TopBuild - Q3 2020
November 3, 2020
Transcript
Operator (participant)
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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tabitha Zane.
Tabitha Zane (Head of Investor Relations)
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 two 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 three. I will now turn the call over to Jerry Volas.
Jerry Volas (CEO)
Good morning, everyone, and thanks for joining us today. We're 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 Home Builder Analysis and Forecast report, John Burns cited the environment as the, quote, "strongest current housing market conditions ever," and one of our builder customers on their third quarter conference call a few weeks ago stated that, quote, "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 four, 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're particularly pleased with the expansion of our adjusted operating and EBITDA margins of 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 five, 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're 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'll be retiring as CEO and member of the board effective December the thirty-first. I'm very proud of what TopBuild has accomplished since becoming a public company on July the first, 2015, the result of a well-timed spin-off from Masco, our previous parent company.
We have significantly increased our national scale with fourteen acquisitions and have demonstrated the strength of our diversified business model, with both insulation installation and distribution, serving both the residential and commercial markets. A culture built around safety, operational improvement, and customer service have 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 forty-seventh 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'm 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?
Robert Buck (President and COO)
Thanks, Jerry, and good morning. To echo Jerry's remarks, TopBuild is performing very well. Our quarterly and nine-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 nine 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 to continue to climb, which I'll discuss further in a few minutes. We are very excited about the overall environment for our TruTeam business. Turning to slide seven, 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've 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 points improvement, and 12.5% for the first nine months, a 200 basis points 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've 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 home building 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 eight, 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've seen a few projects canceled, the vast majority of projects we've been awarded continue to be delayed due to social distancing rules, which limit the number of trades on a job site. Our long-term outlook for our commercial business is still bullish. Our backlog remains robust, and we're bidding on projects well into 2022. As a reminder, this is a $5 billion-plus industry, bigger than residential reconstruction, and we have an 11% market share. So while we'll 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've 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 nine that are top of mind for our customers concerning the home building 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're providing an attractive referral bonus to support this program. This program is 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 401(k) 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 a piece rate, which means as they get more productive, it creates better earnings power for them and for our company. And an average installer earns $45,000-$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 90-100 homes in a very short period of time and meet the customer's deadlines. The second issue that's top of mind is building material 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 they are restarting their Kansas City batts and rolls line, and it should be up and running by the second quarter. This will add 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 two times 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's likely the other manufacturers will follow suit. We feel very confident in our ability to manage these cost increases, as 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 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've been a mentor and a friend, and I look forward to seeing you enjoy the years ahead. John?
John Peterson (CFO)
Good morning, everyone. To echo Robert, Jerry, you will be missed, and we thank you for all that you've 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 nine 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 nine 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 nine 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 the gross margin improvement, as well as cost reduction initiatives implemented in the second quarter and lower travel and entertainment and legal expenses. For the first nine 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 nine 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 nine 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 nine 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 nine months was $24.9 million. This compares to $9.5 million for the third quarter of 2019, and $28.7 million for the first nine 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 nine 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 twelve 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 1 times trailing twelve months Adjusted EBITDA. Total liquidity at September thirtieth, 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 nine 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 2020 at the end of February on our fourth quarter call. Jerry?
Jerry Volas (CEO)
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 in 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'd 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 five and a half 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're now ready for questions.
Operator (participant)
At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Stephen Kim with Evercore ISI. Please proceed with your question.
Stephen Kim (Senior Managing Director and the Head of the Housing Research Team)
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, JM, Knauf, and also Owens Corning announcing the Kansas City lines. I'm 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 a big company, given your scale, you usually can be helpful in base loading that plant volume.
And I was curious as to if that's true, and if that typically spans, you know, a period of a couple of years, two to three 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.
Robert Buck (President and COO)
Yeah. Hi, Stephen, this is Robert. So, yeah, that's a great question, and so 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'll 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're coming back up, as we can, you know, 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're starting up those lines, as they're testing those lines, and as the furnaces are coming up to capacity.
