TopBuild Corp

NYSE:BLD

Earnings Call Transcript 2019-Q3

[Operator]

Greetings and welcome to the TopBuild Corporation earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, October 31, 2019.

I would now like to turn the conference over to Tabitha Zane. Please go ahead.

[Tabitha Zane, executive]

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. 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 conditions. 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.

Please note that, other than as otherwise specifically stated, the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in the presentation accompanying this call.

Please turn to Slide 3, and I will now turn the call over to Jerry Volas.

[Gerald Volas, executive]

Good morning, everyone. Thanks for joining us today. We're pleased to report another excellent quarter, as our team continues to do an outstanding job of generating profitable growth.

Before reviewing the quarter, I want to note that, based on recently announced starts, strong household formations and optimistic builder sentiment, the long-awaited acceleration in housing appears to be under way. Low mortgage rates, a pivot by builders to more affordable housing and a strong economy with solid job and wage growth are all factors driving this positive trend. Moreover, the long-term fundamentals, including projected household formations and limited housing supply, point toward continued growth

Before reviewing the quarter, I want to note that based on recently announced starts, strong household formations and optimistic builder sentiment, a long-awaited acceleration in housing appears to be under way. Low mortgage rates and pivot by builders to more affordable housing and a strong economy with solid job and wage growth are all factors driving this positive trend. Moreover, the long-term fundamentals including projected household formations and limited housing supply point toward continued growth in new home construction.

Our third quarter financial results on Slide 4 reflect the strength of our diversified model and our continued focus on improving operational efficiency. Total sales were up 5.4% compared to lagged housing starts that were down 1%. Our commercial business again performed extremely well and operating margins at both business segments expanded.

Moving to Slide 5, on the capital allocation front, M&A is our number one priority and our focus remains primarily on our core businesses, which are residential and commercial insulation installers and distributors. The synergies we achieve are significant and the opportunity to enhance our market share in regions with strong growth prospects is compelling.

We're also considering expanding our glass product category that encompasses commercial storefronts and residential bath and showers. This business currently contributes approximately $114 million of annual revenue. Our research and experience validate that this adjacent product category offers many attractive characteristics, similar to insulation.

While expansion in this area will be independent of our branch insulation network, we will be able to leverage our management expertise, customer relationships and supply chain model. Looking ahead, our pipeline of acquisition candidates is robust and we expect to bring the best prospects over the finish line in the next couple of quarters.

Our second capital allocation priority is share repurchases. In the third quarter, we repurchased just over 364,000 shares at an average per-share price of $89.76. Since implementing our share repurchase program in 2016, we have repurchased a total of 4.9 million shares at an average per-share price of $56.74.

Consistent with our intent to return capital to our shareholders on a timely basis, we announced a $50 million accelerated share repurchase which we anticipate executing within the next several days and completing in mid-first quarter. This program reflects management's and our Board's confidence in the long-term potential of TopBuild, our strong future cash flow position and our firm commitment to optimizing the efficiency of our capital structure.

While John will discuss our financial results in further detail, I want to emphasize that our strong operating performance quarter over quarter is the direct result of our uniquely diversified model and the ability of our strong leadership team to manage our businesses well in any general, economic and housing environment.

John?

[John Peterson, executive]

Good morning, everyone. I'm pleased to report on another excellent quarter of business results delivered by the experienced and talented team to which Jerry just referred.

Starting on Slide 6 with consolidated revenue, third quarter results increased 5.4% to $682.3 million, primarily driven by increased volume and pricing at TruTeam and increased pricing at Service Partners. Revenue for the first 9 months of 2019 rose 12.4% to $1,961.8 million, which includes revenue from acquisitions of $126.9 million.

Adjusted gross margin increased 130 basis points in the third quarter to 26.3%, and for the first 9 months of 2019 expanded 200 basis points to 26%. Adjusted operating profit in the third quarter grew 16% to $80.6 million, with a corresponding margin improvement of 110 basis points.

For the first 9 months, adjusted operating profit increased 30.6% to $216.1 million with a corresponding margin improvement of 150 basis points. Both gross margin and operating margin improvements were driven by higher selling prices, strong commercial sales growth, operational efficiencies and synergies from USI, partially offset by higher material costs.

