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TopBuild Corp (NYSE:BLD)
Q3 2020 Earnings Call
Nov 3, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the TopBuild's Third Quarter 2020 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]

I would now like to turn the conference over to your host, Tabitha Zane.

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. 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're pleased to report another strong quarter as the TopBuild team continues to perform very well in this environment. Despite the ongoing negative impact of COVID-19 on the overall economy, the housing industry remains a positive story. Our builder customers are reporting very strong traffic and record order growth. In his October Home Builder Analysis and Forecast Report, John Burns cited the environment as the "strongest current housing market conditions ever," and one of our builder customers on their third quarter conference call a few weeks ago stated that "demand is through the roof."

We recognize that part of this trend is driven by COVID-19 impacts such as buyers looking to escape dense urban environments, work-from-home policies driving demand for more space, and active adults seeking to avoid senior residential facilities. And while all of this is currently having a positive impact on our industry, the long-term fundamentals of the housing industry also continue to remain strong. Most notably, historically, low interest rates, increasing household formations and very low inventory. These long -- these short and long-term factors are translating into strong housing starts and our expectation is that this will continue, and we will benefit from this growth.

We acknowledge that labor and material will likely be gating factors, elongating the build cycle, which we did see in the third quarter, but our team has demonstrated its expertise in navigating these waters as Robert will discuss in a few minutes.

Turning to Slide 4, our third quarter results again reflect the strength of our diversified model and the ability of the TopBuild team to perform well at all points in any cycle. Net sales increased 2.2% to $697.2 million, despite delays in some of our commercial projects due to social distancing protocols. We're particularly pleased with the expansion of our adjusted operating and EBITDA margins of 280 basis points and 270 basis points respectively, which drove adjusted net income to $2.10 per diluted share, an increase of 37.3% over the same quarter last year.

Regarding capital allocation on Slide 5, our acquisition team is back to executing on our top priority as we closed Garland Insulating on October the 1st. Garland was one of the largest locally owned and operated insulation companies in Texas having built a strong reputation through 70 years of outstanding customer service. We're very pleased to have this company and their excellent management team as part of the TopBuild organization.

Looking ahead, our pipeline is filled with outstanding potential partners, several of which we expect to join us over the next few quarters. In addition to acquisitions, we returned capital to our shareholders through the repurchase of almost 58,000 shares at an average price of $155.63 per share. Before turning the call over to Robert, I want to remind you that this will be my last analyst conference call as I will be retiring as CEO and Member of the Board effective December the 31st.

I'm very proud of what TopBuild has accomplished since becoming a public company on July the 1st 2015, the result of well-timed spin-off from Masco, our previous parent company. We have significantly increased our national scale with 14 acquisitions and have demonstrated the strength of our diversified business model with both installation and distribution serving both the residential and commercial markets. A culture built around safety, operational improvement and customer service have become fully ingrained in everything we do every day.

As a result, we have performed well in many different economic environments and have increased our market cap from approximately $1 billion to over $5 billion today. In fact, on Friday, we were pleased to learn that TopBuild placed 47th on Fortune Magazine's list of the 100 fastest growing companies. Most exceptional is the team that will be taking TopBuild forward. Robert Buck will be assuming the role of CEO and Director. Since the spin, Robert has been the COO, the primary architect of the numerous operational improvements that have driven our outstanding financial results.

Having worked closely with Robert for many years at different stops throughout our careers, I'm fully confident that Robert will be an outstanding CEO and drive further value. Surrounding Robert will be not only John and Tabitha, who you know well from their investor related activities, but also many other excellent professionals in all areas of the company. TopBuild is in very good hands. Robert?

Robert Buck -- President and Chief Operating Officer

Thanks, Jerry, and good morning. To echo Jerry's remarks, TopBuild is performing very well. Our quarterly and nine-month results demonstrate our team's success in continuing to drive solid financial performance and focus on operational excellence. Starting with TruTeam's third quarter financial results on Slide 6, sales fell 1.2%, primarily driven by a decline in the volume of our commercial business, partially offset by increased selling prices of 1.2%, and acquisitions which contributed 1%. Despite this drop in commercial revenue, TruTeam's adjusted operating margin expanded a robust 300 basis points to 17% in the third quarter and improved 170 basis points to 15% for the first nine months of the year. This is a direct result of our continued focus on improving labor and sales productivity and implementing operational efficiencies throughout the business. Residential housing starts continue to climb, which I'll discuss further in a few minutes. We are very excited about the overall environment for our TruTeam business.

