TopBuild (BLD) Q4 2018 Earnings Conference Call Transcript

BULGARIAN LAND ORD 1P (BLD 0.28%)
Q4 2018 Earnings Conference Call
Feb. 26, 2019 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TopBuild earnings conference call. [Operator instructions] As a reminder, this conference is being recorded, Tuesday, February 26, 2019. I would now like to turn the conference over to Tabitha Zane. Please go ahead, ma'am.

Tabitha Zane -- 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. Please note, we have posted senior management's formal remarks on the Investor Relations section of our website at topbuild.com. As shown on Slide 2 of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial condition.

These forward-looking statements include known and unknown risks, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. In addition, we will also discuss non-GAAP financial measures, which can be reconciled to the most comparable GAAP measures in a table included in today's press release. Please turn to Slide 3.

I will now turn the call over to Jerry Volas.

Jerry Volas -- Chief Executive Officer

Welcome, everyone, and thanks for joining us today. We finished 2018 with a strong fourth quarter. Completing another outstanding year for TopBuild. Our strategy, diversified business model and execution again delivered on our objective of achieving profitable growth.

Before discussing our financial results, I'd like to provide an update on our current view of the U.S. housing industry. On our November call, I talked about consumer affordability issues, potentially causing a short-term pause within the context of an otherwise strong environment for new home construction. Since then, the Fed has moderated their view on future interest rate increases, mortgage rates have come down from fourth-quarter highs and the stock market has rebounded from an overall negative sentiment that significantly impacted valuations.

In addition, our builder customers as they always do are adjusting their strategies to provide homes that customers want and can afford. All of these developments are positive for new residential home construction. As an additional overall positive, the general economy remains strong with solid wage and job growth. While we still believe there could be a short-term pause in the near term, all of the factors I just mentioned appear to preclude an escalation of consumer-affordability issues.

Looking ahead, as shown on Slide 4, we continue to believe that supply and demand fundamentals will eventually drive housing starts toward the historical average of 1.4 million to 1.5 million per year. Inventory is low. Household formations are increasing, and we believe pent-up demand is growing. The next quarter or two will certainly inform the magnitude of any potential 2019 pause.

But whatever shape that takes, our diversified business model that includes installation and distribution in both the residential and commercial markets and our core competency around acquisition selection and integration offers multiple avenues for growth and gives us the ability to perform well in any environment. Although, John will get into further detail regarding our fourth-quarter and full-year 2018 financial results, let me discuss a few of the overall trends. Turning to Slide 5. Within the context of 90-day lagged housing starts, which were up 5.3% for the year, our total 2018 revenue increased 25.1%, with same branch up 8.5% and acquisitions contributing 16.6%.

We view this as outstanding top-line performance, driving share in our existing branches and expanding our footprint aggressively through acquisitions. At the gross profit line, fourth-quarter 2018 improved 40 basis points over fourth-quarter 2017 and total year 2018 was flat at 24.2%. By far the most significant factor was our ability to successfully offset unprecedented material cost increases with higher sales pricing. Given our expansive geographic footprint and customer base, achieving this delicate balance between price and volume has been a monumental effort by our operators across the country, and they have done an outstanding job.

It also reflects positively on the quality of our partnerships with both our suppliers and customers. Adjusted operating income and adjusted EBITDA margins expanded, both for the fourth quarter and full year. The incremental EBITDA margin, a key metric for us, was strong in the fourth quarter and finished the total year at 17.9%, 25.1% same branch and 14.3% for acquisitions. Our consistent culture of operational improvement and the leveraging of fixed cost across the company are the key drivers of this excellent result.

Beyond that, our core competency around integrating acquisitions has produced excellent returns on the capital we are spending on our No. 1 capital allocation priority. Moving to Slide 6. Looking back on 2018, other significant accomplishments include: closing and integrating three acquisition, including USI, that are expected to generate over $410 million in annual revenue with significant synergies driving marginal results; completing a $400 million bond offering at 5.625%; returning $65 million of capital to our shareholders through a share repurchase program; and winning the 2018 Energy Star Partner of the Year for our continued leadership in protecting the environment through superior energy-efficiency achievements.

TopBuild home services has been an ENERGY STAR partner for 16 years, by working closely with homebuilders and consumers to create homes that are more comfortable and energy efficient. As we look to 2019, on Slide 7, we are optimistic that it'll be another year of profitable growth for TopBuild. The housing market, even if there is a short-term pause, will eventually regain momentum due to strong supply and demand fundamentals. Our enhanced size and scale facilitates strong supplier partnerships and contributes to the outstanding value proposition we provide our customers.

We will continue to drive operational efficiencies, improve sales and labor productivity and leverage our cost base with higher revenue and further improve margins. Capital allocation remains an important component of our shareholder value-creation strategy, with acquisitions being our No. 1 priority. Our pipeline's robust with a primary focus on profitable companies within our two core businesses.

As a reminder, we seek well-managed companies with solid customer bases that expand our market share in high-growth regions. Cash beyond what is required to fund internal growth and acquisitions will be returned to our shareholders through our newly authorized $200 million share repurchase program. John, let me turn it over to you.