Adjusted EBITDA for the third quarter was $98 million, compared to $84.3 million in 2018, a 16.3% increase, and our adjusted EBITDA margin improved 140 basis points to 14.4%. In the third quarter, our drop-down to adjusted EBITDA margin for our sales growth was 39.1%.

For the first 9 months of 2019, adjusted EBITDA grew 32.7% to $266.5 million, and adjusted EBITDA margin was 13.6%, a 210 basis point improvement over the first 9 months of 2018. Our drop-down to adjusted EBITDA margin during this 9 month period was 30.3% in total and 46.1% on a same-branch basis.

Third quarter SG&A as a percent of revenue was 14.5% compared to 14.8% in the third quarter of 2018 and 15% last quarter. The year-over-year decrease was primarily the result of lower acquisition and closure costs related to USI.

Moving to Slide 7, adjusted income for the third quarter was $52.7 million or $1.53 per diluted share compared to $44 million in 2018, or $1.23 per diluted share. Third quarter 2019 adjustments were approximately $140,000, primarily related to costs associated with the acquisition of Viking Insulation.

Our effective tax rate was 23.2% for the third 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 number of $1.53 per diluted share as compared to our reported EPS of $1.60 per diluted share.

For the first 9 months of 2019, adjusted income was $138.8 million or $4.02 per diluted share compared to $107.1 million in 2018 or $2.99 per diluted share. Adjustments for the first 9 months were $3 million and were primarily associated with the acquisition and integration of USI. Interest expense in the third quarter 2019 was $9.5 million and for the first 9 months was $28.7 million.

As you can see on Slide 8, CapEx for the first 9 months of the year was $34.1 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 11.6% versus 11.3% a year ago. This increase was primarily due to the strong growth in heavy commercial which has longer receivable terms and a higher mix of installation business from a year ago which carries higher working capital requirements.

We ended the third quarter with net leverage of 1.64 times trailing 12 months adjusted EBITDA. Total liquidity at September 30th, 2019 was $360.2 million, including cash of $171.6 million and accessible revolver of $188.6 million. Operating cash flow was $182.8 million for the 9 months ended September 30th.

As Jerry mentioned, our number one choice for our free cash flow is acquisitions and our second is share repurchases. While our pipeline of acquisition candidates is robust, we are also focused on enhancing our capital structure. We have therefore announced a $50 million Accelerated Share Repurchase Program which should be completed sometime in mid-first quarter 2020.

Moving to annual guidance, based on the last 2 months of starts data and conversations in the field with our customers and branch managers, we've raised our outlook for housing starts for 2019 to a range of 1.245 million to 1.275 million. Our previous outlook was 1.23 million to 1.27 million starts.

Turning to Slide 9, in conjunction with this change and as a result of our strong third quarter performance, we've raised both our revenue and adjusted EBITDA outlooks. For revenue, we've raised the low end by $15 million to $2,625 million and the high end by $5 million to $2,645 million. The low end of adjusted EBITDA has been raised by $9 million to $354 million and the high end was increased $5 million to $360 million.

Robert will now discuss operations.

[Robert Buck, executive]

Thanks, John. Turning to Slide 10. Our strong performance quarter-after-quarter is a testament to our team's hard work, alignment and cadence by which we run the business; our ongoing operational efficiency initiatives; our commitment to excellent customer service; our strong customer and supplier relationships, and our insistence that growth and profit go hand in hand.

Starting with TruTeam's third quarter financial results on Slide 11. Sales grew 7.3%, handily beating lagged housing starts which were down 1%. Volume accounted for 3.8% of this growth while selling price increases contributed 3%. TruTeam's adjusted operating margin improved 80 basis points from a year ago to 14%.

Service Partners' third quarter sales, as shown on Slide 12, were up 3.8%, driven by a 4.4% increase in price, offset by a slight decline in volume. We continue to walk a tightrope between price and volume as we've seen excess fiberglass material flow through to the distribution channels, putting pressure on price. Our team has done a great job managing this balancing act, as evidenced by the 150 basis point increase in Service Partners' adjusted operating margin to 10.6%, the highest adjusted operating margin reported since our spin-off in June 2015.

