TopBuild Corp
NYSE:BLD
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
308.96
479.09
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
TopBuild Corp
You don't have any saved screeners yet
Greetings, and welcome to the TopBuild Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 01, 2019.
I would now like to turn the conference over to Ms. Tabitha Zane. Please go ahead.
Thank you, and good morning. On the call today are Jerry Volas, Chief Executive Officer, Robert Buck, President and Chief Operating Officer, and John Peterson, Chief Financial Officer. Please note, we have posted senior management’s formal remarks on the Investor Relations section of our website at topbuild.com.
As shown on Slide 2 of today’s presentation, many of our remarks will include forward-looking statements concerning the company’s operations and financial condition. These forward-looking statements include known and unknown risks, including those set forth in this morning’s press release as well as in the company’s filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. In addition, we will also discuss non-GAAP financial measures, which can be reconciled to the most comparable GAAP measures in a table included in today’s press release.
Please turn to Slide 3. I will now turn the call over to Jerry Volas.
Good morning, everyone, and thanks for joining us today. We are pleased to report another solid quarter, again demonstrating the strength of our uniquely diversified business model, and our focus on profitable growth. Before reviewing our second quarter results, I wanted to update you regarding our view of the U.S. housing industry.
On our last call, with mortgage rates moving lower and builders positively reacting to the demand for more affordable housing, we expressed optimism that housing starts would begin climbing higher as the year progressed.
Our outlook at that time was further reinforced by a more favorable trend for permits, positive conversations with builders and a healthy economy driving solid wage and job growth.
At this point in time, starts have not accelerated to the degree that we and many others have been anticipating. However, for all the aforementioned reasons, we do expect starts to strengthen further as we move through the year. Long term, we remain bullish on residential new construction.
The fundamentals such as household formations and limited housing supply, point towards continued growth in new home construction activity. Although the slope of growth may be unpredictable and could be choppy in the near term, we are confident starts will improve and continue towards the 50-year historical average of 1.4 million to 1.5 million per year.
Moving to TopBuild’s financial results on Slide 4, we again reported an excellent quarter as we continue to execute well on our strategy, which includes, outpacing lagged housing starts through market share gains and strong operational performance, growing market share in the commercial space, and converting our top line growth to the bottom line through a focus on improving operational efficiency and leveraging our existing branch footprint and back office operations.
In the second quarter, total sales were up 8.9%, compared to lagged housing starts that were down 8%. Our commercial business again performed extremely well, and we saw solid residential new construction activity at TruTeam. While John will follow with more specifics, I want to emphasize that we are particularly pleased with the expansion of our adjusted operating and EBITDA margins of 210 basis points and 260 basis points, respectively.
That drove adjusted net income to $1.43 per share, an increase of almost 40%. Our internal focus on share gains and operational efficiency continues to pay off. Turning to capital allocation on Slide 5. In mid-July, we completed the acquisition of Viking Insulation. This is a well-established, well-managed and profitable company based in Burbank, California that focuses on fiberglass installation for residential and light commercial projects. For the trailing 12-months ended March 31, 2019, Viking generated approximately $9 million of revenue.
Our cost-saving synergies will add to the financial performance of this excellent addition to our national footprint. Looking forward, our seasoned M&A team continues to work a robust pipeline of prospects, primarily core insulation companies, and we expect to close on a number of these opportunities this year. In addition to acquisitions, our capital allocation strategy includes share repurchases and in the second quarter this included almost 197,000 shares at an average per share price of $75.57.
Before turning the call over to John, I want to emphasize that our national scale gives us a significant competitive advantage, both from a material and a labor standpoint. Just as important, our diversified business model, with both installation and distribution into both the residential and commercial markets, gives us the ability to perform well in any environment. Our year-to-date results clearly demonstrate the value of this business model. John?
Good morning, everyone. As Jerry noted, we continue to generate strong financial results. Starting on Slide 6, in the second quarter, consolidated revenue increased 8.9% to $660.1 million, primarily driven by increased selling prices at both TruTeam and Service Partners and one additional month of acquisition revenue from USI. Revenue for the first half of 2019 rose 16.6% to $1.279 billion including $124.9 million of revenue from companies acquired since January 2018.
Gross margin increased 260 basis points in the second quarter to 26.5%, and for the first half of 2019, expanded 250 basis points to 25.8%. Adjusted operating profit in the second quarter grew 32.2% to $76.4 million, with a corresponding margin improvement of 210 basis points. For the first 6 months, adjusted operating profit increased 41.2% to $135.5 million, with a corresponding margin improvement of 190 basis points.
Both gross margin and operating margin improvements were driven by higher selling prices, higher growth of commercial sales, operational efficiencies and synergies from USI, partially offset by higher material costs.
Adjusted EBITDA for the second quarter was $94 million compared to $70.6 million in 2018, a 33.2% increase, and our adjusted EBITDA margin improved 260 basis points to 14.2%. On a same branch basis, adjusted EBITDA was $87.7 million, a 24.3% increase, and our same branch EBITDA margin was 14%. In the second quarter, our drop-down to adjusted EBITDA margin was 43.3% in total.
