Installed Building Products Inc (IBP) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Installed Building Products Fiscal 2017 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jason Niswonger, Senior Vice President, Finance and Investor Relations. Thank you. You may begin.

Good morning, and welcome to Installed Building Products' fourth quarter 2017 earnings conference call. Earlier today, we issued a press release on our financial results for the fourth quarter and posted an investor presentation, 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 statements with respect to our financial and business model, the newly authorized stock repurchase program and its potential benefit, seasonality, our ability to increase selling prices, our ability to manage employee-related costs, the demand for our services and product offerings, expansion of our national footprint, products and end markets, our ability to capitalize on the new home and commercial construction recoveries, our expectations for the residential end market, our ability to strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, our ability to grow Alpha's business, 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 and our earnings in 2018.

Forward-looking statements may generally be identified by the use of words such as anticipate, believe, expect, intend, plan and will, or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may nor 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 statement as a result of various factors, including, without limitation, the factors discussed in the risk factor section of the company's annual report on Form 10-K for the year ended December 31, 2016, and 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 the 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, adjusted gross profit, and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliations for adjusted EBITDA for earlier fiscal years in our investor presentations, which are available on our website.

This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Finance Officer. I will now turn the call over to Jeff.

Thanks, Jason, and good morning to everyone joining us on today's call. I'm happy to have the opportunity to talk to all of you about our record 2017 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.

Our 2017 financial results reflect the continued strength of IBP's growth-oriented business model and the platform we have created to differentiate our company within the installation marketplace and drive success throughout all levels of IBP. While unexpected items impacted profitability during the third and fourth quarters, I am extremely proud of our full year financial results, the sustained growth we have achieved since going public, and the direction in which our business is headed.

As our revenue surprised $1 billion for the first time in our history, I want to start today's call by reflecting on the impressive growth we've achieved over the past 4 years and how our recent accomplishments drive our vision for our future success.

Since going public, IBP has rapidly grown revenues 162%, to a record $1.1 billion, which our adjusted EBITDA has increased 456%, to a record $141.1 million, since December 31, 2013. These accomplishments are as a result of IBP's growth-oriented business model, disciplined acquisition strategy and service-oriented culture.

In addition, we have successfully enhanced our business platform by diversifying our installation services and expanding our geographic footprint to many of the strongest U.S. housing markets. At December 31, 2017, 67% of revenues were derived from installation services, versus 74% of revenues at December 31, 2013.

Additionally, we have increased our access to total residential permits, from 55% at the end of 2013 to nearly 70% at the end of 2017. This enhanced position allows us to provide more installation services while deepening the company's relationships with builders nationwide. These 2 core tenets of IBP's growth strategy -- product line and geographic expansion -- along with customer acquisition are the drivers of our long-term effort to sell more Installed products to our increasing customer base in an expanding geography.

The acquisition of Alpha further diversified IBP's business model, effectively doubling our exposure to the new commercial construction market. We are actively investing in the Alpha platform through organic expansion and back-office improvements to support sustainable organic and acquisition growth. During 2017, we opened new Alpha locations in Denver and Tulsa. More recently, we have added a Tampa location and expect additional organic growth in 2018.

Diversifying our business platform produces a more balanced company in the future that is better positioned to limit the cyclicality of our core residential end market, while increasing the amount of work we perform at construction sites. IBP's success is a direct result of the dedication and commitment of our nearly 7,000 employees, which is an increase of approximately 125% from December 31, 2013.

As I mentioned on our third quarter call, the labor market for the construction industry is tight. We are still able to recruit, hire and train new installers, but we have seen higher employee-related costs. This trend negatively impacted 2017 fourth quarter profitability. We are continuing to work on several key initiatives to improve employee sourcing and increase retention rates of installers, which we believe will help improve productivity and reduce our costs to recruit and train new installers. These initiatives will continue to be an area of significant focus for the management team during 2018.

Reflecting on our commitment and our collective sense to do what is right, last year, IBP began offering a longevity-based restricted stock program and a financial wellness program to all of our employees. I'm extremely pleased that nearly 40% of our eligible employees participated in the financial wellness program, well exceeding our expectations.

As a reminder, the program helps educate participants on key personal financial management topics, including budgeting, debt reduction, saving, and giving back to the community. As a result of this program, IBP incurred approximately $3 million of expense in 2017, representing a dollar-for-dollar match of each participant saving $1,000.

While other members of the executive team joined me in waiving our 2017 bonuses to partially offset the charge, our employees' ability to successfully complete the program before the end of the year was a benefit not only to the employee, but also allowed the company to benefit from a larger tax deduction prior to tax reform taking effect in 2018.

The expense associated with our installers' match primarily impacted gross margins during the fourth quarter. While IBP's financial wellness program will be ongoing, we believe the quarterly expense going forward will be significantly reduced now that the program has been launched and our base group of employees has been covered.

In the spirit of the program's giving back principle, Michael and I will again be waiving our earned bonus compensation in 2018 to further offset the charge. We agree that this is a valuable program that not only helps address employee retention, but represents the right thing to do in order to help educate and inform our dedicated employees about their financial position and security.

In addition to the tight labor market, the fourth quarter also experienced disruption in insulation supply, primarily loose fill fiberglass, which is a result of the catastrophic failure at a manufacturer's facility. Due to the abrupt change in supply, insulation material was sold on an allocated basis throughout the majority of the quarter.