As we look ahead, the acceleration of starts is positive for both of our business segments and is supported by the continued optimism of our builder customers. As starts continue to climb, which we believe they will, we will continue to leverage our operating platform to help drive solid financial results.

Moving to Slide 13, we are extremely pleased with the strength of our commercial business which, once again, posted double-digit growth. On a same-branch basis, commercial revenue grew 18.8% in the third quarter and 21.4% year-to-date. Commercial now accounts for approximately 23% of our total revenue, almost evenly split between heavy and light commercial.

As a matter of reference, commercial represented only 16% of our total revenue at the time of the spin. We plan to continue to grow our commercial business through a number of initiatives. We've mentioned before that light commercial is very similar to residential and most of our branches have the ability to perform this work.

Accordingly, we are providing additional resources and tools for our salespeople and branch managers to help them better identify light commercial opportunities and secure additional work. Acquisitions present another avenue for growth in the commercial space.

Over the past few years we've acquired 3 firms that specialize in heavy commercial insulation, expanding our reach in a number of major cities including Chicago, Los Angeles and San Diego. We are also planning to greenfield a handful of new locations specializing in heavy commercial projects. New York is just one of our most recent moves.

In these greenfield locations, we are partnering with a general contractor with whom we have a previous relationship. As they start up new projects in new geographies, the work is already there for our company to perform and the expense to set up a new location is minimal for us and leads to quicker profitability. Looking ahead, our commercial backlog remains robust and we're bidding on projects well into 2022.

Before turning the call back to Jerry, I want to touch base on a few areas outlined on Slide 14. First is labor, which continues to be tight not only for TopBuild but for all the trades in our industry. We believe we have a leg up on the competition by offering a comprehensive benefits package which helps makes us an employer of choice. In addition, our ability to share labor among our branches is a major differentiator and gives us a competitive advantage. We are also investing in new areas that we will believe will continue to improve labor productivity.

Second is spray foam which continues to grow but at a slower pace than a year ago as builders pivot to entry-level homes in an effort to provide a more affordable product to meet the demands of first-time buyers. As a reminder, although a great solution for our customers, spray foam is about twice the cost of fiberglass insulation.

Finally, moving to Slide 15, our senior leadership team recently undertook an in-depth review of our corporate values and culture. We believe our strong values are a key component of our success and they will continue to guide us as we move forward. They include putting the safety of our people first; delivering results with integrity, respect and accountability; focusing on exceeding the expectations of our customers; continuously improving and encouraging idea sharing; aligning as one team and valuing diversity; making a difference in the communities we serve; and empowering our employees to be their best, individually and as a team.

I am extremely proud of our entire TopBuild team for their adherence to these core values and for their focus on working safely to deliver value, quality and service to our customers.

I will now turn the call back over to Jerry for closing remarks.

[Gerald Volas, executive]

Before opening the call up for questions, I wanted to mention that in September, we hosted our annual strategy session with our Board and key members of our leadership and operating teams. During this 2.5 day meeting we take a deep dive into all aspects of our Strategic Plan, with a focus on both short and long-term goals for our Company.

Our Board is extremely supportive and the Company's direction and the following key tenets of our Plan remain in place; drive top line growth and increase market share in our core residential and commercial installation and distribution businesses; expand existing product adjacencies through a deliberate and measured approach; improve operational efficiency throughout our organization; and make strategic acquisitions that supplement our organic growth.

Operator, we're now ready for questions.

[Operator]

[Operator Instructions] Our first question comes from Trey Morrish with Evercore ISI.

[James Morrish, analyst]

Congratulations on another great quarter. I want to talk a little bit about kind of demand that you've seen. So we've seen a significant ramp from builder orders as housing demand has strengthened over the last several months. And given the magnitude of growth seen by the homebuilders that are reporting this quarter, it seems like there is a real significant potential for a ramp in insulation demand. And if that happens, kind of wondering how quickly could you scale your businesses to capture such growth? And would it be reasonable to assume that Service Partners would be better able to scale compared to TruTeam because of TruTeam's relatively fixed labor component in the near-term?