John Peterson -- Chief Financial Officer

Good morning, everyone. As Jerry noted, we finished with a strong fourth quarter, which closed out a solid 2018 for TopBuild. I'll start by discussing our fourth quarter results on Slide 8, then provide an overview of full-year 2018. In the fourth quarter, consolidated revenue increased 27.6% to $639.5 million, driven by $105.7 million of revenue from companies acquired since January, 2018, as well as improved selling prices.

On a same-branch basis, revenue increased 6.5% compared to fourth quarter 2017. Gross margin expanded 40 basis points to 24.7% compared to the same period a year ago, demonstrating once again, our ability to recover material cost increases through selling price increases and operational efficiencies. Adjusted operating profit grew 32.1% to $67.2 million with a corresponding margin improvement of 40 basis points. Both gross margin and operating margin improvements were driven by higher selling prices, improved labor and sales productivity and USI synergies, partially offset by higher material costs, higher amortization expenses and higher share-based compensation costs.

Fourth quarter 2018 adjustments totaled approximately $2 million, primarily tied to the integration of USI. Fourth quarter adjusted EBITDA was $82.5 million, compared to $57.9 million in 2017, and our EBITDA margin was 12.9%, a 130 basis point improvement from fourth quarter 2017. Our drop-down to adjusted EBITDA margin was 17.8% in the quarter -- in the fourth quarter. On a same-branch basis, adjusted EBITDA was $65.3 million, and our drop-down to adjusted EBITDA was 22.5%, driven by improved selling prices, USI synergies, strong cost control and continued leveraging of our platform, partially offset by higher material cost.

Incremental EBITDA related to our three acquisitions was 16.3%. Looking at our full-year results, total sales increased 25.1% to 2-point -- $2,384,000,000, principally driven by the three acquisitions we completed in 2018 along with volume growth and increased selling prices. On a same-branch basis, revenue increased 8.5% to $2,068,000,000. USI, which we acquired last May, contributed $266.3 million to our top line.

In addition, EBITDA margin from acquisitions was 14.3%, of which USI was the largest contributor. Adjusted gross margin was flat at 24.2%, as there was a delay in recovering first half 2018 material cost increases. The second half of 2018 saw gross margin expansion offsetting the margin compression we saw in first half. As Jerry pointed out, our operations teams did a great job of successfully navigating three material cost increases during the year.

Our adjusted operating margin expanded 80 basis points to 9.8%. Adjusted EBITDA for 2018 grew 43.4%, $283.4 million, and our EBITDA margin improved 150 basis points to 11.9%. Our drop-down to adjusted EBITDA margin for 2018 was 17.9% and 25.1% on a same-branch basis. Moving to Slide 9.

Adjusted net income for the fourth quarter of 2018 was $42.2 million or $1.20 per diluted share, compared to $30.1 million or $0.84 per diluted share in the fourth quarter of 2017. Adjusted net income for full-year 2018 was $149.3 million or $4.19 per diluted share, compared to $101.8 million or $2.78 per diluted share for full-year 2017. Interest expense in 2018 increased from $20.7 million to $28.7 million, primarily related to the funding of the USI acquisition, which included the issuance of $400 million senior notes and our borrowing of the $100 million delayed draw term loan. As shown on Slide 10, CAPEX for full-year 2018 was $52.5 million, approximately 2.2% of revenue.

During the year, we issued $26.6 million of equipment notes to fund our fleet acquisitions. Working capital as a percent of pro forma trailing 12-month sales was 10.4%, 130 basis points higher than prior year. The biggest driver behind the increase is that USI had a higher mix of installation versus distribution business, and the installation business comes with higher working capital requirements. We've updated our long-term outlook range for year-end working capital from the previous guidance of 10% with the reviving guidance of 10% to 11% of revenue.

In 2018, our effective tax rate finished at 25.5%, primarily due to a onetime beneficial adjustment in 2017 of our deferred tax assets and liabilities to reflect the change in the federal tax rate. Operating cash flow was $167.2 million for the year. On the next slide, you can see we ended 2018 with a net leverage of 2.19 times using pro forma EBITDA, well within our comfort zone of 2 to 2.5 times. Total liquidity at year-end was $291.6 million, inclusive of the available balance on the revolver of $190.7 million and cash at $100.9 million.

Moving to 2019 annual guidance, on Slide 12. We are projecting total revenue to be between $2,570,000,000 and $2,635,000,000 and adjusted EBITDA to be between $310 million and $330 million. This guidance assumes a range of residential new housing starts of between 1.26 million and 1.3 million. It does not include any acquisitions we may make this year.

We have changed three of our long-term modeling assumptions, including working capital, which I already mentioned. The other two are a change to our normalized tax rate, which we now project in a range of 26% to 27% instead of a flat 27%, and our estimate of residential revenue TopBuild will generate for every 50,000 increase in residential starts, which has increased from $75 million to $80 million. Robert will now discuss operations and segment results.