While we have effectively managed through the disruption with minimal impact to our customers, the tighter insulation supply has provided additional support to the current price increases in the insulation market. Historically, insulation installers have relied on material inflation as the real and primary driver of increased customer pricing. This industry practice and the need to stay competitive have, over the past 2 years, limited our ability to cover the inflationary impacts of nonmaterial costs and yet remain competitive in many of our markets.

In light of the current supply disruption and material price increases in the marketplace, we are actively engaged with our customers to increase selling prices for our installation services to offset the rising material costs and other inflationary costs. We anticipate these selling price increases and a rising demand environment will improve profitability as we progress through the year.

Finally, as you saw in our press release this morning, IBP's board of directors approved a $50 million stock repurchase program that will be effective as of March 2, 2018, and will remain in effect until February 28, 2019, unless extended by our board. The purchase program reflects our strong financial position and cash flow, positive outlook, and our commitment to generating shareholder value. With more than $90 million of cash and investments on the balance sheet and the strong cash flow generation of the business, the repurchase of stock is a prudent use of capital and complements our continuing acquisition strategy.

With this overview, let's review some additional drivers of 2017's record results. Solid organic growth, the contribution of our recent acquisitions, and improvements in the rate of single-family housing completions continue to favorably influence revenues. For the 2017 fourth quarter, single-family branch sales increased approximately 10%, while total single-family sales increased over 18%, compared to the increase in total U.S. single-family completions of approximately 5%.

Within the multi-family market, our locations benefited from robust demand, and during the 2017 fourth quarter, same-branch multi-family sales increased 25%, while total multi-family sales increased 54%. Combined new residential same-branch sales increased approximately 11%, while total residential sales increased approximately 21%, compared to the increase in total U.S. completions of approximately 5%.

We expect residential end markets to continue to improve towards stabilization of approximately 1.5 million total housing starts over the next few years, and our business will continue to benefit from the recovering housing industry. The February Blue Chip consensus estimates 1.28 million housing starts for 2018, representing an annual increase of approximately 6%.

During the 2017 fourth quarter, total U.S. housing permits increased over 7%, primarily due to a 9.5% increase in single-family permits. Building sentiment has been strong, with many public builders reporting double digit order growth during the fourth quarter. We believe this points to continued strength in our residential end market, and we anticipate that housing will continue to benefit from various factors, including improving employment, rising household formations, and strengthening consumer confidence.

IBP's acquisition strategy continues to supplement our organic market growth, while also helping to expand our geographic footprint into new markets, including Kansas City, Louisville and Las Vegas. During the year, we completed 16 acquisitions, a record at IBP for any single year and representing approximately $172 million of annual revenues at the time of acquisition.

During the fourth quarter, we completed 4 acquisitions, comprised of a Kansas City-based insulation installer; an Oklahoma-based insulation installer; an installer of window blinds, shades and shutters in multiple locations throughout the Southeast; and a Raleigh-based insulation installer. These 4 acquisitions, completed in the 2017 fourth quarter, represent approximately $18 million of combined trailing 12-month revenues.

So far in the 2018 first quarter, we have completed 2 additional acquisitions. This includes Rocket Insulation & Coatings, an insulation installer located on Long Island in New York with annual revenues of $5.4 million; and Allstate Insulation, and insulation installer in Kentucky with annual revenues of $1.5 million. Our pipeline of potential acquisitions is robust, and we will continue to pursue acquisitions that expand our geographic footprint, diversify our end markets and further our complementary product penetration.

By many accounts, 2017 was a fantastic year at IBP, and I'm extremely proud of how our team responded to several challenges that occurred during the year, including hurricanes Harvey and Irma and the more recent impacts of higher employee-related costs and disrupted material supply.

However, the 2017 fourth quarter was a disappointment and does not reflect what I see as our future potential. We are actively increasing pricing on our services to offset the cost pressure, and anticipate incremental profitability will improve throughout 2018.

In addition, during 2018, IBP will profit from a lower effective tax rate as a result of the Tax Cuts and Jobs Act. We will focus on reinvesting the benefits of the lower tax rate back into our business by enhancing our growth opportunities and funding our acquisition strategy.

I'd like to thank IBP's fantastic team of experienced, dedicated and motivated employees for all of their hard work. Finally, on behalf of everyone at IBP, I'd like to also thank our suppliers as well as our homebuilding, multi-family and commercial customers. We appreciate your support, and we are committed to providing each of our customers with superior installation services. Thank you.

I would now like to turn the call over to Michael to provide more details on our fourth quarter and full year results.

Thank you, Jeff, and good morning, everyone. For the full year, our net sales increased 31.3% to $1.1 billion, compared to $863 million in the prior year, which was mainly driven by higher volumes, favorable customer and end product mix, and our 2017 acquisition.

For the fourth quarter, our revenue increased 28.2% to $299.9 million. Our same-branch sales increased 9.4% due to an increase in volume and favorable improvement in price and mix. Our same-branch single-family sales growth was 9.8%, and our total new residential construction same-branch sales increased 11.1%.

Additionally, we continue to experience strong performance in the commercial market. Fourth quarter 2017 gross profit improved 19% to $81.3 million, from $68.4 million in the prior year quarter. Adjusted gross profit improved 23.2% to $84.2 million, adjusting for the company's share-based compensation expense and financial wellness program.

