Installed Building Products Inc (IBP) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Installed Building Products Fiscal 2017 Second Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jason Niswonger. Thank you. You may begin.

Good morning, and welcome to Installed Building Products' Second Quarter 2017 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the second quarter, which can be found in the Investor Relations section on our website.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include our financial model and seasonality, our estimated interest expense, the demand for our services, expansion of our national footprint, our ability to capitalize on the new home construction recovery, our expectations for the residential end markets, our ability to strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, the impact of Alpha on our revenue and profitability, expansion of our commercial business, our growth rate and ability to improve sales and profitability and expectations for demand for our services for the remainder of 2017.

Forward-looking statements may generally be identified by the use of words such as anticipate, believe, expect, intends, plan and will, or in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially from those expressed in or suggested by the forward-looking statements as a result of various factors, including, without limitation, the factors discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2016, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission.

Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for the company to predict these events or their effect. The company has no obligation and does not intend to update any forward-looking statements after the date hereof, except as required by federal securities laws.

In addition, management uses certain non-GAAP performance measures on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release, which is available on our website.

This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer.

I will now turn the call over to Jeff.

Thanks, Jason. Good morning to everyone joining us on today's call. I'm happy to have the opportunity to talk to all of you about our second quarter results. As usual, I will start today's call with some highlights and then turn the call over to Michael Miller, IBP's CFO, who will discuss our results in more detail before we take your questions. As expected, the 2017 second quarter benefited from normal seasonal installation trends, which helped drive sequential improvements in sales and profitability. Momentum in our business remains a very strong, and I'm encouraged that our sales growth continues to outpace the attractive growth trends in our markets.

In addition, during the second quarter, IBP achieved a 25.3% same-branch incremental adjusted EBITDA margin, which reflects our focus on profitable growth. As we enter the seasonally strong second half of the year, I'm pleased with the direction in which we are headed.

Second quarter total revenues compared to the same period last year increased 33% to $282 million, driven by same branch growth, the contribution of our recent acquisitions and the strengthening housing market. The higher revenues we experienced in the second quarter, combined with higher gross margins and controlled spending, helped improve our second quarter profitability with a 50% increase in adjusted EBITDA and a 48% increase in adjusted net income per diluted share.

During the 2017 second quarter, we saw strong growth across all of our end markets. Single-family branch sales increased 10%, while total single-family sales increased over 19% compared to the increase in total U.S. single-family completions of 8%.

Within the multifamily market, our locations benefited from robust demand, and during the 2017 second quarter, same-branch multifamily sales increased 59%, while total multifamily sales increased 117%. Combined residential same-branch sales increased 14%, while total residential sales increased 28% compared to the increase in total U.S. completions of approximately 12%.

We expect residential end markets to improve towards stabilization of approximately 1.5 million total housing starts over the next several years, and that our business will continue to benefit from the recovering housing industry.

According to the U.S. Census Bureau's historical data and the June 2017 Blue Chip consensus forecast for housing starts, total U.S. housing starts are forecasted to increase at a 7% compounded annual growth rate from 2016 to 2018.

During the 2017 second quarter, total U.S. housing permits increased 6%. This was primarily due to an almost 8% increase in single-family permits, while multifamily permits increased 3%. We expect residential end markets to benefit from various factors, including improving employment, rising household formations and historically low mortgage interest rates.

Acquisitions continue to enhance our financial performance. In second quarter, we completed 3 acquisitions, which include Minnesota-based Horizon Electric Company, with 2016 revenues of $1.2 million; Florida-based Legacy Glass & Supply LLC, with 2016 revenues of $5.4 million; and South Carolina-based Columbia Shelving and Mirror Inc. and Charleston Shelving & Mirror Inc., with 2016 revenues of $11 million.

The acquisition of Alpha Insulation and Waterproofing, which was completed early in the first quarter, continued to have a favorable impact on our financial results this quarter as well. To support new commercial business opportunities in Colorado, Oklahoma and Arkansas, we have added new commercial facilities in Tulsa, Oklahoma and Denver. Alpha has already been selected to provide installation services on several large-scale commercial projects in these markets. This organic expansion demonstrates Alpha's ability to continue growing geographically and support its customers across the country as part of IBP's nationwide platform.

So far in the third quarter, we have completed one additional acquisition of Energy Savers, LLC, an insulation installer in Louisville, Kentucky, with annual revenues of $2 million.

Year-to-date, we have completed 7 acquisitions, representing a total of approximately $138 million of acquired revenues. We continue to deliver on our acquisition strategy and remain confident in our ability to identify candidates, successfully integrate newly acquired companies and immediately achieve operating synergies through our scale and national buying power.

