TopBuild Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the TopBuild Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Operator

Tabitha Zane, Vice President, Investor Relations. Thank you, Ms. Zane. You may begin. Thank you

Speaker 1

and good morning. On the call today are Robert Buck, President and Chief Executive Officer and Rob Coons, Chief Financial Officer. We have posted senior management's formal remarks and a PowerPoint presentation that summarizes our comments on our website at topbuild.com. Many of our remarks will include forward looking statements, which are subject to known and unknown risks and uncertainties, 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 Please note that some of the financial measures to be discussed on this call will be on a non GAAP basis.

Speaker 1

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 our Q2 presentation, which can also be found on our website. I will now turn the call

Speaker 2

over to Robert Buck. Good morning and thank you for joining us today. 2023 is shaping up to be a solid year for TopBuild. We continue to operate in a favorable environment and remain focused on driving Profitable growth, a cornerstone of our operating model. The volume growth and strong margin expansion we've achieved not only this year, But also over the past 8 years since becoming a publicly traded company is a testament to our entire TopBuild team And our continuing emphasis on operational excellence and driving improvements throughout all areas of our business.

Speaker 2

Also in display is the strength of our diversified model, which affords us multiple avenues for growth and gives us the ability to outperform in any environment. Total sales for the 1st 6 months are up almost 6%. Our gross margin expanded 140 basis points to 30.7 percent and our adjusted EBITDA margin grew 170 basis points to 19.9%. We are increasingly optimistic about how the rest of the year will unfold based in part on recent positive commentary from our builder customers, Single family starts data over the past 2 months and our continued strong commercial performance. This improved outlook is reflected in our full year for 2023, which Rob will discuss in further detail.

Speaker 2

Reviewing our 2nd quarter results, A positive mix of installation business kept our branches busy. While we did see some slowdown in single family work, We definitely outperformed the single family market. We also demonstrated the strength of our operating model with outstanding multifamily and commercial execution. Our new lead app continues to identify commercial opportunities and our installation branch managers are aggressively pursuing these projects. Their focus resulted in a 22.6% increase in commercial revenue this quarter.

Speaker 2

On the heavy commercial front, we continue to drive improvements throughout this business, which has enhanced our win rate for many projects across the country. Our installation crews are working on a wide range of projects, including the Nashville International Airport, the UCI Medical Center in Irvine, California, And the revitalization of 2 Penn Plaza in New York. We are agnostic as to the types of projects on which we work and are not over indexed to Altus or any other type of heavy commercial work. Looking ahead, our commercial backlog remains robust And we're bidding jobs into late 2024 and early 2025. Turning to our Specialty Distribution business, Overall sales in the 2nd quarter declined 2.3%, primarily as a result of our smaller contractor customers continue to reduce inventory And as more construction activity has shifted to multifamily, we did see a 2.1% increase in sales from our commercial and industrial channels.

Speaker 2

Coming out of allocation as residential distribution volumes continue to normalize, our teams are doing a nice job of identifying and building attractive new areas of growth as our overall results clearly demonstrate. Our special distribution teams Are supporting a number of major industrial manufacturing projects, including 2 large chemical plants for Chevron. We're also seeing quite a few major projects being planned across several diverse industries, fueling the demand for mechanical insulation. Maintenance and repair work on many commercial industrial sites is also being scheduled and this recurring revenue stream should serve As a continued stabilizing revenue driver for our specialty distribution business, we remain very optimistic about the opportunities for growth in both the commercial and Industrial end markets in the U. S.

Speaker 2

And Canada. To touch briefly on labor materials, labor remains tight. While fiberglass is no longer in allocation, some supply is still constrained and no new capacity is expected until Q2 of next year. Our M and A team has also been busy this year. To date, we've closed 3 residential insulation Acquisitions, which combined are expected to contribute approximately $170,000,000 of annual revenue.