For the 2017 fourth quarter, selling and administrative expenses, as a percent of net revenue, declined to 19.2%, as compared to 19.8% for the 2016 period. As a percentage of revenues, administrative expenses were 13.9% in the fourth quarter, compared to 14% for the same period last year, including approximately $1.4 million in noncash stock compensation expense.

Adjusting for noncash stock compensation expense and acquisition-related expenses, selling and administrative expenses, as a percent of net revenue, improved by 70 basis points, from 19.2% to 18.5%. We expect selling 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 and as the volume of total acquired business operations become larger, we will incur additional noncash amortization expense. In the fourth quarter, we recorded $7.1 million of amortization expenses, compared with $3.1 million for the period last year.

This noncash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Based on our acquisitions completed to date, we expect first quarter 2018 amortization expense of approximately $7.2 million. This figure will change with any subsequent acquisition.

For the full year, we improved our adjusted EBITDA to a record $141 million, representing an increase of 34.6% from $105 million in the prior year, and our adjusted EBITDA margin increased 40 basis points, from 12.1% to 12.5%. For the fourth quarter of 2017, adjusted EBITDA improved to $36.2 million, representing an increase of 21.5% from $29.8 million in the prior year. As a percent of net revenue, our adjusted EBITDA was 12.1% in the fourth quarter, compared to 12.7% in the prior year quarter.

As Jeff stated in his prepared remarks, increased employee and related costs impacted gross profit during the quarter. We are actively working with our customers on pricing to offset higher costs, and we continue to believe our financial model can return to a mid-teens adjusted EBITDA margin as the housing recovery reaches stabilization.

IBP's same-branch incremental adjusted EBITDA margin for the 2017 fourth quarter was 8.4%, compared to 20% for the same period last year. The adjusted EBITDA margin contribution from acquired revenues was 10.4%, compared to 10.2% for the same period last year.

2017's full year incremental adjusted EBITDA margins were impacted by the seasonality we experienced in the first quarter, the impacts of the hurricanes we experienced in the third quarter, and increased employee-related costs in the fourth quarter. For 2017, same-branch incremental adjusted EBITDA margin was 13.8%, and the adjusted EBITDA margin contribution from acquisitions was 13.3%.

The current insulation pricing and housing demand environment supports our belief that our financial model can produce full year same-branch incremental adjusted EBITDA margins of 20% to 25%.

On a GAAP basis, our fourth quarter net income was $10.8 million, or $0.34 per diluted share, compared to net income of $11.1 million, or $0.35 per diluted share, in the prior year quarter. Our adjusted net income improved $16.6 million, or $0.52 per diluted share, compared to $13.9 million, or $0.44 per diluted share, in the prior year quarter.

During the fourth quarter, we recorded a $3.4 million one-time noncash gain related to our deferred tax liability as a result of the tax rate change and the 2017 Tax Cuts and Jobs Act. Adjusting for the one-time impact of the 2017 Tax Cuts and Jobs Act, our full year tax rate was 33.6%. For 2018, we expect an effective tax rate of 24% to 27%.

Now moving on to our balance sheet and cash flow. For the 12-month period ended December 31, 2017, we generated $68.8 million in cash flow from operation, compared to $73.3 million in the prior year. This decline is the result of an $18.6 million increase in income taxes receivable. We continue to use this cash flow to fund acquisitions and reinvest in our business.

Capital expenditures at December 31, 2017, were $31.7 million, while total incurred capital leases were $4.4 million. Capital expenditures and incurred capital leases, as a percent of revenue, declined 40 basis points, to 3.2% in 2017 compared to 2016, despite a 31% increase in 2017 revenue. 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 December 31, 2017, we had total cash and short-term investments of $92.6 million, compared to $14.5 million at December 31, 2016. Total debt at December 31, 2017, was approximately $348 million. Taking into account cash and short-term investments at December 31, 2017, our net total debt was $255 million, compared to $137 million at December 31, 2016. Our capital structure remains conservative, and we have considerable flexibility as we continue to deliver on our growth strategy.

During the fourth quarter, IBP successfully reprised its existing 7-year $299 million term loan B facility. The repricing is leverage-neutral and reduces the interest spread by 50 basis points. In addition, the capital expenditure covenant of the term loan B facility was increased from $50 million to $100 million, which provides IBP with greater flexibility to support growth.

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

Thanks, Michael. As we start the new year, there continues to be significant opportunities to meaningfully grow revenues and profitability. We remain focused on our core insulation install business while further expanding our services to new geographies, end markets and product lines. IBP has a strong platform, disciplined approach and experienced team, and while challenging this past year, our performance and growth in 2017 is encouraging. I continue to be confident of and excited by future opportunities to grow and create value for our shareholders.

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

(Operator Instructions) Our first question is coming from Susan Maklari, Credit Suisse.

This is [Chris] on for Susan. Thanks for taking our questions. Our first question is on insulation pricing. I was hoping you guys could give us an update on what your expectation is coming into 2018 and how quickly you expect to kind of recoup the higher costs from manufacturers.

