Greetings and welcome to the TopBuild Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tabitha Zane.

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 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. 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. 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 strong quarter as the TopBuild team continues to perform very well in this environment. Despite the ongoing negative impact of COVID-19 on the overall economy, the housing industry remains a positive story. Our builder customers are reporting very strong traffic and record order growth. In his October Homebuilder Analysis and Forecast Report, John Burns cited the environment as the strongest current housing market conditions ever, and one of our builder customers on their third quarter conference call a few weeks ago stated that, 'demand is through the roof.' We recognize that part of this trend is driven by COVID-19 impacts such as buyers looking to escape dense urban environments; work from home policies driving demand for more space; and active adults seeking to avoid senior residential facilities. And while all of this is currently having a positive impact on our industry, the long-term fundamentals of the housing industry also continue to remain strong. Most notably, historically low interest rates, increasing household formations, and very low inventory. These short- and long-term factors are translating into strong housing starts and our expectation is that this will continue and we will benefit from this growth. We acknowledge that labor and material will likely be gating factors, elongating the build cycle, which we did see in the third quarter, but our team has demonstrated its expertise in navigating these waters as Robert will discuss in a few minutes. Turning to Slide 4, our third quarter results again reflect the strength of our diversified model and the ability of the TopBuild team to perform well at all points in any cycle. Net sales increased 2.2% to $697.2 million, despite delays in some of our commercial projects due to social distancing protocols. We are particularly pleased with the expansion of our adjusted operating and EBITDA margins by 280 basis points and 270 basis points respectively, which drove adjusted net income to $2.10 per diluted share, an increase of 37.3% over the same quarter last year. Regarding capital allocation on Slide 5, our acquisition team is back to executing on our top priority as we closed Garland Insulating on October 1. Garland was one of the largest locally owned and operated insulation companies in Texas having built a strong reputation through 70 years of outstanding customer service. We are very pleased to have this company and their excellent management team as part of the TopBuild organization. Looking ahead, our pipeline is filled with outstanding potential partners, several of which we expect to join us over the next few quarters. In addition to acquisitions, we returned capital to our shareholders through the repurchase of almost 58,000 shares at an average price of $155.63 per share. Before turning the call over to Robert, I want to remind you that this will be my last analyst conference call as I will be retiring as CEO and member of the Board effective December 31. I am very proud of what TopBuild has accomplished since becoming a public company on July 1, 2015, the result of a well-timed spin-off from Masco, our previous parent company. We have significantly increased our national scale with 14 acquisitions and have demonstrated the strength of our diversified business model with both installation and distribution serving both the residential and commercial markets. A culture built around safety, operational improvement and customer service has become fully ingrained in everything we do every day. As a result, we have performed well in many different economic environments and have increased our market cap from approximately $1 billion to over $5 billion today. In fact, on Friday, we were pleased to learn that TopBuild placed 47th on Fortune Magazine’s list of the 100 fastest growing companies. Most exceptional is the team that will be taking TopBuild forward. Robert Buck will be assuming the role of CEO and Director. Since the spin, Robert has been the COO, the primary architect of the numerous operational improvements that have driven our outstanding financial results. Having worked closely with Robert for many years at different stops throughout our careers, I am fully confident that Robert will be an outstanding CEO and drive further value. Surrounding Robert will be not only John and Tabitha, who you know well from their investor-related activities, but also many other excellent professionals in all areas of the company. TopBuild is in very good hands. Robert?

