TopBuild Corp (BLD) 2015 Q2 法說會逐字稿

Welcome to TopBuild's second-quarter 2015 results conference call. My name is Steve and I will be your conference operator today.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Sam Levenson.

Thank you, Steve. As shown on slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks, including those set forth in our second-quarter 2015 earnings press release and our registration statement on Form 10. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those we express today.

In addition, some of our remarks today contain non-GAAP financial measures, as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures. Attached is an appendix to the presentation and to our second-quarter 2015 earnings press release.

At this time I'd like to introduce Jerry Volas, Chief Executive Officer of TopBuild, who will lead our discussion. Jerry?

Thanks, Sam, and welcome to everyone who has joined us on this, our first earnings call as a public company. We're pleased to share and discuss with you our views on TopBuild and the construction industry, as well as our results for the second quarter and the first six months of this year. Joining me on the call today are Robert Buck, our President and COO; and John Peterson, our CFO.

So, turning to slide 5, I'd like to speak to a couple themes playing out during the first half of this year. As you know, the spinoff of TopBuild from our parent company, Masco, was executed on June 30. A tremendous amount of hard work from both the Masco team and the TopBuild team made that happen, and we're very excited to be moving into the third quarter as a separate public company. The financial results for the second quarter and the first six months of 2015, and the comparisons to 2014, have been adjusted to reflect our best estimate of the going-forward TopBuild business model. Let me start with a high level review of our financial results.

We recorded top-line growth of 5.5% in the second quarter, which brings the first six months in at 6.4% ahead of last year. That compares favorably with the pace of housing starts lagged by 90 days. That number has been 4.4% throughout the first six months of 2015. As a reminder, we find that lagging reported housing starts by 90 days provides a reasonable indicator of the environment within which we are operating. That is particularly true with our residential single-family installation business, although somewhat less so with multi-family, commercial, and Service Partners, our distribution business. But, on balance, it's still the best overall indicator of the construction environment for us. So, we are pleased with our top-line performance, which is very important as the building season gets into full swing. And we are currently seeing the housing start and permit data improve, which supports our expectation for more significant sales increases in the last six months of this year.

Bottom-line results for the six months were in line with expectation, despite some impact in the second quarter related to the extended time required to align customer pricing with material cost increases. Historically, we've been able to accomplish this alignment, and we see no structural changes in our business that would change our thinking in expectations now. John and Robert will be adding additional commentary to the dynamics here.

But before I pass the call over to them, I'd like to turn to slide 6 and touch on the underlying housing environment and what that means to TopBuild. As we discussed during our June road show, new home construction starts are currently well below the 50-year average and have been so for the past 7 years. When combined with population growth, general economic improvement, and an aging housing stock, we believe a significant pent-up demand for new construction has been created and will need to be satisfied over the next several years. This bodes very well for the trajectory of housing construction in the US. We see that starting to take shape with housing starts climbing over 1 million in 2015, and then continuing up towards the historical average of 1.5 million units within the next two to three years.

TopBuild is the largest distributor and installer of insulation and related products in the US. Our extensive footprint has positioned us very well to serve the entire builder community, from the large national and regional builders to the thousands of local custom builders around the country. TruTeam, our installation company, and Service Partners, our distribution company, will both benefit from the upper housing trajectory. And having two distinct channels to the broad and fragmented builder community is a significant long-term competitive advantage for TopBuild.

Supplementing that growth from the underlying residential market will be strong growth in the commercial space. With only low- to mid-single digit share, we believe that still makes us one of the largest players today. And we intend to leverage our footprint and resources to increase that share.

We're also the largest residential construction home energy consultant in the country, with TopBuild Home Services. We provide a variety of design and testing services that assist our builder customers in managing the continued interest in regulation happening around energy efficiency.

So, in summary, we feel very good about our business model, our strategy, and the growth dynamics happening in the environment within which we operate. We believe we are uniquely positioned to drive top- and bottom-line growth.