Robert Buck -- President and Chief Operating Officer

Thanks, John, and good morning. Before discussing TruTeam and service partners' financial results, I want to thank our employees for their hard work, dedication and ongoing push for operational excellence throughout 2018. What a great year, and I could not be prouder of our entire TopBuild team. While continue to work safely and provide outstanding service to our customers, we successfully managed the acquisition, financing and integration of three companies, including USI, which had 38 branches and over 1000 installers.

In addition, our local teams achieved selling price increases, which more than offset an unprecedented three material cost increases over the 12-month period. 2018 strong financial performance clearly demonstrate the effectiveness of our energized, very engaged and diverse team of 10,000-plus individuals. Looking at TruTeam's results on Slide 13, fourth quarter sales increased 36.1%, with USI contributing over 74% of that growth. This acquisition continues to perform exceptionally well.

On a same-branch basis, TruTeam sales were up 8.9% in the quarter, driven by a 5.9% increase in selling prices and a 3-point -- a 3% volume growth. For the full year, TruTeam's same branch sales were up 10.1%, with volume driving 5.9% of that growth, outpacing lagged housing starts of 5.3%. Shifting to TruTeam's adjusted operating margin, we saw a 20 basis point decline in fourth quarter to 12.5%. Primary drivers were the absorption of acquisition fixed cost, mainly from the USI; higher amortization expenses; and timing adjustments of insurance accruals versus 2017.

On a full-year basis, TruTeam's adjusted operating margin expanded 80 basis points, driven by our volume leverage, higher selling prices and operational efficiencies, partially offset by higher material costs and USI fixed cost as well as higher amortization expenses. Overall, great operational execution by TruTeam's leadership and everyone in the field. Our TruTeam branches also continue to grow their spray foam business, which is benefiting from increased fiberglass cost, new building codes and consumer education. For the full year, spray foam sales increased almost 39%, 16.5% on a same-branch basis.

Turning to service partners on Slide 14. In the fourth quarter total sales grew 10.7%, led by selling price increases of 7.9% and acquisitions, notably USI and ADO Products, partially offset by a volume decrease of 5.3%. The volume decline was driven by deliberate price-volume decisions and the decision to exit some low-margin business. As a result of these decisions, service partners' fourth quarter adjusted operating margin expanded 80 basis points to a robust 10.1%, driven by improved selling prices and strong cost controls, partially offset by higher material costs and the absorption of acquisition fixed costs and deal amortization expenses.

For the full year, service partners sales were up 14%, driven by higher selling prices and acquisitions, while volume was flat. Adjusted operating margin was 9.6%, flat versus a year ago, primarily due to the timing of material cost increases and the delayed recovery of selling prices throughout the year. Distribution revenues from spray foam increased 32% in 2018 and 21% on a same-branch basis. I do want to briefly discuss material.

Fiberglass remains tight with manufacturers keeping a firm rein on supply. It's too early to tell the traction of the January price increase. But we do believe if there are additional material cost increases this year, they will be highly dependent on industry demand and housing starts.Turning to USI on Slide 15. With the exception of our branch-optimization effort, which we expect to finalize by late June, the integration is essentially complete.

And as you can tell from our results, USI's performance has been outstanding. Our integration team did a great job, and we are highly confident we will exceed $15 million of cost-saving synergies within two years of close. USI has been a great addition to our company. Our total commercial business grew 28.1% for full-year 2018, and 11.8% on a same-branch basis, exceeding our long-term target of 10% annual growth.

We continue to drive improvements in this business, and it remains an important avenue for growth. Our commercial backlog is strong, and our bundled services approach has given us a competitive advantage. In summary, 2018 was a year of solid execution. Our disciplined cadence for how we run the business and our focus on improving or shutting down underperforming branches has proven to be a successful strategy.

We have built competencies in new products and services as well as acquisition selection and integration. We've also been focused on continuing to build our talented team and developing our bench strength. On Slide 16, you can see that this year, an important strategic initiative we are undertaking is a deep-dive review of adjacent product offerings that will provide value to our existing customers and enhance our relationships with certain supplier partners. One particular area of expansion, which we've mentioned in the past, is glass and windows, a product line we expanded into through the USI acquisition.

There are other adjacent businesses we are evaluating as well. However, be assured, we will be very deliberate in our approach putting scale, talent and synergies at the top of our criteria list. As mentioned last quarter, I am constantly in the field working directly with our customers and suppliers. Builders seem increasingly optimistic that 2019 will be a good year.

We are encouraged by our start to 2019 and are pleased to see our customers moving to build more entry-level homes that families want and can afford. Turning to Slide 17. Even if there is a short pause in housing starts, TopBuild's model supports profitable growth from a number of vantage points with a continued focus on driving operational improvements through best-in-class execution, growing our heavy and light commercial businesses, expanding into product -- adjacent product areas and increasing market share organically and through acquisitions. Our track record over the past few years of expanding adjusted operating and EBITDA margins speaks to our success, and our ability to identify and integrate strategic acquisitions is a distinct competitive advantage.

We believe that 2019 will be another solid year for TopBuild, and we look forward to once again delivering strong bottom-line results for our shareholders. I'll now turn the call back over to Jerry.

