Management s Prepared Remarks Second Quarter Conference Call August 7, 2018

Transcription

1 Management s Prepared Remarks Secnd Quarter Cnference Call August 7, 2018 Tabitha Zane Vice President, Investr Relatins Thank yu and gd mrning. On the call tday are Jerry Vlas, Chief Executive Officer, Rbert Buck, President and Chief Operating Officer, and Jhn Petersn, Chief Financial Officer. Please nte, we have psted senir management s frmal remarks n the Investr Relatins sectin f ur website at tpbuild.cm. Many f ur remarks will include frward-lking statements cncerning the cmpany s peratins and financial cnditin. These frward-lking statements include knwn and unknwn risks, including thse set frth in this mrning s press release as well as in the Cmpany s filings with the SEC. The Cmpany assumes n bligatin t update r supplement frward lking statements that becme untrue because f subsequent events. In additin, we will als discuss nn-gaap financial measures which can be recnciled t the mst cmparable GAAP measures in a table included in tday s press release. Jerry Vlas Chief Executive Officer We are pleased t reprt anther strng quarter. While Jhn Petersn and Rbert Buck will fllw with further details, I will speak t a few f the highlights. Secnd quarter sales were up 27.7%, with same branch sales, driven by price and vlume gains, cntributing 10.5% f this grwth. Fr the first half f the year, ttal sales increased 19.8%, 8.6% n a same branch basis, utpacing lagged husing starts. Adjusted earnings per share fr the secnd quarter was $1.03 cmpared t $0.67 a year ag. Adjusted EBITDA margin imprved 140 basis pints t 11.6% and the verall incremental EBITDA margin was 17%, 23.6% fr same branch. We again saw higher material csts in the quarter with a secnd fiberglass cst increase ging int effect in April. The gd news is we achieved higher selling prices in the quarter, allwing us t pass thrugh a sizable prtin f these increased csts. Our cntinued fcus n peratinal efficiency enabled us t ffset the remainder f these higher csts and mre, leading t a 60-basis pint imprvement in ur perating margin. Ging frward, we are cnfident that we will fully ffset material cst inflatin with higher selling prices. We have, ver time, clearly demnstrated ur ability t pass cst increases thrugh with selling price adjustments. It is a prcess f striking the ptimal balance and timing, market by market, between price and vlume. This enables the strng leveraging f fixed csts, an imprtant lever in ur verall margin imprvement. Jhn and Rbert will bth add sme additinal cntext in their remarks. June 30 marked ur third year as an independent public cmpany and I culdn t be pruder f what ur team has accmplished in just 36 mnths. Tday, cmpared t three years ag, Tpbuild is a much mre efficient and prfitable peratin. Our labr and sales frces are significantly mre prductive, we ve ratinalized ur back-ffice peratins, we ve clsed 1

2 unprfitable branches, streamlined mst f ur prcesses and prcedures and enhanced ur management team. This fcus n peratinal efficiency is ne f the key factrs in the expansin f ur adjusted perating margins. Cmparing secnd quarter 2015 t secnd quarter 2018, TruTeam s adjusted perating margin has grwn frm 5.1% t 11.6%, and Service Partners adjusted perating margin expanded frm 7.7% t 9.7%. We als successfully implemented a capital allcatin prgram, driving value fr ur sharehlders. We cmpleted ten acquisitins that are expected t cntribute almst $500 millin f annual revenue and repurchased almst $162 millin f ur cmmn stck. In summary, ur tp-line strength and strng margin expansin ver the past three years demnstrate ur cntinuing fcus n prfitable grwth. Our latest transfrmatin, just three mnths ag, was the acquisitin f the number three player in ur industry, USI, creating a best-in-class rganizatin with a strng platfrm fr grwth and cntinued prfitability. The USI integratin is right n track, bth frm the standpint f prjected cst savings synergies as well as the blending f the utstanding USI team int the TpBuild rganizatin. We nw estimate that between TruTeam and Service Partners, we have a 40%+ market share. N ther installer r distributr can match ur size and scale, giving us a significant cmpetitive advantage. Acquisitins remain ur number ne chice fr capital allcatin and we cntinue t seek cmpanies that Enhance ur custmer value prpsitin Are prfitable, well managed businesses Have slid custmer bases Augment ur prduct mix and Prvide experienced leaders and qualified labr. We remain bullish n new husing cnstructin, believing it will expand fr several mre years. Jb grwth remains slid, husing inventry is extremely tight, interest rates are still relatively lw and husehld frmatins are increasing. N surprise that there has always been a clse crrelatin between husehld frmatins and eventual husing starts. Census Bureau data n husehld frmatins has been very strng fr the last cuple f quarters, including the mst recent June reprt. Given limited resale inventry, new hmes represent the nly chice in twn fr many cnsumers lking t buy a huse. This external envirnment shapes up as a big psitive fr TpBuild. 2

