Q2 2019 Earnings Call
Greetings welcome to installed building products fiscal 2019 second quarter Investor Conference 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.
Please note. This conference is being recorded I will now turn the conference over to Jason They Sander Senior Vice President Finance and Investor Relations. Thank you you may begin.
Good morning, and welcome to installed building products second quarter 2019 conference call.
Earlier today, we issued a press release on our financial results for the second quarter, which can be found any investor relations section on our website.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements within the meaning of the federal securities laws.
These forward looking statements include statements with respect to the housing market and industry conditions.
Our financial and business model.
Our efforts to manage material inflation, our ability to increase selling prices.
The demand for our services and product offerings expansion of our national footprint products and end markets.
Our expectations for our end markets, our ability to strengthen our market position our ability to pursue an integrated value enhancing acquisition, our diversification efforts alphas revenue and profitability.
Expansion of our commercial business.
Our growth rates and if so what are you doing group sales and profitability and expectations for demand for our services and our earnings in 2019.
Forward looking statements may generally be identified by the use of words, such as anticipate believe expect intend plan and will or in each case their negative or other variations or comparable terminology.
These forward looking statements include all matters that are not historical facts.
By their nature forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.
Any forward looking statement made by management. During this call is not a guarantee of future performance and actual results may differ materially from those expressed in or suggested by the forward looking statements as a result of various factors, including without limitation.
The factors discussed in the risk factor section of the Companys annual report on Form 10-K for the year ended December 30, Onest 2018.
Has the same maybe updated from time to time in subsequent filings with the Securities and Exchange Commission.
Any forward looking statement made by management on this call speaks only as of the date hereof, new risks and uncertainties come up from time to time and it is impossible for the company to predict these events were there I thought.
The company has no obligation and does not intend to update any forward looking statements. After the date hereof, except as required by federal Securities laws.
In addition management uses certain non-GAAP performance measures on this call such as adjusted EBITDA Adjusted EBITDA margin adjusted net income and adjusted net income per diluted share adjusted gross profit and adjusted selling and administrative expense.
You can find a reconciliation of such measures to the nearest GAAP equivalent in the Companys earnings release. In addition, a reconciliation for adjusted EBITDA for earlier fiscal years in our Investor presentation, which are available on our website.
This morning's conference call is hosted by Jeff Edwards, Our Chairman and Chief Executive Officer, and Michael Miller, Our Chief Financial Officer, I will now turn the call over to Jeff.
Thanks, Jason and good morning to everyone joining us on today's call.
I'm happy to have the opportunity to talk to all of you about our second quarter results.
As usual I will start today's call with some highlights and then turn the call over to Michael Miller, IBP, CFO , who will discuss our results and capital position in more detail before we take your questions.
The 2019 second quarter was strong across the board as favorable operating performance drove record financial results.
I'd be p. continues to benefit from our strong position in compelling markets across the U.S. and improving pricing environment and our business strategy aimed at product in end market market diversification, both organically and through acquisition.
So lets review our record second quarter results, which demonstrate the significant progress we are making in the positive trends underway in our business.
Total revenues for the 2019 second quarter increased nearly 12% to a quarterly record of $372 million, which was driven by improvement in price mix higher volume and customer and product growth and the contribution from our recent acquisitions.
Beginning last year and throughout 2019, we have worked closely with our suppliers and customers to improve our cost structure and recover from the unprecedented insulation material pricing environment that occurred last year.
The 2019 second quarter reflect the success of our strategies as price mix improved nearly 6% during the quarter.
The material cost environment to date in 2019 has been more stable than what the industry experienced last year.
With recent manufacturer capacity announcements, we believe the pricing environment will continue to be stable for the rest of this year and we believe we will continue to benefit from the strategies, we put in place.
Looking at revenue drivers for the quarter single family same branch sales increased over 4%, while total single family sales increased approximately 10%.
Compared to the increase in total U.S. single family completions of approximately 6%.
When comparing Ibps single family same branch sales growth to completions growth. It is important to remember that the timing of completions and the timing of installation work IBP completes isn't an exact correlation.
