Installed Building Products Inc (IBP) 2018 Q4 法說會逐字稿

Greetings, and welcome to Installed Building Products Fiscal Fourth Quarter 2018 Investor Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jason Niswonger, senior vice president, finance and investor relations.

Good morning, and welcome to Installed Building Products' fourth quarter 2018 and year-end earnings conference call. Earlier today, we issued a press release on our financial results for the fourth 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 statements with respect to the housing market, our financial and business model, our efforts to manage material inflation, 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 expectations for our end markets, our ability to strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, our diversification efforts, Alpha's revenue and profitability, expansion of our commercial business, our growth rates and ability to improve sales and profitability and expectations for demand for our services and our earnings in 2019.

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 fact. 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 statements 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, 2017, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission. Any forward-looking statements made by management on this call speaks only as 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, 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 reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, 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 financial 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 fourth quarter and year-end 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.

For 2018, IBP once again achieved record revenues, earnings per share and adjusted EBITDA. In fact, we have reported record results in each year since going public in 2014. Since December 31, 2013, IBP has rapidly grown revenues from $432 million to a record $1.3 billion, while our adjusted EBITDA has increased nearly 500% to a record $164.4 million. These accomplishments are a result of IBP's growth-oriented business model, disciplined acquisition strategy, and the dedication and commitment of our employees across the U.S.

I'm particularly proud of our performance during 2018. Throughout the year, the market environment and pricing dynamics within the insulation industry presented multiple challenges as we worked through rapid price increases for our materials. I appreciate our shareholders' patients as we worked on offsetting the headwinds facing our business in 2018. I'm pleased to report we ended the year with strong operating and financial momentum, and I'm excited by the opportunities for further growth in 2019.

So let's look at the specific drivers of our business during 2018 and why we are so optimistic about our long-term opportunities. Total revenues for 2018 increased 18% to more than $1.3 billion, driven by greater volume, favorable end customer and product growth, and the 12 acquisitions completed this year. Single-family same-branch sales increased over 12% while total single-family sales increased 20%, compared to the increase in total U.S. single-family completions of 6.1%. Same-branch multifamily sales increased over 7% while total multifamily sales increased approximately 9%.

During the 2018 fourth quarter, IBP experienced a reacceleration in multifamily growth, as same-branch multifamily sales increased nearly 29%. We believe this growth is a function of industry backlog conversion and not indicative of sustained demand.

Combined, new residential same-branch sales during 2018 increased over 11% while total residential sales increased over 18%, compared to the increase in total U.S. completions of approximately 3.4%. We continue to believe our focus on operating branches in strong and diverse U.S. housing markets enhances opportunities and creates favorable position for IBP to outpace industry growth.

IBP's current geographic footprint provides us access to nearly 70% of total residential permits, compared to 55% at December 31, 2013. We remain committed to expanding our footprint through acquisitions, organic branch growth, and to capitalize on cross-selling opportunities of other product offerings within our existing markets.

Diversifying IBP's product mix allows us to provide more installation services to our customers, expands our end markets, and deepens our relationships with builders across the country. At December 31, 2018, approximately 66% of revenues were derived from insulation installation services, compared to 74% of revenues 5 years ago.

Acquisitions continue to play an important role in both our product and geographic expansion strategy. As a result, IBP installs a greater number of products, serves multiple end markets, and has a larger geographic footprint than ever before, which we believe enhances our competitive position.

During 2018, we acquired approximately $83 million of annual revenue across multiple product lines and markets. In the fourth quarter of 2018, we completed 3 acquisitions, including Advanced Fiber Technology, a manufacturer of cellulose insulation in industrial fibers in Bucyrus, Ohio, with annual revenues of approximately $18 million; Carolina Glass % Mirror Inc., a commercial and residential glass applications installer in North Carolina with annual revenues of $6.2 million; and Hamilton Benchmark Inc., a commercial firestopping solutions installer in Wisconsin with annual revenues of $1.3 million.

IBP has a strong platform of complementary businesses managed by experienced leaders. Our product offerings combined with our strong operating cash flow and our expanded facility provides us with significant resources and capital to continue to fund our accretive acquisition strategy. The market for residential and commercial installation services remains highly fragmented. Our pipeline of potential acquisitions is robust, and we believe 2019 will be another strong year of acquisition growth.

In addition to actively growing our business to accretive acquisitions, our capital allocation includes the opportunistic repurchase of common stock. I'm pleased to announce that IBP returned over $89 million of capital back to shareholders through our stock repurchase program during the year. We currently have $2.8 million shares of treasury stock with an average price of $37.28 per share. We remain committed to creating value for our shareholders, and we are focused on maximizing returns on capital.

I'd now like to provide an update on the pricing environment for our installation services and the operational performance at Alpha, our large commercial installation business. We have talked about the complex pricing and demand dynamics within the insulation industry throughout 2018. The increased demand for material to support industry growth, as well as planned and unplanned downtime at manufacturing facilities impacted industry supply and supported manufacturer price increase strategies during 2018.