Turning to Slide 7, Service Partners' third quarter sales were up a strong 10.5%, driven by a 12.2% increase in volume partially offset by a 1.7% decline in selling prices as a result of cost reductions in two commodity products, gutter coil and spray foam. As you know, we made some important decisions and changes at Service Partners over the past two years, including stepping away from some low-margin business and focusing on our mix of customers and products offered. We also made some key leadership changes and now have a very entrepreneurial and forward-focused team. We are seeing these benefits of these moves as evidenced by our strong volume growth and our adjusted operating margin, which was 13.4% in the third quarter, a 280 basis point improvement, and 12.2% [Phonetic] for the first nine months, a 200 basis point improvement. We are excited about the prospects for continued growth of the Service Partners business.

As we look ahead, our builder customers and contractors remain extremely optimistic as they report historically high order rates and continued strong traffic. The acceleration of housing starts we've seen over the past few months is positive for both of our business segments and our Company is well positioned to capitalize on this growth. However, given several constraints in the home building supply chain, we expect these housing starts to be slow coming out of the ground lagging into the first quarter and perhaps even the first half of 2021. This slower ramp will elongate the cycle and provide a solid pipeline of activity for TopBuild. You can be assured we are ready to service these new housing starts, and we will continue to leverage our operating platform to help drive solid financial results.

Our commercial business as shown on Slide 8, specifically, on the heavy commercial side continues to be negatively impacted by project delays due to safety protocols related to COVID-19. On a same branch basis, commercial revenue for all of TopBuild fell 6.8% in the third quarter and is down 6.9% year-to-date. While we've seen a few projects cancelled, the vast majority of projects we've been awarded continue to be delayed due to social distancing rules which limit the number of trades on a job site.

Our long-term outlook for our commercial business is still bullish. Our backlog remains robust and we are bidding on projects well into 2022. As a reminder, this is a $5 billion plus industry bigger than residential new construction, and we have an 11% market share. So while we'll likely see a slower recovery on the heavy commercial side, we see plenty of room to grow and our bundled solutions approach continues to appeal to general contractors.

As Jerry noted a few minutes ago, we were pleased to acquire Garland Insulating last month. The integration is going well and our footprint has been significantly enhanced in the high growth state of Texas. Our M&A group continues to seek out well-managed profitable companies with strong management teams that will enhance our footprint in similar high growth regions. As we've said on many calls, good acquisitions are a high priority for our Company, and we are excited about the prospects in our pipeline.

I also want to touch on a few other areas highlighted on Slide 9, that are top of mind for our customers concerning the home building supply chain. First is labor, which will likely continue to tighten across our industry as we move through this robust housing environment. Our team has always risen to the labor challenge and is approaching this environment creatively, giving us an advantage in attracting and retaining labor. For example, we recently introduced a recruiting program to our 10,000-plus co-workers asking them to invite their friends and family to join our TopBuild team. The high level of engagement having our employees involved to bring their friends and family to our Company is a win for everyone and we are providing an attractive referral bonus to support this program. This program has been very well received throughout our organization and is already beginning to yield results.

Once we get a candidate installer onboard, we offer a comprehensive benefits package which helps make us an employer of choice. This includes health benefits, a matching 401k plan, tuition reimbursement and a career path which can eventually lead to a branch management position. Our installer training program is also comprehensive and covers not only all facets of working safely, but also how to become a more efficient and productive installer. This is important because the majority of our installers work on a piece rate which means as they get more productive, it creates better earnings power for them and for our Company. And an average installer earns $45,000 to $50,000 per year plus benefits and our top producing installers are making six figures.

Just a reminder, we have a unique advantage and differentiator with our ability to share labor among our divisions as they are all on the same ERP system. For example, there have been a couple of regions where our competitors have struggled to meet deadlines because of labor shortages. We were hired and brought in crews from two or three neighboring divisions to insulate 90 to 100 homes in a very short period of time and meet the customers' deadline.

The second issue that is top of mind is building materials supply, including fiberglass capacity. As starts have accelerated, capacity has tightened for all building materials. Part of this tightness is due to some slowdown in production lines earlier in the year when the pandemic first hit. We do expect to see capacity -- additional capacity come online next year. Last week, Owens Corning announced they are restarting their Kansas City Batts and Rolls lines and they should be up and running by the second quarter. This will add 2% to 3% to the industry capacity.

In addition, Johns Manville has informed us they are moving full steam ahead with their new line and it should be producing material in early fourth quarter. We also understand that Knauf is moving forward with their plans to bring on additional capacity in the second half of 2021. In addition, the manufacturers are also improving their operational efficiencies, increasing capacity with -- with existing lines.

From TopBuild's perspective, as the largest purchaser of fiberglass in the United States by nearly two times our nearest competitor, we are comfortable with our supply chain. We buy from a wide variety of building material suppliers and while we have no long-term contracts, we do provide them with monthly forecasts and are confident in our ability to meet the growing demand from our builder customers.