This can be further impacted by the fluid nature of the lag between starts and completions, which we discussed last quarter.
Second quarter same branch multifamily sales increased 10% over the prior year quarter. This is the second quarter of strong multifamily growth, which we believe is sustainable for the near future as our multifamily business benefits from continued multifamily development in the interior U.S., where IBP has a strong presence.
Combined new residential seeing same branch sales during the 2019 second quarter increased over 5%, while total residential sales increased nearly 10% compared to the modest two tenths of 1% increase in total U.S. completions.
We continue to outpace overall industry growth, which we believe is a result of our focus on operating branches in strong and diverse U.S. housing markets.
I'd be peace current geographic footprint continues to provide us access to nearly 70% of total residential permits and we remain committed to expanding our footprint through acquisitions organic branch growth in capitalizing on cross selling opportunities of other product offerings within our existing markets.
The market for residential commercial installation services remains highly fragmented and we continue to have a robust pipeline of acquisition candidates.
Our current pipeline includes installation installers to expand our footprint and geographic reach into markets, where we are under represented.
Additionally, we continue to pursue installers with complimentary building products as well as large commercial installers, both of which diversify our end markets and product offerings.
To date, we have acquired nearly 25 million in annual revenue.
We are pleased that this year's acquisitions have primarily been insulation installers in new geographies.
This includes the 2019 second quarter acquisition of expert installation and insulation installer, serving the Wisconsin, Iowa, North Dakota, and South Dakota markets with annual revenue or approximately $12 million. In addition, we acquired a Pennsylvania based in <unk> insulation installer with annual revenue of approximately $3.6 million.
Based on our announced acquisitions and current pipeline. We believe 2019 will be another good year of acquisition growth.
Turning to Alpha revenue increased 21% for the 2019 second quarter, which reflects the alpha strong backlog within its new and existing markets.
As mentioned in previous quarters, we will open only one new Alfa brands. This year in Phoenix and expect this location to quickly ramp given favorable trends within the region.
We also remain focused on improving alphas profitability at the previously added branches and continue to pursue several opportunities to expand margins as a result of our strategies, we believe Alfa sales and margins are headed in the right direction.
During the 2019 second quarter IBP once again experienced strong employee retention lower turnover and improved labor efficiency rates I'm encouraged with the continued improvements we are making to empower educate and motivate our employees.
I'm extremely pleased with the record results, we reported for the 2019 second quarter and the progress we are making in achieving our business plan.
Industry dynamics remain positive across our single family multifamily and commercial end markets and we expect this combined with typical seasonal trends will benefit our results for the remainder of the year.
With this overview I would like to turn the call over to Michael to provide more details on our second quarter results.
Thank you, Jeff and good morning, everyone.
Net sales increased to a quarterly record of $371.8 million for the 2019 second quarter compared to $332.6 million for the same period last year.
The 11.8% year over year improvement in sales was mainly driven by an increase in price mix a higher volume of completed jobs strong growth at alpha and acquisitions completed over the past 12 months.
As Jeff stated in his remarks, the 2019 pricing environment for insulation materials has been more consistent with historical trends compared to the abnormal environment the industry experienced last year.
In addition, we believe a typical seasonal pattern for completions is underway in the housing market.
As a result, we continue to believe that in the second half of 2019, we will be fully on top of the material inflation, we experienced last year.
Second quarter 2019, gross profit improved to 12.1% to $107.3 million from $95.6 million in the prior year quarter.
Adjusted gross profit as a percent of revenue increased to 29% compared to 28.9% for the same period last year.
Representing the positive improvements we've made in pricing.
For the 2019 second quarter, selling and administrative expenses as a percentage of net revenue was 18.9% as compared to 18.3% for the 2018 period as a percentage of revenues administrative expenses were 14.1% in the second quarter compared to 13.5% for the same period last year.
The 60 basis point increase in administrative costs as a percent of second quarter revenue was primarily due to lower than historical trends in general liability and medical insurance reserves in the prior year quarter.
These accruals impacted the comparable quarter by approximately $1.8 million, but will vary from quarter to quarter based on actuarial estimates and trends. We highlight this as a comparison to last year and not structural change and administrative costs.