As we stated last quarter, we are putting a greater emphasis on our branch managers to align with customers that want partners like IBP, who can deliver quality installation services on time and at a fair price. We expect this alignment to enable us to better manage periods of martial inflation, improve our labor utilization and drive margin expansion across each of our product categories.

Our price mix growth during the fourth quarter was 7.8%, which is our strongest quarterly increase in price mix during 2018 and shows the progress we are making to increase our prices. We continue to proactively work with our customers and suppliers to lessen the impact of rising material cost across all product lines, and we expect further improvements during 2019.

Turning to Alpha, revenues increased 11.5% for 2018 and 13% during the fourth quarter. I'm pleased to report profitability continues to stabilize, and during the fourth quarter, operating expenses to support new locations improved as sales increased. As these trends continue, we expect profitability at these new branch locations to show further improvements. Organic geographic expansion continues to be a key component of our large commercial construction strategy. We are opening a new Alpha location in Phoenix early this year and expect this location to quickly ramp, given favorable trends within the region.

To wrap up my comments before turning the call over to Michael, I'd like to review the impacts our financial wellness, stock compensation and community engagement programs have had on our company and our employees. As a result of these programs, I'm pleased to report IBP experienced improving employee retention rates in 2018. Better retention rates produce significant benefits across our organization. They increase labor efficiency, reduce training cost, and improve employee morale. I've received numerous emails and hand-written letters from employees thanking me and IBP for these programs. Through these initiatives, we have positively impacted the lives, families, and communities of our hardworking local employees. To date, more than 3,000 people have gained tools and knowledge through our financial wellness program. Our performance and longevity based stock compensation program has been awarded to more than 1,000 employees, who now enjoy the pride of ownership in IBP. With our support, numerous hours have been volunteered, and financial resources have been donated to various organizations throughout our many IBP communities, and we encourage our employees to support the local causes they believe are important. We are dedicated to providing and promoting a strong employee-first culture at IBP, and I am proud and encouraged by the progress we are making.

In closing, 2018's financial results show the strength of IBP's platform. As we look to the future, we are excited by the opportunities we have to grow our geographic footprint, increase our end-market penetration, and expand the products and services we offer residential and commercial builders. We are focused on profitable growth which has produced significant improvements in net income and adjusted EBITDA and drives compelling recurrence on invested capital and equity. We are committed to creating value for shareholders and will continue to deploy our strong operating cash flow to make strategic acquisitions, invest in our business and repurchase stock. I'm excited about our future and the opportunities we have to create value for our stockholders.

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

Thank you, Jeff, and good morning, everyone. For the full year, our net sales increased 18% to $1.3 billion, compared to $1.1 billion in the prior year, which was mainly driven by higher volumes and pricing, favorable end customer and end product mix and our 2018 acquisitions.

For the 2018 fourth quarter, our revenue increased 17.8% to a record $353.1 million. Our same-branch sales increased 11.1% due to favorable improvements in price and mix and an increase in volume. Our same-branch single-family sales growth was 8.6%, and our total new residential construction of same-branch sales increased 10.9%.

Fourth quarter 2018 gross profit improved 21.3% to $98.6 million, from $81.3 million in the prior year quarter. Adjusted gross profit as a percent of revenue was 27.9%, compared to 28.1% for the same period last year. Based on seasonality within the business, we would typically expect to see adjusted gross profit as a set of revenue decline sequentially in the fourth quarter. The 27.9% in the fourth quarter of 2018 is consistent with the third quarter, predominantly as a result of the timing of material cost increases and our customer pricing initiative.

I'm pleased to report on the labor side of cost of goods sold, we continue to experience lower turnover and better retention and productivity rates. These improvements are a direct result of the investments we've been making to attract, retain, and motivate our workforce, and we will continue investing in our employee benefit program.

For the 2018 fourth quarter, selling and administrative expenses as a percent of net are revenue improved to 18.7% as compared to 19.2% for the 2017 period. As a percentage of revenues, administrative expenses were 13.7% in the fourth quarter, compared to 13.9% for the same period last year. Adjusted selling and administrative expenses as a percent of net revenue improved by 50 basis points from 18.5% to 18%. 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 increased sales.

As we have stated in previous earning 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 non-cash amortization expense. In the fourth quarter, we recorded $5.7 million of amortization expenses, compared to $7.1 million for the same period last year. This non-cash 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 2019 amortization expense of approximately $5.9 million and full-year expense of approximately $23.3 million. This figure will change with any subsequent acquisitions.

For the full year, we improved our adjusted EBITDA to a record $164.4 million, representing an increase of 16.5% from $141.1 million in the prior year. And our adjusted EBITDA margin was 12.3%. For the fourth quarter of 2018, adjusted EBITDA improved to $43.6 million, representing an increase of 20.5% from $36.2 million in the prior year. As a percent of net revenue, our adjusted EBITDA was 12.4% in the fourth quarter, compared to 12.1% in the prior year quarter.

Our same-branch incremental adjusted EBITDA margin benefited from stabilizing gross margins and operating leverage for the 2018 fourth quarter, with 15.5%, compared to 8.4% for the same period last year. This is the highest same-branch incremental adjusted EBITDA margin we achieved for any quarter in 2018 and demonstrates our initiatives to improve profitability.

