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TopBuild Corp (NYSE:BLD)
Q4 2019 Earnings Call
Feb 25, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the TopBuild Earnings Conference Call. During the presentation all participants will be in listen-only mode. Afterwards, we'll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, February, 25, 2020.

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

Tabitha Zane -- Vice President, Investor Relations

Thank you and good morning. On the call today are Jerry Volas, Chief Executive Officer; Robert Buck, President and Chief Operating Officer; and John Peterson, Chief Financial Officer. We have posted senior management's formal remarks on the Investor Relations section of our website at topbuild.com.

As shown on Slide 2 of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial condition. These forward-looking statements include known and unknown risks, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward looking statements that become untrue because of subsequent events.

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

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

Jerry Volas -- Chief Executive Officer

Good morning everyone, and thanks for joining us today. We were pleased to end the year with a strong fourth quarter, with solid top line growth and operating margin expansion at both business segments. For full-year 2019, we again demonstrated the strength of our diversified business model and our seasoned management team as we delivered on our objective of achieving profitable growth. In 2019, the US housing industry grew stronger as the year progressed, culminating in a 19.6% increase in starts in the fourth quarter.

Our expectation that new residential construction will continue to strengthen in 2020 is based on several factors. Consumer affordability keeps improving as mortgage rates remain low, wage growth is offsetting home price appreciation and builders have pivoted toward supplying more entry level homes. In addition, household formations continue to be strong. Many people who delayed home ownership are beginning to engage, fueling pent-up demand. We are also seeing limited inventory, reflecting the slow ramp from the housing bust. All in all, an excellent operating environment for TopBuild and our 2020 annual guidance reflects our optimism.

While John will discuss our financial results in detail, I want to start with a discussion of a few of the overall trends on Slide 4. Within the context of 90-day lagged housing starts, which were down 2.3% for the year, our 2019 net sales increased 10.1%, with same branch sales increasing 4.6%. Our commercial business again performed extremely well, with same branch revenue in the fourth quarter and full year growing 11.4% and 18.6% respectively. Our operating and EBITDA margin expansion are the result of our consistent focus on identifying and implementing operational efficiencies, realizing synergies from the USI acquisition, balancing selling price and input costs and leveraging our national footprint and fixed costs across the company. All play a role in driving our bottom line, leading to adjusted EPS increasing 31% to $5.49.

While Robert will talk about our commercial business plans and outlook in more detail, it is clear from our results over the past few years that our bundled solutions approach for general contractors continues to gain traction. This business now represents approximately 23% of our sales, up from 16% in 2015 and we now have an 11% market share compared to just 6% a few years ago. In addition, our commercial business is an important aspect of our uniquely diversified business model, as it helps to mitigate any cyclicality of the residential new construction market. This was clearly demonstrated in the first half of 2019 when lagged starts were down almost 7% and our commercial business grew over 23%.

Turning to capital allocation on Slide 5. After pausing acquisitions to focus on the integration of USI, we completed one acquisition in 2019, Viking Insulation. More recently, in the just the last week, we have closed on two acquisitions, Hunter Insulation and Cooper Glass. Furthermore, based on our strong prospect pipeline we expect to close on additional acquisitions this year. And having developed a core competency integrating acquisitions onto our systems and supply chain we expect to drive meaningful synergies quickly from these deals.

As a reminder, our primary focus remains on core insulation companies, though we continue to evaluate a number of glass companies that would fit well with our existing $160 million business in this product adjacency. As noted on our last call, we believe this product category offers many attractive characteristics similar to insulation. While expansion in this area will be independent of our branch insulation network, we will be able to leverage our management expertise, customer relationships and supply chain model. Also, on the capital allocation front, in 2019 we purchased 1.3 million shares of our common stock for approximately $111 million. This includes the $50 million accelerated share repurchase announced on our last call that should be completed no later than the end of this quarter. Our share repurchase program reflects the confidence of both management and our board in the long term potential of TopBuild, our strong future cash flow position and our firm commitment to optimizing the efficiency of our capital structure.

John, will now discuss our financial results in detail.

John Peterson -- Chief Financial Officer

Good morning everyone. As Jerry noted, we finished with a strong fourth quarter which closed out a solid 2019 for TopBuild. I'll start by discussing our fourth quarter results on Slide 6, with comparisons to fourth quarter 2018, then provide an overview of full year 2019.

In the fourth quarter, net sales increased 3.6% to $662 million, primarily driven by improved selling prices and volume increases in both Residential and Commercial, partially offset by a higher mix of multi-family work and an increase in entry level homes, which generate lower revenue per unit. Gross margin expanded 120 basis points to 25.9%, and adjusted operating profit grew 14.1% to $76.6 million, with a corresponding margin improvement of 110 basis points. Both gross margin and operating margin improvements were driven by higher selling prices, improved labor and sales productivity and synergies from USI; partially offset by higher material costs. Fourth quarter 2019 adjustments were nominal at just under $200,000, primarily tied to acquisition related expenses.