That's really a strength of ours. So we'll do that with the manufacturers as they're bringing up those new lines.
Then, you know, we'll help them level load that line for, you know, foreseeable future as they're bringing up capacity, because that line may ramp up for a while, as they continue to get, you know, 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. Definitely a strength of ours. The manufacturers love to partner with us on that, and we love to be partners with them on that new capacity.
Stephen Kim (Senior Managing Director and the Head of the Housing Research Team)
Yeah, that's 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?
Robert Buck (President and COO)
Yeah, 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 yeah, I think there is, you know, residual benefit that goes down the road.
Stephen Kim (Senior Managing Director and the Head of the Housing Research Team)
Great. Yeah, that's encouraging. I know that you said that you're going to 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, I mean, the builders have been putting up some numbers, and in some cases, like 50% up in terms of orders.
There's just such a huge range of numbers that people are trying to choose from. Was curious if you could help us dimensionalize what your outlook or just what you're seeing right now in terms of plans for single family housing starts growth over the very near term, the foreseeable future, call it 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, you know, more than that? Just help us understand what kind of ramp in growth you're anticipating.
John Peterson (CFO)
Hey, Steven, this is John. So yeah, I think, again, the reason we didn't give guidance was entirely tied to the fact that across the entire industry, all construction, basically labor and material, are ramping up to support what we're seeing as a really nice push in orders converting into starts. And we've seen that the last two or three months, I think, the starts data averaging over a million four. So to your point, we are extremely bullish about what's coming. And really, you know, when we think, you know, three to six months or even beyond that period of time, we're pretty bullish beyond that period, too. With all the demographics and everything supporting the growth long term, lower interest rates, we expect to see that for an extended period of time.
You know, 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're 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'll probably be with us till, you know, midyear next year sometime. But in terms of giving you numbers, we're not giving numbers out today. Obviously, I think we'll be in a position in the first quarter in February to give you a good look at twenty twenty-one from a sales and EBITDA.
We're 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.
Stephen Kim (Senior Managing Director and the Head of the Housing Research Team)
Yep. Okay. And so I guess that's still going to be an outlying question. All right. Well, thanks very much, guys. Good job, and, Jerry, don't be a stranger.
John Peterson (CFO)
Thanks, Steven.
Operator (participant)
Our next question is from Ken Zener with KeyBanc Capital Markets. Please proceed with your question.
Ken Zener (Senior Analyst)
Good morning, everybody, and Jerry, clearly congratulations. So pretty amazing results. Robert, John, how? You know, the gross margins are up about two hundred basis points. You got leverage on EBIT across the business because it's closer to three hundred. And I understand you're focused on labor, but how should we think and price and 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're 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?
John Peterson (CFO)
Yeah. So, Ken, this is John. You know, 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 the second quarter, and we get great leverage, as you know, off of those volume increases we've 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, you know, a higher performance than we saw in the second quarter. But we also got the benefit in the third quarter of some line items being impacted by COVID favorably, travel and entertainment, group health.
Shop 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 third quarter. So,.
Ken Zener (Senior Analyst)
And that sounds like an SG&A item, John, is that correct?
John Peterson (CFO)
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 would be more on the gross profit side. So, you know, roughly 50-50 split, if you had to split it. So I think, you know, you're just seeing a continuation of our teams executing extremely well in the field, managing price, material, labor, which are obviously the three most important elements for us to manage. And then, you know, the SG&A bucket and certain overhead buckets, you know, 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.
You know, continuation of 2Q with some minor adjustments and changes, the biggest being volume and improved material costs.
Ken Zener (Senior Analyst)
So just following up on that, I mean, it's such a juicy quarter to ask questions. But the volume, I mean, I know you called out commercial, which if you could comment on your real ability to take further M&A in commercial, given the environment we're seeing. But the volume you're 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've stated annually, at about 23%, that means you were still down on new construction. So the volume gains that you're referring to, could you maybe be a little more explicit? And 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.
