TopBuild Corp (BLD) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the TopBuild earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded, Thursday, August 4, 2016. I would now like to turn the conference over to Tabitha Zane. Please go ahead

Thank you and good morning, everybody. On the call today are Jerry Volas, Chief Executive Officer; Robert Buck, President and Chief Operating Officer; and John Peterson, Chief Financial Officer.

Please note we have posted senior management formal remarks on the Investor Relations section of our website at TopBuild.com.

As shown on slide two 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. In addition, we will also discuss non-GAAP financial measures which can be reconciled to the most comparable GAAP measures in a table included in today's press release.

I will now turn the call over to Jerry Volas.

Thank you, Tabitha, and good morning, everyone. Starting on slide three, we had a solid second quarter on both the top and bottom line. We continue to execute well on our strategy, which is driving our core residential insulation business consistent with the housing recovery and supplementing this with market share gains in the commercial space.

And most importantly, we are converting that top line to stronger margins with our focus on operational improvement.

Total sales in the quarter were up 6.9%, with TruTeam, our installation business, up 8.6% and Service Partners, our distribution business, up 2.1%. As expected the year over year sales level performance in the second quarter came in than lower than the weather-assisted first quarter year-over-year performance.

For the first six months, sales were up 10.9%, with TruTeam up 12.5% and Service Partners up 6.4%. As a reminder, we benchmarked two deemed sales with 90-day lagged housing starts, understanding that variables such as builder cycle times and single/multi-family mix can impact that comparison in any one-quarter. So at 90-day lags, the costing starts up 11.5% in the first half. We feel good about our sales performance this year.

Our second quarter adjusted operating margin improved significantly at 6.4%, a 120 basis point improvement both year-over-year and sequentially. The second quarter dropped down to adjusted EBITDA was a robust 33.3%.

While a portion of that relates to easier comparisons to second quarter 2015, when margins were negatively impacted by some imbalance between selling prices and material cost, a significant portion also relates to ongoing operational improvements throughout the business.

In previous calls and presentations, we've indicated that a 20% dropdown was of a reasonable way to model our business. Year-to-date, after the strong second quarter, our adjusted EBITDA dropdown margin is 28.8%. So, while we are significantly ahead of the 20% benchmark, we continue to caution that the timing of certain events and expense recognition could generate significant quarterly fluctuation. Having said that, we will continue to be aggressive in making changes to optimize our operational performance and beat that 20% for the entire year.

On slide four, regarding our share repurchase program announced on March 3, 2016, we purchased just over $3.3 million of our stock in the second quarter at an average price of $34.23 per share. For the first six months of 2016, we have repurchased close to $5 million of our stock at an average price of $32.34 per share. This program is an important component of our total capital allocation strategy which includes investments in our business and selected acquisitions.

Regarding M&A, we had increased our resources dedicated to identifying, closing and eventually integrating acquired companies into our model. We continue to be measured in this regard to ensure their geographic and strategic fit, and to optimize their sustainable value throughout the housing cycle.

Turning to slide five, from a housing recovery perspective, we remain bullish. The fundamentals such as household formation and available housing supply point towards continued growth in new home construction activity. Although a number of factors such as credit availability, student debt, shipping attitudes towards homeownership and labor availability, [that will] continue to make this scope unpredictable, we believe these fundamentals will prevail for several more years and make this recovery cycle much longer than the historical average. This is a very good environment for TopBuild and we intend to take full advantage of it.

Let me now turn the call over to John for a financial review of the quarter.

Thanks, Jerry. As Jerry noted, we had a good quarter and a strong first half. I do want to point out that comparisons to second quarter of 2015, but they're particularly strong as well last year we experienced some imbalance between selling prices and higher material costs that negatively impacted our margins.

Moving to slide six, in the second quarter consolidated revenue returned to a more [stable] performance and increased 6.9% to $432 million, primarily driven by strong growth in TruTeam in both our residential and commercial lines of business, as well as improved selling price. TopBuild continue to trend at gross margin expansion in the second quarter, increasing 140 basis points to 22.6%, adjusted operating profit reporting 1.9% to $27.4 million, with a corresponding margin improvement of 140 basis points.