3 Jhn Petersn Chief Financial Officer Cnslidated revenue increased 27.7% t $606.0 millin, driven by increased sales vlume and selling price grwth at bth TruTeam and Service Partners, and $81.9 millin f revenue frm cmpanies acquired since April Revenue fr the first half f 2018 rse 19.8% t $1,097 millin, including $102.5 millin f revenue frm cmpanies acquired since January Adjusted grss margin declined 60 basis pints in the secnd quarter t 24.0%, and fr the first half f 2018 declined 50 basis pints t 23.3%, a direct result f higher material csts as well as higher insurance expenses, partially ffset by vlume leverage and imprved selling prices. We realized selling price increases f 3.3% at TruTeam and 7.7% at Service Partners, an imprvement frm first quarter where price increases were 2.3% and 5.6%, respectively. The secnd quarter grss prfit cmpressin was largely the result f a delayed full recvery f secnd quarter material cst increases. That said, we re cnfident we mre than cvered the first quarter material increases and expect full recvery f secnd quarter material cst increases smetime in the third quarter. As I explained last quarter, while at times there can be a lag between a material cst increase and a crrespnding selling price increase, we remain cnfident in ur ability t push the full impact f inflatinary input csts thrugh selling price increases. Adjusted perating prfit grew 37.0% t $57.8 millin, with a crrespnding margin imprvement f 60 basis pints. Operating margin imprvements were driven by vlume leverage, higher selling prices and strng SG&A cst cntrl; partially ffset by higher material and insurance csts as well as higher amrtizatin csts driven primarily frm the USI acquisitin. With the acquisitin f USI n May 1, ur amrtized intangible assets have increased by $165.9 millin, resulting in additinal annualized amrtized expense f apprximately $15.0 millin. Secnd quarter 2018 adjustments ttaled $14.1 millin, including $9.8 millin related t acquisitin expenses and $4.3 millin f ratinalizatin charges, the majrity f which were related t the USI transactin. Adjusted EBITDA fr the secnd quarter was $70.6 millin, cmpared t $48.2 millin in 2017, a 46.4% increase, and ur EBITDA margin imprved 140 basis pints t 11.6%. On a same branch basis, adjusted EBITDA was $59.9 millin cmpared t $45.6 millin a year ag, a 31.4% increase, and ur same branch EBITDA margin was 11.4%, versus 10.1% secnd quarter In the secnd quarter, ur drp-dwn t adjusted EBITDA margin was 17.0% in ttal and 23.6% n a same branch basis. Fr the first six mnths f 2018, adjusted EBITDA grew 42.0% t $116.6 millin, and adjusted EBITDA margin was 10.6%, a 160-basis pint imprvement ver first half Our drp-dwn t adjusted EBITDA margin in the first half was 19.0% in ttal and 28.6% n a same branch basis. Secnd quarter SG&A as a percent f revenue was 16.7% cmpared t 16.0% in the secnd quarter f 2017 and 15.7% last quarter. The year-ver-year increase is the result f higher acquisitin related csts, higher amrtizatin expense and transitin csts related t the USI acquisitin, partially ffset by lwer legal expense and lwer bad debt expense. Stripping ut ratinalizatin and M&A csts frm bth years, SG&A as a percent f revenue wuld have been 14.4% in 2Q 18 versus 15.7% 2Q