John Peterson (CFO)
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, you know, great execution in terms of share gains there in that industry, and also getting more of our current customers' pocket, basically. So they're the major drivers, I think, Ken, if that answers your question.
Ken Zener (Senior Analyst)
It does. I'll, I'll talk to you guys again. Thank you.
John Peterson (CFO)
Thank you.
Operator (participant)
Our next question is with Phil Ng with Jefferies. Please proceed with your question.
Phil Ng (Managing Director and Sell-side Equity Research Analyst)
Hey, guys, really impressive quarter, and, Jerry, congrats, really enjoyed working with you, and best of luck.
Robert Buck (President and COO)
Thanks, Phil.
Phil Ng (Managing Director and Sell-side Equity Research Analyst)
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 know, how 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?
Robert Buck (President and COO)
Hi, Phil, it's Robert. The thing about the third quarter and even a little more recent, I mean, we continue to see a gradual ramp every month in the third quarter, so we thought that was positive. You know, just a little bit forward looking here, we were really pleased with what we've seen in October. You know, we would obviously. You got, you know, the winter months coming up here. We'd expect to see smoother seasonality than we'd see in years past. I think we're pretty positive looking forward, as John said earlier, and we like what we've seen, the continued gradual ramp. Long way of answering your question, I think we're already seeing some of it now.
Phil Ng (Managing Director and Sell-side Equity Research Analyst)
Okay. Robert, was your volumes in October up for your installation business?
Robert Buck (President and COO)
We saw some nice improvements in October, for sure.
Phil Ng (Managing Director and Sell-side Equity Research Analyst)
Okay, got it. And then some of the strength that you've seen in your distribution business, that's really exciting in terms of the 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?
Robert Buck (President and COO)
Yeah. I think, Phil, I think we're pretty positive about, you know, growth and Service Partners. I mean, again, as we mentioned, we've seen this as, as shared growth, better execution by the team, both, the sales side, service side, pieces of business, you know, mix of customers, products that we're offering, new products that we're offering, that type of thing. So, so we're definitely optimistic about the future. Relative to your question around pre-buy, I, I would say could have been some of that, but I wouldn't, I wouldn't put a significant amount on that, in that. If you go back to that time period, materials were already getting tight, in supply, so there wasn't a lot of, what I'd say, excess material available for a pre-buy scenario.
Phil Ng (Managing Director and Sell-side Equity Research Analyst)
Okay, great. And then one last one from me. It sounds like from an M&A pipeline standpoint, things are looking quite robust. Any way to help size up some of the deals that you have in the pipeline that could be joining you soon, relative to maybe Garland and some of the deals you've done in the past?
John Peterson (CFO)
Yeah, Phil, this is John. I think we're not gonna give out specific numbers except to say that it's a pretty broad spectrum in terms, you know, historically, some of the deals you've seen have been that five to tens, something like Garland at sixty. And quite frankly, there are others out there that are bigger than that, that are right now in our pipeline that we're 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'll say it right now, we're very optimistic in terms of our pipeline and what we think it'll deliver.
Phil Ng (Managing Director and Sell-side Equity Research Analyst)
How are the multiples shaking out in some of these recent deals you've closed on?
John Peterson (CFO)
Yeah, this is John again. So I don't think we've seen a significant change at this point from what we saw historically. So, you know, I think we typically talked about that five-to-six range on a pre-synergy basis. So that's kind of what we'd expect to see for some of the transactions. Now, some of the larger ones that have been in play for us, as you know, USI, et cetera, there might be different economics involved, but I think for the majority of the transactions, that five-to-six on a pre-synergy is probably the range.
Keith Hughes (Managing Director and Equity Research Analyst)
Got it. Super helpful. Good luck in the quarter, guys.
John Peterson (CFO)
Thank you.