For the first 6 months of 2019, adjusted EBITDA grew 44.6% to $168.6 million, and adjusted EBITDA margin was 13.2%, a 260 basis point improvement over first half 2018. Our drop-down to adjusted EBITDA margin in the first half was 28.6% in total.
Second quarter SG&A as a percent of revenue was 15% compared to 16.7% in the second quarter of 2018, and 16% last quarter. The year-over-year decrease was the result of lower acquisition and closure costs related to USI.
On Slide 7, you can see adjusted income for the second quarter was $49.5 million or $1.43 per diluted share compared to $36.9 million or $1.03 per diluted share. Second quarter and first 6 months 2019 adjustments were $393,000 and $2.9 million, respectively, primarily tied to the acquisition and integration of USI. Our effective tax rate was 22.2% for the second quarter due to some discrete items captured in the quarter.
For long-term planning purposes, we still guide to a normalized tax rate of approximately 26.5%, which is reflected in our adjusted EPS guidance of $1.43 per diluted share as compared to our reported EPS of $1.51 per diluted share. For the 6 months of 2019, adjusted income was $86.1 million or $2.49 per diluted share compared to $63.1 million or $1.76 per diluted share.
Interest expense in the second quarter 2019 increased from $7.3 million to $9.6 million versus prior year, and for the first half, increased from $9.6 million to $19.2 million, primarily related to the funding of the USI acquisition in the second quarter last year.
Moving to Slide 8. CapEx for the first 6 months of the year was $22 million, 1.7% of sales, slightly below our targeted long-term range of 2% to 2.5%.
Working capital as a percent of sales for the trailing 12 months was 11.9% versus 11.1% a year ago. This increase was due to a number of factors, including the higher mix of installation business from a year ago, strong growth in heavy commercial, which has longer receivable terms and the impact of selling price increases.
As shown on Slide 9, we ended the second quarter with net leverage of 1.8x, using trailing 12 months adjusted EBITDA, which is slightly below our targeted range of 2 to 2.5x. Total liquidity at June 30, 2019, was $328.9 million, including cash of $141.8 million and accessible revolver of $187.1 million. Operating cash flow was $96.3 million for the 6 months ended June 30.
Moving to annual guidance on Slide 10. We’ve lowered our outlook for housing starts for 2019 to a range of 1.23 million to 1.27 million. Our previous outlook was 1.26 million to 1.3 million starts. While this reduction is in line with weaker-than-anticipated starts through the first half of 2019, we expect to see some moderate growth in the second half of the year. As Jerry noted, we remain bullish regarding the long-term health of the residential and commercial markets we serve.
Accordingly, we’ve lowered the high end of our outlook for the total revenue by $30 million to $2.640 billion with the low end remaining the same at $2.610 billion.
At the same time, based upon our strong first half performance, we’ve increased our adjusted EBITDA outlook, raising the low end of our previous guidance by $15 million to $345 million and the high end by $5 million to $355 million. Robert will now discuss operations.
Thanks, John. To eco Jerry and John’s remarks, TopBuild is performing very well.
Our quarterly and 6-month results demonstrate our success in driving profitable growth by focusing on market share gains and operational excellence.
Starting with TruTeam on Slide 11. Second quarter sales increased 12.5%, driven by selling price increases and 1 additional month of acquisition revenue from USI. We handily beat lagged housing starts, which, as Jerry mentioned, were down 8%.
TruTeam’s adjusted operating margin improved 260 basis points from 1 year ago to 14.2%. This was driven by great operational efficiencies, USI synergies, residential and commercial sales growth and increased selling prices to offset material cost increases.
As shown on Slide 12, Service Partners’ sales were up 3.8%, driven by a 5.1% increase in selling prices and 1 month of acquisition revenue from USI, partially offset by a volume decline of 2.6%, primarily related to the exit of some low-margin business late last year. Adjusted operating margin was 9.9%, up 20 basis points from second quarter 2018.
On the residential new construction side, our crews remain busy. While we recognize a portion of our second quarter growth is attributable to builders playing catch up from the backlog, we also believe we are growing market share.
Turning to Slide 13. For the fourth consecutive quarter, we posted extremely strong growth in our commercial business. In the second quarter it was up 22.1% on a same branch basis. Year-to-date, commercial has contributed 22.6% of TopBuild’s revenue. As we have consistently mentioned, this is a great business for TopBuild, and we expect continued strong growth. The majority of our installation branches do like commercial work, and we have 18 branches that just focus on heavy commercial jobs.
Most of our distribution branches sell and distribute commercial products as well. While we’re currently working on many large projects across the country, some more notable ones include La Guardia airport, the Comcast building in Philadelphia, the Raider’s Stadium in Las Vegas, and the World Trade Center development.
Looking ahead, our backlog remains robust, and we’re bidding projects well into 2020 and 2021. We have enhanced our leadership team in this area, and with only 9% to 10% share of this $5 billion-plus market, we have plenty of room to grow.
As noted on Slide 14, we are seeing excess fiberglass capacity in the market that has found its way into the distribution channel and competition has heated up. We continue to work on a positive mix of business to support our distribution margins. We are pleased with both Knauf and Johns Manville’s announcements that they will be bringing on new loosefill capacity in the next 18 to 24 months.