[Robert Buck, executive]

This is Robert. So I'll start managing the question. So relative to demand, I think you could see in our volumes in Q3, I think we were happy with what happened on the residential side, even though we worked on more multifamily units in the quarter, we also saw an increase in single-family units in the quarter as well. And then as you know, as we're getting into Q4, we're seasonally busy as a company as the public builders are driving toward their closings before the holiday is here. So I'd say we're very optimistic. The sentiment that we get from the builders is very positive as well and we look forward for definitely a positive -- positive flow for the future. Relative to your second question, looking at our footprint and then looking at both businesses, I think we're very comfortable with an appropriate ramp in volume and residential and how we could service that. So I'll start with your last one on distribution. Looking at the network around the country and where we can service some stuff absolutely ramping up and continuing to service contractors around the network, we're very comfortable we can do that. But I would say we're also equally as confident on our contracting side and on the TruTeam side of the business. I mean, I think one of the great things about our model and about our business is how we can share labor across the footprint and how we're constantly working on both ends of getting new labor into our network, but then also constantly improving the productivity of the existing labor that we have. So we're very confident and comfortable with our ability to ramp and I'll just give you a little bit of short story, which I think is a good one, relative to that ability that we have.

And that is, I can give you an example of a large public builder recently that we're looking to push their closings in about a 5-day period and they were looking to push about 90 to 100 closings and we were the only contractor that could pull together from about 5 different branches in this geography, and quite honestly, we got their houses closed in 2 days versus the 5 to 6 days they were asking as for. So that's the power of our network. It's the power of how we can share labor, share equipment, share material, share inventories as well. So I think just summary we're very confident in our ability to handle the ramp-up.

[Stephen Kim, analyst]

It's Steve Kim. I just wanted to jump in here with sort of a broader question. Over the past few years, we've seen some pretty notable choppiness in the trajectory of manufacturer pricing, as new lines have been turned on and such. And you guys have done a great job, obviously, navigating through any choppiness using your scale and breadth in margins -- in driving margins higher. That said, we're hearing that virtually all the insulation guys, manufacturers are preparing to implement a January increase. And more importantly, seem to be focused on establishing a steadier cadence of price increases going forward. And so regarding that, I had 2 questions. One is, in your opinion, are the industry conditions right now in place that would allow for greater consistency in manufacturer pricing? And two, if a stay at steady or cadence were to emerge, could this enhance your company's competitive advantage even further?

[Gerald Volas, executive]

Sure. I'll --Jerry here, let me take a crack at that. So I would say that what happened last year was unprecedented from the standpoint of the significance and the frequency of the increases. I think it probably does and I'll caveat this with saying that we can't speak for the manufacturers, what they're going to do, what they want to do, but I think it's probably a fair comment to say that a steady, more predictable, if you want to call it, schedule of increase is probably good for everybody. As you commented, we're very confident in our ability to stick-handle whatever happens. But I probably would say that a steady -- a steady schedule of increases is far better than the rapid fire we had a year or so ago. And also keep in mind that Robert and his team do a wonderful job of ongoing relationships with suppliers. It's constant conversation. So as it affects our business directly, yes, there can be choppiness externally in terms of what's announced but the relationships that we have, long-term relationships with all the suppliers really, really kind of smooths that out internally for us. So Robert, I don't know if you have anything to add on to that commentary.

[Robert Buck, executive]

Yes. Thank you, Jerry. So Stephen, I would agree with everything Jerry said. I think it's hard to see supply and demand, right. As we come out of the year ahead into next year, from that perspective, we haven't seen anything, any public announcements, but we wouldn't be surprised if there is an announcement from the manufacturers. And I think, you know the one thing that we keep pointing to, we think there is ample supply and just a reminder, 2 of the large manufacturers have announced additional capacity coming on late 2020, early 2021. So that's how we think about it.

[Operator]

Our next question comes from Phil Ng with Jefferies.

[Philip Ng, analyst]

Congrats on another very strong quarter. Great to see you raise your starts forecast, that's pretty encouraging, it lines up with some of the comments from the public builders. Appreciating there could be a lag, but do you expect to see your improved outlook on housing to start showing up as soon as fourth quarter or is this more of a 2020 event?