On a GAAP basis, our fourth quarter net income was $16.5 million or $0.54 per diluted share, compared to a net income of $10.8 million or $0.34 per diluted share in the prior year quarter. Our adjusted net income improved to $21.8 million or $0.72 per diluted share, compared to $16.6 million or $0.52 per diluted share in the prior year quarter.

For 2018, our effective tax rate was approximately 24.2%, and we expect a full-year effective tax rate of 25% to 27% for 2019.

Now moving on to our balance sheet and cash flow. For the 12-month period ending December 31, 2018, we generated $96.6 million in cash flow from operations, compared to $68.8 million in the prior year, a 40.5% increase. We continue to use our strong operating cash flow to fund acquisitions and reinvest in our business and repurchase our shares. Capital expenditures at December 31, 2018, were $35.2 million, while total incurred capital leases were $2.2 million.

Capital expenditures and incurred capital leases as a percent of revenue decreased 40 basis points to 2.8% at December 31, 2018, compared to the same period last year. At December 31, 2018, we had total cash and short-term investment of $100.5 million, compared to $92.6 million at December 31, 2017.

During the fourth quarter, we repurchased approximately 1.3 million shares of our common stock for a total price of approximately $46.5 million. For the year, we've repurchased approximately 2.1 million shares for a total price of approximately $89.4 million. We have approximately $61 million available in our expanded $150 million stock repurchase program.

Total debt at December 31, 2018, was approximately $463 million. Taking into account cash and short-term investments at December 31, 2018, our net total debt was approximately $363 million, compared to $267 million at December 31, 2017.

Our capital structure remains conservative, and we have considerable flexibility as we continue to deliver on our growth strategy.

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

Thanks, Michael. IBP has a strong platform, a disciplined approach, and an experienced team. I'm encouraged by our record results and our opportunities to grow and create value for our stockholders in 2019 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.

First question I wanted to ask was about the price mix. Obviously a very strong number at nearly 8%. You know the turmoil that began in terms of insulation pricing at the beginning of '18, you have talked about it taking through part of '19, maybe even all of '19, to get back to equilibrium in terms of your input cost versus your pricing to your customers. So it looks like you made some pretty good progress in '18 obviously based on that -- I'm sorry, in 4Q based on that 8% number. Where are we generally in terms of catching up and getting to an equilibrium there? Just kind of a rough sense of that, please.

Nishu, this is Michael. As you can probably tell from our prepared comments, I'm fighting a bit of a cold, so sorry if I don't come across very clearly. But yes, we did make very good progress in the fourth quarter, which we were pleased with. But as we noted in the third quarter, we expect to continue to make further progress as we go through '19, and that continues to be the case. So we're continuing to make sure that we're, as Jeff said in his prepared comments, that we're working with customers that are willing to pay us the fair price for our services and fully get back to, as you refer to it, that equilibrium between price cost and selling price to our customers.

And I guess -- this is Jeff, Nishu. But I guess to further clarify or make even a little more of a point on it, I don't consider our price and our margins at the beginning of '18 to even be equilibrium. Quite frankly, we've been playing catch-up really since the price increases have started. Just because we took 3 last year, there was at least a couple for multiple years before that. So it -- this idea of playing catch-up existed even at the beginning of '18. So I would consider what we're after is something better than what we started with, to be honest with you.

Absolutely.

Got it. And the well-recognized turmoil in the residential market, I think it makes the progress you made in price mix even -- stand out even more. Can you give us your general sense of how the volatility in the residential, new residential end market affects your ability to get back to equilibrium? I think the general investor perception might be that it would make the task a little bit more difficult. Your 4Q number obviously argues against that. But how does that complicate, or perhaps ease the process of getting back to equilibrium on price versus input costs?

Well, clearly we can't ignore the -- kind of the macro environment that's there. But quite frankly, we feel very good about the continued demand environment we're seeing. Clearly, as is very well noted publicly, that the builders are making a strong pivot towards anyhow a more affordable home, which means more volume. It also means shorter cycle times, and it also means more specs. So there's still quite a bit of backlog of single-family work to work on. And we're encouraged by the pivot the builders are making and also the very early signs that we're -- the indications that we're seeing from the spring selling season.

But fundamentally, as you know, because we've spent quite a bit of time talking about it, we have been positioning the business for a pause or a slight slowdown in the rate of growth in new single-family construction by diversifying the product offerings that we have to our new single-family construction customers, but also on the commercial side of the business. So we really have been building and preparing for, however, you want to characterize what's going on in the market now, for really 18 to 24 months, now. And we feel very confident about our ability to continue to perform and deliver good returns for our shareholders.

Right, right. And the 18% growth you saw in commercial projects in 4Q '18 certainly obviously reflects that diversification. How does that compare, that 18%, to the underlying market rate of growth? And what do you expect for 2019 on the commercial side?