As we have stated in previous earnings calls it is important to note that as our acquisition strategy continues and as the volume of total acquired business operations become larger we will incur additional non cash amortization expense.
And the second quarter, we recorded $6 million of amortization expense compared to $7.3 million for the same period last year.
This non cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability.
Based on our acquisitions completed to date.
We expect third quarter 2019 amortization expense of approximately $6.1 million and full year expense of approximately $24.2 million.
This figure will change with any subsequent acquisitions.
For the second quarter of 2019, adjusted EBITDA improved to $49.6 million, representing an increase of 8.9% from $45.6 million in the prior year.
As stated in previous earnings calls, we expect fiscal year 2019 to support typical seasonal trends, where we experienced improving sales and profitability in the second half of the year.
We continue to be encouraged by the momentum in the new single family construction market I supported by solid order growth recently reported by the public homebuilders.
On a GAAP basis, our second quarter net income was $18.9 million or 63 cents per diluted share compared to net income of $16.3 million or 52 cents per diluted share in the prior year quarter.
Our adjusted net income improved to $25.9 million or 87 cents per diluted share compared to $24.6 million or 78 cents per diluted share in the prior year quarter.
For the 2019 second quarter, our effective tax rate was approximately 24.6% and we expect a full year effective.
Effective tax rate of 25% to 27% for 2019.
For the six month period ended June Thirtyth 2018, we generated $52.4 million in cash flow from operations compared to $33.1 million in the prior year of 58.2% increase.
And the 2019 second quarter alone, we generated $36.5 million of operating cash flows compared to $27 million for the same period last year. We will continue to use our operating cash flow to fund acquisitions reinvest in our business and opportunistically repurchase shares of our common stock.
Capital expenditures at June Thirtyth, 2019 were $17.8 million or total incurred finance leases were $1.8 million.
Capital expenditures and finance capital leases as a percent of revenue.
Decreased 30 basis points to 2.7%.
At June Thirtyth 2019, compared to the same period last year.
At June Thirtyth 2019, we had total cash and short term investments of $105.7 million compared to $100.5 million at December 30, Onest 2018.
During the second quarter, we did not repurchase any of our common stock we have approximately $61 million available and our expanded $150 million stock repurchase program.
That is in effect through February 2020.
Total debt at June Thirtyth, 2019 was approximately $464.9 million taking into account cash and short term investments at June Thirtyth 2019, our net total debt was approximately $359 million compared to $363 million at December 30, Onest 2018.
Our capital structure remains conservative and we have considerable flexibility as we continue to deliver on our growth strategy.
With that I will now turn the call back to Jeff for closing remarks.
Thanks, Michael.
Im extremely encouraged by the direction in which we are headed in the positive business and market trends we are experiencing.
With the strong first half of 2019 complete we are positioned to continue our trend of strong sales and earnings growth.
Operator, let's open up the call for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Sorry, Keith.
Our first question is from just interfere with Zelman and Associates. Please proceed with your question.
Hi, Good morning, guys. Thank you.
Just a couple of couple of questions.
Tied to the margin profile in terms of the trajectory as we think about.
Exiting this year in particular, but as we think about Threeq and Fourq you.
Should we begin to see some year over year improvement or.
On the gross margin side, both on a year over year basis on a sequential basis as we think about the set up into the back half of that year.
Yes, I mean, as we have consistently talked for the past several quarters. We believe that you know for the second half we will get on top of the.
Pricing cost dynamic that we've been talking about for the past several quarters and we do think that that'll, particularly with what we are seeing and anticipate from volume growth typical seasonal volume growth in the back half of the year, we feel good about.
Kind of the margin profile of the business I'm going forward as well as the incremental margins that the business will be able to generate as we go into the back half of the year.
Excellent and then on the SG ne side are there any more onetime accrual items to call out as we think about mapping the back half I guess, how do you think about that yesterday levels going forward.
Yes, as we said Justin in the prepared comments I mean, it really was more of a comparison to last year because.