4 Adjusted incme fr the secnd quarter was $36.9 millin, r $1.03 per diluted share cmpared t $25.0 millin r $0.67 per diluted share. Fr the six mnths f 2018, adjusted incme was $63.1 millin, r $1.76 per diluted share, cmpared t $42.0 millin, r $1.12 per diluted share. Wrking capital as a percent f sales fr the trailing twelve mnths was 11.1% versus 8.8% a year ag. This increase was primarily due t the acquisitin f USI, whse accunts payable terms are ntably less favrable than TpBuild s as well as t a strategic buildup f inventry at Service Partners. Our team is wrking with suppliers t align USI s terms with urs, and as these terms are adjusted, wrking capital as a percent f revenue is expected t decline. CAPEX fr the first six mnths f the year was $27.5 millin, 2.5% f sales, within ur targeted lng-term range. As a reminder, we are nw purchasing versus leasing ur vehicles. We finished the quarter with ttal liquidity f $256.4 millin, including cash f $65.7 millin and accessible revlver f $190.7 millin. Operating cash flw was $41.4 millin fr the quarter. Our effective tax rate was 25.5% fr the secnd quarter. This rate is lwer than ur guidance f 27% primarily due t sme small discrete items captured in the quarter. Fr lng term planning purpses, we still guide t a nrmalized tax rate f apprximately 27%. Mving t slide 11, while Rbert will talk abut where we are in the integratin prcess, frm a financial standpint we are extremely pleased with USI s initial results. Of the $81.9 millin f acquisitin revenue this quarter, USI cntributed $68.7 millin. In additin, incremental EBITDA margin frm acquisitins was a strng 13.0%, f which USI was the largest cntributr. We remain very cnfident we will realize at least $15 millin in cst-saving synergies, including $2 millin t $4 millin this year. Synergies fall int three buckets: back ffice efficiencies, branch ptimizatin and supply chain efficiencies. We estimate the ne-time cst t achieve these synergies is in the range f $10 millin t $12 millin, with rughly $8 millin t $10 millin t be spent in Thrugh the secnd quarter we have recrded apprximately $5 millin f these ne-time csts. We funded the $475M acquisitin f USI with prceeds frm ur $400 millin 5.625%, eight-year Senir Ntes ffering and frm a $100 millin delayed-draw term lan that was available under ur existing secured credit facility. As a result, ur prfrma net leverage multiple at the end f the secnd quarter was a cnservative 2.55 times and, if yu include the $15 millin f cst savings synergies I just discussed, ur leverage multiple wuld be 2.4 times, within ur targeted net leverage multiple range f 2.0 t 2.5 times. Mving t 2018 annual guidance and inclusive f USI, we ve raised the lw end f ur utlk fr ttal revenue by $20 millin t $2,358 millin with the high end remaining the same at $2,398 millin. The lw end f the range fr adjusted EBITDA has been raised by $6 millin t $269 millin with the high end remaining the same at $284 millin. We are nw assuming residential new husing starts f between 1.26 millin and 1.28 millin, increasing the lw end by 10,000 starts. Our utlk assumes USI cst saving synergies f between $2 millin and $4 millin this year. 4