Thanks, Jerry and good morning. To echo Jerry’s remarks, TopBuild is performing very well. Our quarterly and 9-month results demonstrate our team’s success in continuing to drive solid financial performance and focus on operational excellence. Starting with TruTeam’s third quarter financial results on Slide 6, sales fell 1.2%, primarily driven by a decline in the volume of our commercial business, partially offset by increased selling prices of 1.2% and acquisitions, which contributed 1%. Despite this drop in commercial revenue, TruTeam’s adjusted operating margin expanded a robust 300 basis points to 17% in the third quarter and improved 170 basis points to 15% for the first 9 months of the year. This is a direct result of our continued focus on improving labor and sales productivity and implementing operational efficiencies throughout the business. Residential housing starts continue to climb, which I will discuss further in a few minutes. We are very excited about the overall environment for our TruTeam business. Turning to Slide 7, Service Partners’ third quarter sales were up a strong 10.5%, driven by a 12.2% increase in volume partially offset by a 1.7% decline in selling prices as a result of cost reductions in two commodity products: gutter coil and spray foam. As you know, we made some important decisions and changes at Service Partners over the past 2 years, including stepping away from some low margin business and focusing on our mix of customers and products offered. We also made some key leadership changes and now have a very entrepreneurial and forward-focused team. We are seeing these benefits of these moves as evidenced by our strong volume growth and our adjusted operating margin, which was 13.4% in the third quarter, a 280 basis point improvement and 12.5% for the first 9 months, a 200 basis point improvement. We are excited about the prospects for continued growth of the Service Partners business. As we look ahead, our builder customers and contractors remain extremely optimistic as they report historically high order rates and continued strong traffic. The acceleration of housing starts we have seen over the past few months is positive for both of our business segments and our company is well-positioned to capitalize on this growth. However, given several constraints in the homebuilding supply chain, we expect these housing starts to be slow coming out of the ground, lagging into the first quarter and perhaps even the first half of 2021. This slower ramp will elongate the cycle and provide a solid pipeline of activity for TopBuild. You can be assured we are ready to service these new housing starts and we will continue to leverage our operating platform to help drive solid financial results. Our commercial business, as shown on Slide 8, specifically on the heavy commercial side, continues to be negatively impacted by project delays due to safety protocols related to COVID-19. On a same branch basis, commercial revenue for all of TopBuild fell 6.8% in the third quarter and is down 6.9% year-to-date. While we have seen a few projects cancelled, the vast majority of projects we have been awarded continue to be delayed due to social distancing rules, which limit the number of trades on a jobsite. Our long-term outlook for our commercial business is still bullish. Our backlog remains robust and we are bidding on projects well into 2022. As a reminder, this is a $5 billion plus industry, bigger than residential new construction and we have an 11% market share. So, while we will likely see a slower recovery on the heavy commercial side, we see plenty of room to grow and our bundled solutions approach continues to appeal to general contractors. As Jerry noted a few minutes ago, we were pleased to acquire Garland Insulating last month. The integration is going well and our footprint has been significantly enhanced in the high growth state of Texas. Our M&A group continues to seek out well-managed, profitable companies with strong management teams that will enhance our footprint in similar high growth regions. As we have said on many calls, good acquisitions are a high priority for our company and we are excited about the prospects in our pipeline. I also want to touch on a few other areas highlighted on Slide 9 that are top of mind for our customers concerning the homebuilding supply chain. First is labor, which will likely continue to tighten across our industry as we move through this robust housing environment. Our team has always risen to the labor challenge and is approaching this environment creatively, giving us an advantage in attracting and retaining labor. For example, we recently introduced a recruiting program to our 10,000 plus coworkers asking them to invite their friends and family to join our TopBuild team. The high level of engagement having our employees involved to bring their friends and family to our company is a win for everyone and we are providing an attractive referral bonus to support this program. This program has been very well-received throughout our organization and is already beginning to yield results. Once we get a candidate installer on board, we offer a comprehensive benefits package which helps make us an 'employer of choice.' This includes health benefits, a matching 401k plan, tuition reimbursement and a career path, which can eventually lead to a branch management position. Our installer training program is also comprehensive and covers not only all facets of working safely but also how to become a more efficient and productive installer. This is important because the majority of our installers work on piece rate, which means as they get more productive, it creates better earnings power for them and for our company. An average installer earns $45,000 to $50,000 per year plus benefits and our top producing installers are making six figures. Just a reminder, we have a unique advantage and differentiator with our ability to share labor among our divisions as they are all on the same ERP system. For example, there have been a couple of regions where our competitors have struggled to meet deadlines because of labor shortages. We were hired and brought in crews from two or three neighboring divisions to insulate 90 to 100 homes in a very short period of time and meet the customer’s deadline. The second issue that is top of mind is building materials supply, including fiberglass capacity. As starts have accelerated, capacity has tightened for all building materials. Part of this tightness is due to some slowdown in production lines earlier in the year when the pandemic first hit. We do expect to see additional capacity come online next year. Last week, Owens Corning announced that they are restarting their Kansas City Batts and Rolls lines and they should be up and running by the second quarter. This will add about 2% to 3% to the industry capacity. In addition, Johns Manville has informed us they are moving full steam ahead with their new line and it should be producing material in early fourth quarter. We also understand that Knauf is moving forward with their plans to bring on additional capacity in the second half of 2021. In addition, the manufacturers are also improving their operational efficiencies, increasing capacity with existing lines. From TopBuild’s perspective, as the largest purchaser of fiberglass in the United States by nearly 2x our nearest competitor, we are comfortable with our supply chain. We buy from a wide variety of building material suppliers and while we have no long-term contracts, we do provide them with monthly forecasts and are confident in our ability to meet the growing demand from our builder customers. As far as material pricing, we saw an increase in September and Owens Corning and Knauf announced last week, an 8% increase for January and it is likely the other manufacturers will follow suit. We feel very confident in our ability to manage these cost increases as we demonstrated in 2018. This is a testament to our strong local division managers and the quality of our partnerships with our builder suppliers and customers. Before I hand over to John, I would like to make a quick comment on Jerry’s retirement at the end of this year. On the behalf of the Board of Directors, management team and over 10,000 coworkers, thank you Jerry for everything you’ve done for TopBuild. Speaking for myself, it’s been a pleasure working with you for over 20 years, first at Masco and TopBuild. You have been a mentor and a friend and I look forward to seeing you enjoy the years ahead.