Our pipeline of potential residential and commercial deals over the next 12 months is robust, and we anticipate the remainder of 2017 will continue to be another strong year of acquisition growth. I'm very pleased with our strong start to the third quarter and our successful half, and expect 2017 will be another record year as we are positioned to achieve over $1 billion in revenues.

IBP has a fantastic team of experienced, dedicated and motivated employees, and I'd like to thank them for all their hard work.

Finally, on behalf of everyone at IBP, I'd like to also thank our suppliers as well as our homebuilding, multifamily and commercial customers. We appreciate your support, and we are committed to providing each of our customers with superior, committed and excellent installation services.

Thank you. Michael, I would now like to turn the call over to you to provide more details on our second quarter results.

Thank you, Jeff, and good morning, everyone. We continue to make excellent progress, growing revenue and improving profitability. For the second quarter, our revenue increased 33.2% to $282.2 million. Our same-branch sales improved 11.6% due to an increase in volume across all of our end markets and favorable improvements in price and mix. Our same-branch single-family sales growth was 9.8%, and our total new residential construction same-branch sales increased 14.2%. Additionally, we continue to experience strong performance in the commercial and repair and remodel markets.

As noted in previous quarters, we believe it is helpful to look at certain metrics over more than just a single quarter. Over the last 12 months, our total same branch sales growth was 10.8%, comprised of 11.1% from our new residential end market and 9.4% from commercial and repair and remodel, all on a same-branch basis.

Second quarter 2017 gross margin increased 70 basis points to 30.1% compared to 29.4% in the prior year quarter as we continue to benefit from a seasonal mix of installation services and higher volume.

For the 2017 second quarter, selling and administrative expenses as a percent of net revenue declined to 19.6% as compared to 20.2% for the 2016 period. As a percentage of revenues, administrative expenses were 14.8% in the second quarter compared to 14.6% for the same period last year, which included increased public company compliance costs, primarily associated with the transition to a large accelerated filer, and approximately $2.1 million in noncash stock compensation expense as we increased the number of field employees who will benefit from the increase in shareholder value they create with their hard work and dedication. We expect general and administrative expenses as a percent of net revenue to continue to improve over time as we further scale our operations and benefit from higher sales.

As we have stated in previous earnings calls, it is important to note that as our acquisition strategy continues and as the volume of total acquired business operations become larger, we will incur additional noncash amortization expense. In the second quarter, we recorded $6.6 million of amortization expenses. This noncash adjustment impacts net income, which is why we believe adjusted EBITDA is the most useful measure of profitability.

Based on our acquisitions completed to date, we expect third quarter 2017 amortization expense of approximately $6.7 million and full year amortization expense of approximately $26.4 million. These figures will change with each subsequent acquisition.

For the second quarter of 2017, adjusted EBITDA improved to $39.2 million, representing an increase of 49.6% from $26.2 million in the prior year. As a percent of net revenue, our adjusted EBITDA improved to 13.9% in the second quarter, representing an increase of 150 basis points from 12.4% in the prior year quarter. We are very pleased with the successful steps we have taken to enhance our operating efficiencies and increase our adjusted EBITDA margin, and continue to believe our financial model can return to mid-teens adjusted EBITDA margin as the housing recovery reaches stabilization.

IBP's same-branch incremental adjusted EBITDA margin for the 2017 second quarter was 25.3%. The adjusted EBITDA margin contribution from acquired revenues was 14.8% compared to 10.1% for the same period last year, reflecting the contribution of Alpha's higher-margin commercial revenues.

Long term, and as demonstrated in the 2017 second quarter, we continue to believe our financial model can produce full year same-branch incremental adjusted EBITDA margins of 20% to 25%.

On a GAAP basis, our second quarter net income was $12 million or $0.38 per diluted share compared to net income of $10 million or $0.32 per diluted share in the prior year quarter. Our adjusted net income improved to $18.7 million or $0.59 per diluted share compared to $12.5 million or $0.40 per diluted share in the prior year quarter.

For the second quarter of 2017, our effective tax rate was 33.4% compared to 33.2% in the prior year quarter. For the full year, we continue to expect an effective tax rate of 35% to 37%.

Now moving on to our balance sheet and cash flow. At June 30, 2017, we generated $28.4 million in cash flow from operations, which we continue to use to fund acquisitions and reinvest in our business. Capital expenditures at June 30, 2017, were $14.7 million, while total incurred capital leases were $2.5 million. Capital expenditures and incurred capital leases as a percent of revenue declined 60 basis points to 3.2% in the 2017 first half compared to 2016 despite a 33.3% increase in 2017 first half revenues.