Fourth quarter adjusted EBITDA was $92.5 million, compared to $82.5 million, and our adjusted EBITDA margin was 14%, a 110-basis point improvement. Our drop-down to adjusted EBITDA margin was 44% in the fourth quarter, driven by improved selling prices, higher volume, strong cost controls, synergies from USI and continued leveraging of our platform; partially offset by higher material costs. Adjusted net income for the fourth quarter of 2019 was $50 million or $1.48 per diluted share, compared to $42.2 million or $1.20 per diluted share, in the fourth quarter of 2018.

Looking at our full-year results, total sales increased 10.1% to $2,624 million, principally driven by our USI acquisition, completed in May 2018, increased selling prices and higher volume. Gross margin expanded 180 basis points to 26%, primarily due to increased selling prices, synergies from the USI acquisition, higher sales growth in our installation segment and operational efficiencies, partially offset by higher material costs. Adjusted operating profit improved 25.8% to $292.7 million with a corresponding margin improvement of 140 basis points to 11.2%. Full-year 2019 adjustments totaled $3.2 million including rationalization charges and acquisition related expenses, the majority tied to the USI acquisition. Adjusted EBITDA grew 26.7% to $359.1 million, and our adjusted EBITDA margin improved 180 basis points to 13.7%. Our drop down to adjusted EBITDA margin for 2019 was 31.6%, 46.1% on a same branch basis. Adjusted net income for full year 2019 was $188.9 million, or $5.49 per diluted share, compared to $149.3 million, or $4.19 per diluted share for full year 2018. Interest expense in 2019 increased from $28.7 million to $37.8 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.

Turning to Slide 7, capex for full-year 2019 was $45.5 million, approximately 1.7% of revenue. During the year we issued $15 million of equipment notes to help fund our fleet acquisitions. Working capital as a percent of trailing 12-month sales was 10.3%, 10 basis points lower than prior year. A reduction in inventory was partially offset by an increase in accounts receivable days sales outstanding driven by the continued growth in our commercial business. Our effective tax rate decreased from 25.5% in 2018 to 24.7% in 2019, primarily due to an increased benefit from share based compensation, partially offset by an increase in state and local taxes. For 2020, we expect our normalized tax rate to be 26%, which is higher than our 2019 effective tax rate, since the 2020 normalized rate assumes no benefit from share based compensation. Operating cash flow was $271.8 million for the year. Total liquidity at year-end was $373.4 million, inclusive of the available balance on the revolver of $188.6 million and cash of $184.8 million. Net leverage at year-end was 1.54 times.

Moving to 2020 annual guidance, we are projecting total sales to be between $2,765 million and $2,835 million and adjusted EBITDA to be between $387 million and $412 million. This assumes a range of residential new housing starts of between 1.30 million and 1.34 million. It also includes the two acquisitions, Hunter Insulation and Cooper Glass, which we acquired this month, but no additional acquisitions we may make this year.

On Slide 9, we've also provided our long-range modeling targets for a number of metrics, most of which are unchanged from when we last provided them to you a year ago. The range for working capital remains at 10% to 11% of trailing 12-month sales. The range for same branch incremental EBITDA is 22% to 27% and 11% to 16% for acquisitions also unchanged. We still project $80 million of revenue for every 50,000 increase in residential housing starts and our commercial sales growth to average 10% annually. We have lowered our normalized tax rate to 26% from the previous target of 26.5%. Finally, we now project capex at 2% of sales, compared to the previous guidance of 2% to 2.5%. Building on these metrics, here is what TopBuild could hypothetically look like at 1.4 million starts. Starting at 1.32 million starts, the midpoint of our 2020 guidance, and increasing starts by 40,000 each year through 2022, we project just over $3 billion in annual revenue and EBITDA around $460 million, delivering a 15% EBITDA margin. Acquisitions would bolster these numbers and we expect considerable activity in this area over the next three years.

Robert will now discuss operations and segment results.

Robert Buck -- President and Chief Operating Officer

Thanks John. Good morning everyone. Before discussing TruTeam and Service Partners' financial results, I want to thank our entire TopBuild Team for their hard work, dedication and ongoing push for operational excellence throughout 2019. Everyone's efforts delivered another great year for our company.

Looking at TruTeam's results on Slide 10. Fourth quarter sales grew 4%, beating lagged housing starts. Contributing to this increase were selling price, volume growth in both residential and commercial and contributions from acquisitions. Our solid results were offset, to some extent, on the residential side as a result of a higher mix of multi-family work and the move by production builders to more entry level homes which have a smaller footprint resulting in a lower take per unit. For the full-year, TruTeam's sales were up 13.4%, 6.3% on a same branch basis, again beating lagged housing starts which declined 2.3% for full-year 2019. Shifting to TruTeam's adjusted operating margin, we saw a 90 basis point increase in the fourth quarter to 13.4% and a 150 basis point increase for the full year to 13.3%. Primary drivers were increased selling price, increased sales volume, operational efficiencies and synergies from USI acquisition, partially offset by higher material costs. Since 2015, our first year as a public company, TruTeam's full-year adjusted operating margin has expanded 820 basis points, a testament to great operational execution by TruTeam's leadership and our team in the field.