Both gross margin and operating margin improvements were driven by volume leverage, improved selling prices and improved labor efficiency trends we expect to continue in the future, contributing to additional year-over-year margin expansion. That can [cover] 2016 adjustments totaled $647,000, primarily related to severance for rationalization actions.

For the first six months of 2016, consolidated revenue increased 10.9% to $845.6 million and gross margin improved 120 basis points to 22.1%. Adjusted operating profit during this period grew 85.6% to $48.2 million with the adjusted operating margin improving 230 basis points to 5.7%. Adjusted EBITDA for the quarter was $32.6 million, compared to $23.3 million in 2015, and our dropdown to adjusted EBITDA margin was a strong 33.3%.

For the first six months, adjusted EBITDA grew 71.2% to $57.8 million and our dropdown to adjusted EBITDA was 28.8%. Compared to last year, performance was particularly strong for the first half of 2016 due to a robust first quarter that benefited from a mild [winter] and a weaker 2015 second quarter which as I mentioned earlier was impacted by compressed margins as a result of the imbalance between material costs and selling prices. As we look at the second half of the year we expect a more normalized comps.

Moving to our individual operating segments on slide seven and starting with TruTeam, second quarter sales increased 8.6% and adjusted operating margin was 7.9%, 280 basis points better than the prior year quarter. Sales benefited from improved selling prices with higher commercial and residential volume with some offset tied to a higher mix of multi-family units worked on during the period.

Looking at the first half of the year, TruTeam's sales were up 12.5% outpacing the high (inaudible) which, as Jerry mentioned earlier, were 11.5% during the same six-month period. Adjusted operating margin improved 390 basis points to 6.6% driven by volume leverage, improved selling prices, improved labor efficiency and strong cost control.

One of the key strengths of our TruTeam operating model is that is (inaudible) we are well positioned to leverage our existing branch footprint and backlogs operations as evidenced by our strong margin expansion.

On slide eight, looking at Service Partners, sales were up to 2.1% in the quarter and 6.4% for the first six months. As in the first quarter, Service Partners' second quarter sales saw volume growth offset by lower selling prices. Selling prices were largely impacted by additional fiberglass capacity that came online in 2015 and that has created downward pressure on fiberglass pricing.

For the quarter and the first six months of 2016, Service Partners adjusted operating margins improved 50 basis points and 80 basis points respectively to 8.2% and 8.6%.

The improvement was driven by volume leverage, lower material costs and strong cost control, partially offset by lower selling prices.

TopBuild's second quarter adjusted SG&A increased $3.9 million or 5.9% to $70.3 million, primarily as a result of higher stock-based compensation and higher performance (inaudible). As a percentage of sales, adjusted SG&A was 16.3%, compared to 16.4% a year ago. Second quarter adjusted SG&A was up slightly, sequentially from first quarter and should remain relatively flat for the remainder of the year.

Moving to slide nine, adjusted income from continued operations for the second quarter was $16.2 million or $0.43 per share, per diluted share, compared to $10.3 million or $0.27 per diluted share.

On slide ten, you can see CapEx for the first six months was $6 million, 0.7% of sales and working capital as a perspective of sales for the trailing 12 months was 8.4%.

Operating cash flow was $6.1 million for the first six months and cash on the balance sheet was $102.1 million, a decline of $6.1 million from the first quarter of 2016.

As we stated in the past, the first half of the year was the weakest cash flow period for TopBuild, driven by seasonality in the business and in this case higher disbursements tied to an inventory build in anticipation of a fiberglass price increase, as well as two tax payments totaling $15.5 million made in the second quarter.

Our effective tax rate for the second quarter of 2016 was 38.7%. As we continue to work improvements on our timed position. You still will [believe] a normalized tax rate of 38% is represented going forward.

Robert will now discuss operations.

Thanks, John, and good morning, everyone. Turning to slide 11, it's clear from both Jerry's and John's remarks that 2016 looks to be another good year for TopBuild and I thank our entire team for the hard work. Overall, builder sentiment is optimistic and business remains steady and growing in the vast majority of our markets.