As far as material pricing, we saw an increase in September and Owens Corning and Knauf announced last week an 8% increase for January and it is likely the other manufacturers will follow suit. We feel very confident in our ability to manage these cost increase as demonstrated in 2018. This is a testament to our strong local division managers and the quality of our partnerships with our builder suppliers and customers.

Before I hand over to John, I'd like to make a quick comment on Jerry's retirement at the end of this year. On the behalf of the Board of Directors, management team and over 10,000 coworkers, thank you, Jerry for everything you've done for TopBuild. Speaking for myself, it's been a pleasure working with you for over 20 years first at Masco and TopBuild. You've been a mentor and a friend, and I look forward to seeing you enjoy the years ahead. John?

John Peterson -- Chief Financial Officer

Good morning, everyone. To echo Robert, Jerry, you will be missed, and we thank you for all that you've done for everyone at TopBuild.

Moving to our financials on Slide 10, we are pleased with our results, particularly our strong margin expansion, again, demonstrating the strength of our diversified business model. Starting with the third quarter, net sales increased 2.2% to $697.2 million, primarily driven by increased same branch sales volume, revenue from acquisitions and increased selling prices. Revenue for the first nine months of 2020 rose 1.8% to $1,996.6 million. Adjusted gross profit margin increased 220 basis points in the third quarter to 28.5%, and for the first nine months of 2020 expanded 160 basis points to 27.6%.

Gross margin improvements were driven by volume gains, increased selling prices, lower gutter and spray foam material costs, lower insurance costs and continued gains in operational efficiencies. Adjusted operating profit in the third quarter grew 26.2% to $101.7 million, with a corresponding margin improvement of 280 basis points to 14.6%. For the first nine months, adjusted operating profit increased 18.2% to $255.5 million with a corresponding margin improvement of 180 basis points to 12.8%.

Adjusted EBITDA for the third quarter was $119.2 million compared to $98 million in 2019, a 21.6% increase, and our adjusted EBITDA margin improved 270 basis points to 17.1%. Both operating and EBITDA margin gains were driven by the previously mentioned factors impacting the gross margin improvement, as well as cost reduction initiatives implemented in the second quarter in lower travel and entertainment and legal expenses.

For the first nine months of 2020, adjusted EBITDA grew 18.3% to $315.3 million, and adjusted EBITDA margin was 15.8%, a 220 basis point improvement over the first nine months of 2019. Third quarter SG&A as a percent of revenue was 13.9% compared to 14.5% in the third quarter of 2019. The year-over-year decrease was primarily the result of lower travel and entertainment expenses and savings from cost reduction initiatives. Adjusted income for the third quarter was $69.6 million or $2.10 per diluted share compared to $52.7 million or $1.53 per diluted share in 2019.

Third quarter 2020 adjustments were approximately $160,000 primarily related to acquisition costs and COVID-19 pay. Our effective tax rate was 25.5% for the third quarter. For the first nine months of 2020, adjusted income was $171.2 million or $5.14 per diluted share compared to $138.8 million or $4.02 per diluted share. Adjustments for the first nine months were $3.7 million and were primarily related to rationalization charges, COVID-19 pay and acquisition related costs. Interest expense in the third quarter 2020 was $7.7 million and for the first nine months was $24.9 million. This compares to $9.5 million for the third quarter of 2019 and $28.7 million for the first nine months of last year. The decrease in interest expense was primarily driven by lower LIBOR rates and a lower balance due on our term loan.

Moving to Slide 11, capex for the first nine months of the year was $27.2 million, 1.4% of sales lower than our targeted long range of 2%. As we have noted on previous calls, at the start of the pandemic, we pared back our planned 2020 capex spend, however, we do expect that to return closer to the 2% range in the fourth quarter. Working capital as a percent of sales for the trailing 12 months was 10.1% versus 11.6% a year ago. This decrease is primarily due to improvements in our accounts receivable aging, a decline in heavy commercial sales which have longer receivable terms and carry higher working capital requirements, and a richer segment mix of our Service Partners business which carries lower working capital requirements.

As shown on Slide 12, we ended the third quarter with net leverage of just under one times trailing 12 months adjusted EBITDA. Total liquidity at September 30, 2020 was $704.9 million, including cash of $315.3 million and accessible revolver of $389.6 million. Operating cash flow was $255.7 million for the nine months ended September 30, 2020. We remain extremely bullish about the current and future health of the residential and commercial businesses we serve.