Operator (participant)
Our next question is with Justin Speer, with Zelman and Associates. Please proceed with your question.
Justin Speer (Managing Director)
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.
Robert Buck (President and COO)
Thank you, Justin.
Justin Speer (Managing Director)
I just wanted to.
Robert Buck (President and COO)
Thanks for coming.
Justin Speer (Managing Director)
Oh, you're 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 it for us, and maybe how long you think that could sustain into next year?
John Peterson (CFO)
Yeah. So, looking at SG&A on the overall company, a big piece of it was travel and entertainment, and we put that number in the third quarter, probably roughly $2 million, Justin. I mean, there's other things too, obviously. Again, we took restructuring in the second quarter, so we've been managing our salary, wages, benefits line very well, too. But, the T&E, it's really difficult to say when that's gonna come back and how quickly. We saw a little bit of an increase in third quarter versus second quarter levels. And, you know, I think we'll continue to see that over time.
Whether it will ever truly normalize to what we had historically, I think, you know, the onus is on the company right now to evaluate, you know, how much of that gain or benefit can live through after things kind of get back to normal. But yeah, we'd expect to see that number start to ramp, continue to ramp up, as, you know, as COVID hopefully gets behind us over time here.
Justin Speer (Managing Director)
For sure. I guess, maybe another way of thinking about it is, you know, it's been a, you've 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 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?
John Peterson (CFO)
Yeah, I think we can certainly leverage, you know, the cost that we have in that bucket. And again, you know, we're not gonna see that. As demand recovers, we will see some additional T&E and other line items that have been disproportionately lower come back. But, you know, I'd say travel and entertainment specifically, until it's safer out there, I think you're gonna continue to see that lower than we've had historically. And again, as we get into twenty twenty-one, we will be evaluating what we can do to keep as much of that benefit as possible in the P&L on a long-term basis.
Justin Speer (Managing Director)
That makes sense, and then separately, you know, we're back in kind of the mode of suppliers, manufacturers, particularly fiberglass manufacturers and other suppliers, with these price increase announcements. I know historically, inflation's not a bad thing for a distribution-like model, but maybe remind us how you're 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 midterm 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've 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?
Robert Buck (President and COO)
Hi, Justin, this is Robert. I'll take the first part of that question around the material and the suppliers. So, you know, I think a few parts to that question. I think it's obviously going to be supply and demand. I mean, material is tight right now, and labor is tight. So if I think about, you know, from a distribution perspective, labor and the level of service we're able to provide is key for our customer base. And so, you know, we feel comfortable, as we've demonstrated in the past, with appropriately passing along those increases. On the install side of it, obviously, it's a labor and material combination of the two, which are both extremely high demand right now. So, you know, we feel comfortable and confident in both businesses.
I think, you know, back to the supply and demand. I think as if this ramp in housing continues to happen, then I think, you know, we can expect to see definitely multiple increases in twenty twenty-one 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 materials stay in that tight supply and labor will as well. Overall, we feel, you know, comfortable with our ability to pass that along, and I think we've demonstrated that on a pretty consistent basis in the past.
John Peterson (CFO)
Justin, this is John. I'll take the second part of that in terms of your questions around what does margin look like in the future from an EBITDA standpoint. I'm not going to give you a specific number, but starting with third quarter, if you take the 17.1% we achieved, I mentioned that about $4 million of that was tied to what I'll call COVID-related expenses, which were lower than we historically would have seen due to COVID. So if you back that out, you're probably close to 16.5%. And I'd say on a go-forward basis, we feel great about the prospects on a go forward.
I think we've already got great evidence of the fact that we can leverage the footprint, and, you know, we think there's plenty of room to leverage, you know, as we've said many, many times in our history, up to 1.5 million starts and beyond. So I think that's in our favor. I think there's always continuous opportunities on the labor and productivity side. And again, we've got pretty good evidence of delivering that. From an M&A standpoint, certainly, you know, very accretive margins, and we think there's many accretive acquisitions out there for us to continue to play in that, you know, way out into the future. So we're pretty bullish about the prospects.