So, Nishu, just to clarify, our -- for the full year, our total sales growth was at 18%, and in the quarter, our total sales growth was 17.8%. But the growth at Alpha was 13% in the quarter and 11.5% for the full year.

So as you know, we don't provide guidance, but Alpha has continued to grow at an organic rate similar to our same-branch sales growth. And we feel, given the backlog of business that we have within the Alpha business, we continue to feel good about its ability to grow at a good clip.

As you full-well know, because it's commercial business, and they are long-term contracts, we have greater visibility into what their revenue picture is going to look like than we might some of the other businesses. So we feel good about that business's ability to perform in '19.

As we've mentioned in previous calls, the profitability there has been a little bit lower than our expectations because of the branch startup costs that we've been incurring, but we did make good progress in the fourth quarter of '18, both from a revenue and a profitability at that business. But we still have work to do in '19. And as we've previously said, we believe we'll continue to see improvement going through '19 with that business.

I would (inaudible) both business, both the residential side and the commercial side, there's plenty of market opportunity for us to run the playbook that we've set out before us.

So our next question comes from the line of Michael Wood with Nomura Instinet.

First, are you able to quantify for us the headwinds to profit in the fourth quarter from price cost in the new Alpha branch investments that you're making?

So you know, when we've talked about it in the past, we've talked about, on an annual basis, it being $1 million to $1.5 million. The headwinds in the fourth quarter for the new branches was significantly less than that. There was still some headwinds associated with it, but it was significantly less than that on a quarterly basis. And as I just said, we feel good that we're getting positive momentum, not just in the organic business, if you will, or the legacy branches, but also that the new branches are getting up to a scale where they'll get to a profitability that we find acceptable. So the drag was -- there was definitely a drag there, but it wasn't nearly as significant as it was in the second or third quarter.

Okay. And on the residential organic growth side, are you able to give us some idea of where the organic growth rates are in some of the non-insulation products in the fourth quarter, like blinds, winter proofing? Just some of the major categories, maybe directionally commenting on it, or a range.

So we've seen pretty good balance, I would say, in terms of growth of the various product lines. We definitely have seen kind of the, I would say, stepped-up growth in the blinds business, as we've talked about. But we've really seen good balance through the various products, and that really is continuing to perform and execute on our strategy of cross-selling those other products to our insulation customers. So we're making the progress that we've been talking about for the past several quarters, and we hope that that's going to continue, or would expect that that would continue through '19.

Our next question comes from the line of Mike Eisen with RBC Capital Markets.

Just wanted to start off, and looking at what the builders have talked about, and you guys mentioned the volatility and pressure they've seen, how should we think about the potential for some organic sales declines in '19? And if that is likely to happen or possible to happen, how should we think about the decrementals in the business with volumes down?

This is Michael. I would say that we -- our internal view at this point, when we're looking at a full-year '19, is that volumes will still continue to be positive for the overall industry. I think we've done a very good job of demonstrating our ability to grow at a rate above the industry. So we would absolutely not expect there to be any decline. And we're very confident in our ability to, again, use the other products and some of the other -- like the commercial business -- to help offset any temporary weakness there might be in the new single-family side.

And that's a separate part, obviously, from our price increase strategy, and continue to try to sort through our customers to make sure we're doing work for the customers that are willing to pay us what we should get paid; a fair price.

But, and I think it was clear from the fourth quarter results is that right now, we're not emphasizing volume. We're emphasizing quality of customer and quality of margin.

Got it. That's helpful and encouraging. And then following up on that, Jeff, you also made the comment about a strong push from the builders to mix down to smaller, more affordable products. When thinking about the different moving pieces in the price bucket, including the size of the homes, the additional products you're putting in, how much of the price expectation of getting back to equilibrium is strictly talking about the insulation product, as opposed to your overall share of the wallet from the builders?

That's actually a great point because you're right. It's not just the insulation that we're talking about. It really is all of the products. Because the material price inflation that I think everybody saw in '18 was across, again, all of the products. So we're working on pricing on everything that we sell to the builder. And it's not a question of just making up share of wallet. It's a question of getting higher selling prices and a fair selling price for the product that we're installing.

Absolutely. Well, and I -- I [could] say that, as it relates to our portfolio of products, for the most part, as we've referred to them before, we've kind of I guess referred to them at times as nuisance products. But we love that word. We love the word nuisance, even though it has a negative connotation. But at the end of the day, most of the services and products that we provide to the builders are of a de minimis amount in the scheme of the total price of the house. Now, that's not to say that we shouldn't be encouraging and rewarding our salespeople for doing their job and getting out there and getting with the builder and getting it done. But at the same time, we're not talking about typically thousands of thousands of dollars of price increase that are associated with some of the other trades that would need to accomplish the same things in the house.

And I think it's key, too, as the builder makes this pivot to the more entry-level home, cycle times do shorten, and getting the house done on time becomes even more important.

Absolutely.

So we become, we believe, more important to the builder, particularly because we've done, quite frankly, such an excellent job on the labor side. Improving productivity, improving our turnover, and really having the labor to get the jobs done and get them done on time. And I think as it, again, it's been widely discussed with investors and with yourselves, that the builders that are going to win are the builders that have the houses ready to sell very quickly because an entry-level buyer is not going to wait around 6 months for a house.