Housing starts are strong and our commercial backlog and bidding activity remain very healthy. However, there is still some uncertainty over the pace of this growth, which is why we have not given guidance at this time. We hope to have more clarity over the next few months and are optimistic we will be able to provide annual revenue and EBITDA guidance for 2021 at the end of February on our fourth quarter call. Jerry?

Jerry Volas -- Chief Executive Officer

In closing, I want to emphasize that our national scale gives us a significant competitive advantage, both from a material and a labor standpoint. Just as important, our diversified business model with both installation and distribution into both the residential and commercial markets gives us the ability to perform well in any environment. Our year-to-date results clearly demonstrate the value of this business model.

Finally, I'd like to conclude our formal remarks by thanking our 10,000 employees for their hard work and commitment to our Company. Because of you, my five and a half years at TopBuild have been one of the most enjoyable and rewarding times in my 40-year business career. Although somewhat difficult to step away, it's a bit easier knowing that the Company is in such good hands.

Operator, we're now ready for questions.

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim -- Evercore ISI -- Analyst

Thanks very much, guys, and strong results. I guess, my first question relates to some of the new capacity that you were talking about opening up JM, Knauf and also OC announcing the Kansas City lines. I'm curious if you could just review for us whether there are any incremental opportunities that you typically see emerge for TopBuild when you have a new plant open up in a local market, and I know you talked about not have any long-term contracts.

But I -- my perception was that big company given your scale, you usually can be helpful in base-loading that plant's volume. And I was curious as to, if that's true and if that typically spans a period of a couple of years, two years to three years kind of a thing as you base-load that plant? So if you can just help us with the opportunity set when you have new capacity open?

Robert Buck -- President and Chief Operating Officer

Yeah, hi, Stephen, this is Robert. So, yeah, that's a great question. And so I think that is a real strength of TopBuild given the footprint, given our ability to really forecast demand as well. So as the manufacturing partner is bringing up that new capacity, we'll work with them, one, to be able to provide a forecast as to demand, especially geographically to the location of that plant and where that capacity is coming back, and then we can absolutely help them level load those lines as they are coming back up as we can provide them ongoing ramp of demand coming into that of which that demand will forecast.

And so it's really good for them as they're starting up those lines, as they're testing those lines and as the furnaces are coming up to capacity, that's really a strength of ours. So we'll do that with the manufacturers as they're bringing up those new lines and then we'll help them level out that line for foreseeable future as they're bringing up capacity because that line may ramp up for a while as they continue to get good opportunities with the line or they continue to gain efficiencies with the line, which is something I mentioned in the comments here, we see them continue to work their operational efficiencies as well. So definitely a strength of ours. The manufacturers love to partner with us on that and we love to be partners with them on that new capacity.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, that's encouraging. Once the plant gets to a sort of a steady state kind of situation, do you feel like there are any residual benefits for having been involved in that initial start-up?

Robert Buck -- President and Chief Operating Officer

Yeah, I think so, because obviously, we help them build demand regionally or geographically close to that new capacity. So I think it's good for them and good for us as partners with them. So yeah, I think there is residual benefit that goes down the road.

Stephen Kim -- Evercore ISI -- Analyst

Great. Yeah, that's encouraging. I -- I know that you said that you're going to defer holding -- defer providing official guidance on your volumes and expectations for next year until the 4Q call. But just generally speaking, I was curious if you could talk about the outlook what pieces you can see right now? You talked about housing starts in particular, having a little bit of a slower ramp, a constrained ramp, which is a good thing into late -- into 4Q and into early 2021.

As we think about what that means in terms of specific numbers because you mean the builders have been putting up some numbers and in some cases, like 50% up in terms of orders, and so there is just such a huge range of numbers that people are trying to choose from. Was curious if you could help us dimensionalize what your outlook or just what you're seeing right now in terms of plans for single-family housing starts growth over the very near-term, the foreseeable future call it three months to six months? Are we talking about like kind of a mid-teens growth kind of a picture, is that what you mean by a little bit of a slower ramp or are you talking about something that could flex a little bit more than that? Just help us understand what kind of ramp in growth you're anticipating?

John Peterson -- Chief Financial Officer

Hey, Stephen, this is John. So yeah, I think again the reason we didn't give guidance was entirely tied to the fact that across the entire industry, all construction basically, labor and material are ramping up to support what we're seeing is a really nice push in orders converting into starts and we've seen that the last two months or three months, I think the starts data averaging over 1.4 million.

So to your point, we are extremely bullish about what's coming. And really, when we think three months to six months or even beyond that period of time, we're pretty bullish beyond that period too with all the demographics and everything supporting the growth long-term. Lower interest rates, we expect to see that for an extended period of time. Good pent-up demand, really, really tight inventory both on new and resale.