Our strategy [derived] performance to local empowerment, operational excellence and the simplification of business processes [issue] being sound results. Let me speak to some of the details of the business and improvements we continue to drive.

On the residential side of the TruTeam business, what we should notice of all sizes, they are more heavily weighted towards large production, regional and multi-family builders, we continue to achieve strong operational improvements and gain unit share in all three of these segments.

Compared to our mix of residential business to the second quarter of 2015, this year TruTeam completed a higher percentage of multi-family units versus single family units. The business also grew commercial revenue which includes both light and heavy by more than 10% and we remain dedicated to our strategy of expanding our footprint and capabilities in this line of business.

TruTeam experienced improved pricing performance in the quarter as well. Our focus on labor productivity and increased utilization rates is also driving bottom line improvements.

Service Partners, which primarily supply small contractors who install custom -- for custom builders remains a top performer in the distribution space as the Service Partners leadership team continues to successfully convert top line growth into solid bottom line results.

As John mentioned, this segment did see sales growth offset by lower selling prices. This compression of selling prices has been driven by an abundance of fiberglass capacity in the industry which has seen new lines come on over the past 12 months. As a result of this additional capacity, previously announced price increases have not been sustainable as some may have [hoped] and the fiberglass manufacturers have been aggressive to fill this capacity.

However, our Service Partners team continues to identify and sign up new smaller contractors to market our one-stop shop and best-in-class service. Looking ahead, we are very comfortable with our long-term supply chain and believe, as the largest [purchaser] of fiberglass installation in the industry, we are benefiting from our scale.

Looking at slide 12, on the labor side of the equation, labor shortages continue to plague the builder community and our industry as a whole [extending] the build cycle in certain areas of the country. At TopBuild, we remain in full recruitment mode in many of our branches to facilitate the growth of our business. We are the employer of choice in the industry, and our new program to get installers on board within 24 hours after they submit their application has been very well received by our local branches and has definitely facilitated a simplified hiring process.

On slide 13, in the area of operational excellence, as mentioned previously we are seeing tangible results and improved labor productivity and utilization. With our tool uses our high tech technology solution enabled on a smartphone that is provided to every crew in the field. This technology, which we have been utilizing for over a year, enables us to optimize a crew's route and track their job progress. It has enhanced the efficiency of our workforce and provided a tangible way to measure productivity while providing up-to-date customer service information. This has been driving improved operating results in the business.

Moving to slide 14, we believe it's important to continue to emphasize the unique model that we're building at TopBuild that differentiates us from peers. With our two businesses, TruTeam and Service Partners, we are able to comprehensively reach the [already] fragmented builder community and service builders of all sizes in both the residential and commercial space. The adoption of stricter energy codes is also providing a tailwind and through TopBuild Home Services, we're applying the principles of building science to new home construction.

Turning to slide 15 we fully believe that the diversity of our model complemented with strong operational leadership and great local talent provides long-term stability and drives value for our shareholders. To this point, we are pleased to announce that [Bob Monroe] has rejoined TruTeam trying our West Coast operation. Bob is a recognized leader in the industry, has extensive knowledge in both light and heavy commercial as well as the residential business. We'll see Bob back on our team and partnering with [Steve Reya] gives us a significant competitive advantage as we have the best operators in the business driving operational excellence.

Another example of driving our strategy and having the best team in place is the addition of [Dave Prosica] who is a 100% focused on leading our commercial growth initiative. Dave joined TopBuild in 2015 and has over 25 years of both light and heavy commercial experience.

As Jerry mentioned previously, we are making good progress identifying strategic and accretive acquisitions. To ensure success we have created a dedicated M&A team that is now being led by [David Cushion], one of our senior operations leaders who has been in the industry for over 20 years. David is now 100% dedicated to acquisition, due diligence and integration. As you can see, we've put an outstanding team in place of experienced, well respected industry veterans who have demonstrated a successful track records. Together they will continue to drive business performance, translating it to the market share gains and improved profitability.