Speaker 2

These are SRI Holdings, which enhances our presence in Georgia, Michigan, Ohio, Florida, Alabama and South Carolina Best Insulation, which serves high growth regions in the Southeast and Southwest, including Florida, Texas, and Arizona, And Rocky Mountain Spray Foam operating in Colorado. We were also excited to announce our planned acquisition of SPI last week. This highly strategic core transaction will bring together 2 specialty distributors of mechanical insulation, reinforce our position as A leading specialty distributor in the highly fragmented $17,500,000,000 insulation industry further differentiate our unique operating model and Reduce the cyclicality of our business by increasing the percentage of recurring revenue driven by maintenance and repair work. As a reminder, this is an all cast transaction valued at $960,000,000 and we expect to achieve between $35,000,000 $40,000,000 of run rate cost synergies By the end of year 2, post close. Looking ahead, acquisitions will continue to be our number one Capital allocation priority and a key component of our growth strategy, and our pipeline is filled with outstanding potential partners.

Speaker 2

In summary, we had a great Q2. And as you can see from our revised guidance, we're on track to have another strong year. Our team continues to execute well and our diversified model positions TopBuild to outperform in any environment.

Speaker 3

Rob? Thanks, Robert, and good morning, everyone. We had a great second quarter on both the top and bottom line reflecting the strength of our unique model. Our teams continue to execute well with a relentless focus on driving operational improvements every day. This passion for constant improvement is core to our strategy and has been a key driver behind our continued success.

Speaker 3

Moving to the financials, I'll start with an overview of our Q2 results, update you on our balance sheet and provide the latest on our full year guidance. 2nd quarter net sales increased 3.4 percent to $1,300,000,000 reflecting the success of our teams leveraging our multiple avenues for growth. Gross margin improved 190 basis points to 32%, the highest in the company's 8 year history as a public company. This margin expansion reflects, in large part, our success in managing labor and material costs in this favorable operating environment And our continued focus on driving operational efficiencies and acquisition related synergies. 2nd quarter adjusted EBITDA increased 13.7 percent to $275,500,000 and our adjusted EBITDA margin was 20.9%, A 190 basis point improvement compared to last year, driven by the gross margin expansion described earlier.

Speaker 3

Our Installation segment's 2nd quarter net sales were $809,100,000 an increase of 8%. Our installation teams did a great job pivoting the multifamily and commercial work, the latter of which increased by 22.6% as Single family construction slowed slightly. 2nd quarter adjusted EBITDA margin for our Installation segment was percent to $574,500,000 This was driven by the residential shift from single family to multifamily, Our contractor customers continuing to right size their inventories and distribution volumes normalizing post allocation. Adjusted EBITDA for our Specialty Distribution segment was 17.6%, a 40 basis point improvement. Overall, solid results for this segment in the current environment.

Speaker 3

Interest expense in the 2nd quarter increased from 13 point $1,000,000 to $18,600,000 primarily as a result of higher interest costs on our variable rate term loan. 2nd quarter adjustments to net income were $2,100,000 driven by acquisition related costs. 2nd quarter adjusted net earnings Moving to our balance sheet and cash flows. Our June 30 year to date operating cash flow was $385,800,000 Compared to $217,700,000 last year, a 77% increase driven by increased earnings and improvement in our working capital management. Working capital at the end of June improved to 14.9%.

Speaker 3

Our long term working capital target remained at 12% to 14% And slightly below our long term guidance. Through the end of the second quarter, we have allocated $46,000,000 to M and A. M and A remains our number one capital allocation priority as evidenced by our recent announcements for BEST Insulation and SPI. There were no significant changes to our debt structure as our outstanding short term and long term debt balances remain just under $1,500,000,000 With our average cost of debt at 4.77 percent. We ended the 2nd quarter with net debt leverage of 0.92 times Trailing 12 months adjusted EBITDA.

Speaker 3

This is down from 1.31 times at the end of 2022. Total liquidity at June 30, 2023 was $958,800,000 including cash of $526,300,000 I want to again express our enthusiasm for the acquisition of SPI. We are confident this transaction is a great use of capital and will create significant shareholder value. As a reminder, we plan to fund this $960,000,000 deal with cash on hand and a $550,000,000 delayed draw term loan. Following the close of this transaction and inclusive of BEST Insulation, our pro form a net debt leverage would be 1.8 times as of June 30, 2023.