This speaks to their long-term confidence in the health of the U.S. housing market, and we agree with their optimism. As starts continued its march towards the historical annual average of 1.4 million to 1.5 million, we wouldn’t be surprised to see additional capacity investments.
As mentioned by both Jerry and John, we do expect housing starts to pick up speed as we move to the remainder of the year. In our conversations with builders, they are optimistic, 2019 will end up being a solid year for the housing industry. We believe weather may have hampered this acceleration thus far 2019, but job growth is strong, interest rates are low and lack of inventory remains an issue.
Looking at Slide 15, we do believe our financial results demonstrate the strength of our uniquely diversified business model, consisting of, a nationwide footprint that gives us scale and efficiency, residential construction business balanced with an accretive and growing commercial business, 2 ways to reach a fragmented industry through installation and distribution, as well as an expertise in all insulation-related solutions.
In addition to our model, our team manages the business with a constant mindset of driving improvements and achieving operational excellence. We still see opportunities operationally to continue our track record of producing improved financial results.
We have the most talented team of operators in the field and a dedicated and experienced group at our branch support center. Our entire team remains focused on delivering strong results and creating shareholder value in every operating environment. We are driving improvements throughout the business and executing extremely well at all levels. And this focus on execution will continue.
As always, I thank our entire TopBuild team for their hard work, energy and unyielding focus on delivering continued great customer service and strong bottom line results, while operating safely every day. I’ll now turn the call back over to Jerry for closing remarks.
Before opening the call up for questions, I want to note that June 30 marked the end of our fourth year as an independent public company. In just 48 months, we have significantly transformed TopBuild, successfully executing on a strategy of profitable growth in all areas of our business.
Since the second quarter of 2015, our revenue has increased almost 64%, and our adjusted EBITDA margin has improved 840 basis points.
Our commercial business has grown from approximately 16% of total revenue to over 22% today. We estimate, we touch over 40% of all residential new home starts versus 30%, 4 years ago. Our capital allocation plan has resulted in 11 acquisitions that are contributing almost $510 million of annual revenue, and the repurchase of $246 million of our common stock at an average per share price of $54.10.
Operator, we’re now ready for questions.
[Operator Instructions] First question comes from the line of Michael Wood, please go ahead.
Great job on the continued market. My first question, I wanted to ask about the -- your comment about the excess fiberglass capacity, it’s on its way into the distribution channel. Can you just give some information in terms of what that means to Topbuild in terms of, did you acquire that at favorable prices and maybe if insulation prices are declining or stable?
Yes good morning Mike, this is Robert. So yes, I think we’ve seen, if you take compared to last year, whenever the material was tight and some allocation of loosefill material. If you take the change in that and relative to housing going into 2019, definitely, excess capacity and excess material, that’s been more prevalent, I’d say, in the distribution channel. You created some competitive situations there.
As we’ve always said, we’re constantly in discussions with the manufacturers, and we buy from all 4, and that’s just a constant business practice from our part. We felt, we’re focusing on our balanced mix of the business on the distribution side, to continue our strong margin performance. But it’s heated up some competitive nature there. But as Jerry said, and we continue to say, we believe we make good decisions on the profitable volume and price trade-offs and stuff.
So we’re confident in that. And we think that as the back half heats up and the back half volume increases and stuff, that’ll bring some stability as well.
Okay. Are you able to quantify the price cost in 2Q? Maybe split out by TruTeam or Service Partners?
Now we have the -- this is John, Mike. We have the price broken out, but we don’t break out material cost specifically.
So on the price side, TruTeam was up 4.3% on price versus prior year, and Service Partners, 5.1%. Both of those -- if you looked at the first quarter price gains were down a little bit, but that’s because, of course, we were chasing price last year. So the comps got a little bit tougher throughout the year.
Michael, Jerry here. The one thing I would add to that would be, in Q2, we are clearly back to price cost neutrality. In Q2 a year ago, we were not, if you remember back then. So, so when you look at this quarter versus the same quarter a year ago, there’s a stronger performance there.
And as Robert said very well, the environment right now for material, looks quite a bit different than it did a year ago, which could hardly not be the case since a year ago was highly unusual, given the rapid -- the machine gun fire cost increases. So looks a little different today.
A couple of suppliers have brought outside capacity that’s going to help, and then that’ll match up, we think, with improving housing starts that are going to happen here. So we -- it’s a really important piece of our model that we partner with our suppliers, constantly. Robert and his team do a great job at that.
Great. Just finally, are you able to -- efficiencies that you talked about? Is this part of normal blocking, tackling? Or maybe your rollout or benefits of a bigger productivity initiative?
Mike, I think you kind of -- you went out a little bit there, but I think what you asked was if the operational efficiency is kind of consistent where we’ve been. And the answer is, yes. I think, over the past 3-plus years, we’ve talked a lot about that. We’ve talked a lot about how we manage our branches.
Each one has an individual income statement, each one gets monitored and reviewed every month in significant detail, not just profitability, but looking by product line, by customer, sales rep performance, etc.
So focusing on that bottom 25% quartile, which is the ongoing way that we really drive and really allocate our resources to the ones that get the biggest bang for the buck. And that you saw, again, in the second quarter, the first half, and we think that doesn’t lose any steam as we continue through the end of this year and beyond on the recovery of starts.