As you look at the rest of the year, we expect solid, full year performance at both TruTeam and Service Partners. We are pleased with the important protruding housing market, adoption of new energy codes, and commercial market opportunities. I thank the entire TopBuild team for their focus on working safely to deliver value, quality and service to our customers. I'll now turn the call back over to Jerry for some summary comments.

Thanks, Robert. Our strategic plan remains focused on achieving profitable growth through operational excellence and thoughtful and balanced capital allocation. We have been and will continue to be consistent with this strategy. Our diversified model includes both installation and distribution across both residential and commercial. Surrounding all that with energy efficiency expertise and the deepest, most experienced management team in the industry enables outstanding execution, the critical final step of any strategy.

Our second quarter results provide further evidence that it's all working. And while we believe the housing recovery has a number of years remaining and provides the wind at our back, we want to emphasize that our diversified model will perform well throughout the entire cycle.

This will provide consistent and dependable financial results for our shareholders. Operator, we're now ready for questions.

Thank you. (Operator Instructions) And the first question comes from the lines of Keith Hughes with SunTrust. Please proceed with your question.

Thank you. Questions. I guess first, I'm a little surprised to hear on the mix between multi-family and single family construction seems to be going the other direction. Was this just some individual winds for you? And what's your outlook on that mix for the rest of the year?

Hey, Keith, this is John. Really, that's really a result of last year. We had, from a start standpoint, a significant amount of starts that were won in the business. And really, it's a carryover from a completion standpoint for us in the second quarter. So, we went a go forward basis, we would expect to get to a more normalized mix between single and multi-family.

And Keith, keep in mind -- it's Jerry here -- that the lag with multi can be very long. And so, to John's point, I think you -- and sometimes it's either these are projects that were started several months ago. They just come to completion in Q2.

And those are -- is multi-family lower margin for you as well, compared to single family?

Margin-wise, Keith, it's pretty comparable. It's just that obviously from the take, if you're getting a revenue stand point, it's as normal a take for us.

Yes. Okay. Second on pricing, if we got pricing, too many moving in different directions. And then the tier division and a -- you know, the manufacturers, and several of them now are talking about potentially tight capacity and some point here in the next add 18 months or so. I guess my question is what is your view on that projectile, your growth, do you think we'll see a tightening situation at the cost pricing and maybe some market availability [sort of].

Jerry here, Keith. I would -- I think at this point in time, so there's always a relationship obviously between the capacity that's available from the suppliers and what was happening on the demand side. Largely driven by how did they start. So, as far as our comment, right at this very moment, there is some capacity that's been created. In the last short term -- that really probably exceeds what the demand is right now.

If you look into the next couple three or four quarters, if you know popular opinion now would suggest that the housing start could get to be probably as [lacking] a little bit compared to what it was. So, if I had to make a guess, I would say that the manufacturers make decisions on spending money and it's very expensive. And even if they had increased the capacity, to limit those decisions, anticipating what's going to happen with the housing recovery. And, the fact that it's probably going to flatten a little bit from prior expectations was adjustably to that there probably would be plenty of capacity here for the near term.

And if I say near term, certainly the rest of this year, well into next year, would be my guess. Especially what happens after that. That's too far to guess. That would be anybody's -- anybody at that point in time. And it's relate to us personally, it's going to top billed. And, you know, we maintain relationships with all most suppliers and in need -- we understand that there's been need here over the long term. Because they continue to do that. And in spite the fact that we've had a disagreement with [decoding] on our contractual issue. You know, we continued to do business with them. We've always had a good relationship with them. We would expect to get over this speed of boat then ultimately continue to do a lot business come [entwined]. So, that's kind of a summary of the overall [14] situation.

And that -- their relationship with (inaudible) the issue is on the insulation side not on the distribution side, correct?

That is correct. To some install side of the business rather than government installed side of the business not on the distribution side of the business.

Okay. And I guess follow up question. You know, the pricing is obviously different between the two divisions. Talk about positive pricing and the insulation, it's routine installation unit. Do you a some sort of indication of the unit price to nix even just generally how that contributed in the second quarter?