So we think those things are in play for an extended period of time. I think on the commercial side, I think Robert talked about it in his prepared remarks. We're also very bullish on that. I think the challenge there right now is on the heavy commercial side. It's just a much lower cadence in terms of the work being done and performed because of primarily social distancing, and that will probably be with us till mid-year next year some time. But in terms of giving you numbers, we're not giving numbers out today. Obviously, I think we'll be in a position in the first quarter in February to give you a good look at 2021 from the sales and EBITDA, but we're very, very bullish about the prospects. I think the only question right now is how quickly the industry in general, can respond to the growth.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, OK. And so I guess that's still going to be an outline question.

John Peterson -- Chief Financial Officer

Yeah.

Stephen Kim -- Evercore ISI -- Analyst

All right. Well, thanks very much, guys. Good job. And Jerry, don't be a stranger.

Jerry Volas -- Chief Executive Officer

Thanks, Stephen.

Operator

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

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah, so, Ken, this is John. What we saw really in the third quarter was really an extension of what we saw in the second quarter. I think the biggest differences in the third quarter was that we had better volume. So obviously, volume came into play much stronger and better than we saw in second quarter and we get great leverage as you know off of those volume increases we've had, so that was a benefit.

And I mentioned in my prepared remarks that we also saw some improved material cost on around gutter and spray foam and that was at a higher -- a higher performance than we saw in the second quarter. But we also got the benefit in the third quarter of some line items being impacted by COVID favorably, travel and entertainment, group health, sharp supplies are probably the three biggest on our P&L, and that extended into the third quarter. I think the second quarter, we talked about a $5 million benefit, it was roughly $4 million in the second -- in the third quarter. So...

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

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

John Peterson -- Chief Financial Officer

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

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah. So in terms of our commercial volume, I think sequentially, we saw an improvement versus the second quarter in the third quarter as we did on all of our lines of business basically, but that improved in the third quarter versus second. The biggest change for us volume wise was in Service Partners, where we had a significant gain year-over-year versus where we were. Second quarter was a good quarter. Third quarter was a much better quarter in terms of those volume gains year-over-year. And Robert touched on those in his prepared remarks, great execution in terms of share gains there in that industry and also getting more of our current customers' pocket basically. So they're the major drivers, I think, Ken, if that answers your question?

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

It does. I'll talk to you guys again. Thank you.

John Peterson -- Chief Financial Officer

Thank you.

Operator

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

Philip Ng -- Jefferies LLC -- Analyst

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

Jerry Volas -- Chief Executive Officer

Thanks, Phil.

Philip Ng -- Jefferies LLC -- Analyst

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

Robert Buck -- President and Chief Operating Officer

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

Philip Ng -- Jefferies LLC -- Analyst

Okay. Robert, was your volumes in October up for your installation business?

Robert Buck -- President and Chief Operating Officer

We saw some nice improvements in October for sure.

Philip Ng -- Jefferies LLC -- Analyst

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

Robert Buck -- President and Chief Operating Officer

Yes, I think, Phil, I think we're pretty positive about the growth in Service Partners, I mean, again, as we mentioned, we've seen this as share growth, better execution by the team, both the sales side, service side piece of the business, mix of customers, products that we're offering, new products that we're offering that type of thing. So we're definitely optimistic about the future.

Relative to your question around pre-buy, I would say could have been some of that, but I wouldn't put a significant amount on that -- in that. If you go back to that time period, materials we're already getting tight in supply. So there wasn't a lot of what I'd say excess material available for a pre-buy scenario.

Philip Ng -- Jefferies LLC -- Analyst

Okay, great. And then one last one for me. It sounds like from a M&A pipeline standpoint, things are looking quite robust. Any way to help size up some of these deals that you have in the pipeline that could be joining you soon relative maybe Garland and some of the deals you've done in the past?

John Peterson -- Chief Financial Officer

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

Philip Ng -- Jefferies LLC -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah, this is John again. Phil, I don't think we've seen a significant change at this point from what we saw historically. So I think we typically talked about that 5 to 6 range on a pre-synergy basis. So that's kind of what we'd expect to see for some of the transactions. Now some of the larger ones that have been in play for us, as you know USI, etc., there might be different economics involved, but I think for the majority of the transactions that 5 to 6 on a pre-synergy is probably the range.

Philip Ng -- Jefferies LLC -- Analyst

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

John Peterson -- Chief Financial Officer

Thank you.

Operator

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

Justin Speer -- Zelman Associates -- Analyst

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

Jerry Volas -- Chief Executive Officer

Thank you, Justin. Thanks for your comments.