Let me now turn the call over to Robert Buck, our COO, for some additional comments on our operations.

Thanks, Jerry. I'd also like to take this opportunity to welcome everyone who is participating in this call. We appreciate your interest and support.

Turning to slide 8, during the first half of 2015, TruTeam and Service Partners, both leaders their space, continue to leverage our 20-year operating history and execute against our strategic initiatives. As a reminder, TruTeam has over 190 installation branches in 43 states, and Service Partners has over 70 distribution centers in 35 states. Our footprint and scale is unrivaled in the industry. Both businesses are supported by our industry-leading building science business, TopBuild Home Services. TopBuild Home Services was recently recognized as a 2015 Energy Star Partner of the Year.

Moving to slide 9, I do want to discuss the Q1 price increases [moving] to the marketplace by the fiberglass manufacturers and the impact on our business in Q2. Coming off of a weak first quarter for the industry and slower than anticipated new housing ramp, we have not yet realized as much price with our customers as anticipated. The slow start to the year also forced some jobs bid from Q1 completion to push into Q2. However, as has always been our proven practice in the past, we completely expect that we will fully align customer pricing with our material costs.

The results of the quarter for our TruTeam and Service Partners businesses show different trends. The TruTeam top-line revenue in the quarter, up 9.5%, benefited from improved residential construction installs and greater organic growth in commercial business. Our Service Partners business was basically flat quarter over quarter, due to challenging comps from increased second-quarter 2014 customer purchases driven by an impending late second-quarter 2014 selling price increase. We expect solid full-year performance in both businesses but, as mentioned previously, results will inherently fluctuate quarter to quarter.

As we look out towards the back half of this year and next year, let me share our view on where we believe the opportunities and risks lie. The availability and cost of labor continues to be a challenge across our industry, with some regions presenting greater challenges than others. As labor is the second largest component of our cost of goods sold behind material costs, we pay strict attention and put significant management effort on labor recruiting, retention, and productivity.

Most of you have likely heard us discuss being an employer of choice in our industry. We intentionally offer a very competitive wage and benefit package to our employees. Our builder customers have confidence that the people we're putting on their job sites have been safety trained, drug tested, and have their work eligibility verified. As a result of our efforts, when labor is scarce, we attract the best talent, and the labor we employ sets the standard for the industry.

In terms of opportunities, we're not only pleased with the improving housing market and the adoption of new energy codes, we're also excited with commercial market opportunities. We have already built expertise throughout the business and light commercial and [rating] capabilities in the heavy commercial sector over time. We have the choice of building and/or acquiring commercial capabilities as required. We firmly believe, within a few years, the TopBuild commercial revenue could be $100 million more than the approximately $240 million in revenue we recognized in 2014.

Prior to turning the call over to John, I know I speak for our entire leadership team when I thank our nearly 8,000 employees across the country for their hard work, dedication, and focus on working safely to deliver great value and service to our customers. With that let me turn things over to John to discuss financial results for the quarter. John?

Thanks, Robert. Jerry and Robert have provided some operational headlines on the Company's second-quarter performance, and now I'll take you through a more detailed financial review.

As TopBuild became an independent public company at the end of the second quarter, there's a little bit of noise in our financial statements for the quarter, due to three items. First, we recorded approximately $4 million of unusual and nonrecurring charges. Second, we recorded a fixed-asset disposal of approximately $2 million tied to devices in our installation truck fleet that are being replaced with a more efficient and current technology. Finally, the Company also received additional overhead allocations from Masco, as required under the regulations for a spin, and incurred approximately $1- million growth in expenses year over year as we prepared to be a stand-alone public company.

As part of the reconciliation of GAAP to non-GAAP, we eliminate all Masco allocations and current period stand-alone public company costs and replace them with an estimated full quarter of our anticipated expense to become a public company. I'll cover the impact of these items in more detail later in this presentation. However, let me note that we have provided a GAAP to non-GAAP reconciliation on slide 18 that normalizes the adjusting items and, in addition, reconciles to an adjusted EBITDA balance.