Good morning, everyone. To echo Robert, Jerry, you will be missed and we thank you for all that you have done for everyone at TopBuild. Moving to our financials on Slide 10, we are pleased with our results, particularly our strong margin expansion, again demonstrating the strength of our diversified business model. Starting with the third quarter, net sales increased 2.2% to $697.2 million, primarily driven by increased same branch sales volume, revenue from acquisitions and increased selling prices. Revenue for the first 9 months of 2020 rose 1.8% to $1,996.6 million. Adjusted gross profit margin increased 220 basis points in the third quarter to 28.5% and for the first 9 months of 2020 expanded 160 basis points to 27.6%. Gross margin improvements were driven by volume gains, increased selling prices, lower gutter and spray foam material costs, lower insurance costs and continued gains in operational efficiencies. Adjusted operating profit in the third quarter grew 26.2% to $101.7 million, with a corresponding margin improvement of 280 basis points to 14.6%. For the first 9 months, adjusted operating profit increased 18.2% to $255.5 million, with a corresponding margin improvement of 180 basis points to 12.8%. Adjusted EBITDA for the third quarter was $119.2 million compared to $98 million in 2019, a 21.6% increase and our adjusted EBITDA margin improved 270 basis points to 17.1%. Both operating and EBITDA margin gains were driven by the previously mentioned factors impacting gross margin improvement as well as cost reduction initiatives implemented in the second quarter and lower travel, entertainment and legal expenses. For the first 9 months of 2020, adjusted EBITDA grew 18.3% to $315.3 million and adjusted EBITDA margin was 15.8%, a 220 basis point improvement over the first 9 months of 2019. Third quarter SG&A as a percent of revenue was 13.9% compared to 14.5% in the third quarter of 2019. The year-over-year decrease was primarily the result of lower travel and entertainment expenses and savings from cost reduction initiatives. Adjusted income for the third quarter was $69.6 million, or $2.10 per diluted share compared to $52.7 million or $1.53 per diluted share in 2019. Third quarter 2020 adjustments were approximately $160,000, primarily related to acquisition costs and COVID-19 pay. Our effective tax rate was 25.5% for the third quarter. For the first 9 months of 2020, adjusted income was $171.2 million, or $5.14 per diluted share compared to $138.8 million or $4.02 per diluted share. Adjustments for the first 9 months were $3.7 million and were primarily related to rationalization charges, COVID-19 pay and acquisition-related costs. Interest expense in the third quarter 2020 was $7.7 million and for the first 9 months was $24.9 million. This compares to $9.5 million for the third quarter of 2019 and $28.7 million for the first 9 months of last year. The decrease in interest expense was primarily driven by lower LIBOR rates and a lower balance due on our term loan. Moving to Slide 11, CapEx for the first 9 months of the year was $27.2 million, 1.4% of sales, lower than our targeted long range of 2%. As we have noted on previous calls, at the start of the pandemic, we pared back our planned 2020 CapEx spend, however we do expect that to return closer to the 2% range in the fourth quarter. Working capital as a percent of sales for the trailing 12 months was 10.1% versus 11.6% a year ago. This decrease is primarily due to improvements in our accounts receivable aging, a decline in heavy commercial sales, which have longer receivable terms and carry higher working capital requirements and a richer segment mix of our Service Partners business, which carries lower working capital requirements. As shown on Slide 12, we ended the third quarter with net leverage of just under 1x trailing 12 months adjusted EBITDA. Total liquidity at September 30, 2020 was $704.9 million, including cash of $315.3 million and accessible revolver of $389.6 million. Operating cash flow was $255.7 million for the 9 months ended September 30, 2020. We remain extremely bullish about the current and future health of the residential and commercial businesses we serve. Housing starts are strong and our commercial backlog and bidding activity remain very healthy. However, there is still some uncertainty over the pace of this growth, which is why we have not given guidance at this time. We hope to have more clarity over the next few months and are optimistic we will be able to provide annual revenue and EBITDA guidance for 2021 at the end of February on our fourth quarter call. Jerry?

In closing, 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. Finally, I would like to conclude our formal remarks by thanking our 10,000 employees for their hard work and commitment to our company. Because of you, my 5.5 years at TopBuild have been one of the most enjoyable and rewarding times in my 40-year business career. Although somewhat difficult to step away, it’s a bit easier knowing that the company is in such good hands. Operator, we are now ready for questions.

Our first question is from Stephen Kim with Evercore ISI. Please proceed with your question.

Thanks very much guys and strong results. I guess my first question relates to some of the new capacity that you were talking about opening up. I am curious if you could just review for us whether there are any incremental opportunities that you typically see emerge for TopBuild when you have a new plant open up in a local market? And I know you talked about not having any long-term contracts, but my perception was that given your scale, you usually can be helpful in base loading that plant’s volume. And I was curious if that’s true and if that typically spans a period of a couple of years, 2 to 3 years kind of a thing as you base load that plant. So if you can just help us with the opportunity set when you have new capacity open?

