of phenomena and it's building materials across the industry across the industry, as labor across the industry. So I'd say it's very different than '18. And I'd say we're even more confident given this is really a demand driver, really a positive thing going on in the industry and going on with housing.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to Jerry Volas for closing remarks.

Thank you again for joining our call. And Robert and his team look forward to reporting TopBuild's fourth quarter and year-end results at the end of February.

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