Jerry Volas -- Chief Executive Officer

Before opening it up to questions, I want to again emphasize that we look forward to 2019 as another year of profitable growth. The external environment is positive, our strong and diversified business model has produced excellent results, and our team executes well. Operator, we're now ready for questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Michael Wood from Nomura Instinet. Please proceed with your question.

Michael Wood -- Nomura Instinet -- Analyst

Hi, good morning.

Jerry Volas -- Chief Executive Officer

Good morning, Mike.

Michael Wood -- Nomura Instinet -- Analyst

First question I wanted to ask about this -- in a relatively flattish demand environment for new construction, would that type of an environment benefit relatively large customers like yourself with having more ability to push out price acceptance on insulation? Or how do you think about your relative positioning?

Robert Buck -- President and Chief Operating Officer

Mike, good morning. It's Robert. So as we think about that, I think one thing to keep in mind is just the importance of labor. That's still top of mind to our builder customers.

And so as we think about things were flatter, slightly up in the year, obviously, we had that bundled solution of material and labor. And labor's still very, very valuable in the service that we provide to our builder customers or to the general contractors and stuff as well. So if there is price to be gained or pricing environment, we feel comfortable with our ability to execute day-to-day in the field at a local level. And I think as we mentioned before, we have a very diligent process as to how we do that.

Jerry Volas -- Chief Executive Officer

The other thing I would add, Michael, to that to that top -- the other thing I would add to that, Michael, would be that our diversified model, what I mean by that is installation, distribution, residential and commercial blow. So we do have some diversity across our total model, which in an environment like the one we may be looking at where it's -- we're projecting it to be slightly up from 2018. I think the diversity that we have in our model is going to play extremely well.

Michael Wood -- Nomura Instinet -- Analyst

Great. Is there any guidance or color that you can provide us in terms of first quarter, given the lag decline in starts? And I'm just looking in terms of any inefficiencies that might be there on seasonally low demand that you can call out to help us model that cadence.

Jerry Volas -- Chief Executive Officer

Yes. We can't really give you much detail in the way of what's happening with Q1. But what we can say is that we did put guidance out there for 2019. And it is true that over the years, there is a bit of seasonality in our business.

Q1 is normally not a stronger quarter, but what I can tell you is that what we're seeing so far in the first quarter is consistent with the guidance that we put out there for the year. So I think that's what we can say, and we feel good about it.

Michael Wood -- Nomura Instinet -- Analyst

OK. Thank you.

Operator

The next question comes from Phil Ng with Jefferies. Please proceed with your question.

Unkown speaker

Good morning, everyone. This is Maggie on for Phil. Looking at service partners, can you talk us through that volume decline? And how much of that was driven by deliberate pricing or volume decisions on your side versus a softer demand environment in 4Q?

Robert Buck -- President and Chief Operating Officer

This is Robert, again. So I would say, really all of the deliberate decisions on our part, I think the team did a good job of making some good price-volume trade-offs. We actually believe that service that we provide is valuable. And then I think we also mentioned, there were some lower-margin business that we made the conscious decisions to back away from as well.

At the same time, I think we feel very confident in what we're doing at the local level with -- obviously, gaining share with current customers, but the door's always open with other customers and new avenues that we're pursuing as well from a growth perspective. So I would say it was all driven by deliberate decisions that we consciously made.

Unkown speaker

Got it. That's very helpful. And then you've done a great job on price cost, and it's maybe too soon talk about how the January price increase is coming through. But what are your expectations for 2019? And then what kind of impact are you expecting from the recent announcement that one of the manufacturers is shuttering some capacity? Thanks.

Robert Buck -- President and Chief Operating Officer

So relative to the January price increase, that was announced -- too early to tell. Too early to see if there's traction with that increase as of yet. As you know the spring selling season just really started a couple of weeks ago, early February if you will. So a little early to tell traction of the January 1 price increase.

As I mentioned earlier, I think the direction of future material cost increases will be based on demand and what happens with the housing starts, which you heard Jerry and John's comments on that. And then relative to -- yes, we've seen where there's been some small lines bogged down or some capacity bogged down based on some other public announcements that came out, not too concerned about that. I mean, material may be a little tighter at the back half of the year as things improve and as starts improve. But at the same time, we see other products.

I think we constantly mention we see other products like spray foam that we're using more and more of. That' offsetting some of the capacity issues, if you will, on the fiberglass side. So not too overly concerned about that, but we're constant in communication in talking with the manufacturers.

Unkown speaker

All right. Thanks, guys.

Operator

The next question comes from the line of Ken Zener with KeyBanc. Please proceed with your question.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Good morning, everybody.

Jerry Volas -- Chief Executive Officer

Good morning, Ken.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Very good delivery of price and operating leverage. My question is about FY '19 and the comment around price, which obviously is a price you would pay to manufacturers but also the price that you're able to get from the builders. The housing start number that just came out here, looks like it was 1.247 million for the year, FY '18. If you're -- if you hold that annualized number in FY '18 that means you're basically going to be having it down January through February.