We continue to expect gross capital expenditures and incurred capital leases to trend at approximately 3% to 4% of sales during this part of the housing recovery.

At the end of the 2017 second quarter, we had total cash and short-term investments of $92 million compared to $14.5 million at December 31, 2016. On April 17, 2017, we announced the successful refinancing of our borrowings under the company's existing term loan and delayed draw term loan facilities and the closing of a new $300 million Term Loan B facility and $100 million ABL Revolving Credit facility.

At June 30, 2017, our total debt was approximately $341 million. Taking into account cash and short-term investments at June 30, 2017, our net total debt was $248.5 million at the end of the 2017 second quarter. We have a conservative capital structure and considerable flexibility as we continue to deliver on our growth strategy.

As a result of our new credit agreements, we anticipate interest expense of approximately $4 million in the third quarter and approximately $14.5 million for the full year, including the writeoff of unamortized loan cost related to our previous credit facilities. These figures will change based on subsequent finance fleet purchases and short-term cash flow financing under our ABL facility.

With that, I will now turn the call back to Jeff for closing remarks.

Thanks, Michael. While I think that pretty well sums up the numbers and drivers of what was another fantastic quarter. And as you can see, our growth-oriented business strategy continues to drive strong financial results. With the housing industry continuing to demonstrate improving trends, we are excited about our opportunities for 2017 and beyond.

Operator, let's open up the call for questions.

(Operator Instructions) Our first question comes from the line of Nishu Sood with Deutsche Bank.

I wanted to start out with a kind of a bigger picture question. As the housing recovery has progressed here, one of the biggest topics of discussion has been the return of the entry level. I thought it might be helpful to start with a discussion of how that underlying trend in the evolution of the housing recovery might affect your trends maybe from the type of jobs. We get questions about the higher-end insulation, the spray foam, obviously, and obviously, just the quantity per unit as well. So how will that affect your business in the coming years?

Nishu, it's Michael Miller. So I think we've talked about this on previous calls as well because, certainly, it's top of mind for a lot of people. But the shift to entry level for us is clearly better than from a take-per-unit perspective, if you will, than the multifamily opportunity, which we've done an excellent job of really realizing that opportunity and growing that significantly organically. But we think that as the market continues to trend towards the entry-level customer, that does help us relative to multifamily. Obviously, we have a higher take per unit for sort of high end in custom homes, but we believe there's still -- that hasn't been fully recognized in the market as we trend towards stabilization. There is still a lot of opportunity with the regional and local builder. And I think that's evidenced by some of the things you're seeing relative to land development loans that are going to that regional and local builder. And from a price mix perspective, they are very beneficial for our price mix and our take per unit over time. So we are very encouraged that as we continue towards stabilization and normalization between single-family and multifamily, it's going to continue to benefit our business, both from a trend toward single-family away from multifamily, even though we really like that opportunity and have realized good benefit from that, and as the regional and local builder continues to come back. So we think that it is a positive trend, and we think it's positive for the overall market that the entry-level market becomes stronger from an affordability perspective.

I mean, frankly -- this is Jeff, Nishu. But frankly, I mean, it's really our bread and butter. And there's really no negative, I think, whatsoever as it relates to our business if that trend does in fact continue to grow and multiply the way everybody thinks. And I guess specifically, not every location that we have is of a size that can completely take advantage of and participate, for instance, in the multifamily business. But if we have an insulation installing location, every single one of our insulation installing locations, for instance, could take advantage of this trend. Not every branch that we have is in foam, but in this particular instance, if we have a location and it's an insulation installing location, we can do that work, which is a big positive.

That's a very big positive for us. And keep in mind too, Nishu, when we disclose our price mix, mix is an important part of that as well, not just price. So one of the things that we did particularly well, and we've talked about this on previous quarters, that we did particularly well in the second quarter of this year was grow our other product sales, which were -- we're excited about because we think that helps improve our leverage and our margins in the business, but because those other products are at a lower price, they impact the overall price mix the way that we disclosed it to you guys in the earnings release.

Got it. I guess, the air -- the -- I think that's a very good understanding of the single-family versus multifamily mix. I think though the trend that folks are more focused on is the entry-level segment versus the move up in luxury. Specifically, things like -- obviously, there's typically lower square footages. Is the type of the insulation work a lower value-add typically in the entry level? Also, it's not just insulation that you folks are doing with the garage doors and gutters. So the potential, if any, impact from mix on entry level versus the move up in luxury, I think is just the kind of more recent topic of focus.

I think it goes back to what we were saying earlier. I mean, it's a shift from multifamily to entry, which is very positive mix shift for us. And it's not as if the -- in our opinion, it's not as if the kind of luxury high-end home market is not growing. We feel it's growing well. But the entry level is just growing at a faster rate, which, again, relative to multifamily and relative to not having the permits, is very positive for us.