Speaker 3

This is well within our targeted leverage range between 1 and 2 times trailing 12 months adjusted EBITDA. Moving to our annual guidance. Based on our first half performance and our outlook for the remainder of the year, we expect 2023 to be another great year for TopBuild. Despite the slowdown in single family starts in the first half of the year, we are more optimistic for residential today given the recent improvement in starts And the continuing strength of multifamily. As a result, we are raising our outlook and now expect residential revenue to be down only single digits Only low single digits.

Speaker 3

Turning to our Commercial and Industrial business. Given our strong results, We're also more optimistic now and expect revenue to be up mid single digits. This will put our full year sales in the range of 5 $25,000,000,000 to $5,175,000,000 a $325,000,000 increase on the low end of the range and a 2 $75,000,000 increase on the high end. We also raised our guidance for adjusted EBITDA to be between $950,000,000 $1,000,000,000 A $130,000,000 increase on the low end of the range and a $90,000,000 increase on the high end. Our long range modeling targets are unchanged from those published on May 4.

Speaker 3

As a reminder, we do not include the impact of any planned acquisitions in our outlook. I will now turn

Speaker 2

the call back to Robert for closing remarks. Thanks, Rob. To conclude, our team manages the business with a constant mindset of driving improvements and achieving operational excellence. We're proud of our track record of consistently producing strong financial results and we recognize our success as a result of having the best and most talented operators in the field And a dedicated and experienced group at our branch support center in Daytona Beach. Our goal is to create sustainable shareholder value in every operating environment.

Speaker 2

We're also very excited about the planned growth of our Specialty Distribution business through the acquisition of SPI. This is another transformative acquisition for our company and one that will create long term value for our shareholders. As always, I thank the entire TopBuild team for their focus on working safely to deliver value, quality and service to our customers. Our highly engaged team is the reason TopBuild has been chosen a Best Places to Work company. Operator, we are now ready for

Operator

questions. Thank you. We will now be conducting a question and answer And our first question comes from the line of Mr. Ken Zener with Seaport Research Partners. Please proceed with your question.

Speaker 4

Good morning, everybody.

Speaker 3

Good morning, Ken.

Speaker 5

Two questions. 1, I just kind of want to obviously, the quarter was good in terms of the installation units being positive. Could you comment perhaps on the single family and multifamily and the commercial mix? And the reason I ask is I'm trying to understand obviously the

Speaker 2

Starts,

Speaker 5

that's the first question.

Speaker 3

Okay, Ken. This is Rob. So breaking that down a little bit for We don't break out single family versus multifamily. But what I can tell you on the install side is our residential sales were up about 3% In the quarter, single family was down slightly as we've seen the impact of the slowdown in starts that we saw The back half of last year going into the start of this year. But as we've been telling folks, our teams have been out ahead of that Bidding multifamily, bidding like commercial work and we had a great quarter with that, right.

Speaker 3

So evidence of our Multiple avenues for growth there and that we were able to grow residential even with single family down. And then on the commercial Side of things for install, we were up around 23% for the quarter. So, great growth story there.

Speaker 5

Does that mean if you didn't contract as much as single family, does that mean the recovery won't be as Strong, when one thinks about the percentage basis declines in the residential going down, say 'twenty and then popping up, does that mean your growth would also be more moderate For context, just to tie that question off.

Speaker 2

Hey, Ken, this is Robert. So we would say if you look at what happened in residential second quarter, there's combined and as we look at it individually, we'd say nice share gain by our teams in the field On residential, you got to look at that commercial growth. It's pretty phenomenal. It's what the team delivered there as well. So I don't think that I don't think it mutes anything To the back half of what's coming from a top node perspective.

Speaker 5

Excellent. And now related to the STI deal, Which was pretty amazing, and I don't think these questions were asked necessarily on the call last week. But obviously, this Expression of your unique vision that just keeps unfolding. So when I was walking And you guys hosted Distribution International, the warehouse. A lot of that Looks similar to what would go into residential, which ties into purchasing power.