Please turn to slide 11. As Jerry mentioned, consolidated sales increased 5.5%, to $404 million, driven by strong growth in our installation segment, in both residential and commercial lines of business, and improved selling price. Overall growth was above 90-day lag starts of 4.4%, a benchmark we use to measure our performance versus industry growth. On average, the Company distributes and installs material 90 days after a housing start. Although this performance varies and fluctuates due to quarterly seasonality and unit mix between single and multi-family, we believe it's a good overall benchmark to use.

Adjusted operating margins came in at 5%, or a 160-basis-point improvement from prior year. Margins improved due to volume growth, lower depreciation expense, and cost-reduction activities. The Company did see some compression on gross profit percentages, due to the imbalance between selling price and higher material cost that Robert discussed earlier.

Moving to slide 12, TruTeam, our installation segment, delivered second-quarter sales of $265 million, a 9.5% improvement over prior year and substantially more than the 4.4% improvement in light housing starts. Residential and commercial lines of business both contributed to the top-line growth, along with improved selling price. Coupled with first-quarter performance, TruTeam has grown 9.7% for the first half of 2015, 510 basis points better than first-half lag starts. Adjusted operating margins for TruTeam were 5.1%, a 220-basis-point improvement over the prior-year quarter. TruTeam's top-line growth, lower depreciation, and the impact of cost savings initiatives were partially offset by a negative imbalance between selling price and material cost.

Please turn to slide 13. Service Partners, our distribution segment, had second-quarter sales which were relatively flat compared to prior year. This was due to a challenging comp as, in the prior year, we saw accelerated customer purchases in the second quarter ahead of an announced price increase to take effect the end of second-quarter 2014. Service Partners' operating margin in the second quarter of 2015 was 7.7%, 40 basis points below prior year driven largely by an insurance reserve adjustment taken in the quarter.

Please move to slide 14 where we'll review SG&A. As we have mentioned in prior presentations, we had a significant asset rolloff of our depreciation schedule at the end of 2014. So, each quarter in 2015, our D&A will be approximately $3 million less than what it was in the comparable prior-year period. Offsetting some of that savings in the second quarter were the nonrecurring charges and fixed-asset disposals discussed earlier, higher than normal corporate allocations from Masco, and the stand-alone public company and cost incurred in the second quarter.

After adjusting for all items and replacing the approximately $7 million of Masco allocations with an estimated $5.5 million for anticipated incremental public company expense, total SG&A for the second quarter is down $5.1 million versus the prior year. That's a 220-basis-point improvement as a percentage of sales. $3.4 million of the reduction in SG&A was driven by lower D&A, and $1.7 million was largely due to strong cost-control activities across both segments. On a go-forward basis, we expect continued strong leverage on SG&A as the anticipated growth develops.

Please turn to slide 15. Starting with operating cash flow, the Company used $9 million in cash in the first six months of 2015, as compared with a source of cash flow of $16.9 million in the prior year. Last year benefited from supplier terms changes that took effect early 2014 and provided a one-time cash flow benefit in the first half of last year.

In addition, late 2014 and into early 2015, the Company built fiberglass inventory levels in response to announced supplier price increases. As a result, second-quarter 2015 disbursements were higher than prior year when a more normalized inventory procurement pattern was followed. Results were normalized for the remainder of the year and we anticipate strong operational cash flow growth through the end of 2015. In addition, we continue to expect that working capital as a percentage of sales for the full year will track close to 6.5%, as we've guided in the past.

As was previously communicated, we established borrowings of $200 million and paid a distribution to Masco for the same amount the date of the spin. The details of the lending agreement appear in our Form 10-Q being filed today.

In addition, during the quarter, we finalized a $120-million revolver. Our credit facility also has an accordion feature that allows us to increase the borrowing capacity an additional $100 million, subject to certain approvals. At the end of the second quarter we had over $63 million in cash on the balance sheet and, coupled with our available revolving credit facility, provides TopBuild with $131 million in liquidity.