I mean, honestly , we, as a company, have been waiting for it to come back (inaudible) deposits in that market, the entry level.

And the cost of service is very efficient, right? So you tend to be very efficient in those areas.

Got it. No, that's very helpful. On multifamily, the 50-something percent sales growth year-over-year, fantastic number, obviously, relative to the market trends. And I believe if I understand the way you calculate that correctly, that excludes so far the impact of what Alpha might be doing in some of the mid- to high rise projects. So what's your -- what drove that? I mean, obviously, significant outperformance in existing, pretty stable business line for you. And also, as the Alpha mix gets factored into the organic, how is that going to affect your trends? Adding in the mid- to high rise? Because obviously, where multifamily has slowed a little bit more has been in those city center projects. So what's your thoughts on that?

So a couple of things there, Nishu. I mean, on the multifamily same branch or organic side in the quarter, that revenue increased a little over 59%, and that does exclude Alpha, as you said. Including the benefits of Alpha and our other acquisitions, in the quarter multifamily sales -- total multifamily sales grew over 100%. So what's really driving that factor is a couple of things. And I think I've mentioned this on a couple of the most recent calls is that we made a very concerted -- very strong focus on going after multifamily in our existing markets and recognizing that opportunity that was there. And if you think about our footprint, we have very -- we have good footprint on the East Coast, but we also have a very good footprint in the center of the country. And I believe that -- or clearly what we're seeing is that those markets, those individual markets on a multifamily side are different than the East Coast market. And as Jeff was saying earlier, not all of our branches do multifamily work, but as we've gotten branches into multifamily work, this is existing branches that are calculated in that organic same-branch number. It's really been able to -- we've really been able to recognize that opportunity. And what we are really excited about is that we're taking advantage of this opportunity that exists right now. We're continuing to grow that opportunity. Yes, I think we would all admit that multifamily is probably reaching stabilization way ahead of the single-family market. That doesn't mean though that we can't continue to grow organically in that business in markets where we may not have done that before, and also it's very easy to redeploy multifamily crews to single-family work as that work continues to grow. So it's really engaging and using our labor force as effectively as possible. So we feel very good about our ability to pivot and also to really realize the potential in our markets on the multifamily side.

I mean -- Nishu, it's Jeff again. I mean, the facts are we were underindexed to that market segment not too long ago, and we still -- even as a percentage of the overall starts, it's not -- we don't match up with the way the housing starts and completions break down. So it comes really from not having that much presence. And back to your earlier question, your previous question, part of it was as the first-time homebuyer, new-entry homebuyer is not there for us, they were obviously ending up in apartments, and we knew we needed to overperform in that segment. So that's what we set out to do, and that's what we were able to do. And even still, on a percentage basis, it's not representative of what the opportunity is on a market-wide basis at all in our business.

Yes, as a percentage of our residential business, it's about 15%, right, which as you know, the mix between multifamily and single-family right now is higher on a national basis.

Got it.

And I would tell you that we have, in particular, some branches and some individuals and teams that have gone to work on this hard. And I guess I'll take a moment just to acknowledge that on the phone and tell them they're doing a great job.

Got it. Got it. Great. And the Alpha part of it, like how will that affect, do you think, this market share penetration story? Does Alpha also have the opportunity to increase market penetration? Or is that more on the legacy side of the business?

There is opportunity there from a organic growth perspective. But in terms of the size and scale of our sort of footprint without Alpha and the ability to get new branches into the multifamily business, that is a greater organic opportunity. But we see Alpha, yes, on the multifamily, high rise multifamily, or larger multifamily projects, but it really is their bread and butter that we're seeing there that we're excited about. And while they are not in our organic numbers yet, on a pro forma basis, they are growing their business -- or that business is growing organically at a rate equal to or even slightly above our organic growth. So we feel very good about how Alpha is performing and the ability for Alpha to continue to improve our commercial business and the multifamily side of the business as well.

I mean, Alpha is and will be an organic growth story for the business. And it's not to say that we won't, because we will, make acquisitions in that commercial market also. And many times maybe to lead with the smaller acquisitions just to gain a toehold in the market. But ultimately, really, I think that the real opportunity here is an organic growth story for Alpha.

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

Kind of speaking of Alpha, once Alpha enters the comp next year, anniversary-ing the deal, is that going to have an impact, one way or the other, on the organic contribution margin?

Keith, this is Michael. Yes, it will because of their higher margin. So we still believe that the incremental EBITDA margin on a full year basis, we're still talking about that 20% to 25%, but clearly, when you put in a higher-margin business in that organic mix, it tends to trend towards a higher level.