Based upon the actuarial analysis is that we get done in mid year. It was a kind of out of trend sort of favorable number in the second quarter of last year, which made from a comp perspective, the second quarter of last year, our most difficult comp what we would expect and I'm sort of experienced in the second quarter of this year.
And would expect through the second half of next year as a more continue as sort of a moderate environment that we've continued to experience. So.
We don't expect anything unusual obviously, what makes an unusual is that you don't expect that but right now as we're seeing that the back half of the year given the order growth numbers that are coming out of the builders from what were seeing both early in the quarter from a revenue perspective, and what we're seeing from our non publicly traded builders and customers.
We feel very good about the back half of the year.
Okay last question for me just that intermediate term margin destination.
Recognizing that there there's been some roadblocks getting margin traction in recent years now that looks like that that might be in the rearview mirror, how should we think about the intermediate term EBITDA margin profile potential of the business, assuming we get to that one and a half million starts destination and then you also mentioned some some potential traction at the alpha as well so when you roll. It all together how do you think about the mid term margin bogey that that you guys have spoken to before.
We feel very good about getting to that mid teens EBITDA margin when single family reaches stabilization I'm quite honestly what helps our conviction around that is the continued growth.
In the alpha business as well as our efforts to continue to improve the profitability level at that business. So all of those things are contributory to our conviction around getting back to a mid teens EBITDA margin over that yeah.
The next several years as the as the markets continue to recover obviously, if we see a pause or a slowdown in particularly new single family construction, which we don't think is the case, yeah that might slow our ability to get there but from everything we're seeing now.
Particularly for the rest of 19 and even going into 20, we feel very good about those longer term targets that we put out there.
Excellent. Thank you very much.
Sure.
Our next question is from Trey Grooms with Stephens Inc. Please proceed.
Hey, good morning.
So I guess just on the single family.
Same branch.
Overall up 4% or so.
I know, there's some pricing in there. So you know volume if you kind of step back and just look at what you highlighted in the press release pretty clearly.
Completions up like six or so your volume would've underperform that and I know there's.
A lot of puts and takes there lag between the start and the completion and catch ups and all these things but.
Really the question is more about kind of.
Looking forward.
You know as we look at the back half of the year and into next year with.
Well it looks like you know homebuilders kind of starting to pick up the pace a little bit more how do you see that relationship.
Between your same store volume and.
Starts our completions from where we sit today, how we should be thinking about that.
Yeah, that's a great question and in our prepared remarks, we sort of alluded to that you know the timing of starts and completion and we kind of do our work sort of in between generally speaking and add the cycle is now shifting towards more entry level product. We would expect that it's even closer to its star than it would have been in the beginning parts of the recovery because of the time to build from a start the time from start to completion, that's happening with the builders now. So you know historically people would say that.
Our work would be done 90 days. After a start you know that timeline is getting compressed as we go more towards entry level. So that the starts number in some respects him to even more it becomes more relevant than the completions number as it relates to sort of our volume growth that being said you know what we've said this on previous calls I think it's important to note that we're looking at total U.S. starts and total U.S. completions and we only have access to about 65% to 70% of that market. So it's a little bit of a tough comparison, if you will from that perspective, but also as we've said in the past couple of quarters, given the pricing dynamic that was going on last year from a material perspective and our.
Efforts to increase selling prices, we have definitely favored.
Price over volume so we have as a company we want to focus on doing.
Fairly priced work as opposed to underprice pork and that's been a especially true over the past two quarters.
Okay. So just.
I guess boiling down the the first part of your comment there is that.
It sounds like going forward, we should be.
Looking at a or maybe trying to model something closer to the trends in starts in your markets as opposed to the trends and completions in your markets.
Yeah, I mean, it's going to change over time, I mean, something that you that happened in the second quarter is that sort of that backlog that we talked about last quarter has really come down quite a bit yeah, particularly on the single family side, which is healthy in our opinion because it means that this extended spring selling season that I think it's pretty well documented at this point given what the public builders have announced from an order growth perspective, we think sets ourselves up and even the industry. Yeah I'm to have a very good back half because of that accelerated volume growth coming into the back half of the year. Trey This is Jeff.