You know, Keith, this is John. So, if you've been talking through team -- so this point in the council --

Which point, which -- all of above -- just some, just sort of just do a re-bag it --

Yes, so I think --

I know --

I think between the two segments I think if you look at TruTeam, certainly we had very good price performance year-over-year and as you recall last year that we talked about in our prepared comments that we -- last year, we were unable to get certainly price, the same time we took the material cost increase and had that impact or -- anything else. So, we've been driving price in the TruTeam side of the business and expecting quarter and that continued into the second quarter this year.

So, recognizing the different models you said we're selling a bundled solution for the builder in this case, labor material, and our building science expertise as part of that bill.

So, looking at TruTeam good price -- we talk about 3.7% price of fee on the queue when we had on our comments. Our volume somewhat give it a little bit the mix issue on multi-family that we talked about.

So, again, that's what tempered a little bit the buy into some of the service partner side, relative -- the price increase that we talked about. And then, some volume increase roughly 4% deviation on Service Partners as we really don't know the mix of units they're selling into because quite often we're not sure where the customers are going to deliver that product.

So, not sure about the mix impact there. But in a year to date basis that we said tracking very close if not above light housing search, so.

Okay, thank you very much.

You're welcome.

And, the next question comes from the Mike Wood from Macquarie Capital, please proceed with the question.

Hi, good morning. Thanks for that information on the near term capacity. But, I'm actually curious what your view is on the market's receptivity, from your customers, your builders, consumers for additional installation price increases. I know the industry is attempting one in August. So, just curious what you think the market -- how your customers will receive the potential price increase.

Jerry here, Mike. They never liked price increases. Customers don't like that, and our builders don't like that either. Having said that, the installation piece of the total cost for a builder is not that large. And as time goes on, and as the capacity tightens a bit, if it ultimately does, I think that kind of environment would be -- would facilitate price increases and I think our builders would be receptive to that.

Now, certainly what we do from the standpoint of labor -- labor, this is a big part of the value that we provide to our builders. So, that is -- labor availability is still a bit of an issue. And we feel like we get more than our share of available labor, and I think it puts us in a good position. Ultimately, if the environment is suitable us to do well with our builders relative to continue to demonstrate our value to them, be the supplier they can count on with available laborer. And I think that puts us in a pretty good situation relative to getting the price that we need to offset whatever happens on the material side.

Great. And this -- if I think about housing longer term, what steps can you do now to prepare for that normalized level of housing activity which we may see in a couple of years, where -- as you mentioned, capacity and with the installation manufacturers could be very tight. And potentially even on allocation at a normalized level of start. What do you do now to secure your supply chain, and just to make sure if it ever was to go on allocation you guys would be at the top of the chain?

Well, the big piece of the answer to that would be the model that we have. We like how our Company will perform through the entire cycle, generally speaking. And what I'm talking about is the fact that we have the installation distribution business. Commercial is going to be a more and more important piece of our total puzzle. In at all -- some cases the product that the commercial is involved in is not necessarily fiberglass. So, there is the longer list of suppliers beyond the fiberglass suppliers that really are responsible for the stability of our total Company model.

Now, as it relates to fiberglass in particular, again, I think the thing that we could do is basically maintain relationships with all four of our suppliers. And unfortunately our scale gives it the opportunity to be significant to all of our suppliers, and that's important to them. I mean, we have -- we understand what their model is. They're looking for substantial volume, dependable, and we can offer that.

So, there is that good relationship and it's the reason why we maintain business with all four of them. Spray foam is also a significant piece of the puzzle. Again on the list of terms, there are products that we would use beyond fiberglass. Spray foam is not insignificant and probably will continue to be, if not get more significant as time goes on. Long answer to a short question, but diversification of our model is a big plus for us, and the scale and the long-term relationships with all the suppliers is what we depend on to work our way through the cycle.

Thanks. And just finally, are you able to frame for us the benefits that you have received from your internal productivity initiatives and how that's contributed to your EBITDA incremental margin performance?