The next question comes from the line of Trey Morrish from Evercore, please go ahead.
Hey, thanks guys and fantastic quarter. I want to start on the guide. It really looks like your second half guide for EBITDA was unchanged. And so on pricing, which we think has having a better fall through to the bottom line was stronger in the quarter and volumes are weaker.
And since pricing tends to be a bit stickier and have a greater impact, we would have thought that given the strong price in 2Q, your back half outlook would have been upgraded, especially as we’ve heard that volumes for insulation contractors in their backlogs, it seemed rather strong at this point in the year. So could you just kind of describe the levers of what’s driving the back half outlook and EBITDA to be kind of unchanged?
Trey, this is John. Just for clarity, we did increase the lower end of our guidance by $15 million and the higher end by $5 million on EBITDA. Okay?
Yes.
So that was increased. If you do the math, actually, you pick the midpoint of our revenue guidance and the midpoint of our EBITDA guidance, you really back into about a 25% pull-through on incremental, on sales growth, on incremental EBITDA, which is kind of right in the middle of our long-term guidance.
So certainly, we expect a strong quarter, and we’re forecasting a strong quarter using the midpoint.
The reason is it’s not quite as robust as the first half of the year. There’s a few things I would call out. I’d start with the fact that sales price and input cost relationship in the second half of the year, last year, we did a good job of driving price in response to significant first half fiberglass cost increases.
So with the comp on that, selling price, input cost becomes a little bit more, I’ll say, difficult the second half of the year. Commercial, which drove a big part of our growth the first half with nice accretive margins and significant top line growth, the comps on the revenue get a little more challenging in the second half where we had a really strong second half ‘18. So that comp becomes a little more difficult.
And then finally, synergies from USI, which, if you think about second quarter 2019, we were comping on 2 months a year ago where we didn’t drive significant synergies, the first 2 months of acquisition, the back half, we started to get those synergies. So those comps become a little more difficult too. But again, our back half pull-through on our guidance, taking the midpoint at 25%, roughly, we think, is relatively strong.
Okay. And going back to something you said in your prepared remark. You mentioned that you wouldn’t be surprised to see additional capacity investments from the manufacturers. Could you elaborate a bit on that statement? And how do you think about the potential for another manufacturer to announce that they were building new capacity at some point this cycle?
It’s Robert. So I think they’re always looking at opportunities and their capacity situation. They’ve changed technologies and stuff as well. They see that as an opportunity for efficiencies, for new capacity on their side.
I think that -- obviously, we’re talking to the manufacturers all the time, and as we said earlier, we share their optimism of -- at the back half of the year, their optimism for housing for the future, and they do as well. They also like what they see on the commercial side of business.
So they see growth on both sides of the business as well. So that constant look of -- look of that and the opportunity relative to what we’ll see, it’s kind of -- it’s hard for us to say. I think that looking forward, there’s plenty of opportunities with all 4 manufacturers as they look at their footprint.
And as I say we talk to their upper management on a continuous basis as well. So they’re optimistic. They’re looking at their footprint or opportunities, residential and commercial insulation products.
So we say that we think we could see additional investment because, again, I think they share our optimism, and they have the opportunity here as well.
Yes, Trey, I would say that, that’s -- as Robert said, that’s a pretty strong endorsement, I think, of how they view housing mid to longer term. I mean, these -- these are expensive investments that these folks make. And they only do it if they view a payback coming in the future years.
So the fact that some of them are now doing that. And to Robert’s point, we don’t know what’s going to happen in the future with further capacity increases. But I think it’s very, very good sign that a lot of people are on the same page here relative to the future of housing, being very optimistic about it.
All right, thanks very much and good luck.
Thanks Trey.
The next question comes from the line of Kenneth Zener from KeyBanc, please go ahead.
Good morning everybody.
Good morning Ken.
So just -- obviously, you took a lot of share. Could you kind of walk us through why you think that’s happening here? Given your price cost neutrality, doesn’t seem like you are, right, giving away your product.
Yes Ken, this is Robert. Yes, I think the first thing that I would probably point to is, we feel like we did a great job on share. If we look at the commercial growth in the business, we’re absolutely taking share there and our teams across the country, both heavy and light commercial, we’re very focused on that business, and we’ve seen some really great momentum from that perspective.
As we look at our -- on the residential side of business, although starts being down, we showed nice performance on the residential side. Some of that was our backlog carrying through as well in the quarter. But we feel lack in some areas on the residential side, we’re doing a nice job of providing great service in a labor tight environment that’s allowing us to pick up share without having to jeopardize from a price perspective. So we feel comfortable to share perspective, great job on commercial and a really solid job by the team in the field on the residential side as well.
Okay. And now, Jerry, I just -- with comments from, obviously, OC about pricing and market share and all that stuff. I mean, only time will tell what’s happening. But could you please give us some context? Jerry, you said the back half will bring stability, I think you’re referring to price.
Could you just kind of walk us through -- I mean, could -- you just did take down start guidance, about 2%, nothing dramatic. And I don’t think there’s a big downturn coming, but what if we don’t get stability. What’s going to happen? I mean, why would the price declines abate. And when does that price following input costs? When does that kind of impact your operating leverage to -- so to the extent you got the pricing through, it’s helped your incrementals.