Turning to Service Partners, in the fourth quarter total sales grew 4.3%, led by selling price increases of 2.3% and volume growth of 2%. For the full-year, Service Partners sales were up 5.1%, driven by higher selling prices and a small contribution from acquisitions, offset by a slight 0.8% volume decline. You may recall that in the fourth quarter of 2018 we walked away from some low margin business which our team has been working hard to replace. Sales volume did increase in the fourth quarter and we expect volumes to continue to grow in 2020. Partially as a result of the exiting of that low margin business in 2018, Service Partner's adjusted operating margin expanded, up 120 basis points in the fourth quarter to 11.3% and up 90 basis points for the full year to 10.5%. Adjusted operating margin also benefited from strong cost control, increased selling prices and operational efficiencies, partially offset by increased material costs.

Moving to the next slide. I know one top of mind issue for many is material pricing and industry capacity. The manufacturers announced a cost increase effective late January, and while it is still early in the year, based on recent housing starts and the optimism we are hearing in the field from our builder customers, the increase will likely have some traction. Capacity could also tighten, assuming housing starts continue to improve. However, we don't expect a situation akin to 2018 where we saw loose-fill material on allocation. Additional batt capacity has come on line since 2018 and additional loose fill capacity is expected to be on line by the end of this year and Q1 of 2021. We are confident in our supply chain and our ability to successfully pass through material cost increases, as we've previously demonstrated. Just a reminder, labor will remain at a premium in this rising housing environment.

One of our strongest growth areas is our commercial business as shown on Slide 13. Sales grew 24% for the full-year, 18.6% on a same branch basis. On the heavy commercial side, we plan to greenfield more locations this year, which will bring a heavy commercial presence to more than 22 locations. Recent projects we've been awarded include two Penn Plaza in New York City and the George Lucas Museum in LA. We also continue to seek heavy commercial acquisitions, which will expand our market presence and the types of insulation services we can offer to our general contractors. This bundled services approach has given us a distinct competitive advantage, growing our market share of this $5.5 billion industry from 6% just a few years ago to 11% [Phonetic] today. Looking ahead, we are extremely excited about our prospects for our commercial business. We have a robust pipeline of potential activity and are already bidding jobs well into 2022. I will remind everyone that commercial revenue can fluctuate quarterly, especially for heavy commercial projects, as was evident in 2018 when sales started out slow for the first half of the year, but increased in the back half of the year.

Moving to Slide 14. As Jerry mentioned, we completed two acquisitions this month, Hunter Insulation and Cooper Glass. Hunter is a residential insulation company that has been serving the Long Island market for over 80 years and we are pleased to have the talented team at Hunter join our TruTeam business. Hunter installs both fiberglass and spray foam and generates approximately $10 million in revenue. This is a great addition for TruTeam, increasing our market share in this high growth region and providing strong synergies as the company moves to our supply chain. Cooper Glass, which specializes in commercial storefront glass, is our first dedicated acquisition in this adjacent product category, where we already generate approximately $150 million of annual revenue. Cooper, which will contribute approximately $9 million in annual revenue, has been servicing the Memphis market for 28 years and we are happy to have the Cooper team join our company. We are excited about the prospects of the glass business and expect to grow our footprint and market share through strategic acquisitions.

Before turning the call back to Jerry, I want to talk about one area of our operations that gets little attention publicly, but is at the heart of our company, safety. As Slide 15, notes, putting the safety of our people first is a core value and it guides everything we do at TopBuild. We believe safety is a lifestyle both at work and at home, not just a program or initiative. We strive for a zero accident safety environment at our nearly 300 branches as well as at our Daytona Branch Support Center. Safety training at each branch is conducted monthly and we ask our employees to sign a safety pledge, where they promise to never sacrifice or compromise safety to perform a job and to report immediately any unsafe conditions to their supervisors. Our employees visit over 15,000 job sites every day and we want them to return home safely to their families every night. In fact, a percentage of management's annual bonus is tied to our safety metrics.

As we look out to 2020, we will begin to benefit from the substantial ramp up in starts as the year progresses. We are further encouraged by our extensive conversations with builders who are reporting solid demand. We are growing our market share organically and through acquisitions and expect to see continued margin expansion at both TruTeam and Service Partners. Our team is energized and we look forward to once again delivering strong bottom line results for our shareholders. All in all, it should be another great year for TopBuild. Jerry?