Speaker 5

Is that this cost synergies at $35,000,000 to $40,000,000 I assume that would unfold similar to DI in terms of, let's say, 40% If that was my recollection is correct. And if so, how important is Buying more and more from the same manufacturers playing into your thinking about How that might be affecting your returns and the ability to increase share even more?

Speaker 3

Yes, Ken. This is Rob. I'll start off and I'm sure Robert will add to it. But when we bought DI, if you remember, we talked about one of the things we loved about Getting into that space was the opportunities for growth and the M and A opportunities that would be out there. And at the top of our list, as we looked at that was SPI, right?

Speaker 3

So the fact that It won't be too dramatically different. I mean, it's going to be roughly 50% supply chain, roughly 50% operational improvements. But as we as you've seen, we've exceeded the high end of that range on the DI transaction. That was part of our strong margin expansion we saw on specialty distribution here in the quarter was the continuing achievement of those synergies. And that's why we're so excited about this SPI transaction.

Speaker 2

Yes. And I think I'll add on to that, Ken. I think as we think about acquisitions and our track record there, Obviously, we've always talked about synergies and we talked about supply chain synergies. But one thing, but having a dedicated integration team, how we bring that together And that consistent track record of delivering and exceeding the synergies, I think that's built upon a few things in the model. One that I point to is just constantly Driving operational improvements, including the acquisitions.

Speaker 2

These are great brand companies. And so we're able to take those ideas. We're able to get those back into our total top business and we're able to drive improvements in their business as well, and that's really helped us exceed the synergy. So that's one thing we don't talk about sometimes, But it's really helped us over deliver on acquisitions and the synergies in the past. That's something I'd really point to here as well.

Speaker 5

And I assume it changes your dialogue with on the commercial side having so many distribution and Craig Rhee at your Investor Day talked about you being able to port labor on that specialty side. Have you hit that maximum or that threshold where you're really able to be a unique Servicer to commercial customers?

Speaker 2

Yes, we absolutely think so. I think it plays into I think I put it in the prepared remarks, Just the work that the team is doing in the field relative to driving improvements in that business, we think it's helping the win rate, we think it's helping drive performance in that business, Really great from a service perspective, both installation, if you think about the envelope side of it and then service partners Relative to distribution side and then now you got the whole model of SPIDI together, which is that commercial industrial distribution. And by the way, those businesses are

Speaker 5

Thank you very much.

Speaker 6

Thank you.

Operator

Thank you. And our next question comes from the line of Mr. Stephen Kim with Evercore. Please proceed with your question.

Speaker 4

Yes. Thanks very much, guys. Great quarter. And I guess my first question relates kind of on more on the industry macro side. Can you give us an idea of what you're expecting in terms of housing starts, the trajectory, both single fam and multi?

Speaker 4

And then also in terms of the outlook for fiberglass Price increase, our sense has been that enthusiasm has been building as single family has rebounded for another industry price increase on the fiberglass I was wondering if you shared that view that from what you can see if the support is there for an increase Here as we head into the fall, or whether you think that either the decline in multifamily activity that we might Or the rate spike we just incurred here, whether those are significant enough to maybe Impede a price increase announcement. Thanks.

Speaker 3

Yes, Steven, this is Rob. I'll start off on the single family, multifamily assumptions, And then Robert will add in on the supplier side of things. But from a guidance perspective, kind of the way we're seeing The rest of the year play out. We expect the strength we've recently seen on single family to continue. And so that's what we've got baked into our guidance.

Speaker 3

So a starts number for the full year somewhere between $1,401,500,000 Probably towards the upper end of that is probably what we're expecting to see there. Obviously, the next few months will be key in terms of start, In terms of what drives our 4th quarter results. And then multifamily, like we've been saying, the backlog remains really strong there. We're still seeing Good bidding activity there as well. So we feel really good about multifamily heading through the rest of the year as well.

Speaker 2

Yes. And Stephen, this is Robert on the fiberglass side. Adding on one to Rob's about single family, which I think feeds in this question. I think as single family continues, that's one thing I like about, We've done a great job of updating our guidance and looking at the future. We'd say single family starts continue to attract.