Yes. Hi, Steven. This is Robert. So yes, that’s a great question. And I think that is a real strength of TopBuild given the footprint, given our ability to really forecast demand as well. So as a manufacturing partner is bringing up that new capacity, we will work with them, one to be able to provide a forecast as to demand especially geographically to the location of that plant and where that capacity is coming back. And then we can absolutely help them level load those lines as they are coming back up as we can provide them ongoing ramp of demand coming into that, of which that demand will forecast. And so it’s really good for them as they are starting up those lines as they are testing those lines and as the furnaces are terming up their capacity, that’s really a strength of ours. So we will do that with the manufacturers as they are bringing up these new lines. And then we will help a level of that line for foreseeable futures, they are bringing up capacity, because that line may ramp up for a while, as they continue to get, opportunities with the line or they continue to gain efficiencies with the line, which is something I mentioned in the comments here. We see them continue to work their operational efficiencies as well, so, definitely a strength of ours the manufacturers love to partner with us on that. And we love to be partners with them on that capacity.

Yes, that is encouraging. Once the plant gets to a sort of a steady state kind of situation, do you feel like there are any residual benefits for having been involved in that initial startup?

Yes, I think so. Because obviously, we help them build demand regionally or geographically close to that new capacity. So I think it’s good for them and good for us as partners with them. So yes, I think there is residual benefits that goes down the road.

Great. Yes, that is encouraging. I know that you said that you are going to defer holding, defer providing official guidance on your volumes and expectations for next year until the 4Q call. But just generally speaking, I was curious if you could talk about the outlook? What pieces you can see right now, you talked about housing starts in particular having a little bit of a slower ramp, a constrained ramp, which is a good thing into late 4Q and into early 2021? As we think about what that means, in terms of specific numbers, because you mean, the builders have been putting up some numbers, and in some cases, like 50% up in terms of orders, and so there is just such a huge range of numbers that people are trying to choose from? I was curious if you could help us dimensionalize what your outlook or just what you are seeing right now, in terms of plans for single family housing starts growth, over the very near term that the foreseeable future called three to six months? Are we talking about like kind of a mid-teens growth kind of a picture? Is that what you mean by a little bit of a slower ramp or are you talking about something that could flex a little bit more than that, just help us understand what kind of ramp and growth you are anticipating?

Stephen, this is John. So yes, I think, again, the reason we did not give guidance was entirely tied to the fact that, across the entire industry, all construction, basically, labor material are ramping up to support what we are seeing as a really nice push in orders converting into starts and we have seen that the last 2 or 3 months, I think the starts data averaging over $1.4 million. So your point, we are extremely bullish about what is coming and really, when we think 3 to 6 months or even beyond that period of time, we are pretty bullish beyond that period. So with all the all the demographics and everything supporting the growth, long term, lower interest rates, we expect to see that for an extended period of time, good pent-up demand, really, really tight inventory, both on new and resale. So, we think those things are in play for an extended period of time, I think on the commercial side. I think Robert talked about it in his prepared remarks. We are also very bullish on that. I think the challenge there right now is on the heavy commercial side. It’s just a much lower cadence in terms of the work being done and performed because of primarily social distancing. And that will probably be with us to mid-year next year sometime, but in terms of given the numbers, we are not giving numbers out today obviously, I think we will be in a position in the first quarter in February to give you a good look at 2021 from a sales and EBITDA. But, but we are very, very bullish about the prospects. I think the only question right now is how quickly the industry in general can respond to the growth.

Yes, okay. And so I guess that’s still going to be an outlying question. Alright. Well, thanks very much, guys. Good job. And Jerry, don’t be a stranger.

Thanks, Stephen.

Our next question is from Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Good morning, everybody and Jerry, clearly, congratulations. So pretty amazing results. Robert, John, how the gross margins are up about 200 basis points, you got leverage on EBIT across the business because closer to 300. And I understand you are focused on labor, but how should we think in price mix and all these items? But I have kind of two basic questions. Did we see a structural improvement in your business as it relates to operating leverage in terms of how you are actually running the business, i.e., are some of these costs going to come back next year or are you just doing it better than you thought you could?

Yes, so Ken, this is John. What we saw really in the third quarter was really an extension of what we saw in the second quarter. I think the biggest differences in the third quarter was that we had better volume, so obviously, volume came into play much stronger and better than we saw in second quarter and we get great leverage as you know off of those volume increases we have had, so that was a benefit. And I mentioned in my prepared remarks that we also saw some improved material costs on around gutter and spray foam and that was at a higher performance than we saw on the second quarter. But we also got the benefit in the third quarter of some line items being impacted by COVID favorable. Travel and entertainment, group health, short supplies are probably the three biggest on our P&L and that extended into the third quarter. I think the second quarter, we talked about a $5 million benefit it was roughly $4 million in the second – in the third quarter, so…

And that sounds like an SG&A item, John, is that correct?

It’s a combination. It’s a combination of the two, the travel and entertainment touches on primarily SG&A, but then the group health, shop supplies will be more in the gross profit side. So, roughly 50:50 split if you had to split it. So, I think you are just seeing a continuation of our teams executing extremely well on the field, managing price material labor, which are obviously the three most important elements for us to manage and then you know that the SG&A bucket and certain overhead buckets impacted by the COVID and also, we took a restructuring in the second quarter. I think you may recall and we picked up about another $1.25 million worth of benefit year-over-year from the restructuring. So, a continuation of 2Q with some minor adjustments and changes the biggest being volume and improved material cost.