[John Peterson, executive]

Phil, this is John. So I think part of it shows up in the fourth quarter, because I think in the last 2 months, we probably have averaged about $1.310 million in terms of seasonally adjusted. So one of the reasons we bumped up our full-year estimate -- our full year guidance, I should say, is driven by that. But we remain pretty bullish and optimistic in terms of obviously the long-term impact in residential and commercial. So yes, a little bit of the increase we saw was driven by the optimism at starts and we'll come back to you in February with our 2020 outlook at that point.

[Philip Ng, analyst]

Got it. And then to be clear, I mean your volumes have generally outpaced lagged house starts -- housing starts pretty noticeably. Any color on what's driving that upside? I mean certainly commercial has been very strong. But have you been accelerating share gains this year?

[John Peterson, executive]

Yes. So I think we talked about it in the prepared script, an 18% 19% increase in terms of commercial growth which, by the way, is a little bit less than we experienced first half from a comp standpoint, but we talked about that on previous calls that the comps get a little more difficult in the back half of the year. So certainly commercial has been a big part of that. Having said that, residential new construction, I think despite the fact that we're seeing a -- I'd say a little bit more of a mix shift to multi-family versus a year ago, our residential new construction on the TruTeam side has been very strong. We do think we probably picked up a little bit of share in the TruTeam side and then there was a partial offset, as we talked about, in terms of down slightly on Service Partners. Most of that is driven by those late 2018 actions we took in terms of price discipline.

[Gerald Volas, executive]

Phil, the one thing I would add to that is, so the acquisitions that we've done over the last couple or three years not just USI, but all the other ones as well. The job that we do integrating these acquisitions into our footprint, as time goes on, that really pays dividends because what that does is that strengthens our position in key geographies. And as time goes on, the integration job that we do really pays dividends in terms of our ability to service our customers.

[Philip Ng, analyst]

That's great. And just one last one for me, I think you mentioned on the call there is excess fiberglass supply out there that's had some pressure on pricing for Service Partners. But you've managed that quite well. But curious, has that led to even better buy on your end from TruTeam and has it help on the price cost front this year.

[Robert Buck, executive]

This is Robert. So we're constantly working with the manufacturers talking with the manufacturers, relative to -- wherever they have excess capacity and stuff. So it's an ongoing discussion with us, with folks that take add point back to. We haven't seen significant selling price declines and our teams have done a really nice job of balancing that in the field, and I think you know that the term that we'd use is really good price discipline, selling price discipline in the field and we'll keep that up, for sure.

[Operator]

Our next question comes from Ken Zener with KeyBanc.

[Kenneth Zener, analyst]

So another boring quarter for you guys, steady EBIT leverage. John if we go back to this 1% you guys -- excuse me, the share gains you're having on the insulation side, I think you were highlighting that was a mix of residential, where you did gain a little share I think is what you said, as well as commercial. Is that correct?

[John Peterson, executive]

Correct.

[Kenneth Zener, analyst]

I don't want to try to do the math, where I often [Phonetic] mess it up, but if you have about 75% -- 77% of your business is single family, that really suggest your commercial, you know If you -- the market is down 9% lag, starts, let's say, you were down 5%. I mean your commercial is really firing on all cylinders there. When you sat down at your guys review that you mentioned in October, I mean, are you still thinking commercial is going to be, let's say, a quarter of your business in 2 or 3 years given what we're seeing in new construction? Any M&A you do in new construction for residential versus commercial, taking a larger share because this is probably what distinguishes your business model going forward versus people's impression of just new residential trends.

[Gerald Volas, executive]

Ken, this is Jerry here. So obviously the numbers in terms of the percentage that commercial is our -- becomes our total business will depend on what happens with residential, but I can say that, is that we're happier than ever with the development of our commercial business. It's been a deliberate disciplined ramp up. It's a bit more challenging, complicated business and requires some different attention and some things going on job side. So we did some acquisitions here last year that we really have done a nice job of integrating and our footprint is growing. Robert spoke a little bit in his prepared comments about some greenfielding that we're doing. That's also very effective. So we really are assembling some scale there now and the headroom that we have in the commercial business, we spoke to that before, is huge. As a matter of fact that sandbox is even bigger than residential and our share there is ramping up and there's a lot of headroom. There is a lot of headroom and we're really happy with the capability that we're developing. And we do see that continuing to grow and continuing to add momentum. And will it get to a quarter of our business? Who knows, but that's -- it's getting there almost now. We're very close now, and yes, I do see it probably happening.