Speaker 2

We'd see upside on some guidance as well, which we think is very positive story. And then fiberglass, I think it does depend on those single family starts next couple of months. I think that trajectory It continues. There will definitely be a possible increase that would come here in the fall. So I think we have to see what the next couple of months unfold here.

Speaker 2

I think You probably know there's really no increased capacity coming on until Q2 of next year. So let's see what happens with those starts and I think that That could drive the decision by the manufacturers.

Speaker 4

Okay, got you. That's helpful. And then If we could shift a little bit to the commercial industrial. Within your specialty distribution Sales, can you give us a sense for how resi did versus commercial industrial? And then can you also touch on what Pricing the pricing environment looks like on the C and I side, but like foam and glass sorry, foam glass and like calcium, silicon and stuff.

Speaker 4

Just Give us a sense for how that looks because we tend to focus a lot on fiberglass.

Speaker 3

Yes. I'll start off with the resi C and I split Robert will add On the price side, from a specialty distribution side of things, we did see On the service partner side, they're serving a lot of the smaller contractors that have been impacted by the slowdown on the single family side of So our residential sales were down around 8% in the quarter for Specialty Distribution, but we did see a nice second quarter in a row growth On the commercial industrial side, sales up 2% on that side and up 5% year to date.

Speaker 2

And I think building on that, Stephen, so I think whenever we look at those specialty distribution volumes on the residential side, We're pretty I think the team is doing a nice job. If you look at that compared to other industry data points out there, you can see, how the specialty distribution team really there Has been performing well. I think relative to your pricing question on C and I, I'd say definitely stability there. If you remember, there wasn't as much inflation coming in there. We keep talking about big projects coming on, whether it be MRO projects and some other larger projects coming.

Speaker 2

So if we think about the C and I side, definitely more sustainable Nice job at sustainable price relative to the C and I piece of the business.

Speaker 4

Okay, great. That's very helpful. Thanks, guys.

Speaker 6

Thank you. Thanks, Steven.

Operator

Thank you. And our next question comes from the line of Mr. Joe Allersmeyer with Deutsche Bank. Please proceed with your question.

Speaker 7

Hey, good morning, everybody, and congrats on the results and updated guidance.

Speaker 3

Thanks, Joe.

Speaker 7

Just thinking about what seems to be some growing visibility certainly into the back half, but even into next year, good leading indicators on commercial, long multi Family backlogs and sort of calling a bottom here, it sounds like on single family in the second quarter. Maybe just at this point, Assuming things don't unexpectedly get significantly worse, are you sort of willing to target Organic EBITDA growth in the next year, I know that you've got the deal coming through, which will help. But organically, should we expect EBITDA growth in 2024 at this point?

Speaker 3

Yes, Joe. As you know, we haven't given any guidance into 2024, but certainly what we're seeing with Leading indicators like you talked about, we're certainly optimistic for 2024 and what we're seeing and we look to continue The trend we've had, if you look at the midpoint of our guidance, we just put out this will now be our 8th straight year of revenue growth and EBITDA expansion, And we'll be looking to do that into 2024 as well.

Speaker 7

Appreciate that. And Maybe are there any call outs because the top line certainly seems to be the more constructive part of that conversation, but your gross margins are up, call it, 400 basis points run rate versus pre pandemic. Is there any sort of watch out there on that line item? Maybe we're if If we've got 100 basis points or 200 basis points or something that needs to roll out or would you say that's not the case?

Speaker 3

Yes, I think certainly in the second quarter, right, there's A lot of variables that go into our gross margin, right? If you think about it, you got the mix of the segments, which obviously as That helps out there. You got all the variables that go into these large projects on the commercial side, both on distribution and residential. You got bidding, you got how available material is, you got labor availability, labor efficiency on the install side. Yes, we do a great job of managing that.

Speaker 3

Our ERP certainly gives us an advantage in managing that.