And just kind of on a lagged basis, is it possible to really have -- is there a circumstance that you can think of where you really had down volume and pricing within your guy's long history in the space? Incremental pricing, that is, when volume was falling.

John Peterson -- Chief Financial Officer

I think -- this is John. I think Robert mentioned it before, those situations where volumes either flat or down a little bit where labor, obviously, comes into play. And the availability of labor is critical, would create in some cases an opportunity for some of our branches to drive price. And we've done that in the past by the way around the country in certain time frames throughout the past three or four years.

So that really would be the opportunity I think when those options present themselves. Again, labor very, very critical element of the TruTeam side of the equation.

Jerry Volas -- Chief Executive Officer

Another thing, Ken, just to add on to that. So yes, starts, we just saw that number. Starts were low. Permits, we're pretty solid actually.

I think slightly above December. So that in combination with as Robert discussed he has all kinds of conversations with builders. They appear to be tweaking their strategies. They're not pessimistic.

They're optimistic about what '19 is going to look like. And as I said earlier, our guidance for 2019 reflects binding up low single digits from 2018, and we think it's going to be a good year. I mean, some things economically -- as economy remains strong, interest rates certainly have changed the picture a bit as we turn the corner into 2019. And so all in all, I mean, we certainly realized that Q4 was a bit of a rough ride, but we think a number of things have changed here as we go into 2019, and we're optimistic.

We are happy with where we're headed.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Yes. No, I think that's clear from your results. And on Slide 13, you talked about spray foam. At the builder show, we had extensive dialogues with some of those companies.

Can you talk -- you talked about spray foam increasing 39%, 16% same branch. Can you just give us a context again for how much of your business is spray foam today in terms of either value or units or both?

John Peterson -- Chief Financial Officer

Yes. Ken, this is John. So on the residential side of the business, something just around 10% roughly in terms of the units-based system. Something under just under 20% on a sales dollar basis would be spray foam.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Thank you.

John Peterson -- Chief Financial Officer

You're welcome.

Operator

The following question comes from the line of Matt McCall with Seaport Global. Please proceed with our question.

Matt McCall -- Seaport Global Securities -- Analyst

Thank you. Good morning, everybody.

John Peterson -- Chief Financial Officer

Good morning.

Matt McCall -- Seaport Global Securities -- Analyst

So you walked away from some unprofitable business and then you've got the USI synergies that are still going to pull through. Can you talk about the impact on those two items on the assumed organic incremental as we move out into '19? Or what's the organic incremental that you're assuming in the '19 guide?

John Peterson -- Chief Financial Officer

Yes. This is John. We really don't break out, and we're not going to break out. Certainly, we've got four months worth of 2019 where we'll still be comping USI versus prior year where we didn't have it, but the comparison, obviously, so.

And we're not done from a strategy standpoint. We've done a lot of the work, most of the work completed on the back office all the work on the supply chain side. But we'll go well under the third quarter in terms of branch consolidation takings place. So we will continue to see those benefits accrued throughout 2019.

Matt McCall -- Seaport Global Securities -- Analyst

I mean, is it safe to say with those items that the assumed incremental, be it organic or not, is going to be toward the high end of the range because I think this year you had a little bit of a -- I think you spoke about it, the disconnect, the catch-up period for price versus cost. It was a little bit of a drag first half on gross margins. So is it -- am I thinking about it the right way that toward the high end of the range would be the right way to think about it?

John Peterson -- Chief Financial Officer

Yes, so if you look at our guidance, basically, you can do the math of taking our 2019 guidance, either low end, high end or make the midpoint. If you take the midpoint on that, you're going to be within our EBITDA pull-through assumptions that we provide on our long-term basis, so.

Matt McCall -- Seaport Global Securities -- Analyst

OK, maybe a way to ask, is there an offset or are there any negative offsets to those positives that would be incrementally -- or incremental to the normal?

John Peterson -- Chief Financial Officer

Yes. Again, really on a guidance basis for 2019, the only thing we're really going to provide is the kind of the guardrails around our estimate, which is the starts of 1.260 million to 1.3 million. We're not going to sit and breakdown the elements of cost and price and all those type of things. So suffice it to say, I think Jerry said it well, we feel real good about that projection from a guidance standpoint and standby at this point.

Matt McCall -- Seaport Global Securities -- Analyst

OK. That's fair. So maybe if I think about the top line, so you're assuming I think low single-digit starts growth. I assume the long-term commercial target of 10% is a good number for 2019.

Plus, I think you'll get some carryover price of kind of not depending on what happens in '19. You'll get some carryover price from '18. Yet, there's only 4%, I think, assumed growth at the midpoint on the top line. Are there same kind of question, there are some offsets.

Am I giving too much credit for anyone of those buckets?

John Peterson -- Chief Financial Officer

So again Matt, we're not going to attempt to break it down element here. We feel it's -- and by the way, we don't use our long-term guidance assumption -- modeling assumptions necessarily to come up with our annual guidance. so certainly, we baked in commercial assumptions, pricing assumptions and some volume growth assumptions. Again, we feel pretty good about the growth that we're projecting, and we think it's in line with estimate we have around residential housing starts.