But I would also say that mean pretty consistently we've been able to outpace.
What what would be normal kind of start completion related organic growth and we see absolutely. No reason why we cant continue or wouldn't continue to do that there is nothing in our way in that regards so I would agree with Michael's comments, we feel very good about second half of the year and continue to do what we're doing.
Perfect. Thanks for all the color there it's helpful and then on Alpha I mean, you guys are.
Continuing to really impress there I understand that that business is lumpy.
But and you know what it sounds like across all your business lines, including Alpha you are encouraged with the the outlook, but could you give us a little bit more color on kind of what the the backlog there might look like in the types of projects, you're you're seeing there.
Again understanding that it can be lumpy from quarter to quarter, but maybe even more just a general comment about kind of what's in the backlog is your.
As you look forward and just the types of projects.
It's a mix of projects I mean, there's some large significantly large projects there also.
One of the things that's helping drive the growth at Alpha is for actually even focusing on doing smaller dollar volume projects that are quicker heads. If you will and that also tend to be pretty good margins. So.
It took us a while in all honesty to kind of get that one under our belt so to speak but that team now. We believe is kind of very aligned with a combination of both you know profit.
Primarily profitable growth, but profitable growth.
At a high level. So you know that business year to date has shown [noise].
Excuse me.
No.
You know mid teens, almost 14% sales growth you know, we would expect that through the remainder of the year, we improve upon that but.
21% is a good number but you know.
We think that you know it can it can continue to maintain sort of a double digit sales growth rate and certainly as we go into the back half of the year and into 2000, because as you know we have pretty good visibility revenue wise on that business and they are out the team's done a really great job.
The sales growth in the new markets is what you would both want and expect.
So clearly that's good but also as Michael said.
Regular base hits me true Trophy findings grade on the one hand, when you land them, but on the other hand or you know the smaller jobs.
Were you realize cash crop, it's faster and you can get kind of make your bread and butter, that's not a bad thing either especially in kind of the core markets. Some of the bigger markets that we can have they started up and you kind of called their base business before the.
Became involved.
With that I'd be happy.
Got it.
Makes sense. Thank you for taking my questions I'll pass it on.
Great. Thanks.
Our next question is from Michael Wood with Nomura Instinet. Please proceed with your question.
Good morning. This is Ryan corn on for Mike just on the Alpha talking here.
How did the investment in branch costs at Alpha a in second quarter compare to prior quarters, and then what's to be expected going forward.
Maybe what they're fairly consistent I mean, there are up a little bit in the second quarter, but that's because of the new location that we talked about opening but you know they're pretty modest.
When you look at it, particularly because as we've been talking all along we're focusing on improving the operations of those kind of startup branches and have only opened up one branch this year and we believe based on the sales growth and kind of what we're seeing there. It was definitely the right decision to do to kind of.
Stabilizes the wrong word but to really work on the you know the base hits, if you will of the business and making sure that we're all focused on profitable growth. So.
Okay, Great and then just one more.
Yeah. Some of the recent acquisitions you guys have made this year, especially the two in June I'm more focused on on installation is I've got to go change to refocus on the core business or.
We should I guess going forward.
I think we even did mentioned that we were going to do.
In prior calls was probably two or three quarters ago. If I had to guess that we were going to try to hit I mean, we would categorize a fiberglass installing.
Acquisition candidate as right straight down the fairway for us.
That's not in any way I'm trying to disparage some of the other acquisitions that we've done that are related to.
Other products at an airport really trying to drive.
Both experienced in those products in a market, where we maybe are not strong in it and then that leads to.
Kind of high organic growth, but yes, we have starting about two quarters ago made a concerted effort to try to.
Find some deals that are straight down the fairway.
Great. Thank you.
Our next question is from Mike or EIS in with RBC capital markets. Please proceed with your question.
Good morning, Thank you for taking my questions.
Morning.
Just wanted to start off.
You both had some interesting comments around price I mean, I wanted to get a little clarity and more details. If you can provide you stated that for the back half of the year, given what you're seeing from the Oems you're expecting price stabilization.
So first just looking to clarify that you're talking there specifically on the insulation part of your business and then when you talk about stabilization are you.