Okay, thank you. That's a great question. This is Jeff Edwards. As you're probably all aware, this has been a time, really over the last 6 months, where material pricing and both supply have firmed up really versus prior years. So there was a, late last year, increase in terms of material pricing. There was also a price increase in January of this year, and while some may not be aware, there's actually currently, which it's scheduled to be effective at the end of March, a loose fill fiberglass price increase, currently announced by 3 of the 4 manufacturers, in the neighborhood of 9% to 10% out there. So without doubt, as I think all of us expected and predicted as we come closer to being at stabilization and as the manufacturers continue to find demand strong, we find ourselves in a rising price environment. Honestly, and ultimately, that's a situation that we obviously need to deal with, but, in a lot of ways, it's really welcome. We've faced challenges, as anybody might know or might be able to guess, as it relates to labor and other costs inside of the business. Historically, as I mentioned earlier, this is a business that -- or an industry that really rallies around -- from an installer perspective, around material price increases from manufacturers in order to raise our prices to our customers. So we are vigorously in the marketplace raising prices. They, as you might guess, depending on the customer, sometimes take some short period of time to take effective, but, in general, we know that's job number 1 for us right now. Frankly, as both a leader and as American citizens, the fact that we're seeing wage increases is not a bad thing at all, but, ultimately, we also understand that we have a responsibility to our investors and that we need to make a fair profit on our services, so, therefore, the idea and the concept of a living wage and supporting and/or at least beginning to try to stem the gap or the bridging of the gap is something that we as a company support. We just need to get paid for the services we're providing to our customers, and we'll make sure that we do so.

And then just taking a step back, for my second question, how are you guys weighing the potential M&A opportunities between commercial and residential given your priority to diversify the business? And then what are some of the views you guys have of differentiation of your product lines on the residential side?

I don't know that we absolutely make a differentiation between -- you didn't exactly say the attractiveness of commercial versus residential opportunities. I don't know that we make really that comparison, per se. I think we analyze every opportunity basically on the merits of that opportunity itself, not whether it's one or the other, and I guess I would say -- and I mentioned earlier -- we continue to have a lot of acquisition opportunities and robust opportunities in both segments. Clearly, we are doing a lot of work with Alpha in terms of creating the platform that we believe we bought, and making sure that our commercial group, with Alpha kind of as the core and the lead -- by putting them in a position to be able to both grow organically, as we've said, but also through acquisitions. So I don't know that we necessarily weigh those. Clearly, because of the penetration we have on the residential side from a geography perspective, versus the penetration we have on the commercial side from a geography perspective, clearly there is probably more room on the map as it relates to commercial, but I don't know that I'd weigh them one or another or against one another. And then I'm not sure I exactly understood the question or the point as to differentiating ourselves -- or maybe not ourselves. Maybe you meant our products or our install from others. But we have always and we believe that we provide a better and a higher level of service, really, to all of our customers. I mean, that's what we do. We don't pretend to be the absolute low-cost provider in general, and as you can probably tell from our numbers, we believe that -- if you look at our organic sales growth, you look at our penetration into the national builder market and our growth in those 2 segments as an example, that we really do believe we do a better job, and we're differentiating ourselves based on service.

Chris, this is Michael, and I would also highlight that we completed 16 acquisitions last year, and we feel very confident in our ability to do both commercial and residential transactions, both from a team perspective and integration perspective and also capital perspective. So we're looking at both opportunities very strongly.

Our next question is coming from Nishu Sood of Deutsche Bank.

I also wanted to just talk about the price versus input cost inflation. You folks have been very successful, through insulation inflation in the past couple of years, passing on price, and so I want to understand a little bit more about what changed in 4Q '17 that limited your ability to pass it on because insulation prices have been rising for some time here. Is it the -- you called out the allocation on loose fill. What percentage of your products that you're putting in is loose fill. Was that alone the reason, or was there some rate of change in other products that you're installing as well that caused kind of a breakdown in your ability to pass on price this quarter?

Nishu, this is Michael. Thanks for the question. We actually do not believe there was any fundamental change in this quarter particularly as it relates to material price. The material price inflation that we've been discussing and talked about in the third quarter, and I think that even Owens Corning talked about in their earnings call, really relates to 2018. The pressure that we saw in the fourth quarter relative to our same-branch incremental margins really came from 3 areas, all sort of equally weighted. It was higher workers' comp expense, higher fuel usage, and higher medical costs. So those things were not impacted by the material price. Why Jeff spent so much time talking in his comments about the material price and allocation is because that provides an extremely supportive environment for us to get material price appreciation -- or, excuse me, for us to get selling price increases, and we firmly believe that the market has accepted a large percentage of the announced price increases in 2018 from the manufacturers, and that sticking, if you will, or that acceptance by the marketplace was really increased by the loose fill allocation that happened. As I think everybody is aware, Johns Manville experienced a catastrophic event at their loose fill facility, which is quickly coming back online, but that really added a lot of rigidity, if you will, to the announced 2018 -- January 2018 price increase. Loose fill, to your question, represents approximately 40% of our fiberglass install, so it is a meaningful component, and it also tends to be more meaningful towards the end of the year because loose fill is what we blow into attics, and it's one of the last things that we do before the house gets sold and closed, so you see loose fill demand increase towards the end of the year.

Got it. So the impact on incrementals in the fourth quarter is more related to the rising costs, as you mentioned, the compensation costs and the transport costs. What caused those to spike, then, in a way that it limited your incremental -- your ability to capture margins in the fourth quarter? I mean, what caused that rate of change?