[Kenneth Zener, analyst]

Right, I mean it seems like, John, I know to get the single start guidance and still their orders are doing well, but it really seems as though, if you look at the units in 3Q, it seems like more of the beat came from the commercial versus the reacceleration in residential, is that a fair observation?

[John Peterson, executive]

Yes, Ken, without question, commercial was a bigger piece from a percentage standpoint, as we set up about 19% in total. So -- but again, residential new construction, very strong on TruTeam, despite the fact that we've got some slight headwinds in terms of, like I said, that mix of multi and single-family and even a slightly smaller footprint, which drives a lower revenue per unit for us. But yes we're real pleased with the volumes that we had in the business in both lines of business, residential and commercial.

[Kenneth Zener, analyst]

All right. I think there's a lot to talk about in commercial. I'll get off.

[Operator]

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

[Matthew McCall, analyst]

Maybe I'll continue on the commercial theme, it seems as though the, maybe the macro -- some of the macro indicators are slowing a bit. I'm curious about, I guess any indications that you're seeing of slowing activity and maybe what the -- some of those companies specific, are there -- so company-specific growth opportunities, are they at a point where the cycle matters less, if there is any type of softening?

[Robert Buck, executive]

This is Robert. So I'll take that question. So relative to commercial, as I've said pipeline is robust. We're bidding jobs well into 2022 right now. And when we think about, I mean, building on what Jerry said, it's a very big space in the commercial side of the business and 23% of our revenue, we feel like we have great share gain opportunities there. We're capitalizing upon that right now. But beyond that, we're greenfielding locations. We got the opportunity for acquisitions, growing our core current heavy commercial locations as well. So we're only in that ballpark of 11% to 12% share from the commercial perspective and we see a lot of runway there, so -- we don't see it softening. If it did, we think we'll continue to capitalize on the initiatives that we're putting in place and gain share in the commercial space.

[Matthew McCall, analyst]

Okay. The next question I guess, John, the organic incremental, I remember last quarter you talked about some of the items, excuse me, that were going to impact the trend, I guess, from what you reported in Q2 to what you're going to report in Q3. I think you talked about USI and commercial some other, maybe sources of pressure. Can you talk about the outlook, maybe just as we talk about or we think about Q4? I don't know if you want to make any comments about next year, but any other items, you should call out to make us understand what the trend should look like as we exit the year?

[John Peterson, executive]

Sure, Matt. Sure. So if we go back to second quarter, our same branch pull through was about 76%, if I recall. So we've reported 40%, which we're ecstatic with those obviously, but pretty consistent with what we've been saying all year, the comps got a little bit tougher and will continue to get a little bit tougher in the fourth quarter for us. So when we think about the 40%, I'm going to start with great operational performance both at the branches and in the branch support centers. So we continue to perform really well, both in the field and here in Daytona Beach. In addition to that, again, tied to the significant material cost increases we saw a year ago for first, second and into the third quarter, the comps on that have gotten a little bit easier throughout the year for us, because last year, as you know we were chasing that, did a pretty good job of catching that at the back half of the year. So looking ahead to the fourth quarter on that one, that comp gets more difficult too.

I think the other thing, we do expect a strong commercial, but even a year ago, our commercial performance in the fourth quarter was probably our strongest of the year, so that comp gets a little more difficult. And then USI synergies, the last piece helping to drive that 40%; same story, I think in fourth quarter a year ago, we were starting to deliver those synergies in a greater cadence. So fourth quarter, the comp gets a little more difficult. Having said all that, if you do the math on our guidance in the fourth quarter, we still have roughly a 24% to 25% pull-through on our incremental revenue at the midpoint of our guidance. So we're happy with that. We're really happy to report on that, when we get to our fourth quarter call, but that's kind of the way it's going sequentially and how the comps look year-over-year.

[Matthew McCall, analyst]

Okay, that's fair enough.

[John Peterson, executive]

Yes, 2020 -- as far as 2020, we're not at the point right now where we're going to provide guidance on that, we will on our fourth quarter call sometime late February. But yeah, we'll be prepared to talk about that in specifics then.