Are you, implying that you're no longer looking for as much of a tailwind and you're looking for flat pricing in the back half the year or do you mean, they should stabilize in the mid single digit level, you've got in the first couple of quarters of the year.
Our commentary was you know, obviously fibroblast, particularly fiberglass insulation is the largest of the products that we purchase but the comment was meant to cover really the inflationary environment for all of the products that we we purchase we feel that we're in a much more historical environment in terms of the level of price appreciation that we're seeing so it's nothing like what we saw in 18 and you know we feel.
Very confident about the you know kind of the balance that we have between price and cost from a material parts perspective, I mean, it's a good market. Its a healthy market right I think the comment more was to just highlight that the volatility that we saw in it last year is not nearly as president back not present as compared to last year. This year.
That's really what yep.
Got it that's helpful and shouldn't be a tailwind for profitability as well, Okay, and then transferred transitioning on talking about the few of the branches that Youve acquired this year, you talked about them being new markets for you. All can you talk about what made those markets attractive for you and is it the thinking of the footprint. You currently have or are there other markets where are you.
I would like to be better index is there any examples you can give to help us think about where growth is going to be coming from.
Yeah, I would say that I mean, our goal still is to be pretty much everywhere, we are not and when I say that that doesn't mean that there aren't mark there are markets that we currently serve but we don't serve them as efficiently as we might be able to if we were located lets say exactly in that market. So what what are our in both instances. We just not in those markets were still underrepresented in number of markets. So in addition to what I mentioned earlier about kind of a tactical move a bit I guess as it relates to straight down the fairway acquisitions, you know our most desirous deals right now our geography, expanding installation installing acquisitions and we've still got despite I think you've said six access to 65% percent permits it's not efficient access and there is still plenty of really reasonably robust markets, where we don't have much of a threat.
So then it becomes more opportunistic I mean, we're always looking.
Some markets there are acquisition candidates that you know where their their desires and kind of life choices to maybe think about exiting the business. If it's mom and pop shop, which typically has a lot of what we are you know we're we're talking doing the deals that we do.
And if that happens all aligned with us one to be there that's when these kind of situations workout.
Understood and if I could sneak in one more I'm understanding the profitability headwinds in Phoenix as you ramp up that Alpha branch and then it will take some time to get up to speed can you give us any details around the branches you opened last year, how the profitability in those is ramping up according to both your plan in relative to the rest of the business.
They are wrapping up they're not quite there yet, but we feel very good about as Jeff said, yeah. The alpha team is doing.
Very good job of focusing on profitable growth.
And you know clearly is aligned with.
Well the way that we have always looked at growth and that you know it's not at a high margin and it's not really good growth and yeah. There. The the new locations are clearly working hard to execute on that strategy. You know part of the issue. There is just getting enough volume to get to that level of profitability, but they're all making good progress on getting towards there as we've talked in previous calls about this you know we ran two fast last year, we learn from that and you know we're jogging now and I think it's starting to pay off.
Got it thanks for taking the questions.
Sure.
Our next question is from Matt Mccall with Seaport Global Securities. Please proceed with your question.
Thank you good morning, everybody.
Good morning, Matt.
Oh.
Maybe start with the organic incremental I think in the past you guys have it encouraged us to to to look at it on a on a full year basis and it sounds like you're you're talking about a return to kind of your targeted range in the back half for I guess first part of question is am I hearing that correctly and then secondly is the way to look at the full year that will.
Navy approach that or will follow a short and maybe we should look at it on a four four quarter basis from here. After we've gotten pasties, it's kinda first half issues.
Yeah. So what we are implying is that and this is consistent movies, we've talked about for the past. Several quarters is that you are getting fully on top of the price cost dynamic would allow us to get back into that kind of 20% to 25% range that we've talked about on the Incrementals. We take it you know just mathematically it would be pretty hard to get on top of it for the full year because of some of the headwinds that we experienced in the first half of the year, but I think if you did then you know all things being equal and if the market continues to improve as I think most of US are expecting if you did look at it on a fourth core four quarter basis, starting from the third quarter on a full year basis. You know, we definitely think there's there's a high probability that we would be in that 20% to 25% range. So that would be using third COVID-19 fourth COVID-19 first quarter 22nd quarter 20.