So.

Matt McCall -- Seaport Global Securities -- Analyst

OK. Maybe I'll slip one more in. You talked a lot about labor and labor availability and we've seen completions kind of lag starts this entire cycle, there hasn't been a period where we've worked into the backlog at all. So I guess the question is, is there the potential for some of the builders to work in -- work down some backlog and that may help you because you're involved at such late stages of the construction project.

Would it help you maybe get through this period of softness or pause a little better than the 90 days that lagged starts would indicate?

Robert Buck -- President and Chief Operating Officer

Yes. Matt, this is Robert. So sure I mean, there could be some working into the backlog for sure. That's not uncommon in Q1 that there is some working in the backlog.

And if you maybe go back a couple of years, I think maybe coming out of '16 into '17 there was some of that for sure that was noted. So that can always be the case working into that backlog piece.

John Peterson -- Chief Financial Officer

Yes. And I think the other thing -- this is John, to add to that, keep in mind 20% of our business is commercial. And that commercial backlog as we talked about in the past has a much longer tail on it. So the solid business to work on there, obviously.

Matt McCall -- Seaport Global Securities -- Analyst

OK. Thank you all.

John Peterson -- Chief Financial Officer

Sure.

Operator

The following question comes from the line of Trey Morrish with ISI. Please proceed with our question.

Trey Morrish -- Evercore ISI -- Analyst

Thanks, guys. I was wondering if you could talk a little bit more about these adjacent product offerings that you talked about. Are these products that you would think to add to your existing branches? Are these somewhat separate businesses that you look to get into initially through acquisitions and then roll into your existing footprint?

Robert Buck -- President and Chief Operating Officer

This is Robert. So -- yes, so we talked about glass and windows, we're looking at other businesses. I think the main thing is we have a very deliberate, diligent process that we're going through here. We definitely learnt from some of the past years of how to make these businesses very successful.

And I think your question about existing branches, new branches, I'd say both. We never want to distract from our core business. That's something that we're very, very focused on as it takes and it's a robust market that we're into. It could be a separate branch or separate business that we start.

We, obviously, leveraged some fixed cost there. But we would never distract from our core business. That's something that we're very, very committed to and do not want to ever distract from our core business. And I think we've done a good job at showing that we don't do that.

Even acquisitions, that's actually saying we stay very focused on the core business.

Steve Kim -- Evercore ISI -- Analyst

It's Steve Kim also from Evercore. Just first -- or general question here, you said that -- we've heard that you shifted from -- in your TruTeam business from one of your major suppliers. And that their capacity curtailment were actually taken in response to that to drive industry utilization rates for all the other manufacturers into the high-90s, so you have a very sort of bifurcated situation in terms of the capacity on the supply side. Generally, your strategy has correctly assumed kind of rational behavior from the suppliers.

And if so, if someone is extra capacity, you can buy it at a discount, given your scale. I was curious though if you have a lot of that capacity or, adversely, all of it in the hands of one supplier, is it possible that your ability to purchase at a discount -- to continue to purchase at a discount might be it becomes more dependent upon suppliers actually greenfielding new capacity in the future, and how quickly could that come on if they did?

Jerry Volas -- Chief Executive Officer

Yes, I would -- Jerry, here. I would say on that one that one of the things that we do really well, and it's because of our size and scale and the long-term relationships that we've had with our suppliers. I mean, we do business with all four of the major fiberglass manufacturers. And because of our size, we're able to be significant to all four of them individually.

And we worked with these folks, Robert and his team, I would say every week we're on the phone with them, discussing this and that. And it's always a very fluid situation with all four of them. And we have our objectives. They have their objectives.

We find a middle ground, and that continues. So there is an ebb and flow always relative to what we're doing with any particular supplier. With the one you're talking about, we do a lot of business with Owens Corning. They're the ones that announced the -- that we saw as a heads up shut down on the West Coast.

We do business residentially, with commercial, all across our footprint with those folks. So that's about -- I can't give you any more detail on that, but we think that each of these suppliers or they're individual businesses, they make their own decision on capacity and I'm sure that they'll be looking out into the future. And I think, generally speaking, they probably view the housing trajectory longer term, the same way we do. So ultimately, I think the capacity will be right-sized as time goes time goes on, and it's not just about fiberglass.

It's about a spray foam and other kind of insulation. Fiberglass is not the only way to insulate a house. So I think all those factors are relevant. And Kim, I believe that our business model affords us the ability to handle it very well, which we'll continue to do.

Trey Morrish -- Evercore ISI -- Analyst

Great. Thanks very much guys.

Jerry Volas -- Chief Executive Officer

Sure.

Operator

[Operator instructions] The following question comes from the line of Keith Hughes with SunTrust. Please proceed with your question.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Yes. A question on spray foam. More great growth in the quarter on the product. The buildings are clearly mix shifting down to lower-price downs to smaller footprints.