[Operator]

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

[Justin Speer, analyst]

Yes, I have a few questions. Wanted to start with USI integration comment, just curious if you can give us some context on where your synergies are now and -- or how much you've accrued thus far and maybe how much is left in that pipeline, and if possible where those underlying EBITDA margins are for USI in the third quarter?

[John Peterson, executive]

So this is John. So we'll talk a little bit about the guidance we provided originally of that deal was $15 million. The synergy is kind of broken evenly between supply chain, between branch consolidation and also around the corporate costs or the corporate back-office expenses at their branch support center in Minnesota. So as we said on previous calls, we've significantly -- we've delivered much more than that at this point and we've done it much more quickly. We are at a full run rate kind of in the second quarter. We were pretty much at a full run rate in terms of those synergies. So really from this point on, we're not really delivering incremental. In fact, it's almost impossible for us to really determine exactly what would be USI, because we've done low double-digit type of branch consolidation between our TruTeam and the USI branches. But suffice to say we delivered a lot more than we originally anticipated, and we did it quicker.

If you go back to our first and second quarter reporting, we did break out acquisitions, and I believe we had roughly a 19% EBITDA margin on about $135 million worth of sales that were incremental year-over-year. So that gives you kind of the flavor of the type of performance we have on U.S., in fact that was all USA. So obviously a great transaction for TopBuild, great shareholder returns and you're seeing that live through in our results the back half of this year.

[Justin Speer, analyst]

And you mentioned that you're at full run rate in the second quarter, but that implies, on a year-over-year basis that you still have, as you look to the third and obviously the fourth quarter, you still -- and even the first quarter, you still have some year-over-year carryover good guy to think about as potentially an offset any unexpected headwinds?

[John Peterson, executive]

Yes, Justin, that's correct, I think. So as we get to the fourth quarter, that number gets significantly smaller. As we get to the first, it's really not significant at all, because we've done most of -- well, we did the back office consolidation early January, a lot of our branch consolidations toward the latter part of half year last year and the early part of this year. So not near as much supply chain obviously was consolidated early third quarter 2018, so really not much -- not much more in the fourth from a comp standpoint, and as we get to next year, really not much at all.

[Gerald Volas, executive]

So Justin, as we said earlier, as time goes on, because of the strength of the integration, the way we do it, it becomes part of the strength of our ongoing business and that's part of what you see, relative to the overall TopBuild results.

[Justin Speer, analyst]

Makes sense. And it's been just a tremendous hit for you guys, and appreciate that color. The next question I have is just the pricing across your business in terms of the sequential trend for you and how that looks across the competitive landscape in view of the manufacturers, at least recently having become a little bit, I guess, sequentially degrading their pricing back -- just removing the January price increase from earlier this year. I guess, give us a sense for what you're seeing and if that manufacturer price is leading to any kind of competitive types of pressures on your business.

[John Peterson, executive]

Yes. I mean the only thing I'll talk about on pricing. I think you've seen our pricing results. We break that out specifically as a line item. You've seen that on a comp basis drop year-over-year. I think early in the year, we were at a much more significant number, probably closer to something like a 6% improvement roughly at a place like Service Partners. I think just under 6%, 6.5% in total. That number was closer to 4%, I think, in the third quarter. So the reason for that is because of that phenomenon we talked about a year ago where we were chasing that cost increase -- that material cost increase we saw very significant in the first half of the year. As we talk about this year, we've not seen -- we've seen some material inflation, but nowhere near a year ago. So I think sequentially we've seen some price increase, but it's been very minor across the entire business. Most of what you're seeing live through in our prices, the comparison versus a year ago results. So you know as far as material cost increases, like I said, we did have a first quarter manufacturer cost increase, we talked about. We absorbed that. And again, our sequential increase is rather moderate this year in those segments.

[Justin Speer, analyst]

Perfect. And if I can squeeze one more in, the commercial pipeline you mentioned being robust, was bidding into 2022. Really love to get your thoughts on where you're seeing that in terms of the core verticals or even geographies. Is it office? Is it education, health care, industrial where you're seeing such strength?