Okay. So the contribution margin on dollar is higher there, is that correct?

Correct.

Okay. And I guess, also, can you give us an update on multifamily? You've talked about a lot on the call here. What is that as a percentage of the mix, percentage of the sales in the second quarter?

So in the second quarter, it was 12% of our overall sales, and single-family was 65%.

As you look at the order trends coming in multifamily, it appears as though this is going to slow down pretty dramatically in 2018 just in terms of what the starts number have done. Is there still room for share gain there? Or will you see that business slow down for you as well?

Yes, we believe there's still considerable opportunity for share gains because, as Jeff was saying, not all of our branches currently do multifamily. So -- and it's not as if multifamily is going to completely stop, it just may not be growing at the same rate as single-family. So we're excited to continue to focus on that business. We like that business. But we're also very optimistic about the continued recovery in the single-family side of the business and our ability to pivot our team to work successfully on that single-family growth.

Okay. And final question, the price mix number was still positive, little bit less than what we've seen in previous quarter. If you can provide any comment on that in the period, particularly around the second half of the year around fiberglass insulation pricing and what you're expecting there.

So I'll do the first part of that question then Jeff can do the second part. But on the first part, it goes back to what we're saying a little bit earlier. That price mix, I think a lot of people have a tendency to think of it as just being price. But it really -- I mean, the mix component of it can really influence significantly that number. And as I was saying, we did an excellent job of growing our other product revenue in the quarter. And as a consequence, those smaller dollar projects have a tendency to -- or do bring down the average on the price mix side. So as it relates to our core insulation, particularly fiberglass insulation business, we've been very pleased with the progress we've made, both with the regional and local builder and also with the national builder on our ability to improve price mix there.

Keith, this is Jeff. So you hinted at it so, obviously, you're aware there's 8%, both bat and blow price increase out there from all 4 manufacturers to take place in early September. That's really a little more in line with what we would've seen historically, and kind of other times there's been less kind of cohesion around what the thoughts were as it related to price increases in general over the next -- last really -- almost couple of years, I suppose. But I would say that I think the environment for a price increase right now is as positive as it's been for a very long time, really.

And the timing of it is the way that it should be in September, which is when we're going into our seasonally strongest period. So we think it was -- it makes a lot of sense.

Our next question comes from Bob Wetenhall with RBC Capital Markets.

Most of my questions have been answered. What's your thoughts on the next 18 months from an M&A standpoint? I think the commercial side of the business is now 19% or 20% of sales. Seeing some hindsight like a great acquisition. Your commentary this morning is very constructive, especially on the single-family demand trends and the pricing environment. So it's kind of like you're in the sweet spot right now. What does IBP look like at the end of 2018? And what do you want (inaudible) the business?

So that sounds like -- a lot like guidance.

We're going to buy some companies on a go-forward basis and we're going to integrate them in. It's going to be good. Sorry, Bob (inaudible) I think it's more of the same. I mean, we're going to run the same play we've been running. We're a larger company than we were, obviously. So we'll do our best to make sure that what we're doing is as impactful to the business as it's been in the past, and do the best on kind of making smart decisions and ringing the cash register and watching expenses and driving the business forward.

Got it. So you're happy with the current composition of the business. I mean, if there is stuff out there, will you -- is there any intent given the fact that you have these great tailwinds right now, what's your appetite for M&A? Is it higher than it was a year ago? Do you expect to kind of press on the accelerator a little bit? Or you find the business right size for the current demand profile of the housing market?

Yes. I would say that we're -- I mean we've always been, as you know, Bob, excited about the acquisition opportunities that we have. And I would say that we're pursuing that as aggressively or more aggressively than we ever have. And clearly, our balance sheet is in a position right now with the amount of cash that we have and the availability that we have that there's just -- there's a lot of opportunity out there, we're making sure we're doing the right deals that fit with our strategy. But definitely, we'd rather own businesses more today than 18 months from now as we continue to benefit, and we believe they will continue to benefit from the market recovery.

So far 6 months, 7 deals?

7 deals.

We've done 7 deals in the first 6 months of this year. That's on pace with probably one of the most brisk pace we've had really in our history. Certainly, in our history as a public company, it's a quicker pace than we've been on. And we see, honestly, nothing in our way to not continue to really make good accretive acquisitions, the team is functioning perfectly well, and it's what we do.

Let me ask you, would you prefer to focus more on commercial opportunities or core residential opportunities?

Both.

Yes.

Your next question comes from Susan Maklari with Crédit Suisse.