Got it. Very helpful. And if I could sneak in one more, with the comments of the new branch in Phoenix, I think that brings you guys to 6 organic greenfield branches on the commercial side. Can you help us think about, when thinking [of the] 13% growth in the quarter, what the legacy Alpha branches did and how we should think about the growth rates from the new branches?

Yes. We haven't broken that out, and part of the reason is -- and I think we've talked about this on previous calls -- is because that business can be very lumpy at a local level, at a branch level, particularly on a quarterly basis. And it just, we think it would take away from the clarity of the picture we're trying to present.

Our next question comes from the line of Phil Ng with Jefferies.

This is [Maggie] on for Phil. I just wanted to dig into the supply and demand dynamics in the industry, either what you're seeing currently, or what you're expecting this year. I guess based on recent commentary about one of your competitors moving supply around and one of the manufacturers shuttering capacity this year. So I guess what the implications are for pricing and what you're expecting this year.

I guess, in a broad brush manner, I'd still say that insulation material, fiberglass, that is, remains still tight, and from a capacity perspective, pretty highly -- utilization rates are pretty high. So I don't know that we are in a vastly different position than we were in prior years. As you might remember last year, there was an unexpected, as one of our -- my colleagues would call it, a catastrophic failure, I think is what it's been referred to, in a blown wool plant that kind of threw the market into a bit of a tizzy and a tighter spot than it would have been otherwise. I don't think anybody anticipates that happening again, although that's I guess the nature of something that you don't expect. But in general, I would say it's not markedly different than it's been.

From a capacity view.

From a capacity of utilization perspective.

Yes.

Got it. Okay. Go ahead.

No, I was just going to say, as you know, that and we've talked about this for the past 5 years, we maintain a great relationship with all 4 of the manufacturers, and we think that's a key strategy, and we're going to continue to do that. They know that we're here to support them, and they're there to support us as well.

And how does the Advanced Fiber acquisition play into that, now that you own some of that playlist manufacturing capacity? Is that an easy substitute for fiberglass, and have you seen fiberglass inflation driving more demand growth in cellulous?

There has been more demand growth in cellulose because it is a substitute for fiberglass. And given that fiberglass pricing has increased so significantly, it's a logical substitute. But, I mean, there's still, the cellulose capacity is nothing like the fiberglass capacity that's out there. You can add cellulose capacity faster than fiberglass capacity, but it still takes some time. So cellulose is still sort of a niche product to some extent, but it's definitely an alternative, and it's definitely a good counterbalance to fiberglass, particularly loose-fill capacity utilization on the fiberglass side.

Got it. And if I could sneak one more in, just on your incrementals, they've been lagging that 20% to 25% target range over the last few quarters. I'm definitely being mindful of the cost inflation in 2018. But I guess what has to change, or what levers do you have to pull to get incrementals back to that long-term range? Is it just pricing, or is there labor efficiencies? Anything like that?

Yes. So we still feel very confident that we'll get back to the 20% to 25%. But again, I need to reiterate that it is not something that we expect on a quarterly basis, particularly in the first half of the year. It's typically a back half of the year opportunity for us and on a full year basis. But clearly, as we've talked about in the third quarter and in on this call, we're still getting on top of kind of the price increases and trying to realize more stronger price mix from our customers. And as we said in the third quarter of last year, we expect that to continue to go into '19, as we do today, continue to expect that to go into '19 and believe as we get into the back half of next year, we feel more confident about our ability to return to those levels.

And it is predominantly pricing. But with the decrease of turnover at the employee level and predominantly at the installer level, that we've been able to shepherd fully. We expect that to start to contribute, too, towards helping us return to a more acceptable and more historical margin.

We feel very, very good about -- I mean, I -- probably the best we've felt in…

A long time.

In a long time about our labor situation. Not that it's not something we're working on every single day, and that is definitely one of the greatest challenges of this business, but our team is just doing an excellent job, and they've really used the tools that we've given them from a employee wellness perspective to, we believe, increase significantly employee engagement and employee retention.

Our next question comes from the line of Susan Maklari with Credit Suisse.

The first question is, in kind of building on your comments just now in response to Maggie's question. But obviously, as you've gone for price, you've still really held onto your share. Can you talk to how some of the efforts you have made on the labor side, the lower turnover, the productivity, how is that helping your branch managers to have these conversations? Is it perhaps making them more productive than they otherwise would have been?

Well, I think that's a fair statement -- very fair statement, to be honest with you. I mean, the idea is that you have a finite, to a degree, at least resource who are on top of it more than maybe a competitor might be on the labor side. It certainly emboldens your conversation in terms of the price to get the job done. And quite frankly, if they -- and it's not uncommon, actually, for us sometimes to give up a little bit of work to have them try another contractor that might be a little less expensive who's not quite in the same position, only to return back to us later when they're stumbling or struggling. So it absolutely does help a manager or a salesperson to go have that conversation, and knowing that the services are going to be required elsewhere if it's not with that particular build.