But particularly, on the lower-price downs, they're probably going to be some pressure on mix in products. So that's my question on spray foam. Do you anticipate that growth to slow down, given what the builders are having to do to move units? And if that's the case, does that matter to you what products they use?

Robert Buck -- President and Chief Operating Officer

Keith, this is Robert. So we're -- let me start with your last question. We're pretty agnostic that we do everything. We do all varieties of installations, based on what the need is and the different solutions we give the customer.

And then also maybe feed into your first question, the thing on what's going on with building codes. So there are codes that are driving this, whether it be smaller homes, larger homes. Obviously, the bigger concentration of spray foam is with the custom builder and the small -- excuse me, the larger regional builder, if you will. So I think you're going continue to see it.

I think there's opportunities in certain markets I could pick to -- I could pick on Southern California where you can deconstant out of their home, some relative to HBHC and other things, which make spray foam much, much more attractive offering in those homes. So I think we feel confident in the last thing I'll just mention is we're seen -- expect more and more on the commercial side of the business as well. So there's adoption, residential and commercial. So I think we feel comfortable that it's continuing to move ahead.

And I would also say the suppliers are doing a great job of some innovation in the product, better yields in the product and stuff as well. So it continues to gain efficiency from that perspective as well.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

That product tends to move around and price based on the underlying chemicals. Is pricing now -- has it come off from some of the highs we saw when Tru moved up or is giving you the same kind of feel on where that kind of stands?

Robert Buck -- President and Chief Operating Officer

There were some minor -- I would say, Kieth, some minor fluctuations in '18, but nothing significant from that perspective.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you.

Operator

The following question comes from the line of Megan McGrath with Buckingham Research. Please proceed with your question.

Megan McGrath -- Buckingham Research -- Analyst

Thanks. Good morning. Just wanted to touch a little bit on capital allocation with your share repurchase announcement. Maybe give us a little bit of an insight into how you're thinking about the share repurchases versus potential M&A and the timing of getting your debt ratios back down into your comfort level?

Jerry Volas -- Chief Executive Officer

Megan, Jerry here. Acquisitions continue to be our priority, and we feel good about the fact that we've proven our ability to select and integrate those. And so more than ever, we believe acquisitions is the No. 1 priority, and they are very lumpy going forward.

I mean, we can never really quite scope out exactly when these acquisitions are going to occur and how bit they'll be. We -- while we have a number on them on the burner at any given time but when they get to the finish line, it's always been unknown. So on the buyback side of things, it -- that will be dependent on where we go from an acquisition standpoint. And we have the authorization out there that extends out quite a bit of time.

We always want to have the ability if the acquisitions are not getting to the finish line quick enough and we think that it's a good time to buy our shares back, we want to have the authorization out there. So that's really what that was about because that's our second priority from a capital allocation standpoint, behind acquisitions.

Megan McGrath -- Buckingham Research -- Analyst

Great. And then just wanted to circle back a little bit on your conversation around getting into potential new product lines. Maybe a bit of a history lesson and for those of us that have been around a while, I think you're trying to reassure us that past mistakes weren't going to be repeated. But maybe it'll be helpful to talk about when you're part of Masco.

You added a lot of product lines, ended up sort of getting rid of a lot of those. So what were the lessons learned there? What are the things you don't want to do as you move into new product lines again?

Jerry Volas -- Chief Executive Officer

Good question. Yes, I understand all the history as do Robert and John. I would say the lessons learned, Megan, at that point in time, probably, were don't try to do too many things too fast. And we find that at the branch level, the more focused we can keep our operators on the core business, the better we'll execute.

And that is one of the primary lessons we learned. And I would say the other thing is, as we step into and as we consider some of these adjacent product categories, to Robert's point earlier, we're going to be very diligent about the criteria. And so the criteria is things such as is there an adequate level of business to be had? Can we scale it up? Can be scale it up to significance? And the second thing would be, the element of the business do they enable us to make money. We want to have adequate margins that are accretive to our business when we're adding something on.

And then third thing is, can we execute it? Is there any synergy with our current business? And we feel like we have the talent either in the house or talent that we can acquire that can execute it well. And so I would say if those three boxes can be checked, and we have the balance sheet to be able to extend ourselves a little bit into some of these categories, we'll be thinking about doing that. But to your point, Megan, we'll be far more careful than we were at one point in time in our history. And we'll be stepping carefully because we don't want to lose track of the core business that we are very good at.

That's something we will not do.

Megan McGrath -- Buckingham Research -- Analyst

Great. Thanks very much.

Jerry Volas -- Chief Executive Officer

Sure.

Operator

The final question comes from the line of Justin Speer with Zelman & Associates. Please proceed with your question.

Justin Speer -- Zelman and Associates -- Analyst

Good morning, guys. Thank you. Just a few questions. One on the intermediate term roadmap, I know you mentioned, I think, here on the call $75 million to $80 million now for every 50,000 change in starts.

Just wondering what goes into that. Then as you unpack that, thinking about that mid-cycle margin view, I think you're originally like a 13.5% mid-cycle at 1.5 million starts. So with USI and some of these other acquisitions in the equation, does that change the calculation on where you think you can take revenues? And ultimately, operating margins in the 1.5 million scenario in the next few years?