Justin Speer -- Zelman Associates -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah. So looking at SG&A on the overall company, a big piece of it was travel and entertainment. And I -- we put that number in the third quarter probably roughly couple of million dollars, Justin. I mean, there's other things too, obviously, again, we took restructuring in the second quarter. So we've been managing our salary wages benefits line very well too. But the T&E, it's really difficult to say when that's going to come back and how quickly.

We saw a little bit of an increase in third quarter versus second quarter levels. And I think we'll continue to see that over time, whether it will ever truly normalize to what we had historically, I think the onus is on the company right now to evaluate how much of that gain or benefit can live through after things kind of get back to normal. But yeah, we'd expect to see that numbers start to ramp, continue to ramp up as the -- as COVID hopefully gets behind us over time here.

Justin Speer -- Zelman Associates -- Analyst

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

John Peterson -- Chief Financial Officer

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

Justin Speer -- Zelman Associates -- Analyst

That makes sense. And then separately, we're back in kind of the mode of suppliers, manufacturers particularly, fiberglass manufacturers and other suppliers with these price increase announcements. I know historically, inflations not a bad thing for a distribution like model. But maybe remind us how you're kind of thinking about not only the announcements, but maybe the magnitude of the announcements and your ability to absorb them?

And then as a follow-up to that, what's the right mid-term EBITDA margin potential for this model because you guys have done such a good job, pulled forward some of the, I think ambitions that were maybe articulated in years past, you've been very successful with the USI integration. How should we think about normalized margins for this model under a scenario where we eventually do achieve 1.5 million starts?

Robert Buck -- President and Chief Operating Officer

Hi, Justin, this is Robert. I'll take the first part of that question around the material and the suppliers. So I think a few parts to that question, I think it's obviously going to be supply and demand. I mean, material is tight right now and labor is tight. So if I think about from a distribution perspective, labor and the level of service we're able to provide is key for our customer base. And so we feel comfortable as we've demonstrated in the past with appropriately passing along those increases on the install side of it, obviously, it's labor and material combination of the two, which are both extremely in high demand right now. So we feel comfortable and confident in both businesses.

I think back to the supply and demand, I think as -- if this ramp in housing continues to happen, then I think we can expect to see definitely multiple increases in 2021 from the manufacturers. I think you'll see some of that capacity come back, but again, if we continue to see that ramp, I think the material stay in that tight supply and labor will as well. And overall, we feel comfortable with our ability to pass that along, and I think we've demonstrated that on a pretty consistent basis in the past.

John Peterson -- Chief Financial Officer

So, Justin, this is John. I'll take the second part of that in terms of your questions around what -- what the -- what does margin look like in the future from an EBITDA standpoint. So I'm not going to give you a specific number. But starting with third quarter, if you take I think the 17.1% we achieved, I mentioned that about $4 million of that was tied to what I'll call COVID-related expenses, which were -- is lower than we historically would have seen due to COVID.

So if you back that out, you're probably close to 16.5%. And I'd say on a go-forward basis, we feel great about the prospects on a go-forward. I think we've already got great evidence of the fact that we can leverage the footprint. And we think there's plenty of room to leverage, as we said many, many times in our history up to 1.5 million starts and beyond. So I think that's in our favor. I think there is always continuous opportunities on the labor and productivity side, and again, we've got pretty good evidence of delivering that from an M&A standpoint, certainly, very accretive margins and we think there's many accretive acquisitions out there for us to continue to play in that way out into the future.

So we're pretty bullish about the prospects. I think next year, we probably have some challenges from a comp standpoint due to the fact that we've had some of this COVID benefit that we'll be comping up against. But beyond that, we've always talked about a 22% to 27% type of pull-through number for the business, and we are still as bullish about that number on a go-forward basis as we have been in the past.

Justin Speer -- Zelman Associates -- Analyst

Excellent, thanks.

John Peterson -- Chief Financial Officer

You're welcome.

Justin Speer -- Zelman Associates -- Analyst

I really appreciate it, guys. And again, Jerry, congratulations.

Jerry Volas -- Chief Executive Officer

Thanks, Justin.

Operator

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

Adam Baumgarten -- Credit Suisse -- Analyst

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

Robert Buck -- President and Chief Operating Officer

Yeah, good morning, Adam. This is Robert. So I'd say, I think there is multiple fronts to that answer. Number one is a very conscious effort by the team and our direction there. If we went back a year or two ago and you talked about some of the conscious decisions we made there relative to stepping away from some volume and stepping away from some customers, we've obviously got the team there focused on the right mix of customers, right mix of products and complemented by great service across the country as well.