It seems as though volumes are down, the industry, and pricing is down. It seems like that would have an impact. I’m just thinking about ‘05, ‘06, ‘07, I mean, it wasn’t a great time. You guys have changed your fixed cost. But why wouldn’t that be negative if your optimism for second half doesn’t come through?
Yes, Ken, I’ll say a couple of things to unpack there. So the first thing would be on the housing start, revised projections. I mean, we are, in fact, projecting a healthy environment in second half. I mean, if you -- the implied second half on housing starts is actually 4% higher than a year ago, second half.
And sequentially, it’s actually an improvement as well. So the first thing I would say is, we actually are projecting a better housing start environment coming up here. And we think that’s going to continue into 2020 and beyond.
So as it relates to the whole material situation, nothing -- it’s certainly going to be different than it was a year ago, when we have these rapid fire increases. I do think -- can’t speak for OC, what they’re going to do, how they’re now looking at it, it’s -- is the environment is going to be different in 2019, I don’t see it as anything highly unusual.
It’s different than it was a year ago, but last year was the unusual year, not this year. So I think this year is going to be a lot easier for us to manage. And we are going to do the job that we always do, we do business with all the manufacturers, including, Owens Corning.
And we will work towards maintaining our price/cost neutrality. That’s what we think is the sweet spot, and I say that because that enables us to strike that balance between price and volume at our branch level. So that’s really important. And then the last thing I would say about our performance in general is, irrespective of what happens with starts and -- but having said that, we’re optimistic.
But the things that we can control, such as our relationships with our suppliers, such as the operational performance of our branches, such as our M&A process and our ability to integrate them well. I mean, those are all the things that we spent a lot of time working on, and that’s as much as anything else is the engine that’s been driving our performance.
And that’s why we’re so optimistic about the future, is that no matter what the environment is, we think, and we think this is a good year to demonstrate that fact that we’re able to -- in a pretty -- and what so far has been a relatively flat start environment, some really good performance because we’re concentrating on those things that we can control.
And again, having said all that, and I almost said a mouthful here, but we see the material price environment this year has historically been kind of a normal situation that we’re really good at navigating.
Thank you very much.
The next question comes from the line of Keith Hughes from SunTrust, please go ahead sir.
Thank you. The commercial growth is outstanding. I know you talked about it picked up, I guess, in the second half of the year. What kind of comps are you going to be facing in commercial the next couple of quarters?
Yes, Keith, this is John. I don’t have -- I mean, I think last year, we had about a 17% growth in the third quarter. And I think it was a little over 21% in the fourth quarter. So compare that to the first half of the year, we were looking at kind of mid- single-digit type of performance. So that’s why we refer to the fact that the comps on the commercial side, get a little more difficult at the back half, where last year, we had some nice momentum exiting the year.
And the first quarter, what was -- just for reference, what was the first?
Again, mid-single digits, I recall, something like that, low to mid-single digits, I think, in terms of the growth. Yes
Okay. And these are all -- are these just share wins? There’s no -- was there any acquisition volume in these numbers?
No, these are all share wins. I mean, Robert kind of rattled off 4 significant projects. Behind that 4, there’s probably another 24 that we could talk about. So we have absolutely done a good job on both in light, but especially in heavy commercial, driving some nice growth and nice share gains.
Thank you so much.
You are welcome.
The next question comes from the line of Philip Ng from Jefferies, please go ahead.
Hey guys, solid quarter, particularly in the volume side for TruTeam, given how weak housing starts have been. Can you provide a little more color what’s driving that? And as you kind of worked recently in the backlogs from the year, how are you thinking about demand in back half? Is there any risk that volumes actually dipped to the negative territory?
Yes, Phil, this is John. On the volume side, I think we called out the biggest gain from a line of business standpoint. So it certainly, commercial volumes up significantly and substantially. We did a great job on the residential side, however, in spite of the fact that lagged housing starts down 8%. And I think we talked about in the prepared remarks probably, in parts around the country picked up some residential share gains in the business.
So that was favorable. And I think, again, just great execution by the teams in the field, both on the residential and commercial side.
In terms of the back half, again, I think Jerry talked about it, we do expect -- we saw sequentially, first to second quarter. Residential new construction picking up a little bit of steam. And our expectation is, again, sequentially, we’ll probably be about at a midpoint of our guidance, about a 2% improvement in the back half versus the first.
And if you take year-over-year comps, about a 4% improvement. So we do expect a good strong second half of the year. I think you’ve heard most of the builders that eco the same thing in their call. So that’d be our view.
Got it and then on that share gain front, any color on what’s driving that? Is it just a fault in your scale and your service level? And given you’re seeing a more muted raw material environment, does that kind of present more opportunities for you to pick up share as well?
Phil, it’s Robert. So yes, I would definitely absolutely start with service. I mean, labor’s still at a premium and still top of mind for the builders. So we do a great job of moving crews, equipment, material around to really provide great service for our customers. We think that’s absolutely helped us win share as well on the residential side, but then also on the commercial side, we’re taking really great steps there from a leadership perspective in different areas on the commercial side and taking great share there.