[Robert Buck, executive]

Justin, this is Robert. So I'd say across the different areas that you mentioned, the answer applies to yes, I mean the relative to commercial growth again this is -- this is where we're capitalizing on the opportunity in major markets. So we're very strong in California. We're very strong -- I talked about a greenfield and we've got some already existing businesses in the Northeast, including DC, Philadelphia, New York. We're seeing growth in Florida, for example, I would tell you. So I'll give you 2 or 3 examples that maybe will help. Working on a lot of stadiums, so if you think like sports entertainment stuff, we got several big stadium job that either happening now or that we're going to start working on in '21 or that we're bidding for '22.

The second thing I'd mention is lot of distribution centers. So if I think about Amazon, we're working on a lot of Amazon distribution centers across the country. And then the third, which I think is infrastructure related, we are either working -- getting ready to start or bidding several airport jobs, where they're doing terminal expansions or new terminals. So a lot of work in airports, I'd also say.

[Operator]

Our next question comes from Megan McGrath with Buckingham Research.

[Bethany Talbott McGrath, analyst]

I wanted to follow a little bit -- up a little bit on your commentary around the excess fiberglass supply in the market. Just curious if you have any thoughts on the extent of that and if you think the recent improvement in starts is enough to absorb that supply or is part of your guidance in the fourth quarter assume some incremental pricing pressure, as that continues to plague the market a little bit?

[Robert Buck, executive]

Yes. This is Robert. So I'll answer that from a couple of different angles. One, I would say that we do see amply supply even though we're in a seasonally busy time, could tighten up a little bit. But there is, I would say, ample supply. If you think about what's happened in the past 12 to 18 months, and back to first part of your question about excess. So excess supply has been more in the back side of the fiberglass that's filtered somewhat into the distribution channel, but I'd say that also relates to, if you look back in the past 18 months, that's where the excess capacity has come online, has been with bath insulation as well. So I think given that -- given where we are, given capacity that folks have brought on and looking forward, I think we feel like there is ample supply right now. And again, we would point toward there's others bringing back additional capacity in late 2020 and Q1 of 2021.

[Bethany Talbott McGrath, analyst]

And is that -- is that incorporated into your guide for the remainder of the year?

[John Peterson, executive]

You're talking -- Megan this is John, you're talking the products coming on, obviously, in late '20, early '21 has no impact.

[Bethany Talbott McGrath, analyst]

Sorry, no the excess until now. Sorry about that. Yes.

[John Peterson, executive]

Oh, yes. I mean that's -- we've incorporated that as part of our guidance, obviously. And so we haven't seen it, I think in the past quarter or so, we would expect to have significant material inflation.

[Bethany Talbott McGrath, analyst]

Right. And then, my follow-up just on the potential for expansion of your glass business, could you give any more color there on -- you talked about having some similar characteristics to insulation. What exactly is making you think that's an attractive business?

[Gerald Volas, executive]

Megan, Jerry here. Just to repeat, we've been in the glass business for a while, and it's not new to us, we had some experience. And then with USI acquisition we picked up a couple of more branches that have been real stars in terms of their performance. So some of the characteristics relative to glass that kind of mirror insulation, have something to do with the size of the opportunity, which in glass is substantial, multiple billions of dollars and the fact that it's a relatively fragmented business that would have some advantages, if we were to scale it up relative to not only our relationship with suppliers, but also the talent that we could have across the network that we do in insulation. And so -- and there is some commonality relative to the supply chain, there is commonality relative to the fact that it's installer centric, in other words, our ability to manage labor. And then, we have decades of experience doing that on the insulation side; looks very similar on the glass side. So the capability from a corporate standpoint, that's driven the insulation success over the many, many years. There are some -- there are some -- there are a lot of comparables and a lot of similarity in the glass business.

And as I said, this -- we spoke before about product adjacencies and how we would do it on a very disciplined basis. This is a great example of that. Because I've said, we've been in this business before. We're not just stepping into something we know nothing about and we've done the research and we continue to work hard on it and we think it's very promising.

[Operator]

There are no further questions at this time. Please continue with your presentation or closing remarks.

[Gerald Volas, executive]

Thank you again for joining our call, and we look forward to reporting our fourth quarter and year-end results at the end of February.

[Operator]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.