Can we talk a little bit about the gross margin? How is -- as Alpha continues to come through this year and you perhaps get some more project flow from there, how are you thinking about that trending? Are we still sort -- should we still be expecting something in the low-30% range, generally? Just any color you can give us there.

We would expect, Susan, not just because of Alpha, but also because of our continued higher volumes that we would continue to get leverage within other cost of goods sold and also our direct margin or simple margin, that we've talked about before, continues to improve. So it's not just Alpha, but it's the higher volumes in the rest of the business that we will believe -- that we believe will continue to allow us to progress forward on the gross margin front.

Okay. All right. And then in -- within your mix of customers, you definitely have a great read on the private builder within there. Can you just give us some sense of how is that trending, especially maybe as we get more of a mix towards entry level versus some of the maybe higher-end type construction that we have seen coming through earlier. Just any thoughts on what's going on on the ground there.

It's interesting. The one thing that I think most people would say, particularly as a single-family market is improving, is that the regional and local builder, which is a key core competence of our business, really they've been the last to recover, right? We're still seeing -- or we're continuing to see good mix there, but we've been very pleased with relative to our expectations, the strength that we're seeing actually with the larger builder and the national builder and the project mix there. We spent -- earlier in the call, talking a lot about entry level, but even as they shift towards entry level, we're seeing very positive characteristics in pricing mix from our national builder business. So going back to what Bob said, I mean, we are in a very good spot right now. The team is performing exceedingly well, and we feel that -- and we believe we've demonstrated this quarter-over-quarter, is that we have the ability to shift the business towards the best opportunity that's there. And as a consequence, we continue to prove -- improve gross margin and adjusted EBITDA margins.

Your next question comes from the line of Matt McCall with Seaport Global Securities.

So following up on the price mix question. I think I kind of get some of the items you talked, specifically Michael, about the other products and the strengths there. But as we look out in the back half, is there anything that you would call out either from, I mean, market mix perspective or from a product mix perspective that we should keep in mind, especially as it pertains to kind of what looked like easier comps a year ago from a price mix perspective.

Yes, I mean, there are a lot of things that influence the price mix as we were talking about earlier in terms of the other products that, on average, are considerably lower priced than the insulation product. I do think one of the trends certainly that we're seeing as you get more volume growth with the national builders, that tends to be more fiberglass jobs than spray foam jobs. So they have kind of a little lower price mix, but the margin is still good and the volume is beneficial. So we expect that all of those things absolutely influence price mix. And then as we talked about earlier, relative to the market price increase relative to fiberglass, that will, obviously, positively influence price mix as well, we believe, as the -- assuming the insulation manufacturers do realize price improvement.

Okay. And I guess a similar question on the volume side, just looking at volume and looking at the trend from last year, it appears the back half comps get much easier. And I understand there's some intricacies to how you quantify volume that as we take into account more multifamily activity, some of these smaller jobs, would the easier comp be an indication that volume should just accelerate? Or is there something in the mix that would cause that number to not accelerate despite the better volume -- the easier volume comps?

There is -- there's really -- as we look at the back half of the year, and as it relates to certainly the first half of the year and even prior years, we believe that the market continuing to recover towards single-family and towards the regional and local builder. I mean, obviously, that recovery helps volumes, and it also benefits price mix. With the slight offset, again, that I've -- I'm sorry that I'm saying it several times here, the slight offset that you have given our ability to continue to increase the other products because we believe that from an organic perspective, that's -- and from a margin perspective, that's very helpful for us to continue that cross-selling of those other products even though they are at a per unit basis or a per job basis at a lower dollar.

Okay. Got it. And then final question, Michael. The Alpha commentaries, you said you added some new facilities, and maybe I just didn't remember it, but what -- the way I was thinking about the growth in Alpha was basically to leverage the existing IBP branches and sell more commercial there, is adding of these specific -- these commercial-specific branches a bigger part of the growth strategy? And if so, how many do you plan to add?

Bob, this is Jeff. Alpha really is -- I mean, they operate in a commercial arena that, yes, a few of our branches kind of do the very similar kind of work that they do. But for the most part, it is -- although it's a similar type of sale, it's to an entirely different customer on really an entirely different job. So if we confused you or others earlier about they're actually kind of running out of one of our locations, that's not usually going to be the case. This would be -- and we may, in the beginning, help them get started up ticker market, but these would be -- for the large part, if not separate facilities, at least separate operations, in each of these markets in an effort to really leverage customer relationships that Alpha already has in other regions and in other markets that these customers do work in that they are not currently doing work in. So that's -- in this particular case, they were able to follow relationships into those 3 markets. And it's very important on the way in which Alpha really grows is to identify the right people to really kick off and start and chase both sales and the operation side of those locations. And so it will be and -- it will be and is an effort really right now inside of Alpha to train people properly on the way in which Alpha does work and find that salesperson and that ops person for the each of these markets, train them and place them in those market and take advantage of those relationships. So that's the way really Alpha is going to grow.