Yes, we're -- no specific guidance, except that as we said on the call, I think the labor efficiency that would it be called out, so it's primarily on the TruTeam side of the business. Does we look at a 33% go through, a big piece of that certainly is from the labor side and the benefits and the changes we made that Robert talked about on his call, so.

Great. Thank you.

Yes.

And our next question comes by the Trey Grooms with Stephens, Inc. Please proceed with your question.

Hey, good morning.

Good morning, Trey.

Quick question really on the commercial side, I guess, and the progress you're making there. I think you said -- 10% growth in the quarter on commercial. I'm trying to get a feel for how much of that is share gain versus what you think the market's doing, and any kind of color you can give us around your expectations for that going forward. And then, I guess bigger picture, how the commercial business really differs from the residential business from a product perspective. You know, sales approach, and just the differences there in how you go to market and how you're going to win there.

Jerry here, Trey. The commercial space is we talk about where that's spend time is an important adjacency for our Company. Right now, I would say from our overall commercial market perspective, it would be a wild guess on my part. I think it -- mid-single digits is it's probably improving.

Our sales in the commercial space are up, low double digits. So, we certainly are gaining share, without question, in that space. And we'll continue to do that. As I said, it's a very, very important close adjacency for us. In terms of the space itself and how does it differ from residential, it's very significant on a number of different metrics.

One would be in fact we're (inaudible). So, in the residential space, again, insulation, fiberglass, spray foam and a few other types of insulation. On the commercial side, a much longer list of products, other than insulation. So, into the fire-stop products, expansion joints, air vapor barrier. There's a list of products that probably get close to a dozen, maybe slightly less than that, that really are the bundle that we are going to develop and be able to provide to the decision makers. And those are general contractors. Those could be the drywall contractors. And so it's a broader list of products that requires a lot of knowledge beyond just insulation.

And the go to market, as I said, really amounts to connecting with the right decision makers -- that are these general contractors and in some case, drywall subcontractors. And then the other thing I would suggest to you, it's very fragmented. But the business itself obvious is very regional. There are players that geographically spread around the country that are in this business and do this work as the commercial business goes up.

But we believe there's not really anybody who can do as comprehensive a job over time as we can. So, for us it's a matter of doing this and increasing our share here. But do it in a measured way. Because it's to be a complicated business and it needs to be done well. The estimating needs to be done well. The execution of the job itself needs to be done well. Until there's a lot to do right and it's a bit more to complicated business that we believe we're highly able to handle. And, over time you're going to see us increase our share there. And that's going to present itself and it's going to help us with the diversification of our business.

Great. Thanks for that. And then, as you look to expand there, are you thinking more along the lines of greenfield expansions or, given the fragmented nature of the industry, is that an area where you would look to possibly do something on the M&A front?

It would be both. I can pretty much tell you that it will be both as time goes on. As we find, if we can find the right acquisition target in the right geography, we would be highly receptive to growing that commercial business by acquisition.

Okay. And then and just kind of a segue, and my last question, is as you think about capital allocation and with the buyback in place, and how do you balance or how are you positioning now with the capital allocation between buyback and potential M&A? And as you look at M&A, is there anything you could give us, any color you could give us around kind of your focus there? And is it still kind of a blend of possible res and commercial or just any update on that focus? Thanks a lot.

Sure. Certainly "balance" is the key word there. As we're always looking at available cash. We're looking at what the pipeline from an acquisition might look like. We can't predict timing as to what will happen. But both John and Robert did allude to ramping up our dedicated resources relative to looking for and executing an acquisition.

So, I think that's indicative of the fact that we're very serious about the M&A piece of equation. It's impossible to predict what and when. But it -- the space that we'll be looking at will be both residential and commercial. Commercial I spoke about already in terms of how we would approach that. And on the residential side, it's really very targeted. We're looking for additional partners for our business on the residential side that are in the right geographies where we think there's high growth potential, given what housing starts we could do there.

So, we look for the right geographic fit. We look for talent. We look for people who are running those business that could join our team and have a higher impact for us. So, if there is going to be some M&A, it's going to take some time. I don't know exactly when, it's hard to predict when these things will get to the finish line.