The consistency and productivity of knowing that the labor force is there and that it's going to get the job done absolutely gives us a lot of confidence when we're talking to our customers.

And I'd add to that -- this is Jason. I would add to that that, with your managers being less focused or spending fewer hours on trying to get labor (inaudible) -- excuse me -- time for selling, but it also helps with other products and just overall branch profitability in terms of leveraging those costs that we have in these facilities.

Okay. All right. That's very helpful. My second question is, and I know that you oftentimes don't like to talk about the weather, but just given the severity of some of the weather that we have seen this winter, and especially with your focus in the Midwest, is there anything that you are seeing in terms of maybe delays or any other kind of changes that we should be thinking about going into the spring?

I mean, Susan, it's been pretty modest. I mean, as you know, we can work weekends to make up for lost time or times when we can't get to the job sites. And I think you might see it's just some small delays coming later (inaudible), but it's nothing significant. Nothing that we're hearing people complaining about.

Our next question comes from the line of Trey Morrish with Evercore.

In sticking with that, a lot of people are talking a little bit about the material cost inflation. But I wonder if you could talk a little bit about how you're seeing cost inflation shape up for freight and your labor component looking into 2019.

Labor, as we've said I think a couple of times, we feel very good about it and our ability to continue to improve our labor efficiencies. That's not to say that people aren't going to get paid more. It's just that we have -- more productive people get paid more money, but they're also more efficient, from our perspective, in terms of providing less -- just more efficient and better labor percentages for us.

In terms of the freight cost, I think that clearly there was a big ramp up in '18 associated with those. I don't think we or the market expects really a significant change from where we are at this point. And keep in mind, our manufacturers do pay the transportation cost for our products, and we really don't expect to see anything significant -- significantly different, I would say, in '19 around that.

Well, and we've been fighting -- that's maybe an argumentative word -- but fighting the freight rising price environment for a lot longer than even the last 12 months. It's probably been around 24 to 36 anyway. So it's typically dealt with a surcharge from the manufacturers, and it's not all that significant in terms of the surcharge, that is. I should -- I mean, it is -- any cost increase is significant, but it's not double digits.

The material price inflation is more the issue. Is the issue.

Okay. Thanks for that. And then looking back over to Alpha, with such a strong performance in the quarter, you're not really breaking out organic risk card. But I wonder if you could help us think about how pricing in the commercial business is moving. I'm assuming it's rising, but at a less rate than what you're seeing on the residential price mix. So just how to think about that part of the business directionally.

Well as you know, within that business, every job is bid. So it's very job specific. But I would say that, I mean, 2 things just fundamentally in that business, material as a percentage of the cost of a job is lower than it is in insulation or in our other products. And they also have not experienced as much material price inflation as we have in particularly the fiberglass side.

Our next question comes from the line of Trey Grooms with Stephens.

This is (inaudible) on for Trey Grooms. So I kind of wanted to follow up on your discussion of the higher selling prices you saw in the quarter. How much of this was due to mix? And then looking forward into '19, you kind of talk about what impact do you think mix is going to have on that?

Well as you know, we don't break out the difference between price and mix. And as you do know, that the -- our other products that we talk about on the residential side selling, they do reduce the price mix, because their average selling price is less than installation. So we feel very good about the progress we made in the fourth quarter. And as we've said earlier in the call, we still have room to go, and we're continuing to work through '19 to make sure that we get, again, a fair price for the quality of the service that we're providing.

That's helpful. And then my follow up, just how are you thinking about demand in 2019? I know we've talked about the sentiments has improved on the buyer side.

Yes.

But at the same time, we've seen starts continue to trend lower on a year-over-year basis. So how are you thinking about that, and maybe the cadence of that impact from starts?

Again, just looking at the macro data and looking at order growth that the builders are disclosing when they come out with their fourth quarter numbers, clearly, I think it points to a tougher first half than I think the second half. Because what we're seeing now in the forward indicators that we're, getting versus the backward indicators that we're getting, seem to be pretty positive from the builders. So this year might be a little bit lumpier than others for the industry as a whole. As we said previously in the call, we're working hard to offset any kind of weaknesses out there within the builder community. That's what we've been working on for the past 18 to 24 months in terms of diversifying the business. So we feel we're prepared for it.

We also know -- and you look at the numbers, and again, I think we're all skeptical about the census bureau numbers, just given the timing of them coming out and the government shutdown. But the backlog in single-family in December was -- this is, permits to authorize but not started was the highest it's been all year. So there are homes to be worked on as we start getting into the spring selling season. And clearly, as we've said several times on the call, the product that's being shifted to has a shorter cycle time and will get completed sooner. So we think the demand environment, at least from what we're seeing, continues to be constructive, and we're encouraged.

Our next question comes from the line of Justin Speer with Zelman & Associates.

Just a follow-up question for me. Or I have a couple questions. But the price cost you mentioned you were lagging I think something like $4 million to $5 million last quarter. And I know you mentioned something here earlier on the call, but I want to make sure I understand it. How much are you lagging, do you think, into the fourth quarter with what you have in hand now?