So I think that's absolutely driven the share gains that we've seen in the Service Partners business. There were probably, if you look backwards, probably some weaker comps compared to last year, but the team has absolutely done a great job there, really energized in the field and really running great from an operational improvements perspective as well. So just really, really good job there from a Service Partners side. And again, as I mentioned before, I think we're excited about what that business can do in the future as well.

Adam Baumgarten -- Credit Suisse -- Analyst

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

John Peterson -- Chief Financial Officer

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

Adam Baumgarten -- Credit Suisse -- Analyst

Right, thank you.

John Peterson -- Chief Financial Officer

You're welcome. Thank you.

Operator

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

Seldon Clarke -- Deutsche Bank -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah, that's a difficult -- this is John, that's a difficult question to answer only because when we talk about material constraints, we're talking about many different product lines versus installation, one of them, certainly. But across the broad spectrum of all of the materials and parts that go into building a house, I'd say most are challenged right now and in the mode of coming back, and they will. I think the question is how quickly will those individual pieces come into play and how quickly will they ramp to support the growth, it's not only coming, but it's here.

So it's just difficult for us to peg that which is exactly why we didn't give guidance on this call, but we are confident that we're all going to figure it out. We talked about installation specifically on this call, and I think all the other trades and product lines will do the same, but just very difficult to pin a number on that at this point.

Seldon Clarke -- Deutsche Bank -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah, we're not going to give specifics. I think what Robert said is, we saw a nice continuation of growth. So we may call it, average daily sales as an example, was improving throughout October as it had been in the third quarter. And I think that's just a -- an indication to us that -- and by the way we think from a labor constraint or material constraint, TopBuild is in as good a position as anybody in installation and probably anybody in any other product line or trade group at this point in time.

The issue is obviously, there's a lot of pieces are going to build in house that determine how quickly it's built. So I think we're bullish about the fact it's going to come back. I think October, we saw the industry continue to ramp and grow. And as Robert said, I think our expectation is in November-December, we're going to see improved seasonality versus what we typically would and historically would in the fourth quarter timeframe.

Seldon Clarke -- Deutsche Bank -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah, I think as we look forward, we obviously expect volume to continue to grow and improve. But our expectation is that we're going to manage our fixed cost very, very tight. In fact, we're constantly looking for ways to reduce cost and become more efficient, whether that's in the branches, specifically, with their fixed overhead or whether it's here at the branch support center. And again, we've got four and -- four years or five years now a very, very good evidence that we can leverage not only the fixed cost, we have it obviously improve the productivity, reduce cost appropriately, which we did in the second quarter. So I think we expect volume to continue to ramp and grow, but we don't expect there to be a significant amount of pressure on increasing our fixed overhead. And that's just in the way we run the business since day one and that's going to be the way we're going to go into the future, so.

Seldon Clarke -- Deutsche Bank -- Analyst

Okay, I appreciate the questions. Thanks guys.

John Peterson -- Chief Financial Officer

Thank you.

Operator

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

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. The -- just a question on commercial, you've broken that out in the press release. But in general, how much of the commercial business is house and TruTeam versus Service Partners?

John Peterson -- Chief Financial Officer

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

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

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

Robert Buck -- President and Chief Operating Officer

Yeah, I think -- Keith, this is Robert. So I think as we see the starts come out of the ground, I think you may see more portion of ramp on the install side of the business. And I think what we've seen which we're really excited about on the Service Partners side has been that share gain that we've been able to accomplish on that side of business. I think you'll see and in order amount of ramp as starts come out of the ground on the TruTeam side, if you think about it that way.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you.

John Peterson -- Chief Financial Officer

Keith, back to your question real quick on commercial...

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah.

John Peterson -- Chief Financial Officer

...of roughly about $150 million plus, almost $160 million of commercial revenue, roughly two-thirds of that is in TruTeam and about a third in Service Partners.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you.

Operator

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

Ryan Gilbert -- BTIG -- Analyst

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

John Peterson -- Chief Financial Officer

What -- talking specifically in third quarter, we talked about the fact that the material gains were in gutter and spray foam, and those numbers we expect we -- probably the most positive gain we ever coming [Phonetic] in the third quarter from a comp standpoint. Those -- both those commodities are normalizing as we ended the fourth quarter and beyond. In terms of the impact from a fiberglass standpoint, obviously, we don't share specifically what our negotiations are, what our pricing is. So I really can't give you any guidance on that, but again, we're confident we'll be able to manage that as we have in the past.

Ryan Gilbert -- BTIG -- Analyst

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

Robert Buck -- President and Chief Operating Officer

Ryan, this is Robert. So number one, the projects we are already working on, on the job site, those are slower due to some of the social distancing stuff that's on the job site. As far as new projects, we've seen very few projects canceled, some have been slower to get started, so maybe in a delay in some start up some projects, but very few have been canceled. But we're seeing new projects start-up on a weekly basis, but some of them are slower to start than if you ask eighth months ago as an example.