But we're very serious about it, both on residential and commercial end. And, we always have to make an estimate as to what the capital needs are going to be for that. It's lumpy and it's hard to protect. And balance with then (inaudible) -- the step prices, that is also a factor. We think our stock price has plenty of room to run. But as it ramps up, that's also an additional factor that we put into the mix relative to making the overall decision.

All right. Thanks for taking my questions. That's it for me.

Ladies and gentlemen. (Operator Instructions) And our next question comes from the line of Scott Rednor with Zelman & Associates. Please proceed with your question.

Hey, good morning. I'm curious, July to date, or if you want to talk about the end of the quarter, have you guys seen acceleration from the 2Q growth rate of 7%?

Scott, so far this quarter, the month of July, I would say we're a at consistent performance with kind of where it's been. Housing starts we believe in Q3 and Q4, they're seasonal is -- Q3 and Q4 are better quarters. That's when completions do generally ramp up for all builders.

We would expect that to be the case again this year. As it relates to the overall Q3, we don't provide guidance as you know going forward on a quarter, so it's -- so I can't give you a specific number there. But all I would tell you is that the previous seasonal patterns that we've seen in prior years probably will continue to be in effect.

Oh, well, Jerry, just to clarify that, are you above or below 2Q? Because on one hand you guys said that the mix should improve more to single families, which would be positive. But if you looked at lagged housing starts, it would imply a pretty big deceleration your 3Q. So, I was hoping you guys could clarify that?

Yes, this is John. I think what we're seeing is we're seeing a nice, I'll say steady growth from what we have through the second quarter continuing into the third. So, we haven't seen an impact -- a negative impact in terms of 2Q starts. Recognize last year, 2Q starts which were competent against I think you're looking at was pretty strong coming off a pretty bad winter. But, I think in third quarter, we're seeing nice, steady growth. You know, parts of the country, parts like Florida is slowing down a little bit, the Northeast.

But overall I think that we're seeing steady growth throughout the first month of the year and we expect that to continue through -- through the end of the quarter.

Okay --

The acceleration cap off from Q1 to Q2 was somewhat predictable. And, we talked in Q1 about weather assisted relatively much stronger than usual first quarter. So, what we saw in the second quarter, of course we couldn't predict that in terms of what the magnitude of it was. But it was pretty predictable that we would have a bit of deceleration. But hopefully we gave enough, as much guidance as we could give you as to what's going to happen going forward.

No, thank you for clarifying that. The other question more longer term in the housing market, you mentioned a couple of times, it was in the release that starts now may grow a bit slower than previously expected rate. And so, if you guys can talk a little bit more about that because while the multi-family side might be slowing down versus three or six months ago -- the single family side, it's accelerating, and just given that that's more impactful for your business, I would think that you guys would be more optimistic about the outlook three to six months ago than currently where it kind of speaks to maybe more tempered expectations about the overall market.

Internally here, we're rather bullish on housing. I believe that as I commented the fundamentals relative to tight supplier right now for a number of reasons and I believe household formations continue to build. I mean, I might that of local relative to the magnitude of what housing's going to do.

But, there are certainly others out there in the marketplace that forecast housing starts that had begin to gently flatten that curve a bit. So, we certainly are aware of that. We tune in, as you can imagine, to what other experts are thinking are going to happen with housing. But our point of view is that it's going to continue to be a pretty good story here for a number of years to run. And, we're planning resources and everything else internally with that expectation.

And as it relates to the mix of single to multi-, I think you're right, there is -- there certainly is a move right now that is leaning a little heavier towards single versus multi compared to what we've seen over the last couple of years, and I think that may well continue.

And then, just lastly, recognizing where your incremental margin is year-to-date, is there any reason that you guys won't be materially above the 20% for just 2016?

Yes, so just, Scott, this is John. I think right now, again, we don't give specific guidance. I think that the comments we made on the call that the first half of the year, the comps were easier for TopBuild, certainly first quarter being a very strong quarter because of seasonality, the weather, etc. It's the second quarter, the comps for us a year ago was a much easier one -- so, third and fourth quarter I think are best to comment that we can make as we expect to have more normalized comps as we go forward.