I think next year we probably have some challenges from a comp standpoint, due to the fact that we've had some of this COVID benefit, that we'll be comping up against. But, you know, beyond that, we've always talked about a 22%-27% type of pull-through number for the business. And, you know, we're still as bullish about that number on a go-forward basis as we have been in the past.
Justin Speer (Managing Director)
Excellent. Thanks. I really appreciate it, guys.
John Peterson (CFO)
You're welcome.
Justin Speer (Managing Director)
And again, Jerry, congratulations.
Jerry Volas (CEO)
Thanks, Justin.
Operator (participant)
Our next question is with Adam Baumgarten, with Credit Suisse. Please proceed with your question.
Adam Baumgarten (Research Analyst)
Hey, good morning, everyone. Thanks for taking my questions. Just, you know, 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.
Robert Buck (President and COO)
Yeah, good morning, Adam, this is Robert. So I'd say I think there's multiple fronts to that, to that answer. You know, number one is a very conscious effort by the team and our direction there. If you, 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 some customers. You know, we've obviously got the team there 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've seen in the Service Partners business. You know, there were probably, if you look backwards, probably some weaker comps compared to last year.
But the team has absolutely done a great job there, really energized in the field and really running great, you know, from an operational, you know, improvements perspective as well. So, you know, just really, really good job there from the Service Partners side. And again, as I mentioned before, I think, I think we're excited about what that business can do in the future as well.
Adam Baumgarten (Research Analyst)
Okay, got it. And then just you guys called out gutter coil and, and spray foam costs as deflationary. Can you give us a sense, were your fiberglass insulation costs also down year-over-year?
John Peterson (CFO)
This is John. So, no, we basically, 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.
Adam Baumgarten (Research Analyst)
Great. Thank you.
John Peterson (CFO)
You're welcome. Thank you.
Operator (participant)
Our next question is with Seldon Clarke, with Deutsche Bank. Please proceed with your question.
Seldon Clarke (VP and Research Analyst)
Hey, good morning. Thank you. You know, when you think about the relationship between, you know, insulation volumes and starts and, you know, the typical sort of, three-month lag, and I know you talked about a number of supply constraints, but you're sitting there over the last three months, single family starts are up sort of 16%. So could you give us a sense of, you know, if you could possibly quantify, like, how much you think supply will be a constraint, in the fourth quarter? And just, you know, help us think about the relationship now versus starts, you know, compared to how it trended historically.
John Peterson (CFO)
Yeah, that's a difficult. This is John. That's a difficult question to answer, only because when we talk about material constraints, we're talking about many different product lines versus insulation, one of them, certainly, but you know, across the broad spectrum of all the materials and parts that go into building a house, I'd say, you know, 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 that's not only coming, but it's here, so it's just difficult for us to peg that, which is exactly why we didn't give guidance on this call, but we are confident that, you know, we're 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 just very difficult to put a number on that at this point.
Seldon Clarke (VP and Research Analyst)
Is there any way you could just give us some context around, you know, maybe where October is trending? I know you said, you know, inflation was up or better in October, but and maybe just like gauge us on the distribution side as well.
John Peterson (CFO)
Yeah, we're not going to give specifics. 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 as good a 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's a lot of pieces that go into building a house that determine how quickly it's built. So I think we're 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, you know, our expectation is in November, December, we're going to see improved seasonality versus what we typically would and historically would in a fourth quarter timeframe.
Ryan Gilbert (Managing Director and Housing and Real Estate Services Analyst)
Okay, that's helpful. And, you know, if this elongated construction cycle or recovery sort of plays out for the next, you know, twelve months or so, you know, how does that change your ability to, you know, efficiently manage your fixed cost base to leverage those opportunities? Does the increased visibility or sort of more steady, you know, ramp in demand help your incremental margins? Or, you know, is there not much of a difference to how you can manage the business?