Jerry Volas -- Chief Executive Officer

Before opening up the call for questions, I want to briefly mention the announcement we made in January regarding my retirement at the end of the year. Launching TopBuild as a public company in mid-2015 and driving outstanding financial results and shareholder value over the subsequent four years has certainly been a highlight of my business career. But it's important to understand that this track record of performance comes from the efforts of a broad team beginning with Robert and John, extending to those here in Daytona at the Branch Support Center and, most importantly, in the field with our locally empowered branch management. The Board's selection of Robert as my successor was a thoughtful decision at the end of an organized process over the last couple of years. Robert and I have worked closely developing the company's strategy and, as COO, Robert has executed this strategy throughout our national footprint. He has more than ten years of experience with our business model and you can expect the same focus on profitable growth to continue under his leadership.

In closing, 2020 should be another year of profitable growth for TopBuild. With a macro environment of strong residential housing starts and commercial activity, we will continue to focus on growing market share organically and through acquisitions. Our culture of cost control and operational improvement will translate that top line growth into further margin improvement.

Operator, we're now ready for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Ken Zener with KeyBanc. Please proceed.

Kenneth R. Zener -- KeyBanc Capital Markets -- Analyst

Good morning, everybody.

Jerry Volas -- Chief Executive Officer

Good morning, Ken.

Kenneth R. Zener -- KeyBanc Capital Markets -- Analyst

Jerry, congratulations. Very well done there. Could you guys comment on share gains by business segment. So starts were down 2.3% for the year, you guys grew 6%, could you -- there is probably you know two points or three points of price in there, but can you talk about on the single-family on the residential side, how much share you think you gain there versus what was happening in the commercial market, if you would?

John Peterson -- Chief Financial Officer

Hey, Ken. This is John. So I think one of the things we talked about in our prepared remarks was some of the headwinds we had especially in the first -- fourth quarter, excuse me, on things like the mix of multi-family units and the impact of the -- more -- we're seeing more of the entry-level type homes, which obviously affects our revenue per unit, but if you look at our TruTeam units, in terms of how we performed, we were up about 3% in terms of units in the fourth quarter on our TruTeam business, where obviously we have great clarity and great view of that. I think on a full-year basis that's about 1.5% so and to your point, I think if you look at single family starts in the fourth quarter, up about 2.4%, not sure of the full-year number. But certainly from a share standpoint, we feel like we at least held our own for the full year and the fourth quarter. And if anything picked up a little bit, but -- but as I said, what affects the volume, a little bit too is that mix impact I talked about in the multifamily and the to take per unit on the entry-level type homes.

Kenneth R. Zener -- KeyBanc Capital Markets -- Analyst

Excellent. And as my second question, you know your incremental EBITDA is -- while it has been very strong to put it mildly. I'm just -- and I know your long-term targets, but I mean it seems like your M&A incrementals went up you did mention you walked away from lower margin businesses. So the strength that we saw, unless -- if I typed it in correctly, I mean you were north of 40% in the second half of '19, I know your guidance is what it is, but what would cause degradation to that 22% to 27% range in the first half given all the favorable factors you've highlighted? Thank you very much.

John Peterson -- Chief Financial Officer

You're welcome, Ken. This is John again. Yeah, I think I'm certainly proud of what the team has accomplished last year and the years proceeding that. One thing we would point out 2019 had a couple of tailwinds, which are now baked into our 2019 base year, which really are non-recurring. So the first would be the fact that we did have a favorable balancing of price versus our input cost, especially material versus 2018, especially the first half of the year. So that now all baked into our comp and then the other side of that is USI, the acquisition has generated significant synergies. Most of those we finalized early in 2019. So that's now baked into our comp also. So listen, I think if you take the midpoint of our guidance that we provided for 2020, on a same branch basis we're just about right in the middle of that long-term EBITDA drop down that we provided '22 to '27, and quite frankly we'd be real happy to deliver that, but we did have a couple of things that are now baked into the comp that we will be comping to in 2020.

Jerry Volas -- Chief Executive Officer

You know Ken, Jerry here. The one thing I would add to that would be that to all the John's commentary, we want to put a guidance out there that we're comfortable with. We always work really hard to beat that and we've -- in two of the last three years, we have done that. So it's a number we're comfortable with we have a hard charging management team here that will always try to optimize. So that's how we think about it.

Kenneth R. Zener -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from Trey Morrish with Evercore ISI. Please proceed.

Trey Morrish -- Evercore ISI -- Analyst

Thanks guys. The first, I just want to start is on the Cooper Glass acquisition. So you've suggest that you're looking heavily into expanding your glass business. But how do you think about -- did this acquisition specifically, and just thinking about potential future acquisitions, what tools do you have or what can you give the team at Cooper to support some fairly sizable growth for a business of that size?