Okay got it and then so getting fully on top the price increases is that just so I understand what you're saying there are pricing is getting better costs to remain the same or no or costs are getting maybe easier because some of the capacity moves that we've heard about.
The former.
Former prices, Okay, and then I guess the last question is on X gene a Oh I thought just out the insurance accrual it looks like there's still a little bit of de leveraging in the in the quarter on a year over year basis can you talk about what some of the items were and I'm sorry, if I missed on but what are some of the items where that maybe drove that and then just to clarify how we should think about X gene as a percent of sales relative to the year ago period in the back half.
Yeah, as we said you know earlier too.
One of the other question is that I mean, our toughest comp this year, but without a doubt is the second quarter, because we had a very good second quarter of 18, I think we had a great quarter record quarter second COVID-19, but it just made some of the comparisons a little bit more difficult, but if you look at kind of where we are trending you know through the first half of the year, obviously, we will have incremental SGN a.
As as we believe sales will improve.
Under their typical seasonal trends in the third and fourth quarter, but would that would lead to is that higher sales and yesterday don't come in at nearly the same rate that tire sales would so we would expect that we would start to see improve leverage messaging a as we go into the back half the year.
Okay all right. Thank you all.
Yeah sure.
Our next question is from Trey Morrish with Evercore ISI. Please proceed with your question.
Thanks, very much so you've talked a bit about price cost I don't think I actually I've heard you say if you were actually price cost positive in the quarter and then could you just remind us how you were trending on price cost in the last couple of quarters as well.
So we didn't specifically say, but what I would say is that.
As as we've disclosed that the price mix and keep in mind mix has a a big impact on that number but that price mix was up 6% and that the cost environment has not been nearly as volatile as it was last year and you know as a consequence.
You know, it's allowing us to do what we've been saying for the past several quarters and that is to get fully on top of the price cost dynamic by the back half of the year.
Okay, All right and then last call I'd say I think you pointed out that you expected.
Threeq gross margin will likely be the peak for the year, how it can happen seasonally like that I do you still expect the threeq gross margin to be the peak number for the year.
I think the way that we talked about it was more just seasonality of the business and that historically the third quarter is our best quarter from a volume perspective and from a margin perspective, and you know there are things that influence gross margin not only price mix. So our product mix, but also regionally where our sales growth is coming from because the different regions have different gross margin profiles. So I don't remember that specific comment that we met would that we set but really we it should be in the context of EBITDA margin not just gross margins. So that you know historically and 18 was not at historical year from this perspective, but we would expect his historical seasonal trends in 19, where we do see you know the greatest margin benefit in the third quarter and you know within the contact.
Most of the year.
Such that again, you know we as we said in the prepared remarks and as you know we said a couple of times now we would expect sales and profitability to trend positively in the back half of the year.
Okay, and then going back to two price mix I'm, just wondering what what do you consider mix. What's the dynamic in mix are you talking about selling a different products that are higher priced for similar jobs or is it more something like selling the same product, but through a different channel to where you can get a little bit of a higher a higher price for it.
It's a different types of jobs. So the other products that we install our much lower dollar value then.
Our primary product, which is installation and as a consequence, they weighed down price mix and we've seen excellent growth and the other products, which is part of our strategy that we've been talking about for several quarters to increase the other product sales because we know from experience I know, we have a lot of data points for this that a branch that has the more.
Product penetration that we have a end product penetration that we have within a market generally speaking that tends to be a more profitable market. So we believe that the business benefits over the long term by having greater product diversification and market diversification and customer diversification overtime.
We also believe that having multiple products with an existing customer a lousy or creates more stickiness with that customer by providing those additional products. We're installing those additional products assuming their products that meet our characteristics of being able to buy direct from the manufacturer and they are installed by our employees.
At the job site.
Okay. Thanks very much.
Our next question is from Ken Zener with Keybanc capital markets. Please proceed with your question.
Good morning, gentlemen, wanting Ken Worthington.