Moving to income taxes, our effective tax rate for the three-month and six-month periods ended June 30, 2015, was 20% and 30%, respectively, which deviated from our normalized tax rate of 36%, primarily due to a decrease in our valuation allowance. We continue to expect that our cash tax rate for 2016 and beyond will be at or near 36%. As a result of IRS regulations, it is anticipated that a significant portion, or possibly all, of the Company's US federal and net operating loss carried forward will be utilized by the Masco consolidated group through December 31, 2015.

As discussed previously, on slide 16, we provided a reconciliation of reported operating profit to adjusted EBITDA. We believe that adjusted EBITDA is a good measure of our underlying operating performance as it neutralizes a number of unusual and/or one-time items. After reconciling for all GAAP to non-GAAP adjustments, as well as adjusting for non-cash expense items, the Company delivered $24 million in adjusted EBITDA for the second quarter. That reflects a 14% improvement over prior year and a 14% incremental EBITDA margin on second-quarter sales growth of $21 million. On a year-to-date basis, incremental EBITDA margins are approximately 20%.

With that, let me turn the call over to Steve to facilitate your questions.

(Operator Instructions)

Our first question comes from the line of Keith Hughes with SunTrust.

A quick question on pricing. Could you give us some information on how pricing affected the installation division and what it was -- I assume it was down there. Excuse me, on the distribution business assume it was down there and what the impact was on the installation results of [sum]?

Yes, Keith, this is John. In terms of the discussion we had around the imbalance between material costs and pricing, really the impact had -- the significant impact was on the TruTeam side of the business. Service Partners, or the distribution side of the business, had a relatively I'll call it stable material and pricing relationship. So really the impact that drove the gross profit compression we had as a total business was really on the TruTeam side.

And to follow up, so it was simply a fact of the -- no pass-through. Did the situation improve as the quarter went along and what are you see the pricing in July at TruTeam?

Keith, Jerry here. The normal course of events, Keith, would indicate that as time goes on, that alignment improves. That's always been the case historically and we really believe that's going to continue to happen as we get on into Q3.

There's a couple of factors there. One is given the timing of some of the price commitments that we make, particularly with multifamily, some of those price commitments were made months ago and total revenue that shows up in the second quarter it may have been priced some time ago. So there's always that factor that contributes to a bit of a delay.

But we believe that as we get into the third quarter we're already seeing that we believe that alignment is going to improve and we would fully expect that to happen as time goes on.

Okay. Final question, on the distribution, we don't have a lot of long-term comps to know. Given the way you describe the year-ago period I assume the third quarter you would have the proverbial easy comp in that business, is that the best way to look at it?

This is Robert, Keith. We would expect things to improve in Q3 coming off the pre buy that happened Q2 2014. So we'd expect to see some improvement definitely on the distribution side in Q3.

Okay. Thank you.

Your next question comes from the line of Mike Wood with Macquarie Research.

Congratulations getting your first quarter out as a stand alone Company. First question just on the pricing side to follow up as well, how long does that lag typically occur for and do you think you'll abe able to return a 20% incremental margins by 3Q?

Hi, Mike, Robert. So typically it's about a quarter lag there as we're bidding work. And obviously that extended a little bit the first half of this year given the slow start to the year, given the weather. Some, again as I mentioned, some jobs bid for Q1 completion pushed into Q2. So it's typically about a quarter that we look at it from a lag perspective on the pricing side. As always really strong track record and being sure that we align that.

Relative to the 20%? Yes, on that I would say that certainly the 20% as we talked about on the road show, that's a good guideline for us to think about long term and also for a given year. On a quarter-to-quarter basis, it's really hard to project or to guide what any one-quarter is going to look like.

But I would say that coming off Q2, just knowing that the alignment we believe will improve on the pricing material cost, we would expect that EBITDA to drop down to improve in Q3. If the weather gets to 20 or not, it's hard to say that. But again I would continue to reaffirm that the 20% guidance for a full year and for a long-term outlook is a good thing to think about.