Robert Buck -- President and Chief Operating Officer

Hey, good morning Trey, it's Robert. So we think about the glass business a lot like we think about the insulation business. There is a lot of the model, fits really well with our model at TopBuild, especially our installed business on the TruTeam side. We've done some work in this space, quite a bit of work in this space. We know there is synergies to be gained as we're building model -- as we're building the model there and as we build the scale from that perspective of the business. There is customer relationships that we can leverage relative to that. So we think there is quite a quite a bit of tools to bring. And then when we look at Cooper specifically, nice market in the Memphis market, well established business. And something that whenever we look at the acquisitions, we always look at the talent and there is a great team there at Cooper that we think can help broader and so that's one thing that attract us and that's kind of a filter we get through as we look at the glass businesses and I think as Jerry said, we've got a nice pipeline of potentials there.

Trey Morrish -- Evercore ISI -- Analyst

Okay. And then on the -- on the service partner side of the business. Clearly, you've added a tailwind for this year from walking away from low margin business in May, 2018. But how should we think about the underlying margin improvement in that business, specifically going forward now with that one time tailwind if you will? I know you'll give me your little extra boost.

John Peterson -- Chief Financial Officer

Trey, this is John. So in terms of service partners as we talked in the past it's a business that obviously has a lot more variable cost than fixed. So as we grow that business, we will leverage some of the fixed overhead we have, but from a margin expansion as we think about the 22% to 27% range on incrementals, it's certainly is at the lower end of that, but we believe there are opportunities to continue expand margins based on the growth we see, industry growth expected. But it will be on the lower end of our guidance typically because of the fact that again it's a much more variable cost base business.

Trey Morrish -- Evercore ISI -- Analyst

Okay, thank you very much guys. Appreciate it.

Operator

Our next question comes from Michael Wood with Nomura Instinet. Please proceed.

Mike Wood -- Nomura Instinet -- Analyst

Hi, good morning. Good job again on executing this quarter.

Jerry Volas -- Chief Executive Officer

Thanks Mike.

Mike Wood -- Nomura Instinet -- Analyst

You talked about the increased multi-family with the builder push toward more affordable supply with rates low moving lower, are you seeing a mixed back up -- is the mix down a trend you'd expect to continue?

John Peterson -- Chief Financial Officer

Yeah, Mike, this is John. So as we think about that on a go-forward basis, and I think you've seen in the last three months of starts data that have come out, it's been a little more heavily tilted toward multi-family versus single. So we don't see that phenomenon at least in the near term or mid-term ending. And then when we think about the take per unit impact that we saw in the back half of the year, we'd expect that to continue also we think and certainly we see it in our pipeline right now, the size of the footprint is having some degradation -- decreasing a little bit based on that move to more entry-level homes. As a matter of fact, in our guidance in the 2020, we have baked in about a point of degradation on a residential new construction tied to that footprint. So I think those are trends that we don't see changing in the near or mid-term. And we've really baked that into our guidance at this point.

Mike Wood -- Nomura Instinet -- Analyst

Okay. As it relates to the conversion margins, I wanted to just ask about technology adoption. Can you just tell us if there have been major roll out recently if any or planned and if they are largely behind you, where are you in the process of realizing the full benefits of productivity there with any new technology you've rolled out?

Robert Buck -- President and Chief Operating Officer

Hey, good morning, Mike, it's Robert. So you got the experience some in the past the I things we rolled out relative to improving installer productivity, relative to improving sales productivity, but it's a constant push for us around operational efficiency of looking for new ways. So I'll give a story, kind of a small example here that we think is impactful. So we have a fleet of nearly 6,000 that go out every day and so, now we've installed the appropriate devices on our fleet that's going to allow us, number one to make sure that we are operator -- operating under that safe environment that I talked about how our folks are driving and everything from speed to fast breaking of that type of goods is safety number one, but then it also allows us better as to how we're using the fleet relative to route optimization, relative to is the fleet idling that type of thing. So it really just allows us to do a better job of making our fleet, more productive, which by the way, makes our installers and our drivers -- drivers more productive as well. So we've got constant things that we're working, that would be one example I'd give you that we expect to see some benefit from here in 2020, 2021 as well, but we're always pushing and looking for new ideas and that's just our cadence as a management team.

Jerry Volas -- Chief Executive Officer

Michael also realize that as activity levels pick up, housing starts to get bigger, but there is a natural leveraging of even our semi-variable costs, the installation labor, the sales labor, our productivity goes up naturally as we leverage higher levels of activity. So that's win it at our back as well. In addition to all the things, you know the things that Robert talks about relative to best practices and leveraging that across the footprint.

Mike Wood -- Nomura Instinet -- Analyst

Okay, thank you.

Operator

Our next question comes from Phil Ng with Jefferies. Please proceed.

Philip Ng -- Jefferies LLC -- Analyst

Hey Jerry, it's been a pleasure working with you and congrats on the new role Robert.

Robert Buck -- President and Chief Operating Officer

Thank you.

Philip Ng -- Jefferies LLC -- Analyst

I guess to kick things off, your starts forecast for 2020 implies about 2% year-over-year growth notably fostered in some -- what the public builders have been reporting in some of the forecast out there. So just curious, what are you hearing from your customers? And do you have any concerns that bottleneck such as labor is going to constrain growth?