Honestly, we didn't quantify it for this quarter. It's definitely there, but obviously given the strength that we saw in the price mix, it's diminishing. But it's still there, and we still have -- we still have the opportunity, or we still have room to go in terms of getting back to, as Nishu referred to it, equilibrium.

So with the tightness still in capacity and a large manufacturer curtailing more, in terms of 2018, there were 3 price increases, and I think there was an announcement for January for another increase. I guess what's your view on the, I guess the cadence of pricing in view of what is a softer volume backdrop to start the year? And then on -- following on that is how does that play into your negotiations with your customers as you try to push that price through?

Yes. As Jeff said earlier, you know, the capacity utilization is still high. So we would expect that '19, there is price realization for sure from the manufacturers. And it's important for us, and we're having those conversations with our customers now, to make sure that we can stay on top of it. But we don't expect it to be anything like what we experienced in '18 in terms of the number of increases and the rigidity of the increases out there.

Yes. The backdrop, from a manufacturer perspective, is not exactly the same as it was obviously in '18. But it still remains tight from a utilization perspective. But again, I'll just go back to the idea that there is plenty of market opportunity for us as a company out there in the marketplace to run our playbook and to stick with our plan.

So do you, I guess big picture, I think everyone's just trying to figure this thing out, do you think that you can expand margins in view of this tough first half, better back half? And I know seasonally it's important for the back half to be better. But do you think you can expand margins in 2019?

Absolutely. Absolutely. It's really, it's more of a -- it's conviction around getting paid what you should get paid for the services you're providing. And I think our company, down to the salesperson and managers, I think they believe that statement, and they should. It's not an easy business for what we get paid, traveling 3 times out to a house to make on average $2,500 or so on an installation job. It's -- and to do that on time and pass inspection, frankly, we should be rewarded.

Yes. And when we say that, we think of it in the context of the full year.

Right. No, that's exactly what I'm looking for. And then last question for me on this commercial business, because it's tucked in here -- I appreciate you giving us the revenue numbers, but in terms -- could you characterize what the full-year margin was for Alpha and where that destination is if we looked at 2019 and beyond? That'd be very helpful as well.

So it's, yes, as we've talked about, it's still below our expectations, but it is incremental to the business. So it's still a very attractive business for us, and we're pleased with the investment we've made there. And we think long term that it has the ability, like the rest of the business, to get back to sort of that mid-teens EBITDA margin that we've talked about and we believe we will get to.

Do you think you'll be there by 2019, or do you think it'll take a little bit longer to get there?

Well, we've always talked about it in the context of, once we reach stabilization, particularly on the single-family side, and I don't think anybody's expecting we're going to be at stabilization in single-family in '19.

Oh, no. I understand that. I'm talking about for the commercial business. It took a step back in '18 from '17, but that mid-teens [bogey], that destination that you're looking for, is that -- are you in spitting distance of that in 2019, or do you think it's going to take longer to get to that mid-teens number?

Yes. I would say we would expect to be, quote-unquote, in spitting distance with it. But we believe that that business can even improve beyond that, and it's -- but we're going to continue to make these investments in organic branches and do acquisitions. And all that stuff is just continuing to build that business, so. And we believe making those investments are absolutely the right thing to do to create shareholder value long term.

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

This is Josh on for Keith. So I just wanted to follow up on some general topics kind of discussed. In 2019, do you see mix inside the insulation business changing at all, given the shift to kind of more affordable homes?

I mean, certainly, the affordable home product is a fiberglass cellulose product and not a spray foam product. So there's no doubt that that shift will continue to be fiberglass. But keep in mind, the shifts that everybody's talking about is really heavily weighted towards the production builders making that shift, and they were fiberglass installer or fiberglass buyers anyway, as opposed to spray foam, with the exception of Meritage. So I don't think you're seeing necessarily -- going to see necessarily a huge shift within fiberglass and spray foam. I do think you're seeing slightly greater spray foam adoption in some product lines, and as a consequence, the market is seeing good spray foam growth. And particularly as it becomes somewhat more cost competitive with fiberglass. But it's incremental. It's not -- this is not a sea change where all of the sudden spray foam's going to be, in our opinion, bigger than fiberglass.

Okay, great. And then I think you mentioned earlier the other products. That would be kind of a negative mix, just because the average selling price is a little bit less. Is there any expectation for growth profile to be kind of different there than the installation business that would cause some kind of negative mix, versus the pricing you're getting on the installation side?

Yes. I think we've talked about this in previous quarters. I mean, part of the strategy, particularly in a softer demand environment, is clearly for us to aggressively -- more aggressively cross-sell those products to our existing customers. And that definitely has a negative impact on price mix, as we've talked about for quite a while. But as our numbers would indicate, we've been successful in offsetting that by improving our customer mix, who we're doing business with, and improving our average selling prices.