Relative to material, I’d say the other thing is, one thing that we talk about is that we’re a -- we’re the expert in any type of insulation solutions. So as building course change as people become more receptive to other types of materials. They look to us first for that. So we’ve taken share in other materials outside of just fiberglass. And I think that’s part of that package solution we talk about on commercial. I think that’s one reason that we’re winning big on the commercial side of the business as well.
Got it. And then from an M&A standpoint, and so you guys get involved again. I think you mentioned the focus will be your core Insulation business. How are you thinking about the pipeline? Your comfort in stepping up M&A at this point of the cycle? And then is commercial and operating as well, just because it seems like you’re making a good progress there in winning new business?
Yes, Phil, the M&A pipeline is in good shape. We did take a bit of a pause post USI, we’re very comfortable about how that all stands at this point. So without a doubt, we expect M&A to be the number 1 capital allocation priority as the quarter’s take off here. It’s always lumpy, and it always will be.
Yes, we are looking at commercial without a doubt, as well as residential. Because the commercial space is particularly -- it’s very attractive as a growth vehicle, sitting next to our residential performance because our share there is much, much lower than it is in residential. So the headroom that we have in commercial is very, very significant.
And so yes, so residential and commercial acquisitions, we believe we have a process and an engine that performs exceptionally well. When we look back at the acquisitions that we’ve done to date. In total, the performance is really, really good. So after those are the reasons why we think that is the #1 capital allocation priority still, and we expect to be very active.
And then Jerry, from a sizing standpoint, on some of these M&A, are they going to be more bolt-ons like Viking, both on the commercial and resi side in terms of the pipeline you see out there?
Probably. Probably. I mean, there aren’t any other USIs out there, just given the size of them. There are some fairly large things that we’re looking at. But some of the smaller acquisitions that we built on are generated extremely good financial return for us, so we will be on both sides of that spectrum from a size standpoint.
Thanks a lot.
The following question comes from Megan McGrath from Buckingham Resources, please go ahead.
Good mornings, thanks for taking my question. I wanted to follow-up a little bit on the commercial business. You talked a lot about this price cost dynamic on this call. And I think -- we mostly think about that in resi, but is there a different price cost dynamic in commercial, are you less focused on price as you try to gain share in that market? Or are they pretty similar, those dynamics?
Megan, this is John. Really, not a dramatic difference. I think we have seen inflationary cost pressure on the commercial side as we have on the residential side. And if you think about commercial, roughly half of it is light commercial and light commercial, as we’ve talked about before, uses the same type of products, typically, that you would see in single family residential. So we’ve had to respond to some significant inflationary cost with pricing on the commercial side of the business, too.
Okay. And then a follow-up on M&A. You made sure to say, in your remarks, I think that you’re mostly focused on insulation? And you haven’t talked much about your conversations previously about potentially getting into new product line. So wondering if you could update us on that process?
We are still looking, Megan, at adjacent product categories. I think the one we talked about last time was with glass and windows, that’s a pretty significant business that we brought into TopBuild with USI. We are still looking -- that’s still performing very well for us, that’s one example of fairly significant potential adjacent product category that we’re looking at.
So the priorities remain the same. And what I mean by that is, our core business still offers a ton of growth for us, and we’re really good at executing on that. And that’s why that continues to be so attractive from an M&A, but having said that, we’re going to be very disciplined about continuing to look at adjacent product categories and discipline, the keyword in that sense.
And so, yes, it’s still on our radar. We’re going to continue to look at it, and I think as time goes on here, you’ll probably see us moving into some pretty close adjacencies, but they’re going to be ones that we’re highly confident that we can perform really well.
Great, thanks.
The next question comes from Matt McCall from Seaport Global, please go ahead.
Thank you, good morning everybody.
Good morning.
So a lot of questions, I think, around lagged starts, and I just want to clarify. I mean, the way we’ve always kind of looked at it is maybe focusing more on the completions data. I think completions in Q2 were up 6%. So I guess, the first part of the question is you have any problem with looking at it that way?
And then secondly, Robert, I think you talked about working through backlog, builders working through backlog. What can you tell us about the state of that backlog today? I guess, how much longer can we benefit? Or can that backlog help in the absence of the starts recovery.
Matt, this is Robert. I’ll take the last part of that question first, talking about backlog. So I think, 2 or 3 things I would mention is that one multi-family. So as we saw the lag on multi-family spend coming out of ‘18 into ‘19, that definitely drove some of the lag and some of the volume that we talked about in Q2. And the second thing I would just say is not an orderly, it impacted us in any type of negative way.
You saw our volumes, but weather. So weather, if I push them, as we talked about, starts slower to accelerate. Part of that, we believe, is probably because of the weather that hit first quarter and even in the second quarter also. So we think that’s what generated or drove the backlog piece of it. And there was the multifamily aspect to it beyond the weather.
Okay. Maybe, John, I understand some of the items impacting the second half incremental margin outlook. But I guess, the question I have, wouldn’t that be reflected in the year-ago comp? I mean if pricing was better, price cost was better last year. It seems like the year ago, organic incremental comp gets easier. And I’m just trying to understand why that wouldn’t reflect some of the items you talked about? And why would we see such a step down sequentially?
Maybe it’s not 75% organic incremental, but why we would move all the way back to the kind of the target range, when we were at the low end of the range or slightly below in the second half of last year.