John Peterson -- Chief Financial Officer

Yes, so the first question, again, was just the...

Justin Speer -- Zelman and Associates -- Analyst

You mentioned your product category, for every [Inaudible] there's revenue contribution.

John Peterson -- Chief Financial Officer

Right, for every 50,000 starts. So we did bump it up. So we did the $75 million. At the timeframe, we did the USI acquisition.

We've bumped it then. So really the $80 million reflects primarily the increase in pricing that we've seen in the industry on the residential side of the business. So what we don't do is make any forward projections behind the current timeframe for any price adjustments up or down that would impact that number. So that's what makes it up.

The other thing we'd say about our long-term modeling $80 million is we assume kind of a constant level of units from a single and multi-family standpoints and that will really change in the mix between the two. In terms of where we think that can take us, certainly, the long-term modeling we've given will provide the tools you need to do the projection. It all really depends on where we think we're going to get back to that 1 million, 4 million, 5 million starts. But we have done the modeling.

And if you take it out to the 2021 timeframe, 2022 timeframe, we're going to be in that 13% to 14% type of EBITDA margin number as a business in total. So...

Justin Speer -- Zelman and Associates -- Analyst

Perfect. And -- but no changes post-USI. That 13% to 14% still looks salient and good view -- that's a good viewpoint.

John Peterson -- Chief Financial Officer

Correct.

Justin Speer -- Zelman and Associates -- Analyst

The next question I have is just a follow-up on available fiberglass insulation capacity at the manufacturer level. Just looking at the capacity there based on your math, how much capacity do you think is available in the industry under your 2019 starts' assumptions?

Robert Buck -- President and Chief Operating Officer

It's Robert. So hard to tell, I mean, we would say the industry is probably running at 90%-plus, obviously from a capacity perspective. But hard to tell, obviously, with the recent announcement from Owens Corning. We feel very confident and comfortable with our supply chain, the forecast that we have out there.

The conversations puts all the manufacturers down, and we feel very comfortable for the year. No doubt about it. And even looking into 2020 and then probably just to reiterate the point, we see some shifting of products and stuff as well. So we see other products gaining share.

I think last call -- Q3 call, we talked about cellulose and what's happening there. We talked about spray foam, most call. So there's other products. I think Jerry said it earlier that you can insulate the house with, and we're seeing builders take advantage of some of those other products.

Justin Speer -- Zelman and Associates -- Analyst

OK. And then last question for me, in terms of spray foam. What was the revenue -- I don't know if it was 2018 or fourth quarter '18, that you -- those metrics that you provided in the slides. But what was the fourth quarter growth for both the businesses from spray foam in the year-to-date growth?

Jerry Volas -- Chief Executive Officer

Yes. I think you got it.

John Peterson -- Chief Financial Officer

Including acquisition, the number's on the TruTeam side. This is Q4 year-to-date. Full year was 39% growth on the TruTeam side, again, including acquisitions. service partners up about 32% on a full-year basis.

Justin Speer -- Zelman and Associates -- Analyst

All right. And then in terms of the economic there, can you help us understand the economics today of spray foam versus fiberglass versus -- relative to industry? And what your assumptions are for 2019 for fiberglass?

John Peterson -- Chief Financial Officer

Yes. So in terms of our -- I'll answer the last one first, we're not going to give you specific guidance in terms of fiberglass, spray foam for '19, if that's the question. But if you're going back to what the economics are, typically, on a job, it's double the revenue on a like-for-like job between spray foam and fiberglass. And the margin percentage is roughly even from a percent standpoint.

So certainly we drop more bottom-line dollars on a spray foam job versus fiberglass.

Justin Speer -- Zelman and Associates -- Analyst

But in terms of the economics itself, its still about two times even with the fiberglass price increases. The economics have narrowed but not materially, necessarily and relative to...

John Peterson -- Chief Financial Officer

Well, again, keep in mind about three years ago -- three-plus years ago, it was roughly 3 times. So they certainly have narrowed but, yes, still roughly 2% -- 2 times today.

Justin Speer -- Zelman and Associates -- Analyst

Perfect. Thank you very much guys. Appreciate it.

John Peterson -- Chief Financial Officer

You're welcome.

Operator

And we have no further questions at this time, sir. I'll turn the call back to you.

Jerry Volas -- Chief Executive Officer

Thanks, everybody, for joining us today, and we look forward to our Q1 '19 call in the spring.

Operator

[Operator signoff]

Duration: 55 minutes

Call Participants:

Tabitha Zane -- Investor Relations

Jerry Volas -- Chief Executive Officer

John Peterson -- Chief Financial Officer

Robert Buck -- President and Chief Operating Officer

Michael Wood -- Nomura Instinet -- Analyst

Ken Zener -- KeyBanc Capital Markets -- Analyst

Matt McCall -- Seaport Global Securities -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Steve Kim -- Evercore ISI -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Megan McGrath -- Buckingham Research -- Analyst

Justin Speer -- Zelman and Associates -- Analyst

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