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

A couple questions, here. Last year in the fourth quarter when the incrementals started slowing down, you guys were very clear about Alpha being the driver of that. I think in the second quarter you talked about how you were hitting those normalized incrementals on the installation business, ex-Alpha. So it sounds like you're talking about the improvements, right? The year-over-year incrementals have improved from 8 to 15. And at the time, I think it was last quarter or the quarter before, you talked about the gap being related to Alpha, your incrementals, and came to that $3 million or $500,000 a branch. That really seems, at the time, we talked about that subsiding by kind of mid-'19. There's nothing that's changed regarding your prior comments, is there? In regards to new greenfields or anything else like that?

Hi, Ken, this is Jason. No. I mean -- excuse me. The communication that we had (inaudible) the second quarter was consistent about Alpha and the impact it had on the quarter. I think largely we feel that Alpha's done a great job of getting these new branches up to a reasonable level of profitability that it's not been something that's really been a big impact on incrementals or profitability. There's still work to do in terms of making those meet the expectations that we have, but it's not been a sizeable drag on what we've reported in the third and fourth quarter.

Okay, good.

And it's consistent with exactly what we said in the second quarter -- second and third quarter. We're continuing to see improvement. Continuing to see improvement in Alpha, we're continuing to see improvement in our price mix. We're doing exactly what we said we've been doing.

Good. A question. Isolating -- just thinking at your slide deck, when you -- if you were to exclude commercial, so any foam and commercial businesses, what's your residential insulation split between fiberglass and foam in terms of units and value? I mean, is it 10% of volume to 20% of value? Just trying to get a sense there when I look at (inaudible).

All right. So I'm going to give you a very -- yes. I'm going to answer part of that question very specifically. Our new single-family spray foam volume, dollar volume is about 15% of our new single-family insulation volume. The -- I'm not going to give you units, because units we used as a general rule…

That's fine. Don't worry about it. But, and I just wonder. I know you guys were referencing this 1 to 2 points of growth in single-family and clearly, spring is developing. I would say all the flowers, they're going to come. They're not out, to put it mildly. And I'm in California, so. When you look at it, if you take the government data because you have I think per your deck 28% share of new single-family installs, but for another competitor, you probably have the best real-time data in the country. Does it -- and it was a really bad start number in December, which is probably flawed government data. But I mean, if you look at it, it's saying starts lag 90 days, you're down about 6%. I think December's data is probably wrong, just because of the collection process. But it does point, in any case, to a down unit outlook when your lag starts 90 days. And I know you guys bring in completions a little bit.

But if it was negative in the first quarter, would that actually surprise you, or do you think it's, you know, that's just crazy based upon what you're seeing. I know you referred to backlog for permits. But you have pretty good visibility into real data versus what the government is alleging. Is that -- the government's data appear to be wrong in its negative casting of starts lag 90 days?

I mean, I think we're all skeptical about the monthly data from the census bureau, right? We've talked about that a lot because it gets revised significantly and often. We continue to feel very good about the year. I mean from a macro perspective exclusive of IBP, could you see negative numbers coming in the first and second quarter of '19? Yes. Do we feel -- I mean, we're 2/3 of the way through the quarter, and we obviously have a lot of boots on the ground. Do we feel very good about our ability to perform through any kind of a soft patch? Absolutely.

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

So back to price cost, I just wanted to make sure I understood. Sounded like there's going to be continued pressure in H1 consistent with what you said before, opportunity in the second half. Does that opportunity in the second half, what does it incorporate from an incremental pricing action perspective in the first half of '19?

It includes us continuing to make progress, as we have in the fourth quarter, with our customers. So and we obviously, as you know, don't provide guidance, so we haven't talked about any specific numbers that we would expect to get from a price perspective.

Okay. But does it assume -- are you basically catching up from last year's price, or are we -- I guess the question I'm asking is the new pricing action, should manufacturers push out that potential pressure, as you guys have to catch up from '19 pricing actions?

Yes. What I would, as I think -- we may not have said it very clearly, but as I think we've sort of indicated both in the third quarter call and in our answers to some of the previous questions, is that the capacity within the fiberglass industry continues to be high. I think, while the inflationary environment in '19 is much more benign than it was in '18, it's still there. And we still have work to do in terms of getting on top of '18's insulation. So we're working on both getting on top of '18's insulation and, albeit at a more benign level in '19, on top of that as well. It is a constant working and crafting of making sure that our customers are willing to pay us the fair price for our services.

And I think last quarter, Mike, you talked about if you exclude the price cost pressure, you would have been within your targeted incremental EBITDA margin range. Was that the case in Q4 as well?

Yes.

Okay. And then final question, you've kind of established a trend here on the SG&A leverage front, 80, 90 basis points the last couple of years. How do we think about that going forward? And I guess a lot of it depends on the volume. But how do we think about your outlook for SG&A leverage in '19, '20 just broadly?

We continue to believe that we'll make progress. And maybe not at the same rate that we've been making progress at, but we continue to believe we'll make progress in getting that leverage. One of the keys, obviously, is, on a company-wide basis, is the pace of which we do acquisitions. Because obviously, acquisitions bring on with them G&A expenses as well.

I would 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. You may disconnect your lines at this time. Thank you for your participation.