So just following up on that, I mean, it’s such a juicy quarter to ask questions, but the volume, I mean, yes, I know you called out commercial, which if you could comment on your ability to take further M&A in commercial, given the environment we are seeing, but the volume you are seeing, I mean, it went up a little bit, obviously $50 million quarter-to-quarter, but you did have down commercial 6.8%. If we assume that is the same sales mix, as you have stated annually at about 23%. That means you were still down on new construction. So, the volume gains that you are referring to, could you maybe be a little more explicit on why did commercial grow so much on that volume? Was there a channel shift? I know that was more than one question, but I apologize. Thank you very much, gentlemen.

Yes. So in terms of our commercial volume, I think sequentially, we saw an improvement versus the second quarter in the third quarter as we did on all of our lines of business, basically, but that improved in the third quarter versus second. The biggest change for us volume-wise was in service partners, where we had a significant gain year-over-year versus where we were second quarter was a good quarter, third quarter was a much better quarter in terms of those volume gains year-over-year. And Robert touched on those in his prepared remarks, no great execution in terms of share gains there in that industry and also getting more of our current customers pocket basically. So they are the major drivers, I think, Ken, if that answers your question.

It does. I will talk to you guys again. Thank you.

Thank you.

Our next question is with Phil Ng with Jefferies. Please proceed with your question.

Hey, guys. Really impressive quarter and Jerry, congrats, really enjoyed working with you and best of luck.

Thanks, Phil.

When do you guys expect to see some of these bottlenecks easing and just kind of being able to play catch up on demand? I know you called out labor and supply chain, which is a bigger issue at this juncture, and do you expect volumes to inflect positively in the fourth quarter on your installation business?

Hi, Phil, it’s Robert. So as I think about the third quarter and even a little more recent and we saw continued to see a gradual ramp every month in the third quarter. So, we thought that was positive. And just a little bit forward-looking here, we were really pleased with what we have seen in October. So, we would – obviously, you got the winter months coming up here, we expect to be – see smoother seasonality than we would see in years past. So I think we are pretty positive looking forward as John said earlier and we would like what we have seen the continued gradual ramp, so long way to answering your question. I think we are already seeing some of it now.

Okay. Got it. And then from the strength that you have seen in your distribution business, that’s really exciting in terms of this share gains. Is that level of growth sustainable over time? And did you see any pre-buys perhaps ahead of the price increase during the quarter?

Yes, I think, Phil, I think we are pretty positive that growth and service partners. And again, as we mentioned, we have seen this as shared growth, better execution by the team, both the sales side service side piece of business, mix of customers products, that we are offering new products that we are offering that type of thing. So we are definitely optimistic about the future relative your question around pre-buy, I would say could have been some of that, but I would not put a significant amount in that, we go back to that time period materials, were already getting tight in supply. So there was not a lot of what I say excess material available for a pre-buy scenario.

Yes Phil this is John. I think we are not going to give out specific numbers except to say that it is a pretty broad spectrum in terms of historically some of the deals you have seen above that 5 to 10 something like Garland is 60 and quite frankly there are others out there that are bigger than that that are right now in our pipeline that we are evaluating. So I think it’s a pretty broad range in terms of the opportunities for us. And as we said on the prepared remarks, and we will say right now, we are very optimistic in terms of our pipeline and what we think it will deliver.

How are the multiples shaking out in some of these recent deals you have closed on?

Yes, this is John again. So I don’t think we have seen a significant change at this point from what we saw historically. So I think we typically talked about that 5 to 6 range on a pre-synergy basis. So that’s kind of what we would expect to see for some of the transactions. Now some of the larger ones that have been in play for us, as USI, etcetera there might be different economics involved. But I think for the majority of the transactions that five to six on the pre-synergy is probably the range.

Got it. Super helpful. Good luck on the quarter, guys.

Thank you.

Our next question is with Justin Speer with Zelman & Associates. Please proceed with your question.

Good morning, guys. Thank you. And Jerry, I just wanted to extend my congratulations to you on your retirement. And it’s just been an incredible thing to watch your team and you orchestrate just incredible returns for shareholders, it’s been an amazing story.

Thank you, Justin. Thank you.

You are welcome. Great job. I wanted to really unpack the SG&A for a bit and look into the margins, because you guys have done such a great job for not just this quarter, but for many, many quarters on the margin side. But, recognizing that there may be some like temporal things going on here with the SG&A side. I guess from the SG&A piece of the equation that is controllable, I guess how much of a tailwind from that travel and entertainment piece that may or may not be sustainable, I guess, how much maybe quantify for us and maybe how long you think that could sustain into next year?