Robert Buck -- President and Chief Operating Officer

Hi Phil. Good morning, Robert. So john and I'll kind of tag team this. So I'd say our builder conversations are definitely very optimistic, they are very positive as to what's going on. They are seeing strong demand, strong foot traffic, good selling season here in the spring. So very positive coming from the builders. I think as we said, we expect the ramp up in housing to happen throughout the year as a lot of these starts have come here in the winter months. We think it would be -- we think it will be a ramp through the year as this goes so that the industry can ramp up as well, but I'd say in general the builders are very positive and they're reporting good demand as you are hearing and reading as well.

John Peterson -- Chief Financial Officer

Yeah. And so the only thing I'd add to that, this is John, I'd add to that is you mentioned that the actual starts numbers up about 2.5% roughly. Certainly from a live start standpoint, we expect that to be a little bit better and that's baked into our guidance to because as you know, fourth quarter '19 was significantly better than the fourth quarter of '18 starts in the first leg that goes into the next year so. So that's baked into our numbers again, we feel good about at this point so.

Philip Ng -- Jefferies LLC -- Analyst

Got it. And then on some of the comments you just made Robert, would be helpful kind of help us think about the shape of the year because you were just talking about lot of the starts happen during the winter months and it's going to take some time to build and appreciating you have some tough comps on the commercial side, any color to kind of help us think about the shape of the year would be really helpful?

Robert Buck -- President and Chief Operating Officer

Yeah, I mean I think it's good question Phil. First thing, we would point to is the lag. And then we think especially given the timing of the starts and stuff, that we think that lag will extend and is extending. Today you heard John obviously talk about the mix of multi-family has been has been very rich as well. So we think it's a nice steady ramp through the year when all happen here in Q1, but we'll see that ramp up throughout the year. And then I think the lag will extend, we're seeing that we're hearing that as we think about 2020. I'd say we are, again I'll just point to builders are optimistic, I would say obviously we're busy right now. So we expect it to be a good 2020 as the ramp happens.

Philip Ng -- Jefferies LLC -- Analyst

Got it. And just one last one for me. You noted the manufacturers are seeing some traction on this Jan. increase and can go for a second increase, how have your conversation been on pricing with your customers and you've done a fabulous job managing this price cost dynamic, but any risk at least for a quarter, you could get squeezed a little bit? Thanks.

Jerry Volas -- Chief Executive Officer

Yeah, I think at this point from manufacturers standpoint, we're in good shape. We had a good heads up obviously in terms of this first quarter price increase that was announced back I think early fourth quarter. We'll be well prepared, we always are ready to have conversations with manufacturers if another increase comes and certainly with a pretty robust year expected, I'd say there is a good possibility of that, but we're always confident of our ability to pass through that cost Phil and I think, again we've got great evidence of that historically in our results, so.

Robert Buck -- President and Chief Operating Officer

Phil, this is Robert I would add on to John's comment just -- with the builders given, given the ramp and stuff labor is top of mind, right. I mean that's something there, they're very focused on which by the way, we think is a great TopBuild advantage as to how we can move labor around, how we can move our assets around. We think that service model that we have is the best in the industry given our integrated systems and our ability to really leverage our footprint and stuff as well. So it's -- the common topic with the builders is obviously labor in there and want to make sure we can service them, which we're confident we can.

Philip Ng -- Jefferies LLC -- Analyst

Thank you for the color.

Operator

Our next question comes from Seldon Clarke with Deutsche Bank. Please proceed.

Seldon Clarke -- Deutsche Bank -- Analyst

Hey guys, thanks for the question. So we've seen a pretty significant acceleration reported starts last couple of months and into January and obviously I think there is some noise in that data. So could you just give us a sense of how you think your underlying demand or volume growth is sort of trending for the first quarter?

Jerry Volas -- Chief Executive Officer

Sheldon, this is Jerry here. [Indecipherable] Robert's previous comments I would describe that as saying that the direct alignment between housing starts reported and our revenue has never been perfectly linear. There is always -- there is always a variety of factors that move around the lag, singles and multi, the commercial, which is an increasingly big part of our business marches to a different drummer completely. So -- but having said that, we have a lot of optimism relative to ongoing improvement in the business and higher volumes as 2020 progresses quarter over quarter. It is true that the biggest starts improvement impact happened late in Q4. So you know is that going to impact us positively in Q1, it will but more so later in the year. So the best we can do is to tell you that we are very optimistic for all the reasons we talked about. Builders are pivoting as we said toward smaller footprints that's going to drive up the volume for sure in terms of units and you know John, talked a little bit about the headwind, not a big headwind, but some headwinds relative to take per unit caused by more multi and singles smaller footprint, but -- but overall, it's a very, very good picture and that's why we're as optimistic as we are with our guidance for 2020 and we think that 2020 quarter-over-quarter as the year goes on is going to get better and better as it relates to volume.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay, that's helpful, thanks. And I think you touched on this earlier, but I just want to get some clarification, if you -- if commercial growth surprise us to the upside, can you just talk about what that means for your organic incremental EBITDA margins?