So the workers' compensation, a lot of that is just adverse development that occurs, and that changes year-to-year, quarter-to-quarter, depending upon, again, sort of how claims come through. On the fuel usage, a lot of it, believe it or not, is impacted by cold weather. Particularly, we experienced fairly cold weather in the South, and you tend to have a lot more idle time in a truck when that occurs, so our fuel usage increased fairly significantly during the quarter. And then, also, on medical claims, again, it's a question of experience. I mean, we've actually done a very good job of maintaining -- in a very high rising medical inflationary environment, maintaining our medical costs. But in the fourth quarter, we, again, sort of experienced adverse development with the claims, which tends to be cyclical. Towards the end of the year, people tend to spend a lot of dollars before they have to go back to meet their deductibles again, so it was just much higher than we've experienced in prior fourth quarters. So it was really those 3 things that impacted the same-branch incrementals in the quarter.

And I also wanted to ask about the share repurchase program. You're just coming off of your most successful year in acquisitions since you went public, and obviously your track record is very well established in terms of successfully integrating acquisitions. Why a share repurchase program, then, when you've been so successful and clearly have that venue for allocating capital?

We firmly believe we have still plenty of acquisition opportunity, and even with the $50 million share repurchase program, we still -- as Jeff indicated and as we indicated, we have over $90 million of cash and marketable securities on the balance sheet. If we, for the right transaction, needed to take leverage higher, we're very comfortable that we would be able to do that. And our confidence around the company's ability to continue to increase free cash flow, particularly with the lower tax rates -- in our minds, it makes a lot of sense for us to return capital to shareholders in this way rather than having very high cash balances sitting on our balance sheet, earning 1% to 1.5%. We believe that an investment in the company makes superior financial sense. And it will not, in our view, inhibit in any way our ability to fund acquisitions on a go-forward basis.

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

Just given what I'm seeing in the stock here, if we could just go through this again, because I'm not sure if I'm missing it or if you guys aren't communicating it in a way that people are hearing. The workers' comp fueled -- as opposed to something structural in your business, is what hit fourth quarter incrementals, and I just was thinking of the first quarter, when you guys did Alpha and you guys talked about the flow through for commercial and for acquisitions, basically. That's what you're saying, correct? I mean, it was these items, first quarter it was Alpha. Sometimes your incrementals are off, but it's not tied structurally to your ability to realize price increases?

Correct, and the first quarter was really more relative to the comp to the first quarter of '16, which I think we talked a lot about in the first quarter call. When I was speaking about the workers' comp, medical and fuel usage, that really related to the organic incremental margins that we experienced in the fourth quarter. As it relates to Alpha, that business, from an operational perspective, is performing as we expected, and the growth rates that we're seeing there are consistent with the organic growth rates that we're seeing in the business overall. As Jeff mentioned in his prepared remarks, we are investing heavily in opening new locations organically there. We've already opened 3 new locations since they've become part of our team, and we're looking at more locations to open there. Just to give you a sense of kind of a reference point, it costs between $300,000 to $500,000 in kind of start-up costs, if you will, for each of those locations, and as Jeff mentioned in his prepared remarks, we're investing heavily in their back-office operations to make sure that they're ready to be the platform business that we believe it can be as we do additional commercial acquisitions. So we're making a lot of investments in that business, and we're excited about the prospects that are there, particularly the organic opportunity that's there and the acceptance that we're receiving and seeing that their customer base is receiving them as they go into those new markets, so we're excited about that opportunity. As I think we've always been very clear, we believe it's a long-term strategy as opposed to a quarter-to-quarter strategy there, and we're excited about what they're going to continue to bring to the table in '18, '19, '20 and beyond.

This is Jeff. But any assumption or presumption that we're unable to get price from our customers really, frankly, probably couldn't be further from the truth. I mean, we're seeing good traction in that regard. Builders are busy. They're willing to pay for service and for contractors to be able to get to the job and get the job done. Obviously, we are in a rising price environment on a number of fronts, particularly, as I mentioned earlier, labor, but also now in a more staunch way, material, and we have no reason to expect that this industry and our segment in particular won't be able to go ahead and get price increases in kind of the normal way at this point. So as the market improves, we get busier.

That's what it seems to me, and, Jeff, I was just looking at your 2Q comments, when you said, "The environment for price right now is positive. It's been for a long time." Michael, you're commenting on the upcoming September increase, that it's seasonally the strongest time of year. So could you put in context how rare it is to really see this type of traction in January versus the price realization I guess from September? Because it seems to be substantially higher in January from a price realization basis, i.e. what you're paying, but then what you'll be able to charge. From what we saw in the prior quarter, it just seems so unusual for it to happen in January, but that would seem to actually be very bullish.

You're absolutely right, it is very bullish and it is very unusual, and I think there are a couple things driving that. One is the loose fill allocation that clearly drove purchase demand for insulation material, number 1, and number 2 is overall demand from builders, right? I mean, you've seen most builders that have released their fourth quarter order numbers that are very strong, in the 15% to, in some cases, 20% order growth for the fourth quarter. All indications that we've seen and we've heard are that the spring selling season is shaping up to be one of the strongest we've had in a very long time, and there's a lot of justifiable confidence, we believe, within builders and within our ability to get price increases with our builders based upon how busy they are and the activity that they're seeing.