So looking at SG&A, on the overall company, a big piece of it was travel and entertainment. And we have put that number in the third quarter, probably roughly a couple of million dollars, Justin. I mean, there are other things too obviously, again, we took restructuring in the second quarter. So we have been managing our salary, wages, benefits mine very well, too, but the TNA it’s really difficult to say, when that is going to come back and how quickly we saw a little bit of an increase in third quarter versus second quarter levels. And, I think we will continue to see that over time. Whether it will ever truly normalize what we had historically, I think, the onus is on the company right now to evaluate, how much of that gain or benefit can live through after things kind of get back to normal, but, yes, we would expect to see that numbers start to ramp continue to ramp up as the, as COVID hopefully gets behind us over time here.

For sure. I guess maybe another way of thinking about it is, you have managed it very tightly. Should we consider that maybe that will grow more in line with underlying demand as you consider all the moving pieces is that is that a reasonable way to think about it or do you think you can maybe gain some scale there, as you look to what could be decent growth next year, notwithstanding the supply chain headwinds?

Yes, I think we could certainly leverage the cost that we have in that bucket. And again, we are not going to see that as demand recovers, we will see some additional P&E and other line items that have been disproportionately lower come back. But I would say travel and entertainment, specifically until it’s safer out here, I think you are going to continue to see that lower than we have had historically. And again, as we get into 2021, we will be evaluating what we can do to keep as much of that benefit as possible in the P&E on a long-term basis.

That makes sense. And then separately, we are back in kind of the mode of suppliers, manufacturers, particularly fiberglass manufacturers and other suppliers, some of these price increase announcements. I know historically, inflation is not a bad thing for a distribution like model, but maybe remind us how you are kind of thinking about not only the announcements, but maybe the magnitude of the announcements and your ability to absorb them? And then as a follow-up to that, what’s the right mid-term EBITDA margin potential for this model, because you guys have done such a good job, pulled forward some of the, I think ambitions that were maybe articulated in years past, you have been very successful with the USI integration? How should we think about normalized margins for this model under a scenario where we eventually do achieve 1.5 million starts?

Hi, Justin. This is Robert. I will take the first part of that question around the material and supply. So, as they, few parts to that question, I think lease supply and demand, I mean material is tight right now and labor is tight. So if I think about it from a distribution perspective, labor and the level of service we are able to provide is key for our customer base. And so we feel comfortable, as we have demonstrated in the past, but with appropriately passing along those increases on the install side of it, obviously, that labor and material combination of the two, which are both extremely in high demand right now. So, we feel comfortable and confident in both businesses, I think, back to the supply and demand, I think if this ramp and housing continues to happen, then I think we can expect to see definitely multiple increases in 2021 from the manufacturers, I think you’ll see some of that capacity come back. But again, if we continue to see that ramp, I think the material stay in that tight supply and labor will as well. And overall, we feel comfortable with our ability to pass that along. And I think we have demonstrated that on a pretty consistent basis in the past.

So Justin, this is John. I will take the second part of your question in terms of your questions around what does margin look like in the future from an EBITDA standpoint. So I am not going to give you a specific number, but starting with third quarter, if you take the – I think the 17.1% we achieved, I mentioned that about $4 million of that was tied to what I will call it COVID related expenses, which were just lower than we historically would have seen due to COVID. So to back that out, you are probably close to 16.5%. And I would say, on a go forward basis, we feel great about the prospects on a go forward, I think we have already got great evidence of the fact that we can leverage the footprint and we think there is plenty of room to leverage as we said, many, many times in our history up to a 1.5 million starts and beyond. So, I think that’s in our favor. I think there is always continuous opportunities on the labor and productivity side and again, we got pretty good evidence of delivering that from an M&A standpoint, certainly, very accretive margins. And we think there is many accretive acquisitions out there for us to continue to play in that, way out into the future. So, we are pretty bullish about the prospects, I think next year, we probably have some challenges from a comp standpoint due to the fact that we have had some of this COVID benefit that we will be comping up against, BUT beyond that, we have always talked about a 22% to 27% type of pull-through number for the business and we are still as bullish about that number on a go forward basis as we have been in the past.

Excellent, thanks. I really appreciate it, guys and again, Jerry, congratulations.

Thanks, Justin.

Our next question is with Adam Baumgarten with Credit Suisse. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking my questions. Just Service Partners’ volume growth has been outpacing TruTeam now for the last four quarters. Maybe if you could walk through some of the drivers there? Is there less commercial exposure maybe there? Is there more residential remodel, just kind of curious about the divergence there?

Yes. Good morning, Adam. This is Robert. So, I would say I think there are multiple fronts to that answer. Number one is a very conscious effort by the team and our direction there if we went back a year or two ago and you thought about some of the conscious decisions we made there relative to stepping away from some volume and stepping away from customers. We have obviously got the team they are focused on the right mix of customers, right mix of products and complemented by great service across the country as well. So I think that’s absolutely driven the share gains that we have seen in the service partners business probably if you look backwards, probably some weaker comps compared to last year. But the team has absolutely done a great job they are really energized in the field and really running great from an operational improvements perspective as well. So just really good job there from the service partner side. And again, as I mentioned before, I think we are excited about what that business can do in the future as well.

Okay, got it. And then just you guys call that gutter coil and spray foam cost is deflationary. Can you give us a sense where your fiberglass insulation costs also down year over year?