Speaker 2

And I know that, whenever we talk with you 1 on 1, just the constant focus on operational improvements in the business, It's definitely a favorable environment, but the team continues to work. Ideas, improvements, Bottom quartile, that type of thing. So if you talk about what's happened over the past few years, we definitely don't want to downplay all the operational improvements that have gone into the business Well, on top of the good points Rob made.

Speaker 7

Of course. Yes, congrats on the first half and good luck in the second.

Speaker 6

Thanks, Joe.

Operator

Thank you. And our next question comes from the line of Mr. Jeffrey Stevenson with Loop Capital Markets. Please proceed with your question.

Speaker 8

Hey, thanks for taking my questions and congrats on a strong quarter. So you reported a record quarter of gross margin, which was great to see. But moving forward, I was hoping you could provide a little more color of how you're thinking about the cadence of gross margin given an expected moderating year over year inflation?

Speaker 3

Yes, Jeff, this is Rob. So as you know, we don't guide on that level. But like I was saying on the previous answer, there were certainly Some benefits in Q2 that we're going to do everything in our power to continue to do into Q3, Q4. But could there is there $10,000,000 or 80 bps of benefit there that I wouldn't that we haven't baked into our back half guide? There definitely So that's how I think about that moving forward.

Speaker 8

Okay, understood. And you cited kind of continued destocking at the smaller contractor level and specialty distribution. And is that largely complete or do you think any of that will spill over into the Q3? And also your inventories move lower And just wondering if you've made any adjustments on the installation side as well as we're kind of moving into a period of slowing single family residential demand?

Speaker 2

Hi, Jeff. This is Robert. So, yes, on the specialty distribution side, you're seeing some normalizing of distribution volumes coming out of allocation. Obviously, during allocation, Lot of folks come to distribution. So you've seen that normalizing piece of it.

Speaker 2

And then obviously folks are continuing to work on inventories A lot of people, including ourselves, you saw it in our results. To your point, we worked on our inventories as well. I think again, looking at

Speaker 3

the data multiple data points in

Speaker 2

the industry, The Specialty Distribution team did a nice job of offsetting some of that with some of the other growth areas. That's one thing I'd say on Specialty Distribution. The teams continue to do a nice job of working inventory levels as material has come off allocation. We continue to work that and the teams are focused on that at the local level on our install side of the business also.

Speaker 8

Okay, great. Thank you.

Operator

Thank you. And our next question comes from the line of Mr. Adam Baumgarten with Zelman and Associates. Please proceed with your question.

Speaker 9

Hey, good morning, everyone. Just looking at the updated revenue guidance, I believe it implies some modest revenue declines in the back half. I'm just curious why that would be the case given

Operator

Thank you for standing by. Adam, please proceed with your question.

Speaker 9

Okay, thanks. Yes, good morning. Just looking at the updated revenue guidance, it implies at the midpoint at least a modest revenue decline in the second half 23 year over year. I'm just curious why that would be the case given improving single family trends, easier comps. It sounds like the backlogs in multifamily are still pretty strong.

Speaker 9

Just if you could walk Yes.

Speaker 3

Adam, this is Rob. So at the midpoint, you're correct. We've got a slight decline. There is one less Day to prior year and actually versus first half, you get 3 less business days. So that's a big part of the change.

Speaker 3

And then towards the high end of our guidance, we do show growth for the second half of the year on an average daily sales basis. Like Robert If we have reached the trough, we should see that slower growth. But typically the back half of the year, we You see a seasonal uptick of 5% or so year over year and that's not baked in Right now, given the slowdown we saw on the single family side to start the year, and so that's the impact you're going to see in the year over year as well. Obviously, if starts continue to accelerate from where we are today, that'll be upside to the guidance we've got out there.

Speaker 9

Okay, got it. And then if you threw out that 80 basis points benefit to gross margin, can you walk through exactly what drove that and why it may not continue?

Speaker 3

Yes. Like I said, I mean, there's a lot of variables that go in into our margins every quarter, right? It can be segment mix, it can be Bidding, it can be how available material is to us, labor efficiency. And we do a job of forecasting that. But like I said, this quarter, we even exceeded our expectations around that, and we're going to continue to do everything we can To maintain that and to expand on that, but in our guidance, we have not baked in

Speaker 4

that level.