Okay, very helpful. And then my next question is on seasonality since we don't have a lot of historical information. The $25 million in the first half 2014 EBITDA that was about 28% of full-year results last year, is that a typical seasonality for your business? Or is there anything unusual why the second half of this year wouldn't be proportionate with last year?

Yes, that is typical for seasonality for the business. Typically we see that type of trend. And certainly driven by starts and starts build up throughout the country and the seasonality the markets we work in, in the Northwest, Midwest obviously slow down significantly in the first quarter. And we've seen the trend obviously with starts increasing throughout the last two, three years, that tends to push to the back end some of the volume. So yes that's a typical seasonality and we anticipate that same type of performance on an ongoing basis.

Great, great. My final question, you mentioned labor in your prepared remarks. In prior cycles what was the typical rate of inflation you'd get on labor as housing approaches 1.5 million starts?

Yes, I would say relative to, if I heard your question if you could repeat it, I think I heard you say inflation, was that your question?

The rate of labor inflation. You mentioned it was the second largest part of your COGS. I'm curious given the fact that labor tightens as you approach normalized housing levels, what kind of rate of inflation that you embed in that 20% adjusted EBITDA margin. I'm curious what you typically see in prior cycles.

Yes, I can't really speak to the prior cycles but I would say what we've done as we look around the country where labor is the tightest, there's been some what I call minor inflation there. We really work mainly, Mike, on productivity improvements in the business.

And so getting our stock crews out to the job site earlier, making them more productive while they're on the job site, that's proved pretty well in that type of a job force. It's [peak] rates that makes them more productive, increases productivity for the business, so it's a win-win all the way around. So we really work from an improving process and productivity perspective.

Great. Thanks so much.

Your next question comes from the line of Scott Rednor from Zelman & Associates.

Beyond just the starts data I was curious how your conversations with your builder customers and what you're seeing from a bidding standpoint is shaping your second half view that sales are going to accelerate?

Hi, Scott, this is Robert. So I think looking at the -- obviously the starts data that we've seen which already shows the Q3 numbers, some definitely significant improvement in the housing starts and then other leading indicator looking at permits as well. So those are great indicators for the business as well as what we're seeing from a bidding perspective.

Our conversation with the bidders, with the builders is that they're very I'd say confident in the back half of the year, especially as we're heading into the fall and as we get into a lot of those closings that hit in the October, early November time frame, so I'd say pretty positive overall. Again leading indicators positive as well as conversations with builder customers. And I'd say we continue to see nice bidding activity on the multi family side of the business as well. So I'd say single family and multi family.

And then one of the areas you guys highlighted in the slides was cost saving initiatives. Can you guys maybe elaborate what that relates to and what the implications are in a go forward basis?

Sure, a couple of things that we've looked at there. And typically we always look for ways to simplify the business and make it more productive, efficient, et cetera, and drive better customer service.

So two of the key ones that we pointed out in the GAAP to non-GAAP, one would be about the fixed asset disposal where we accelerated depreciation on some old legacy assets that essentially were older, the technology was older. It was less reliable in the field, so we're replacing that rolling out new technology which will improve the customer service levels of our installers in the field. So that's one of the one offs that we had in the GAAP to non-GAAP.

The other we continue to look at the organization and make sure we've got the right structure. And so as part of that as we evolved and moved up to the spin date, we identified an area of the regional structure and some back office support that we ended up eliminating in the second quarter. So combined with both of those initiatives, we're looking at something over $2 million annualized savings from that.

Great. Thank you.

(Operator Instructions)

Our next question comes from the line of Sam Doctor with Fundstrat.

I had a couple of questions. First, could you give us a little more color as the approach in TruTeam, can you give me a sense of how much was the rollover market essential share gains, was it commercial or volume and price mix?

This is John, Sam. So if I understood the question, your understanding what the growth was in TruTeam?