My question for you I think youre, adding the right categories right insulation, you know that is showing to be good growth in new construction versus trends I think we'll see in our in our.
Commercial you know, you're saying the topline growth as our other companies.
I'm. So my question is more about the execution and you know.
I think everyone's obviously, beating around the price cost.
Dynamic as it relates to your longer term incremental EBIT, so I'm going to.
I ask you to look at it this way if you could.
Many other categories have experienced inflation and every covered it faster than you have.
Could you just walk us through since where it sounds like roaming cost them price cost neutrality.
Why it took you so long I mean is it because you're doing M&A and the operations down to the branches.
Or you know you obviously it was unprecedented last year yet its many other categories.
You know weve seen that price cost recovery. So could you just talk about you know.
Since you're it sounds like you're about to go into price cost neutrality why it took you so long when you're looking back.
On that right now thank you.
You know quite frankly looking back on it we you know we've spoken to this in other quarterly calls you know.
We.
As a company.
Look for the long term nature of our relationship with our customers and you know one could argue that we could have pushed through a lot harder and a lot faster the price increases we chose the long term approach of working with our customers, giving them time.
To adjust to the volatility that was experienced in the market to basically protect jobs that were already sold from their perspective houses that were already sold.
And you know we believe that by doing that we continue to demonstrate to our customers. The long term nature of our relationship and the long term nature of what we're willing to do for them and work for them and that you know it's it makes sense to continue to work with us and pay US a fair price for what we're doing could we have taken a different approach and not care. So much about our customers and jam through the price increase faster, probably yes, but we don't think about managing the business quarter to quarter, we think about managing the business over the long term as you know we've all been here for a very long time.
And you know we're looking at the end game not quarterly earnings.
Right. So do you think that.
Longer term focus with your customer I mean, it's leading to market share gains or I mean, how would you express.
The.
If it's not economic the goodwill benefit of that choice.
We believe what is allowing us to do is to improve the mix of work that we're doing with specific customers. So to the extent that we were doing lower margin work, they're allowing us to do higher margin work and give lower margin work to other competitors.
Interesting.
I appreciate that insight and then Michael you used the term under the belt as are related to al side, Jeff.
I think you mentioned this idea that you're you know you're not going after trophy or and more focused on bread and butter could you given that that's suggesting a different approach than earlier.
How do you think the initial approach wise.
Vela and now that you're executing it obviously, you're kind of changing your Tam can you just talk about how that process.
Developed internally in terms of assessing the risks and rewards, which now you think obviously the bread and butter is better than the trophy, but how did that shift occur as you got into that commercial space. Initially thank you.
Yeah, I won't say that Weve shifted we just we've reminded the organization then they reminded themselves that theres a whole lot of other work out there that is not trophy, it's very obtainable.
Accessible profitable they still I mean salesperson wouldn't be a sales person if they weren't interested in we ended trophies right. We just are or not speaking to that specifically and there's still plenty of very large jobs that alpha is working on this is just.
Don't forget the singles and doubles it was more of a comment exactly.
And that understands profitable growth I mean that that is the key is that you know that just continued focus on highly profitable growth.
Thank you.
As a reminder, this star one.
I knew telephone keypad, if you would like to ask a question. Our next question is from Keith Hughes with Suntrust. Please proceed.
Oh, Thank you back to Alpha again.
As a.
As they talk to customers I get a little bit farther lead time than you do in your your historic business.
Are they seeing any changes in backlog for Oh chains of activity of things things like that again 20.
Our backlog looks good in both the alpha business and actually in the multifamily business as well.
And how far in advance can do you can you kind of reliably see what's coming from those businesses.
I mean, you know easily I mean, obviously things change and as we talked earlier in the call that that business can be lumpy just because of weather delays and some of these trophy projects can easily get delayed a couple of months, but you know we feel generally good about the visibility we have there you know sort of a year or more out.
Okay. Thank you.
Yep.
This concludes our question and answer session I would like to turn the call over to Jeff Edwards for closing remarks.
I'd just like to thank all of you for your questions and I look forward to our next quarterly call. Thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Yeah.