John Peterson (CFO)
Yeah, I think as we look forward, we obviously expect volume to continue to grow and improve, but our expectation is that we're gonna manage our fixed costs very, very tight. In fact, you know, we're 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, you know, we've got four or five years now of very, very good evidence that we can leverage not only the fixed costs we have, but obviously improve the productivity, reduce cost appropriately, which we did in the second quarter, so I think, you know, 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've run the business since day one, and that's gonna be the way we're going to go into the future, so.
Ryan Gilbert (Managing Director and Housing and Real Estate Services Analyst)
Okay. I appreciate the question. Thanks, Chris.
John Peterson (CFO)
Thank you.
Operator (participant)
Our next question is from Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.
Keith Hughes (Managing Director and Equity Research Analyst)
Thank you. Just a question on commercial. You've broken that out in the press release. But in general, how much of the commercial business is housed in TruTeam versus Service Partners?
John Peterson (CFO)
I'd say it's about 50/50 in terms of the split. In terms of total dollars, hang on for just a second. Do you have that, Tabitha?
Tabitha Zane (Head of Investor Relations)
You can see the percentage right there.
John Peterson (CFO)
Yeah, it's not on my fingertips, Keith, so we can get back to you on that in terms of the exact numbers.
Keith Hughes (Managing Director and Equity Research Analyst)
Okay. And as we think about the demand patterns between those two business, will they be fairly similar? Or because of the, you know, install aspect, TruTeam, could there be a mismatch as business moves up and down, between the two segments in commercial?
Robert Buck (President and COO)
Yeah, thank you. This is Robert. So I think as, you know, we see the starts come out of the ground, I think you may see, you know, a more proportional ramp on the install side of the business. And I think what we've seen, which we're really excited about on the Service Partners side, has been that share gain that we've been able to accomplish on that side of the business. I think you'll see, you know, an inordinate amount of ramp as starts come out of the ground on the TruTeam side, if you think about it that way.
Keith Hughes (Managing Director and Equity Research Analyst)
Okay. Thank you.
John Peterson (CFO)
Keith, back to your question real quick on commercial.
Keith Hughes (Managing Director and Equity Research Analyst)
Yeah.
John Peterson (CFO)
Of roughly about $150-plus million, almost $160 million of commercial revenue, roughly 2/3 of that is in TruTeam and about a third in Service Partners.
Keith Hughes (Managing Director and Equity Research Analyst)
Okay, thank you.
Operator (participant)
Our next question is with Ryan Gilbert, with BTIG. Please proceed with your question.
Ryan Gilbert (Managing Director and Housing and Real Estate Services Analyst)
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've seen announced for fiberglass?
John Peterson (CFO)
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 gain we have are going to be in the third quarter from a comp standpoint. Those, both those commodities are normalizing, as we enter the fourth quarter and beyond. You know, 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're confident we'll be able to manage that as we have in the past.
Ryan Gilbert (Managing Director and Housing and Real Estate Services Analyst)
Okay, thanks for that. Second question is just a point of clarification on your commentary around commercial. It sounded like when you said, you know, commercial projects have been delayed, my interpretation is 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'm 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 installation?
Robert Buck (President and COO)
Ryan, this is Robert. So, you know, number one, the projects we are already working on, on the job site, those are slower due to some of the, you know, social distancing stuff that's on the job site. As far as new projects, we've seen very few projects canceled. Some have been slower to get started, so there may have been a delay in some start of some projects, but very few have been canceled. But we're seeing new projects start up, you know, on a weekly basis, but, you know, some of them are slower to start than if you'd asked eight months ago, as an example.
Ryan Gilbert (Managing Director and Housing and Real Estate Services Analyst)
Okay, great. Thanks very much.