Ryan Gilbert -- BTIG -- Analyst

Okay, great. Thanks very much.

Operator

[Operator Instructions] Our next question is with Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

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

John Peterson -- Chief Financial Officer

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

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

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

John Peterson -- Chief Financial Officer

Yeah, I mean, I think we're seeing that improved by the way is obviously, we walked through the third quarter and into the fourth quarter through October, I mean, third quarter is a good example, where I think lag starts were down 14% and yet, our volume was up proportionately on a positive mode. So it's a very, very strange relationship now between lag starts and when we get on the job. And as you know, orders turn into permits, permits turn into starts, starts turn into work for us over time, it's just that the traditional lag is off, but it's improving.

We're seeing it improve across all of our locations. If it historically maybe was two months to three months, historically, on average, it might be, I'd say two and a half months to three and a half months or something like that, if may be a month extension right now, but that's starting to compress over time here and only depends on the location you're talking about between the labor and material constraints. But we expect that obviously to continue to play catch-up, but I think it's in the mode of doing that right now, so.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

All right. So the time delay, the second derivative is improving, the worst is past us in terms of that is what I heard you say?

John Peterson -- Chief Financial Officer

Yeah, yeah, I think we're pretty confident that in both labor and material across all construction trades in the industries, we're going to continue to see that improve.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

Right. And now here the other thing about the margin leverage and I apologize about, let's say, just kind of surprised and how I think the tone has been on this conversation. In 2018, there was rather robust price increases due to Louisville plants being shut down, allocation that's kind of followed. So while you talked about, let's say, 8% increase from Owens Corning, traditionally, as I look at 2018 for example, you guys were able to get price and margin expansion.

Did -- you've always talked about industry dynamics and pricing. Are you calling out the inflation because you think there is a different relationship than you saw in 2018 in terms of price and your ability to recover it or within the context of gutter and some of these other input costs that deflated, do you think that's going to be an unrecoverable headwind because it seems people are questioning your ability to reprice your input costs like you did in 2018 when they were much higher. It's just -- can you expand on that to clarify what people seem to be hearing in the conference call? Thank you.

John Peterson -- Chief Financial Officer

Sure, Ken, this is John. So yeah, we certainly didn't mean to send any message like that at all. We remain as confident today as we did back in 2018 in our ability to obviously negotiate and manage our material input cost and then appropriately price it. And again, we've got a good five-year history of doing that. And so we don't see any change on a go-forward basis. I think the only difference between '18 and now, '18 certainly was a surprise, with that came upon the industry and TopBuild as a major surprise overnight.

So there as you recall, we took a little while. We took about a quarter and a half to get, get our pricing and material in balance, but we did and certainly, the back half of '18, we had great evidence of that. I think we feel great about the ability to manage what we see right now, which is we have advanced notice obviously of the January increase. We'll be talking to all four suppliers and we're in the process of doing that right now. We appropriately expect to be able to manage that into our bids prior to that first quarter timeframe. So we feel great about the ability to continue to manage both labor and material input cost in our selling prices and continuing to drive margin expansion as we have in the past.

Robert Buck -- President and Chief Operating Officer

Yeah, Ken, this is Robert. So just to add on to that if you think about '18 right, 20% of the capacity went out the industry overnight from one issue in a manufacturing plant. So there wasn't really any planning, there wasn't really any looking forward type of thing, that was 20% capacity in one night. Here, one, housing starts are ramping up. Number two, labors even at a more of a premium today.

Number three as you see these announcements are coming out in advance, so it's not an overnight type of phenomena and it's building materials across the industry, it's labor across the industry. So I'd say it's very different than '18, and I'd say we're even more confident given this is really a demand driver, really a positive thing going on in the industry and going on with housing.

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

Thank you.

John Peterson -- Chief Financial Officer

Thank you.

Operator

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

Jerry Volas -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Tabitha Zane -- Vice President, Investor Relations

Jerry Volas -- Chief Executive Officer

Robert Buck -- President and Chief Operating Officer

John Peterson -- Chief Financial Officer

Stephen Kim -- Evercore ISI -- Analyst

Kenneth Zener -- KeyBanc Capital Markets -- Analyst

Philip Ng -- Jefferies LLC -- Analyst

Justin Speer -- Zelman Associates -- Analyst

Adam Baumgarten -- Credit Suisse -- Analyst

Seldon Clarke -- Deutsche Bank -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Ryan Gilbert -- BTIG -- Analyst

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