Right, so TruTeam grew about 9.5%, that's about twice the growth in housing starts. So I'm trying to get a sense of how you would attribute that through (inaudible) share gains, was it growth on the commercial side or volume or price mix?

So on a quarterly basis, Sam, we're not going to be breaking out individual line of business. But what we can share with you in terms of our share performance, so we're very confident that we at least held our own as a Company. And in fact we think we increased a little bit especially on the single family side of the business. So we look at that growth it was a nice distribution between both the residential starts impact that we'd expect to see flow into our residential numbers and great organic commercial growth as Robert indicated earlier.

Okay. And a follow up on the commercial side, obviously when you look at the residential side, your market share is pretty strong across all markets. How does the commercial market share break out? Is it -- and it's obviously smaller, but is it more evenly distributed or do you see some areas that you're significantly stronger in and there are other areas where there's opportunities for growth?

Hi, Sam, this is Robert. So we would say as we look at the commercial opportunity, we'd say that our share is in the single digits there, our mid-single digits. It's a great opportunity.

We participate both in what we call the light commercial which is somewhat similar to residential construction, as well as the heavy commercial which is more the high rises and some of the larger metropolitan areas. So we participate in both spots. And again we see that as a great growth runway for us and the opportunity to do something nationally across the country relative to commercial.

So is the market share on the commercial side low-single digits or mid-single digits is that relatively evenly distributed across markets or do you have some areas where you're really strong and then other areas that you see there's a lot of opportunity to pick up share?

I'd say it's relatively evenly distributed. There's a few metropolitan areas that we're stronger in. So I'd say the opportunity to grow the business is pretty well distributed across the country as well.

Great. All right, thank you.

Your next question comes from the line of Ken Zener with KeyBanc.

This is Adam in for Ken. A quick question on the pull forward from pricing and distribution. I was wondering if you could give us, and apologies if you already provided this number, I was wondering if you could give us a dollar figure from that impact?

Yes, when you say the pull forward, you talking about last year's pull forward?

Yes, so I think you mentioned sales appeared flat because of the Q2 2014 impact from higher pricing. So I'm wondering what that dollar figure was so we can get a growth figure ex that impact.

Yes, so Ken, this is John. We don't have a dollar figure per say in terms of the actual amount. It certainly was the reason we were flat as we talked about in the past. Service Partners will not necessarily have the same trajectory as TruTeam, but that was the driver. We're not providing it, we don't have a dollar figure in terms of the actual impact of second quarter.

Okay, thank you. And then second question here, wondering what the gross margins are looking like across the regions, specifically Texas and Florida, and if you guys are seeing an imbalance between -- on a regional basis?

Yes, so relative to -- Ken, it's Robert. So looking across obviously if you look across the border states, if you will, California through Texas, the Southeast up to the Carolinas, those are the stronger -- tend to be the stronger areas relative to housing and even multi family as well.

So we see some better performance in those mild states, if you will, and we continue, the business continues and the teams continue to perform well at a local level. It's such a local business and our businesses are really performing well, especially in those areas where the growth is coming the fastest in the housing ramp.

Okay, great. Thank you.

Thank you. This concludes today's Q&A portion of this event. I would like now to turn the call over to Mr. Jerry Volas for closing remarks.

I'd like to thank all members of the TopBuild and Masco organizations for their support and commitment during this time of transition to a separate public Company. Coming out of the stint from Masco, we have a well capitalized balance sheet, 20 years of operating experience and a strong governance culture.

Our broad base approach to [coast] operations with both our installation and distribution businesses, along with our energy efficiency expertise is unique in the industry. And this business model is proving to be as effective in the commercial space as it has been in the residential space.

We expect to take full advantage of an improving housing market to support growth in sales earnings and cash flow. Look forward to seeing many of you at the upcoming RBC and Zelman Conferences. We appreciate your support of the TopBuild team and look forward to the third quarter call in November. Thanks again to everyone for joining us today.

This concludes today's conference call. You may now disconnect.