This is John. So, now we basically that the driver behind material was entirely gutter and spray foam, so really the rest of the product lines including fiberglass were pretty much treading water compared to prior year.

Thank you.

You are welcome. Thank you.

Our next question is with Seldon Clarke with Deutsche Bank. Please proceed with your question.

Hey, good morning. Thank you. When you think about the relationship between installation volumes and starts and the typical sort of three-month lag and I know you talked about a number of supply constraints, but you are sitting there, over the last three months single-family starts are up sort of 16%. So could you give us a sense of, if you could possibly quantify, like how much you think supply will be a constraint in the fourth quarter, and just, help us think about the relationship now versus starts compared to how it trended historically?

Yes, that’s a difficult – this is John, that’s a difficult question to answer only because when we talk about material constraints, we are talking about many different product lines versus insulation, one of them certainly, but across the broad spectrum of all the materials and parts that go into building a house, I would say, most are challenged right now. And in the mode of coming back. And they will, I think the question is, how quickly will those individual pieces come into play? And how quickly will they ramp to support the growth? It’s not only coming, but it’s here. So it’s just difficult for us to take that, which is exactly why we didn’t give guidance on this call. But we are confident that we are all going to figure it out. We talked about insulation, specifically on this call. And I think all the other trades and product lines will do the same. But it’s just very difficult to put a number on that at this point.

Is there any way you can just give us some context around maybe where October is trending? I know, you said, inflation was up or better in October, but and maybe just like gauge us on the distribution side as well.

Yes, we are not going to give specific. I think what Robert said is we saw a nice continuation of growth. So we may call it average daily sales, as an example, was improving throughout October, as it had been in the third quarter. And I think that’s just an indication to us that and by the way, we think from a labor constraint or material constraint. TopBuild is in a good position as anybody in insulation, and probably anybody in any other product line or trade group at this point in time? The issue is, obviously, there are a lot of pieces that go into building the house that determine how quickly it’s built. So, I think we are bullish about the fact it’s going to come back, I think, October, we saw the industry continue to ramp and grow. And as Robert said, I think, our expectation is in November, December, we are going to see improved seasonality versus what we typically would, and historically would in the fourth quarter timeframe.

Okay, that’s helpful. And, if this elongated construction cycle or recovery sort of plays out for the next 12 months or so, how does that change your ability to, efficiently manage your fixed cost base to leverage those opportunities? Does the increased visibility or sort of more steady ramp in demand help your incremental margins or is there not much of a difference to how you can manage the business?

Yes, I think as we look forward, we obviously expect volume to continue to grow and improve, but our expectation is that we are going to manage our fixed costs very, very tight. In fact, we are constantly looking for ways to reduce costs and become more efficient, whether that’s in the branches, specifically with their fixed overhead or whether it’s here at the Branch Support Center. And again, we have got 4 – 4, 5 years now of very, very good evidence that we can leverage, not only the fixed costs we have but obviously improved the productivity, reduced costs appropriately, which we did in the second quarter. So, I think we expect volume to continue to ramp and grow, but we don’t expect there to be a significant amount of pressure on increasing our fixed overhead and that’s just been the way we have run the business since Day 1 and that’s going to be the way we are going to go into the future so…

Okay, I appreciate the question. Thanks.

Thank you.

Our next question is from Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.

Thank you. Just a question on commercial, you have broken that out in the press release, but in general, how much of the commercial business is house and TruTeam versus Service Partners?

I’d say it’s about 50:50 in terms of the split. In terms of total dollars, hang on for just a second. Yes, it’s not at my fingertips, Keith, so we can get back to you on that in terms of the exact numbers.

Okay. And as we think about the demand patterns between those two businesses, will they be fairly similar or because of the install aspect, TruTeam could there be a mismatch as business moves up and down between the two sides in commercial?

Yes, Keith, this is Robert. So, I think as we see the starts come out of the ground, I think you may see more portion of ramp on the install side of the business. And I think what we have seen what you are really excited about on the Service Partner side has been that share gain that we have been able to accomplish on that side of business, I think you will see, an inordinate amount of ramp as starts come out of the ground on the TruTeam side, if you think about it that way.

Okay, thank you.

Back to your question real quick on commercial, of roughly about $150 plus million, almost $160 of commercial revenue, roughly two-thirds of that is in TruTeam and about a third in Service Partners.

Okay, thank you.

Our next question is with Ryan Gilbert with BTIG. Please proceed with your question.

Hi, thanks. Good morning, everybody. First question is just on material costs, I guess looking to the fourth quarter, do you think the magnitude of the lower gutter and spray foam costs that you saw in the third quarter is enough to offset the 4% price increases we have seen announced for fiberglass?

Well, talking specifically in third quarter, we talked about the fact that the material gains were in gutter and spray foam and those numbers we expect with probably the most positive gains we ever can be in the third quarter from a cost standpoint. Those – both those commodities are normalizing as we entered the fourth quarter and beyond. In terms of the impact from a fiberglass standpoint, obviously, we don’t share specifically what our negotiations are, what our pricing is. So, I really can’t give you any guidance on that. But again, we are confident we will be able to manage that as we have in the past.