Again, we don't give specific guidance about where we're going to end up in a calendar year in terms of our EBITDA dropdown and pull-through. But the third and fourth quarter again, we'd expect a more normalized look, so.

And the only thing I would add to that is, as Robert's comments indicated, we are working very hard on our business as it relates to the margin. And we want to build a machine here at TopBuild that enables us to make good margins no matter what housing starts are and throughout the cycle. So. we're doing a lot of ground level work that Robert talked about, to get us as lean as possible and to get us just focused on the customer as possible, and to enable us to perform as well as we can throughout the cycle.

Okay. Thank you very much.

Ladies and gentlemen. (Operator Instructions). And our next question comes by the line of Ken Zener with KeyBanc. Please proceed with your question.

Good morning, all.

Morning.

The -- your comments -- obviously I think operationally you're doing very well in terms of the industry supply and installation. I think that's a very constructive framework for you guys in terms of being the largest buyer. Being able to pass your price, and having the labor.

I wonder, given your comments around the growth of housing, new starts, one of the things that's really surprised me this year is the composition of the growth. For example, Tennessee has added as many starts as California, pretty much LTM. How do you guys think -- not to get a regional report card from you all, and I know you talked about Florida and the Northeast, do you see that really exceptional growth that we've seen from these kind of the Midwest, mid-Atlantic, parts of the south -- I think you guys are very well indexed to versus the public builders that aren't.

I meant, I think that's part of the reason you guys are growing so well. Is there any shift that you guys see there in terms not only the single, multi but in terms of where you're seeing that growth from? Kind of when you think about slowing growth? Because I think you guys have a lot better data on new construction activity than many of the national forecasters.

We try to hedge our bets really well, as you know, and to be -- to have our model where it is where we're indexed really pretty evenly throughout around the country, we think that's a big plus. But to give you my point of view there, I would suggest that, that what's happening right now, where starts in the West and in the south appear to be stronger than the Northeast and the Midwest, that makes sense to me that that may continue.

But things can turn on a dime, and you know, we don't -- we're not really organizing ourselves necessarily with where we put ranchers or what we do anticipating more than a couple of quarters of things moving one direction or the other. We really want to continue to have ourselves pretty evenly indexed around the country so that we can do well no matter what the trend line is in any given area. But I would suggest that west and south probably are the places that will continue to do well.

Okay. And then related to that, realizing that you're installing in homes and the home prices are different, and you're not a huge piece of the cost relative to lumber. Do the EBIT margins that you get really -- how would you say -- is that really related to your scale within a market?

And then if I were to think about, you know, 2% in a house in Ohio is different than 2% in a house in California, how much of -- you know, how could we think about that 2% swinging around in terms of the cost as well as on an EBIT basis? Are you higher really tied to your share within a market? Thank you very much.

Ken, this is John. So to make sure I understand the question, so the EBIT share within a market based on the 2%, which is the content of the installation -- the installation content of the home?

Yeah, I mean, are your shares higher? I mean is your EBIT really tied to your level -- so, if you have 50% in a market or more or less, I mean, is that where really determines your EBIT margin?

Yes, I mean --

And then how could we -- EBIT dollars per house? Is it really just a function of 2% of whatever the price is? Thank you.

Really hard to answer that question because it's based on, really, the local economics in each and every market we sell into. And that could be influenced obviously by supply and demand economics. It can be influenced by competitive issues. It can be influenced by the type of builder and/or commercial work that's in that market.

So, really hard to answer that generally. You know, obviously the 2% factor you're talking about is not a significant piece of the homebuilders. Or not as significant as the other areas like you mentioned, like lumber, etc. But it does get attention from our customers even though it is relatively low. But again, difficult to answer just because of the fact that it is a local issue that drives the benefits on those factors I mentioned.

Understood. Thank you.

Okay.

And there are no questions at this time.

Thank you all for listening to today's call. Your continued support is important to us and we appreciate your trust in our team. We look forward to our third quarter call in November. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.