John Peterson -- Chief Financial Officer

Yeah, this is John, Seldon. So generally, our commercial business in aggregate, both light and heavy commercial is pretty comparable to resi, so not a significant change plus or minus versus what we see on the residential side. So from an incremental standpoint really still within that '22 to '27 and not a really significant impact versus the overall TopBuild results.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay. Appreciate the questions. Thanks guys.

John Peterson -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Keith Hughes with SunTrust. Please proceed.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. You talked earlier about the growth in commercial business. I think it shows 23% of sales. Can you give us a rough breakdown of where you stand right now, commercial versus new residential multi-family, remodel, things like that?

John Peterson -- Chief Financial Officer

You're talking -- Keith, this is John. You're talking about in our overall sales volume?

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Overall sales volume, yeah.

John Peterson -- Chief Financial Officer

Yeah, so commercial is about 23% of the overall number today, OK. And then if you look at our residential new construction within the business, which is I believe somewhere around 68 plus percent, somewhere in that range, 68% to 70% of the res that's about 70/30. So it's about 70% single family and about 30% multi-family in terms of units, OK. And on a revenue basis, it's obviously different split in that since multi-family is about 40% to 50% of the value of a single-family unit. So hopefully that helps you.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. So, you're saying 70/30 of the remaining 77% is that what you're saying?

John Peterson -- Chief Financial Officer

Well, the remaining 77% maybe seven points or eight points of that is RNR, OK. So then you're down to a 68% to 70% which would be RNC and that RNC split from a unit standpoint, split about 70/30 overall between single and multi.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And shifting to service partners, the major comments on the price increase and insulation, where do you think channel inventory stands there? Has it been a pre-buy ahead of this or what have you seen?

Robert Buck -- President and Chief Operating Officer

Hey, good morning. Keith it's Robert. So I'd say given supply and demand maybe there's been some slight pre-buy. I would just remind a lot of those contractors and stuff don't have huge facilities to buy up too much from that perspective. So there may have been a little bit that we saw when like early this year the increases were mainly effective toward the end of January, but I wouldn't call it significant.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you.

Operator

Our next question comes from Ryan Gilbert with BTIG. Please proceed.

Ryan Gilbert -- BTIG -- Analyst

Thank you. Good morning. I appreciate the hypothetical on the around revenue and adjusted EBITDA on the 1.4 million starts, and I'm wondering if you feel like your company as it currently sits today is positioned to maintain or take market share. If we do see housing starts at 1.4 million or do you need to add more people or make additional investments in the business to support that 1.4 million starts range?

John Peterson -- Chief Financial Officer

Yeah, this is John. So certainly with growth in starts and our growth in commercial, the obvious area we're going to have to add capacity will be direct labor. So that's an area that again we've shown great capability to do over the recovery period here. I think I point out -- we pointed out before and it's worth pointing out again I think we have a distinct advantage versus most other installation contractors and that we are able to routinely and we do it all the time share our labor back and forth across our footprint and the starts have been flowing around the country so, so that would be the obvious area certainly equipment to support that growth. But I think Jerry mentioned before and I think it's worth noting again, that we always get some point of leverage certainly on the fixed side, but even on the semi-variable on the variable side, which you have seen again good evidence in our results as the industry recovers. So, so yeah obvious things we're going to have to invest in. I think we've also pointed out that from a capex standpoint for instance we average about 2% of our sales growth gets reinvested into capex to support the business are rather nominal. Yeah, again, great evidence for the past six years, seven years to perform at that level, and we're confident to go forward with that we can continue to support the investments in the business to grow.

Robert Buck -- President and Chief Operating Officer

But Ryan, there is no big step investment to make, if that's which depends one of your thoughts.

Ryan Gilbert -- BTIG -- Analyst

Yeah, I think that's kind of where the question was heading, it seems like we could potentially have 1.4 million either this year. First half next year on a trailing basis. So that's helpful. Thank you. And then just as builder shift their mix more to entry level, is there a preference for -- or is there been a substitution in different types of insulation so between batt, loosefill, or spray foam, anything you could add there would be helpful?

Robert Buck -- President and Chief Operating Officer

Hi Ryan, good morning, Robert. So I would say you know relative to shift, you see little bit less spray foam as the entry level homes have become more in demand and as the footprint has shrunk from there to the more entry level and the builders have focused more there. So obviously had a more back toward fiberglass both batt and blows so probably taken a little bit back from the -- from the spray foam side for sure. And you know but spray foam continues to grow and we're seeing a lot of spray foam being inspected on the commercial side of the business. So, as we always say we do our products. So we're seeing the spray foam continue to be growing demand on the commercial different types of applications there.

Ryan Gilbert -- BTIG -- Analyst

Thank you.

Operator

Our next question comes from Justin Speer with Zelman and Associates. Please proceed.