And it doesn't happen overnight. So a lot of these opportunities are opportunities that were being worked on even before they became part of the IBP team. I mean, we are looking at and starting the process of kind of "having them collocated in some of our existing facilities". But it's not -- their business is not a business that you just put a shingle out and start work that next day. It really is time where you need to make sure you have the right people doing the right things and you're working with the right customers in the right projects. So it really is going to continue to be that strategy of leveraging our existing footprint, but just realizing that over time, as we have the right people on the team to get that done.

And then in some cases, they will cohabitate, but it's just for ease of start-up, really.

Yes.

Our next question comes from Trey Grooms with Stephens.

Quick follow-up question, kind of, I guess, bigger picture on the commercial side. I mean, I appreciate all the color on kind of Alpha-specific opportunity that you guys see out there. But just more on kind of the end market in general, there is definitely varying opinions out there of kind of where we are in the cycle there on the commercial side. Just wondering if we could get your opinion based on kind of what you see out there in backlog, what your customers are talking about. Outside of market share gain opportunities and things like that, just the, kind of, your take on the overall market and where you see -- which inning are we in, in your opinion there to get to something more like stabilization?

Yes, that's a little bit -- just given the way that -- those markets are measured, it's a little bit more difficult than to, like, come up with sort of an inning analogy as you can with the residential construction side of the business. But what I would say is that we're seeing above-company organic growth at the Alpha business. And we feel -- and that's without them doing this organic geographical expansion. So we feel very confident about their team, what they've built and what they're building and their ability and our ability with them to really execute on the opportunity that's there, particularly when you think of how small they are relative to the overall market opportunity and how few markets they are in. So again, I don't -- I can't call if it's the sixth inning or the seventh inning as it relates to the commercial side of the business. But based on the bidding that we're doing, the team that we have in place and the geography that we have still to cover in that business, we think there is tremendous organic growth opportunity in that business.

All right. That sounds good. Encouraging. And then last one from me. As your comment earlier, of course, with the 8% increase that's out there, you mentioned that the ability for some increases there is more favorable than you've seen in a while. Just wanted to get some color behind what's behind that, what your thought process is there? I mean, are things just tightening to the point that it's becoming a lot easier, everybody kind of getting on the same page. Just your -- what's behind the confidence there?

In general, I would say -- both around the manufacturers, manufacturing capacity, just the general environment in terms of kind of how contractors and other customers are feeling probably about their ability to get price increases, builders, for the most part, are having a good go at it. Labor is tight, which also has nothing to do with the material price increase, but has everything to do, too, with our ability potentially to get a price increase as it relates to -- at some point, we are all busy. So we got to kind of be paired -- paid what we think is a fair price for the work that we do. Obviously, if that coincides with where the manufacturers are coming out with the price increase, also it's easier for us to batch all that together and have a lot of resolve I think around price increase.

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

So Jeff, your comments around pricing, I as well heard you've being very kind of muscular around that. So if the manufacturing supply is tight, can you kind of walk us through on the labor side? I mean, (inaudible) talked about perhaps some delays in their higher-end cabinets, basically. So there wasn't trade available. Is that tightening up at all? I mean, obviously, we're seeing some slower growth in multifamily, I don't know if that necessarily translates over to labor in the single-family side, but are we seeing any constraints on the labor? You talked about, obviously, your value not just being the material you're conveying into the home, but the labor. So is that -- is everything kind of shifting in terms of labor tightness in a way that's also enabling you to get better pricing, because everyone is obviously focused on these incremental margins, right? And there's a lot of pieces in your business that are obfuscating that, but it seems like the core part of your business is -- getting a lot more positive momentum based on your comments around pricing.

I would -- I mean, labor has been tight really since the beginning of the recovery. So I don't know that it's -- we're were facing any different challenges, it's what we do every day. It's hire and hire, hire, hire. And we'll continue to do that. I just -- it's not -- if there were guys sitting around, you could say that, that's a negative as it relates to a price increase. What I would say is that it's probably no worse than it's been, and we just have to continue to do the job that we do, hiring every day. It does give you confidence, I guess. And when you're standing with a customer though and a builder, if it's work that you don't feel like you're being paid a fair price for, there's enough work out there and you're busy enough that it enables you to maybe do different work. So...

And, yes, I think we've demonstrated consistently as the market has recovered that we've continued to improve gross margin and adjusted EBITDA margins, and we've continued to size to our opportunity. And our team in the field does an incredible job of making sure they have well-trained and sufficient labor to meet what the opportunity is in those markets.