I mean, it sounds a little bit preposterous that a failure in one plant on the loose fill side with one manufacturer -- in this case, in Richmond, Indiana -- was enough to kind of throw this thing into a different gear, but it really kind of was, and I guess what you would need to know in order to understand that is a few things. One, the idle capacity that's always talked about in terms of the manufacturers and what's out there from a fiberglass perspective really is grouped around and globed around almost entirely that product, not -- the blowing wool because of a shift in the amount of blowing wool that's used kind of on average in a home or in different applications over the years, has gone up, and as a result of that, from a capacity perspective, the manufacturers were closer to being tight -- far closer to being tight on loose fill in terms of kind of where we were in overall capacity at the end of the year than otherwise. We also happened to be in the blow season, as was mentioned, and then when you had this failure, it was enough to really tighten things up so quickly, it was hard -- it was an impetus. I mean, it just was. It was an impetus to drive an increase that otherwise might have been tougher to push probably in January.

I mean, we've always been very clear that we're supportive of the rising price environment because, historically, we have benefitted from that.

If you're seeing 8% -- let's just make this up -- are you seeing 2% or 3% in the back? I mean, is that the proportionality of price gains or realization that you're seeing on these headline announcements?

Well, you've probably seen and know what manufacturers come out to us with, and it's always -- with the exception of this last one, it's a bat and a blow price increase, and pick your increase, whether it's 8% on bats and 12% on blow or whatever it happened to be for one of these last 2 or 3 announced increases. This last blowing wool price announcement, which, again, was exclusive only to blowing wool, was -- so far, there are 3 manufacturers out. There is 1 manufacturer that is not. Two of the manufacturers have announced a 9%, one has announced a 10%. That's on loose fill. When we go to our customers, for the most part, we are raising prices at one consistent level basically for our services. It's typically not or almost never differentiated between bat and blow. That's too fine a point, I guess I would say.

Is that because you're doing phase 1, phase 2, phase 3 in terms of when you hit the building up?

No, I think it's more to do with just the fact that when you typically would come to -- I mean, as we've said before, we're providing an installed service, so it's a little bit less differentiated, I guess, at the product level than a manufacturer is because they're selling you absolutely bats or absolutely blow, let's say. In our instance, since we're selling an installed service, it makes sense to us to raise our prices, which would be for both applications or all applications that would use fiberglass.

Our next question is coming from Phil Ng with Jefferies.

This is actually [Colin] on for Phil. I was just wondering if you could quantify the headwind from the labor costs that you saw in the quarter, and what portion of these do you think will continue into 1Q '18 and 2018 altogether because of the -- it sounds like the medical costs might have been more 4Q weighted. And then if you could just talk about your ability to give back that 20% to 25% organic incremental EBITDA range in 2018 and how quickly you think you can get there.

This is Michael. That's a good question. I mean, we feel, as we stated in our prepared remarks and we've been very consistent in saying, that on a full year basis, we should be in a 20% to 25% incremental margin basis. As we continue to realize price increases throughout 2018, we believe that lends support to being back to that 20% to 25%. So we feel comfortable that on a full year basis for '18, there's certainly nothing that we see right now that would prevent us from getting to that 20% to 25% range and, again, on a full year basis. Now getting selling price increases, because we have so many customers, it doesn't happen day one. It takes time. But we feel very confident that over the course of '18, that we're going to have a very solid year, and we're actually -- I mean, when you think about what's gone on from a material price perspective in the fiberglass industry, it's really been a fairly -- and we've talked about this, Owens Corning has talked about this -- it's been a fairly benign price environment up until this point. And as Jeff mentioned in his prepared remarks, the industry historically has relied on material price inflation to get installed service price appreciation. Now despite that, we as a company have been able to get good price mix growth, despite the sort of headwinds of nonmaterial price inflation. We believe we're going into '18 with our continued ability to improve price mix combined with material price inflation that we haven't seen in a while, which will, we believe, help offset any other headwinds that we have in other costs of the business.

And then I guess just following up on the product mix and customer mix, in the press release you only spoke about the customer and product mix being a driver for that 3.5% year-over-year growth in price mix. I was wondering if you saw any like-for-like pricing in the quarter. And then, just going forward, how much more runway do you think there is on the customer mix and product mix side of the equation?

So in the quarter -- and we do only talk about price and mix and not specifically price, but a lot of it was mix-related as opposed to price-related. And as we said in the third quarter call, I believe, that really the story this year has been more mix-related than price-related. And as I just said to your earlier question, we do think that, going into '18, we have the benefit of both price mix combined with the rising price environment associated with higher material costs. So again, there's nothing that we see that would limit our ability to improve price mix in '18 and going forward as demand for new residential construction, particularly on the single-family side, we believe the environment is very supportive.

And then one last question. Just given how 90 days starts and lags -- 90-day lag starts and tracks, how do you expect seasonality to really play out in 2018? Could you see a little bit of a slowdown just given the difficult comps that you guys are going to face in the first quarter when you stack them for 2 years?

No. I think, if anything, ideally -- and some of this will be weather-related, but given the strong order growth that builders experienced in the fourth quarter, right, which is ahead of the spring selling season, and given the demand that we believe we're seeing relative to the spring selling season, we're hopeful that what happens in '18 is that the seasonality, actually, of the business smooths out a little bit as opposed to being as typically seasonal as it is, in terms of being weighted most towards the third quarter, then fourth quarter, then second quarter, then first quarter, just because of that demand environment that is out there. So we don't -- and we think that would actually be good because what that means is you don't have then the high fluctuations in labor for all trades within the industry, and you create greater stability within those trades, which is a positive for the industry.