Okay, thanks for that. Second question is just a point of clarification on your commentary around commercial, it sounded like when you said that commercial projects have been delayed. My interpretation is it’s not that the commercial projects have – it’s not that the starts themselves have been delayed, but rather it’s just slower for these construction projects to get to the installation stage? And I am just hoping you can either confirm or just add a little more clarity there, have the starts themselves been delayed or is it just slower to get to insulation?

Ryan, this is Robert. So number one, the projects we are already working on the jobsite, those are slower due to some of the social distancing stuff that’s on the jobsite. As far as new projects, we have seen very few projects canceled, some have been slower to get started. So maybe a delay in some startups and projects, but very few have been cancelled, but we are seeing new projects startup on a weekly basis, but some of them are slower to start than if you would ask 8 months ago as an example.

Okay, great. Thanks very much.

Our next question is from Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Good morning again. I want to clarify what seems to be the tone of this conversation which is growth is slower because there are some channel issues and costs are inflating and you have lots of one-time benefits. First, growth, can you talk about delays given that you have 30% to including distribution 40% plus share the U.S. you have the best insight in the U.S. housing activity over anybody in my view? What is the traditional delay from start to insulation? And where are you now? If you could give us some perspective to quantify this, quote, delay, not in number, but a time delay?

So, Ken, your question is around the time that a start occurs to when we do our work on it?

Yes, so if it’s usually a quarter lag, what are you seeing and how much is that delay? I think that’s part of the concern that people are thinking about on the top line. That’s my first line of question.

Yes, I mean, I think we are seeing that improve by the way is obviously we walked through the third quarter and into the fourth quarter through October. I mean, third quarter is a good example where I think lag starts were down 14%. And yet, our volume was up proportionally on a positive mode. So it’s a very strange relationship now between lag starts and when we get on the job and as orders turn into permits turned into starts, starts turn into work for us over time, it’s just that the traditional lag is off, but it’s improving, we are seeing it improve across all of our locations. If it historically maybe was two to three months, historically, on average, it might be, I would say, two and a half to three and a half months or something like that. It may be a month extension right now, but that’s starting to compress over time here. And really depends on the location you are talking about between the labor and material constraints. But, we expect that obviously to continue to play catch up, but I think it’s in the mode of doing that right now.

Alright. So the time delay, the second derivative is improving the worst has passed us in terms of that is what I heard you say?

Yes, I think we are pretty confident that in both labor and material across all construction trades and industries, we are going to continue to see that improve.

Right. And now, here is the other thing about the margin leverage. And I apologize that just kind of surprised at how I think the tone has been on this conversation. In 2018, there was rather robust price increases due to Louisville plants being shut down allocation. That kind of followed. So while you talked about this 8% increase from Owens Corning. Traditionally as I look at 2018, for example, you guys are able to get price and margin expansion. You have always talked about industry dynamics and pricing? Are you calling out the insulation? Because you think there’s a different relationship than you saw in 2018 in terms of price and your ability to recover it or within the context of gutter, and some of these other input costs that deflated? Do you think that’s going to be, an unrecoverable headwind because it seems people are questioning your ability to re-price your input costs, like you did in 2018, when they were much higher? It’s just can you expand on that to clarify, what people seem to be hearing in the conference call? Thank you.

Sure, Ken, this is John. So yes, we certainly did not mean to send any message like that at all, we remain as confident today as we did back in 2018 in our ability to obviously negotiate and manage our material input cost, and then appropriately price it. And again, we have got a good five-year history of doing that. And so we don’t see any change on a go-forward basis. I think the only difference between 18 and now 18, certainly was a surprise, when that came upon the industry and top billed as a major surprise overnight. So there, as you recall, we took a little while we took about a quarter and a half to get, get our pricing and material in balance. But we did, and certainly the back half of ‘18, we had great evidence of that. I think we feel great about the ability to manage what we see right now, which is, we have advanced notice, obviously, the January increase, we will be talking to all four suppliers. And we are in the process of doing that right now. We appropriately expect to be able to manage that into our bids prior to that first quarter timeframe, so, so we feel great about the ability to continue to manage both labor and material input cost in our selling prices and continuing to drive margin expansion as we have in the past.

Yes, Ken, this is Robert. So, add on to that, if you think about 18%, right, 20% of the capacity around the industry overnight from one issue in a manufacturing plant. So there wasn’t really any planning, there wasn’t really any looking forward type of thing that was 20% capacity in one night. Here, while these starts ramping up. Number two, labor is even at a more of a premium today. Number three, as you see these announcements are coming out in advance. So it’s not an overnight type of phenomena and its building materials across the industry. It’s labor across the industry. So I’d say it’s very different than 18 and I’d say we are even more confident given this is really a demand driver of really a positive thing going on in the industry and going on with housing.

Thank you.

Thank you.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to Jerry Volas for closing remarks.

Thank you again for joining our call. And Robert and his team look forward to reporting TopBuild’s fourth quarter and year-end results at the end of February.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.