Right. So Matt, you’re talking about the second half versus first half? In terms of the –
I think I had several parts to what I just said. But yes, yes.
So why aren’t we going to have a, I think, in average, we were the first half, somewhere in the what, 45%, 50% range, first and second quarter. Again, there’s really 3 major reasons for that. And again, 25% is something we consider to be relatively strong, which I think what the math gets through.
Also, in the back half of the year. But again, the 3 areas would be that commercial growth will be not as significant. And that does carry very accretive margins for us, so that comp becomes much more difficult. The biggest area, I think, by far, though, was, again, last year, as you recall, the first half of the year, we had GP compression, chasing those fiberglass cost increases first and second quarter, low double digit, had great success in the back half of the year.
So now we’re comping to that. And again, the comp on that becomes more difficult. And then the other piece that, I think, is significant also is synergies have been a great part of the story of the USI acquisition.
And we got really good momentum in the back half of last year, almost a little with nothing in the first quarter. We own USI, the first 2 months of second quarter last year, that I should say, the May-June time frame last year.
So that’s going to become a much more difficult comp. But again, I want to emphasize, we feel pretty good about a mid-20s type of pull-through on incremental revenue in the back half of the year that we projected.
Yes, I agree. It’s a good number. I just wanted to clarify some of the puts and takes. So the -- I guess, the last sort of -- I have a question about is the price cost comment, I think you said you were neutral in -- the quarter is neutral, the assumption that you have in your back half outlook?
Yes. We don’t break down our guidance in terms of specifics. Having said that, I think what Robert’s talked about and Jerry is and based on our even our stars profile, we don’t expect significantly tight product in the back half of the year. So inflationary pressures, I don’t think they’re going to be as significant. So I think from a product pricing standpoint or a selling price standpoint -- again, I don’t think there is going to be as much expansion of selling price. I think you’ll see at equilibrium, whatever term you want to use the back half of the year versus what we saw a year ago, certainly, especially the first half of the year.
Okay, thank you John.
Our next question comes from Justin Speer from Zelman Associates, please go ahead.
Good morning guys, thank you. I wanted to just unpack that margin just a little bit more. I know -- I don’t want to beat a dead horse, but just looking at the -- just looking at typical seasonality, you would expect based on history that you could potentially see. I think that’s what folks are wrestling with, typical seasonality would suggest margins would be going higher than where they are casting right now in the second quarter.
And so we’re just trying to figure out what may be you’re trying to message either conservatism or if there’s something else onetime in the front half, and maybe it’s that commercial business. I guess, that’s where I’m leading -- my question is going is, how much mixed tailwind or lift to margins that you get from commercial being so strong in the first half? And maybe, I guess, if you were to think about the back half, is that maybe explaining a large chunk of the sequential step down and plan guidance?
Yes. Justin, the thing I would say, we’re certainly not messaging anything negative. I mean, we are feeling like we’re on all cylinders in terms of ongoing performance here.
I would tell you that Q2, for all the reasons we talked about, the starts did align nicely in terms of our overall margin performance without a doubt. Commercial had a big quarter. Our margins on commercial, actually slightly better than they are in residential. So when our mix moves to commercial that’s the positive.
And then as we’ve talked about, the price cost comparison from Q2 ‘19 to Q2 ‘18 was quite a bit different. So that -- because we were chasing price at Q2 a year ago. So yes, so that was the big factor. If you -- sequentially, as we look to the back end of the year, we’re highly positive about it. We do put guidance out there, we always endeavor to put guidance out there that we think we can reach, for sure. We don’t ever want to put something out there that is a stretch for us.
So to your point about conservative versus aggressive, what I characterize it as conservative, I’d put it on that scale, the same way we always do it we put a very reachable number out there. And then the management team works hard to exceed it. I mean, that’s what we do. We’ve been pretty successful in doing that over the last couple of years, in particular, and we’re going to be locking and loading and trying to do that again in the back 6 months of this year. But I just want to make sure you understand it that we’re not signaling anything negative point to contrary. Yes, about how we can do that.
John. Just to dovetail with that. And if you do the math, for the first half, our EBITDA combined was about a 13%, forget the year-over-year comps, let’s talk sequential. The first half we’re about a 13.2%. The back half of the year we’re about a 13.5%, if you take the midpoint of our sales and EBITDA. But as Jerry’s point, are we conservative? We certainly don’t try to get too far ahead of ourselves on guidance.
But on the flip side, we do have some back-end growth in terms of EBITDA, the tail end of the year, November, December, we do tend to see some seasonality kicking the long way. So I think, again, our numbers are closest to the PIN, basically, we can get right now with maybe to Jerry’s point, some conservatism baked in.
Excellent. And the other kind of element to this mosaic is -- that’s relatively new, some of the -- maybe sequentially, we haven’t seen any -- obviously, manufacture announcements, and then we get maybe some potential for deflationary types of behavior from manufacturer suppliers. And it’s in the midst of some new loosefill capacity being layered on in a couple of years as well and makes year two.
But at the end of the day, how do you think about the prospect of deflation maybe in the near term within your model? I think you mentioned it made a cautionary way for the distribution business, but in overall business, how do you think about managing around that dynamic in your model now?