Speaker 9

Okay. So it wasn't necessarily one specific item, it was just a kind of confluence of factors?

Speaker 3

Correct. It was I mean, it's certainly business performance, It wasn't like a one time accounting good guy or something like that. It was performance of the business.

Speaker 9

Okay, got it. Thanks. Best of luck.

Speaker 6

Thank you. Thanks.

Operator

Thank you. And our next question comes from the line of Mr. Phil Ng with Jefferies. Please proceed with your question.

Speaker 10

Hey, guys. Congrats on another strong quarter. So Robert, if I heard you correctly, you're Currently anticipating maybe single family volumes may have troughed in 2Q for your insulation business. And appreciating your report volume mix together and your volumes were actually up year over year in the first half. So should we expect it to be positive in the back half as well?

Speaker 10

I appreciate you got a little tougher comps there. And then similarly, how should we think about the shape of the year in your distribution business? Is 2Q a trough from

Speaker 9

a volume standpoint as well?

Speaker 3

Yes. Good morning, Phil.

Speaker 2

So I think as we think about that, Rob hit it pretty well. If we continue to see those positive trends on single family, We'd expect that definitely to be positive in the back half. And I would tell you based on conversations with builders, obviously at our local levels with our Operations teams who are very engaged as well as specs we see coming out of the ground. We'd say that's a good possibility If we hit that trough here in Q2, I think on the distribution side, yes, we would expect upside there again. I think

Speaker 3

a really important point here. Look at the data points in

Speaker 2

the industry, Our specialty distribution did a really nice job in Q2, so we would expect that execution to continue here On the back half of the year, even better than the back half of the year. So we're pretty positive of the thing our field teams have been working And the execution that they're delivering at a local level.

Speaker 1

Okay. And from a completion cycle standpoint,

Speaker 10

Have you seen things normalize and should we just take starts and lag it, call it, 3 to 4 months at this point?

Speaker 1

It's

Speaker 2

That lag has definitely gotten back to more

Speaker 3

of a normal levels at

Speaker 2

100% back where it was pre COVID. I wouldn't say Back to that level, but it's not months anymore. It's down to probably weeks getting back to that normal level. So it's pretty close still to your question. Okay, super.

Speaker 10

And then on the commercial industrial side, Robert, really strong results. You raised your guidance there. Where are you seeing that pickup in activity for this year? And from a bidding activity, any pockets within that commercial, industrial that's a little stronger? Is it LNG?

Speaker 10

Is it manufacturing? Any color there? And when we look out to 2024, Factoring. Any color there? And when we look out to 2024, do you think you could sustain that mid single digit growth range in that C and I segment or maybe even accelerate a little

Speaker 2

Yes. So let me hit 2 parts of it. Let me hit the install side of business, which again is more on the light commercial heavy and that envelope piece of it, right? Yes. I mean, the team is doing an excellent job there.

Speaker 2

We got some just our leadership there is very energized. They're doing a nice job of using our tools like our LEAD app and just continue to drive improvements in that business in different parts of the country. As you know, we're close to the major metros Relative to that business, and so they're servicing those markets as well as branching out from some of those as well in the heavy commercial side. If I go to distribution, I think Rob hit on some nice growth rates there. And then you asked about specific areas.

Speaker 2

I mean, a few I would point out is on the commercial side, Data centers, we continue to see a lot of work in higher education and medical. And then on the mechanical industrial side, Definitely liquid natural gas and I would point to that by the way U. S. And Canada, we're seeing some nice projects coming up in Canada, Both MRO and new builds and definitely in that liquid natural gas area, some nice government work that's going on In Canada as well and then between both food and beverage as well as some of the mega projects, EV plants, that type of thing that's driving some of the Demand in some of the bigger projects we see coming down the pipe both in execution and bidding.

Speaker 10

And then with that Outlook on your distribution side, should we expect the growth rate you're seeing this year accelerate in 2024 or pretty steady?