Our next question is coming from Matt McCall of Seaport Global Securities.

I think, Michael, you talked about the 3 items that kind of hurt Q4 incremental EBITDA on the organic side -- workers' comp, diesel, medical. Forgive me if I'm wrong, but I think most of those are going to be on the SG&A line. Gross margin was actually down as well. Can you talk about some of the pressures that you saw on the gross margin line, specifically, and the outlook for those pressures as we move into '18? I know you've talked about price cost and price mix, and I just want to kind of tie it all together.

Yes, I'm really glad you asked that question because both -- at least within our financial statements, both workers' comp and fuel are in gross margin. They're in cost of goods sold. The only one that ends up in administrative expenses is medical. So that definitely put pressure on gross margin. Also, something that happened in the quarter that would put pressure on gross margin but that helped our selling and administrative expense is we did see during the quarter greater growth in the West and the South regions of the country, and those markets tend to have higher EBITDA margins, but lower gross margins, because they have a higher proportion of their business with production and tract builders. And as we've talked before, those customers tend to have slightly higher gross -- or slightly lower gross margins, but they do have lower cost of service, so we end up getting good leverage on the selling and administrative side. So that definitely influences gross margins as well.

And so then, as we look out into '18, those 3 items specifically, anything else -- I know we've talked about price mix, but I'm just trying to, I guess, piggyback on the last question. What does it take to get back to the 20% to 25%? How much of this is items that won't recur? You talked about Q1 getting hit by seasonality, Q3 by hurricanes, Q4 employee costs. Is there a situation where some of these items that hit '17 don't recur and, therefore, you've got some visibility into getting to that 20% to 25%? I think you said you're comfortable for the full year getting there. I'm just trying to understand some of the items that we can identify today.

I think it's a combination of things, particularly with our ability to realize price increases with our customers and also continue to improve price mix. And when we talk price mix, it's not just the job price that we're installing and the type of products that we're installing, but it's also doing work for customers that are paying us a fair and reasonable margin for the work that we're doing, particularly in a high demand environment. So it really is focusing in on all those things and also making sure that we're doing everything we can to control costs and make sure that any cost inflation that we're seeing in any aspects of our business, that we mitigate it as much as possible. But as we sit here today and we look out for 2018, 2019, clearly you can always have fluctuations quarter-to-quarter. On a full year basis, we don't believe any of the headwinds that we saw in the same-branch business in the fourth quarter are going to necessarily on a full year basis in '18, impact '18 because we do feel confident in our ability over the full year to get price increases to more than offset what we're seeing in material price increases in some of these other items.

And then the price mix guidance you've given in the past, I think it's that mid-single digit type number. Is that the way to think about price mix in '18, given all the items you just talked about? And I'm curious to know the impact of the strength in multi-family on your price mix in the quarter because you seem to continue to outperform there.

Yes, multi-family has continued to be a very good story for us, both organically and in an aggregate basis, and as we've talked in previous calls, the multi-family story, like the single-family story, is very market-driven, and we're confident in our ability to continue to grow that business organically. As we've talked about sort of the mid-single digits on price mix, we believe that it continues to be supportable. Things that influence that are our ability to continue to cross-sell other products, which, ironically, actually hurts the price mix because the average price of our other products tends to be considerably lower than our insulation selling price per product, if you will, but, again, we still feel reasonably confident or confident around kind of that mid-single digit price mix growth as we go into '18. There's nothing that is changing our view relative to that.

Did you quantify the expected 2018 tax rate? If I missed it, I apologize.

Yes, we talked about a full year tax rate of 24% to 27%.

Our next question is coming from Michael Eisen of RBC Capital Markets.

Following up on some of the comments you guys had made about what you're seeing on the demand side of the equation, especially on single family. It sounds like there's a really good tailwind going into '18. There are a lot of great indicators from the builders on starts. But as we look at '17's results, there's been a steady deceleration of completions. Can you guys talk what you're expecting to see from there? Should we expect kind of a reacceleration based on comps throughout the year, or are there still limiting factors on the supply side of housing that could limit same-branch growth throughout '18?

That's a great question, and clearly it's a reflection of, obviously, the completions growth -- or a deceleration in the completions growth is clearly a reflection of the backlog that had been created there. We believe that, again, going back to new order growth that the builders have announced, what we're seeing with our nonpublic builders, what we're hearing and seeing about relative to the spring selling season are all very strong positive indicators that completions growth will accelerate throughout 2018. That being said, we never want to really -- the U.S. Census Bureau data is highly variable month to month and gets revised significantly, so we don't necessarily put a huge amount of confidence on a month-to-month basis in that data, but clearly the backdrop is very, very supportive, particularly on the single-family side. And I'll emphasize that on the single-family side -- and I'm talking about this on a macro level -- that single-family completions and starts and permits should be solid through 2018, and we believe even 2019. There's been a lot of talk about rising interest rates and how that's going to detract or derail the single-family residential growth in the country, and we believe that it's more about affordability and availability, and if you look at long-term historical trends, affordability is still below those long-term historical trends, and on the availability side, I mean, it seems as if at least every week you get more information relative to the availability of mortgages increasing significantly. And there still hasn't been a significant pivot towards adjustable-rate mortgages and other ways to reduce the impact of overall rates. So where we sit and from what we see from our customers and what we hear from surveys, we feel very confident that the new residential single-family market is going to have a very good year in '18.