Operator (participant)
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is with Ken Zener, with KeyBanc Capital Markets. Please proceed with your question.
Ken Zener (Senior Analyst)
Good morning again. I want to clarify what seems to be the tone of this conversation, which is growth is slower because there's you know, 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, you know, 30 to, including distribution, 40% plus share in the U.S.? You have the best insight into U.S. housing activity of anybody, in my view. What is the traditional delay from start to installation, and where are you now? If you could give us some perspective to quantify this, quote, delay, not a number, but a time delay.
John Peterson (CFO)
So Ken, your question is around the time that a start occurs to when we do our work on it?
Ken Zener (Senior Analyst)
Yeah. So if it's usually, you know, a quarter lag, what are you seeing and how much is that delaying? Because I think that's part of the concern that people are thinking about on the top line. That's my first line of questioning.
John Peterson (CFO)
Yeah, I mean, I think, you know, we're seeing that improve, by the way, as obviously we walk 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, you know, our volume was up proportionately on a positive mode. So it's a very, very strange relationship now between lag starts and when we get on the job. And as you know, you know, orders turn into permits, permits turn into starts, starts turn into work for us over time. It's just that the traditional lag is off, but it's improving. We're seeing it improve across all of our locations.
If it historically maybe was two to three months, historically, on average, it might be, you know, I'd say two and a half-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're talking about between the labor and material constraints. You know, we expect that, obviously, to continue to play catch up, but I think it's in the mode of doing that right now, so.
Ken Zener (Senior Analyst)
All right, so the time delay, the second derivative is improving. The worst is past us in terms of that, is what I heard you say.
John Peterson (CFO)
Yeah.
Ken Zener (Senior Analyst)
Um, okay.
John Peterson (CFO)
Yeah, I think we're pretty confident that both in both labor and material across all construction trades and industries, we're going to continue to see that improve.
Ken Zener (Senior Analyst)
Right. And now, here, the other thing about the margin leverage, and I apologize about this. I'm just kind of surprised at how I think the tone has been on this conversation. In two thousand and eighteen, there was rather robust price increases due to loose fill, plants being shut down, allocation, that's kind of followed. So while you talked about this 8% increase for Owens Corning, traditionally, as I look at 2018, for example, you guys were able to get price and margin expansion. Did you've always talked about industry dynamics and pricing. Are you calling out the inflation 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, you know, an unrecoverable headwind? Because it seems people are questioning your ability to reprice 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.
John Peterson (CFO)
Sure, Ken, this is John. So, yeah, we certainly didn't 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 costs and then appropriately price it. And again, we've 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 eighteen and now, eighteen certainly was a surprise. You know, that came upon the industry and TopBuild 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 our pricing and material in balance.
But we did, and certainly the back half of 2018, we had great evidence of that. I think we feel great about the ability to manage what we see right now, which is, you know, we have advanced notice, obviously, of the January increase. We'll be talking to all four suppliers, and we're in the process of doing that right now. We appropriately expect to be able to manage that into our bids, you know, prior to that first quarter timeframe. So we feel great about the ability to continue to manage both labor and material input costs in our selling prices and continuing to drive margin expansion as we have in the past.
Robert Buck (President and COO)
Yeah, Ken, this is Robert. So to add on to that, if you think about 2018, right? 20% of the capacity went out of the industry overnight from one issue in a manufacturing plant. So there wasn't really any planning. There wasn't really any, you know, looking forward type of thing. That was 20% capacity in one night. Here, you know, one, housing starts are ramping up. Number two, labor's even at a more of a premium today. Number three is you see, you know, these announcements are coming out in advance, so it's not an overnight type of phenomenon, and it's building materials across the industry, it's labor across the industry.
So I'd say it's very different than 2018, and I'd say we're 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.
Ken Zener (Senior Analyst)
Thank you.
John Peterson (CFO)
Thank you.
Operator (participant)
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.
John Peterson (CFO)
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.
Operator (participant)
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.