Justin Speer -- Zelman Associates -- Analyst

Thank you guys. I just wanted to kind of better understand this volume deceleration in the installation business because you were doing the fairly soft starts -- starts setting roughly 4% volume growth in previous quarters and that really decelerated to less than 1% installation business, so I really wanted to have a, I guess a better understanding of how much of that deceleration is tied to the mix issue versus perhaps share loss in the quarter?

John Peterson -- Chief Financial Officer

Sure, Justin. This is John. So the two things I pointed out that we're calling the headwinds in the fourth quarter one would be the mix of multi-family and the kind of the pivot or the movement toward more entry-level probably on a year-over-year comp basis cost us about $10 million fourth quarter '19 to '18, OK. So that's from a quantification standpoint, probably the best I can give you at that point again any type of go forward impacts baked into our guidance at this point that we provided. And the other thing I'd point out, I think commercially, and I think we've talked about this on previous calls, we had a good quarter in the fourth quarter, but when you looked at our first quarter, second quarter and third quarter versus the prior year comp, we were up substantially. So all the way strong fourth quarter, not quite the growth that we saw year-over-year in the previous three quarters, albeit, a very strong quarter commercially.

Justin Speer -- Zelman Associates -- Analyst

Okay that makes sense. That helps. And then the other thing I just wanted some help understanding is in terms of managing around the price increase slated for early 2020, how much price mix is embedded in your 2020 estimates and does that account for this first price increase at least the January price increase?

John Peterson -- Chief Financial Officer

Yes, so 2020 guidance and we usually don't break it down into too much detail, but at this point what I'll share with you is that we have about -- so I'll start with the fact we got about $20 million in acquisitions in the total at this point and that's of course the full year impact of the Viking acquisition we did third quarter and then the two acquisitions we recently announced. We obviously gave you the starts threshold in terms of what we're projecting at this point. The only thing I'd share with you is we really assume from a couple of other areas multi-family relatively the same mix that we saw in 2019. And then on a TPU basis, revenue per unit basis, our residential new construction business down about a point on the residential new construction just tied to the fact that again more entry-level homes than the overall mix that we're going to see come forward. So beyond that, we really will not give any more details around the guidance and obviously we will update it quarterly throughout the year.

Justin Speer -- Zelman Associates -- Analyst

Okay that makes sense. And then last question from me, just as you look at across your business, if you could give us any context around the cadence of activity regionally and maybe some of the dynamics you're seeing at a regional basis across your portfolio?

Robert Buck -- President and Chief Operating Officer

Hey, good morning, Justin. This is Robert. So to think about the residential side of the business, we're busy. I think I mentioned that earlier and if I look regionally across the south especially so if I think about Southeast, Northern Florida, if I think about Florida mainly Northern Florida is very strong right now. Texas, the Southwest all those areas are strong. And we're seeing good demand across the country, but those would be -- those region, Southwest Texas, Southeast and Northern Florida would be there as I point to specifically. Commercial wise, as I mentioned we have a good backlog and good bidding that we're doing as we say there can be fluctuations quarter-to-quarter, but we expect a good flow from commercial as well as we go through the year.

Justin Speer -- Zelman Associates -- Analyst

And then just last question for me, just on the price increase. I know historically it's been like a two per year kind of cadence and traction would be, maybe dictated by underlying tone and tenor of activity. What's your view on the prospects of that typical kind of cadence, given what you're seeing in your backlog today?

Robert Buck -- President and Chief Operating Officer

Yes, I think there is definitely -- you know if you look at the starts and the demand pattern and what we're hearing from builders, I think there definitely could be a second increase this year. I think depending on how the starts go coming out of the spring and into summer months because that means something in the fall, I think one thing we mentioned in the prepared comments is depending on that ramp, could there be some tightness in material, potentially there could be depending on how steep that ramp is and the starts. I would just go back because -- because we offer the bundled solution, the one thing I would go back to just the labor, I mean the labor is at the premium, it's top of mind for the builders and stuff as well. So it's a bundle packaged material and labor.

Justin Speer -- Zelman Associates -- Analyst

Thank you, guys. Really appreciate it.

Jerry Volas -- Chief Executive Officer

Thanks, Justin.

Operator

Mr. Volas there are no further questions at this time, please continue with your presentation or closing remarks.

Jerry Volas -- Chief Executive Officer

Thanks everybody for joining us today. We look forward to our next call when we report our first quarter results in early May.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Tabitha Zane -- Vice President, Investor Relations

Jerry Volas -- Chief Executive Officer

John Peterson -- Chief Financial Officer

Robert Buck -- President and Chief Operating Officer

Kenneth R. Zener -- KeyBanc Capital Markets -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Mike Wood -- Nomura Instinet -- Analyst

Philip Ng -- Jefferies LLC -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Ryan Gilbert -- BTIG -- Analyst

Justin Speer -- Zelman Associates -- Analyst

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