And then just following up on the same supply side way of thinking, when thinking about all the commentary from the builders and from other people in the channel about labor constraints being a limiting factor, with capacity becoming so tight and that being so supportive of pricing, have you guys started to see in any of your markets where availability of product is shifting to be the main reason for any sort of limitations in growth?

Not so much limitations in growth, but certainly our ability to be very particular about who we do work for, and also rigidity around the selling price increase.

When thinking of the multiples that you guys are seeing in deals that are in the market and in your pipeline and the thought of the repurchase program coming into play, have you guys seen a material increase in what asking prices are and what valuations are in the private market?

No, we haven't. It's business as usual in that way.

Our next question is coming from Scott Rednor of Zelman & Associates.

Michael and Jeff, it's very admiral what you guys are doing on the comp side, so I just wanted to say that in a public forum. I had a question for you guys on the demand side. Within the quarter, you talked about disappointment, Jeff, but you guys didn't really talk about the top line, and you had single-family accelerate and multi-family was, again, 20%, 25%, so why wasn't your overall same-store sales growth stronger?

We actually felt good about the same-brand sales growth. I mean, one thing -- we've talked about this, and even though it's a small percentage of our overall revenue, the repair and remodel business definitely is not growing at the rate that the rest of our businesses are growing at, so that brings it down a little bit. We did have a slight weather impact, particularly in the Northeast and Upper Midwest, as it relates to the organic business, but we felt really good about a 9.4% same-branch sales growth, relative particularly to what happened from a completions growth perspective.

I saw you guys got impacted by the storms in 3Q and saw pretty material slowdown in September, so why would 4Q not be stronger? I think that was pretty much the expectation in the market.

That might have been expectations, but it certainly wasn't our expectation because we never thought of the storms as being an impact for us. And I think we've talked about this on the call, that it was going to significantly impact our revenue in a positive way either in the fourth quarter or the first quarter of '18, that a lot of the work that -- or a lot of what happened there was more of ability to get to job sites slowing down versus opportunity for us to do install work in damaged locations. So I mean, if you look quarter-to-quarter, we still had -- and, again, the fourth quarter is typically weaker than the third quarter. We still had sales growth relative from the fourth quarter to the third quarter.

And just realizing you guys are a sixth of the way through the year, and Michael, the commentary that price cost wasn't a headwind in 4Q, the stock nosedived since you made those comments, and there was some other costs -- can you maybe give us a feel for how you're running now that you're two-thirds of the way through the quarter?

I would reiterate our confidence around full year 2018 and our ability to get selling price increases to more than offset material price inflation and other cost increases that we'd be seeing in the business.

I mentioned earlier we're getting traction around our price increases to our customers, and we feel, obviously, very justified in driving those prices. Obviously, based on both material price increases, which provides the backdrop for us to go out and ask, but also the other increases, absent a rising material price environment, as we've mentioned, are tough to get after, labor and some of these other expenses we've talked about, medical, et cetera. So we feel good about it. We want to get paid a fair price by our customers. We think we're doing a well enough job for them on the service side to be able to ask for it and justify it, and I would say that the reaction from our builders is justification that I think we're doing that.

But to be clear, we look at it as a full year 2018 event and not necessarily just all about the first quarter.

Our next question is coming from Blake Hirschman of Stephens.

This is actually Trey hopping on here. I didn't realize I was going to be able to be on the call, but thanks for all the color. And I don't want to beat a dead horse here at all, but the last thing for me is -- and I know this has been touched on a couple of different angles, but labor obviously became more of an issue for you guys in 4Q, but the point that I think is maybe being missed a little bit here is that -- and correct me where I'm wrong here, but you guys are installers, right? I mean, that's what you do. I mean, you manage labor, largely, and so this hit in the 4Q, is it anything unprecedented, in your mind, or a big surprise? I mean, obviously a little disappointment, but -- or is this something that, as a normal part of business, you guys get over and move on as far as that cost is concerned? You seem confident in that, but you do say it's an '18 kind of recovery back to the margins. I'm just making sure I'm thinking about that right, number 1, and any kind of color on the cadence to getting back to that, number 2.

Yes, you're absolutely right, it was not a surprise. It was a disappointment, for sure. I would say that our -- the main way that we look at labor specifically, labor costs specifically on the install side -- because you're absolutely right, we're an installer, and really one of the main things we get paid for is managing that labor. Our direct labor percentages have been consistent quarter-to-quarter throughout the year, so really what we spoke to -- the higher workers' comp cost, higher fuel usage and the medical costs -- were a fourth quarter event that was disappointing, and it definitely impacted our same-branch incremental margins, but we continue -- as Jeff said in his prepared remarks, we continue to be able to attract, retain installers. We continue to be able to have enough labor to support the opportunity that's out there. We feel very confident in our ability to continue to do that, and we believe that for 2018, that it's setting up to be a very solid year given both the positive backdrop of continued price mix gains combined with real material price inflation that the market has typically relied on to get price increases, and what we're seeing with our customers from a selling price appreciation perspective and the overall core single-family residential new construction market. It's an extremely supportive environment, in our opinion, going into 2018, and it's why we and the board have a lot of confidence about investing in the company right now.

Absolutely.

Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.

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

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.