Justin, this is John. So when we think about our input costs, and I’ll start with material. So certainly, if capacity gets looser, the opportunity for a reduction in material exist. And we’ll have to play that by ear and see what happens. So I think the only flip side of that, though, is we obviously have a labor component on the TruTeam side of the business, and let’s assume capacities looser and labor tends to be a little bit more plentiful, that obviously puts a little bit of pressure, I think, on one of the good levers we have, which is tight labor.
So you got to balance both of those and understand it and listen, we do it day in and day out, we do it by location, traffic is an important comment, because we always talk nationally, but we run this business locally. And so we just deal with that on a day-to-day basis. So there’s puts and takes, I think, on inflation on a go-forward, some positives, some could be detrimental. But we balance that, as I said, day-to-day at about 300 locations around the country.
Okay, okay. And then this is my last question. The free cash flow in the quarter was very strong. The conversion, excellent, a typically strong from a seasonal standpoint. Within the mosaic of your overarching guidance, how do you think free cash flow generation looks for the year?
Yes. We don’t provide that level of guidance. Having said that, I think I’ll just leave you with trends to back half of the year for us, trends to be more robust than even the first half, a lot of that’s tied to the seasonality I talked about where the AR bucket tends to get reduced basically towards the back half, we get some nice free cash flow generation.
So we’re, like we always say, this model is excellent and that we don’t require much reinput of our positive cash flow back into the business to support the growth, whether it’s CapEx or working capital. So we’re always pretty optimistic about the ability to generate free cash flow. I think the other thing in the second quarter, our CapEx, a little below our historical balances. A lot of that shift timing, basically. But again, we feel great about the back half of the year in terms of free cash flow.
Excellent, thank you guys.
Our last question comes from the line of Trey Grooms from Stephens, Inc. Please go ahead.
Good morning, thank you for [indiscernible] here. Mine are going to be -- well, my first one is around the commercial side. You mentioned the backlog continuing to be very robust, bidding into 2020 and 2021. If you could, I guess, both on the backlog as well as kind of the longer-term bidding opportunities you’re seeing out there, if you could give us a little more color on the types of projects you’re seeing, is this looking more on the light commercial side or the heavy side, both backlog and bidding opportunity?
Trey, it’s Robert. So on the backlog side, obviously, lighter commercial jobs, which we referred to light commercial jobs, which we referred to be similar to residential, those jobs are more in the next, call it, 3 to 6-months time frame, where the heavy commercial jobs are probably more in the 12 to 18, maybe 24-month time frame. So that’s kind of how they lag, if you will. But I’d say it’s really a variety of projects of all scale and size. And we’ve got some major I’d say, stadium type work that’s coming up, we’ve got major high-rise work that’s coming up in larger metropolitan areas.
And then we got nice line of sight to light commercial work at the local residential branches across the country participate in, so it’s really a variety. I think the point that we want to leave is just really good momentum in the business, and we put more focus on, we put more dedicated resources on it, we put more leadership resource towards it as well.
And the team’s just done a nice job of using those resources and focusing on it. And quite honestly, everybody sees it as a good balance of this business, both at the local level and at the regional level as well. So I think we’ve done a good job of stepping into the business, learning the business. We’ve been in it for a long time, but then learning at new regions of the country.
And continuing to grow it. And then I think we bring a unique value proposition there. And our unique value proposition is we’re bundling multiple products and multiple trades for the large contractors in these larger jobs, and they like that because now they don’t have to deal with 6 or 7 or 8 different subcontractors are able to deal with one national player that can bring to them the stability, the expertise to perform the job very well in a very highly-trained, safety-focused workforce that really takes a lot of headache off of there -- off their plates.
So that whole value proposition is playing really well for us in commercial.
Well, and with all of the -- you’re obviously seeing market share gains there on the commercial side, and you’re building a lot of talent and manpower at that and focus. So is it your expectation that you could see the commercial piece continue to grow as -- in the overall mix as you consider your outlook for residential? And then what you see in commercial today, kind of, taking more of the overall mix from the 22.6%, where it stands today.
Yes, I think we -- as we mentioned, we see long-term growth here at -- sitting at a plus or minus 10% share of $5 billion, we’re going to continue to put effort resources towards it, we thought we’re boding new competencies. So yes, relative to the total TopBuild mix and even distributing more products in the commercial space as well, we absolutely expect it to become a richer mix of our total TopBuild business.
Okay. So that leads me to my last question, which is, would that be in the case longer term, with commercial becoming a bigger part of the mix. How do you think about that 25% flow through target kind of longer term, understanding that the commercial can be accretive to that?
Yes. Trey, this is John. So we’re going to stick to our guns on the 22% to 27%. I think what you could argue, and we would say is that the more that commercial drives up that the higher end of that range becomes more probable. But again, the 22% to 27%, based on the fact that mix ebbs and flows, etc, but assuming the commercial drives a more significant piece as it has in the past 2 or 3 years, then that -- the higher end of the range becomes more of a probability.
All right. Thank you for taking my questions.
You are welcome.
There are no further questions on the phone lines.
Thanks, everybody, for joining today’s call, and we look forward to reporting our third quarter results at the end of October.
That does conclude the conference call for today. We thank you for your participation and you please disconnect your lines.