5 Rbert Buck President and Chief Operating Officer We are very pleased with ur secnd quarter results. TruTeam and Service Partners achieved slid revenue grwth and bth businesses did a gd jb managing rising material csts and achieving selling price increases. Prfitable grwth cntinues t be ur primary fcus and ur teams in the field are ding a great jb f keeping this gal in mind as ur results clearly demnstrate. Lking at TruTeam s financial results, secnd quarter sales increased 33.8% with a big bst frm USI s installatin branches. Same branch sales are up 11.6%, driven by strng vlume grwth f 8.3%, which utpaced lagged husing starts. Quarterly results als benefitted frm a 3.3% increase in selling prices. Despite increases in material csts and amrtizatin expense, adjusted TruTeam perating margin imprved t 11.6%, a 60-basis pint imprvement frm secnd quarter Vlume leverage was a key cntributr twards this margin expansin and results were als favrably impacted by higher selling prices and great peratinal executin. At Service Partners, sales were up 17.5% in the quarter, primarily driven by a 7.7% increase in selling prices, tw mnths f revenue frm USI s distributin branches and revenue frm ADO Prducts acquired this past January. As expected, selling prices at Service Partners cntinue t imprve as material csts frm manufacturers rise. The lcal Service Partners teams have dne a really gd jb f managing the fiberglass material allcatin while still prviding great custmer service. Adjusted perating margin was 9.7%, flat frm secnd quarter 2017, but up sequentially frm Q1. Acrss the cuntry ur teams in bth segments have dne a nice jb recvering the Q1 material cst increases and we currently have great tractin recvering the Q2 material cst increases. On ur first quarter call we nted that by late February, early March we had begun gaining tractin n selling prices. The secnd cst increase tk effect in April and, similar t the first quarter, by late May, early June we again gained gd tractin passing alng these cst increases. A clear indicatin f this success is the sequential imprvement in price by bth businesses. In June, the fiberglass manufacturers annunced their third cst increase f 2018 due t take effect late August/early September. The material increase is a functin f bth tight supply and increasing freight csts. Again, we are cnfident in ur cntinued and prven executin t recver any material cst increases. As mentined n prir calls, we are agnstic in terms f which insulatin ur custmers select. In sme cases, the rising cst f fiberglass has made cellulse and spray fam a gd ptin fr ur custmers. We cntinue t see spray fam gain share and ur vlumes have increased at bth businesses this year up 34% year t date at TruTeam and up 29.7% year t date at Service Partners. 5

6 Labr cntinues t be tp f mind in the industry. Labr remains tight, but at TpBuild we cntinue t imprve prductivity and find new ways t recruit qualified installers. We gained an additinal 1,200 installers thrugh the acquisitin f USI and we are able t share labr, trucks and inventry acrss ur branches, a significant benefit fr ur custmers. Turning t the USI acquisitin the results f the business and integratin prcess are prceeding better than expected and ur teams are very aligned. With similar crprate cultures and a very strng bias by the entire team t make this transitin as smth as pssible, we are hitting ur milestnes and executing very well. The first wave f USI branch lcatins t integrate nt ur Oracle system went live in June and subsequent waves are happening every mnth thrugh Octber. We are als rapidly transferring respnsibilities frm St. Paul, USI s frmer crprate headquarters, t ur Daytna Beach Branch Supprt Center including the areas f Finance, HR, IT and Supply Chain. We have als started t evaluate and identify crss selling pprtunities and believe there is gd ptential fr incremental revenue. This includes USI s glass and windw business which generates apprximately $90 millin f annual revenue with healthy perating margins. And finally, t reiterate what I utlined n ur last call in early May, by year-end 2018 we will have: Mved all cre branches nt ur perating systems Clsed the St. Paul ffice and mved all crprate functins t ur Daytna Beach Branch Supprt Center Eliminated redundant crprate functins Streamlined back ffice peratins Started t ptimize branch peratins and Started leveraging ur supply chain As Jhn mentined, we expect t realize $2 millin t $4 millin f synergies this year and we are cnfident we will exceed the $15 millin f cst-savings synergies within tw years f clse. In summary, ur team is fcused n prfitable grwth thrugh a balance f vlume and price. We are driving peratinal imprvements, executing extremely well at the lcal level and prviding utstanding custmer service. As always, I thank ur entire TpBuild team fr their hard wrk, energy, and unyielding fcus n delivering cntinued strng bttm line results while perating safely every day. Jerry Vlas Chief Executive Officer As yu can see frm ur results, we cntinue t execute well and generate excellent tp and bttm line perfrmance. We leverage TruTeam, the largest insulatin installer, and Service Partners, the largest insulatin distributr, t create bth scale advantage and cverage acrss a fragmented builder and cntractr cmmunity. Our business mdel is nw even strnger with the additin f USI t the TpBuild rganizatin. We expect the husing market t remain healthy and TpBuild t cntinue perfrming well within that envirnment. 6