Right. And then if -- so at 8%, that's just from a COGS perspective, if that 8%, if half of that goes through, can you walk us through perhaps what a 4% COG increase does in terms of contracts you have out? Does that translate to a, let's say, a quarter of less margin accretion? Or how do you incorporate that type of step function into the business that you're already have in place? Or do you have contract functions that account for that?

So historically, we've -- a rising price environment has always been beneficial to the business over time. And as you know, and where -- what we're talking about is just fiberglass pricing here, right? And that's only a portion of what we do. And as you know, most of our fiberglass jobs are priced -- are not priced that far forward. So -- and we have complete knowledge and the market has very advanced notice about any changes in material costs. So again -- and we're talking -- when we talk about the fiberglass price increases, we're talking about the market. We're not necessarily talking about us, we're talking about the market. And we think it's important that, again, what we believe and what we're seeing is that the general demand environment is very positive and constructive for single-family construction, and those demand drivers are very positive for all participants in the industry, both the manufacturers and the installers like ourselves.

We've dealt with this, obviously, for decades. Is it completely smooth and is it completely kind of linear? No. It's a little sawtooth in terms of ups or downs as it relates to this and when you take it and when it's put in a market and how you handle that, but the times on the saw, if you know what I mean, between the steps are small, and especially when taken in the context of an entire quarter. If you looked at it and you said, what's going to happen today? It's a little more dramatic than what you say, what's going to happen if it -- if you -- assimilate this in over a 120-day period, or 90.

Our next question comes from Scott Rednor with Zelman & Associates.

I just want to clarify, Mike, your answer to a prior comment and just commentary on 3Q. Are you trending ahead of the 12% same-branch sales that you reported in 2Q thus far in 3Q?

If we implied that, that would have been sounding a little bit like guidance, which, as you know, we're sensitive to not providing. But I would say that we continue to feel very good about the business, both what we're seeing, as we talked earlier, about the Alpha business and its performance and also the existing business. So there aren't any negative trends that we're seeing right now that are causing us to be concerned about our ability to continue to perform.

And then when you think about the -- go ahead.

I was going to say -- but if we implied in our answers anything relative to the third quarter, the fourth quarter, other than our overall kind of positive feeling about kind of where we are and that the cycles continue to improve, we didn't -- that wasn't necessarily our intention. So -- I mean, we continue to feel very, very positive about the back half of the year and going into '18 and even '19 at this point.

And then can you maybe talk to the core incremental margin? Obviously, you bounced back nicely this quarter from last quarter, and there were some concern, obviously, last quarter. Can you maybe just frame how you guys think about that 20% to 25% that you guys have historically guided to, both in terms of this year and going forward?

Yes, as, I think, we talked about in the first quarter call as well, I mean, given that the incremental margins were low in the first quarter, that's going to certainly influence the full year. But incremental margins of 25%-plus on an organic basis in the second quarter, which is typically our second-worst quarter, if you will, in a year, feels very good. And keep in mind that's on the organic business. So it doesn't include any contribution margin from Alpha, right? So we felt very good about that in the second quarter, and we would expect, as is historically the case, that we would see higher volumes in the third and fourth quarter. And as historically been the case is that you see better margins in the third and fourth quarter as well. So we feel good about that 20% to 25%, and we feel good about what the rest of the year is going to look like as well.

And then just lastly on Alpha, can you maybe talk to how fast it's growing pro forma? And then as we see the margins as reported, I know you're reporting all the acquisitions at around 15% year-to-date, but that would be a little bit below what Alpha was running last year. So I was just hoping you could give us kind of a view to support the positive commentary in terms of what are the kind of the pro forma trends running now that you've owned it for plus or minus 6 months.

Yes. So they're -- the answer to that question is going to be maybe not as crisp as you would like it to be. So I apologize for that. But for the first half of this year, their pro forma sales growth has been above our organic sales growth, okay? So we feel very positive about that. And then as it relates to margin, we -- they are coming in -- our expectation of their margin is very similar to where they're coming in. The one caveat that I would say in that is, I mean, obviously, we're a public company, they were a private company. What we do on a monthly basis and a quarterly basis from an accrual perspective is much different than what a private company does. So when you -- when we compare their results to our results on a pro forma basis, it's not directly comparable until we get full year results. I'm sorry, this is not as crisp of an answer as I would like to give you, but what I would say is that from a margin perspective, they're absolutely consistent with what our expectations are, and their organic growth is better than what we expected.

There are no further questions. That does conclude our question-and-answer session. I will now turn it back to CEO, Jeff Edwards, for closing comments.

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

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