Speaker 2

Yes. I think as we get back to my comment to that would be Rob may want to add something, but I think as we're getting back to normalizing distribution volumes,

Speaker 1

I mean, I think we would expect to

Speaker 2

see that business continue to grow and outperform, which again, I think they've done the first half here. We'd look to see momentum in the distribution space for sure.

Speaker 3

Yes. And I'd just point out in the second The comps on commercial and industrial are a little tougher than the first half. So while we do expect growth, the year over year numbers won't be as strong as we saw The first half of the year.

Speaker 9

Okay. Great color, guys. Appreciate it.

Operator

And our next question comes from the line of Mr. Keith Hughes with Truist Securities. Please proceed with your question.

Speaker 11

Thank you. We talked a lot about turn and volume and insulation. I just want to switch to distribution. You gave us the breakout In the quarter between industrial, commercial and residential, do you think that kind of numbers are going to hold for the back half of the year? Would you expect either one to accelerate or decelerate?

Speaker 3

Yes, I think on the residential side, we're expecting to see some improvement given what we've seen from Commercial Industrial side, a lot of good projects and activity going on there. So we're expecting to continue kind of that mid single digit steady growth The back half of the year?

Speaker 11

And is that growth is that all volume? Or is there some price in that mid single digit number as well?

Speaker 3

Yes. There's a small piece of price, but there hasn't been nearly as much inflation on that side of things as we had on And even on the resi side, as you can see in our results, the price number is coming down.

Speaker 11

Okay. All right. Thank you.

Operator

Thank you. And our next question comes from the line of Mr. Noah Marcuzko with Stephens. Please proceed with your question.

Speaker 12

Good morning and thanks for taking my question.

Speaker 8

On the install

Speaker 12

side, very good volume growth there in the quarter. You called out shifting your Focus to more light and heavy commercial projects. I was wondering if you could help us understand, is it fairly easy to shift that labor and assets Between end markets and presumably the slowdown in single family was I think quite anticipated by a lot of people for some time now. And I imagine other installers would look to shift that work as well. So I guess, Do you think you're taking market share in those end markets?

Speaker 2

Yes. Good morning, Noah. It's Robert. So first part of that question is, So all of our residential branches could basically do the light commercial work. It's very similar products, very similar applications.

Speaker 2

So that labor will transfer and transfer Easily between jobs and between geographies. On the heavy commercial, which as Rob pointed to some impressive numbers there, You don't transfer kind of the residential light commercial labor over to the heavy commercial. That's really dedicated to that business because It's higher technical and different applications. Now, those crews can travel. Those crews do travel Among Citi, so definitely transferrable within light commercial, definitely transferrable within heavy commercial.

Speaker 2

And then as we think about you're talking about the I think question somewhat around the mix there in the future. I mean, I think as we look at you're right around the single family side, but if you look at our numbers

Speaker 3

and look

Speaker 2

at the starts, we would definitely outperform In the single family side of the business, and then as we've said, I think looking at our overall performance definitely picked up share on the multifamily side of the business as well. So This whole element that we've been talking about, diversified model, multiple avenues for growth, single, multi, commercial, Industrial, you see it paying off here in the results and how the business has outperformed.

Speaker 12

Got it. That's helpful. And then for my follow-up, when you acquired Distribution International, you highlighted A pretty strong pipeline of M and A opportunities there. And clearly, you're executing on that with SPI. So just wanted to get an update there.

Speaker 12

Mean, I know you noted in your prepared remarks, it's still a very fragmented market. But can you kind of help frame up the opportunity of Sizable acquisitions that's in that space?

Speaker 2

Yes. So if you think about that mechanical insulation space and As we think about it, there's SPI is a good example. You've got mechanical insulation. You've also got commercial type of insulation with metal building which we talked about extremely fragmented. And you got smaller players, you got larger players, you got players of all different sizes In that space and both of them are highly fragmented.

Speaker 2

So that's I think Rob or I, one in our prepared remarks, talked about a very active pipeline Relative to deals out there, obviously, SPI is a great company, so we moved forward with that one. But they've I think we said In our announcement last week, they've really got an M and A capability as well. So that's only going to add on top of a great competency that TopBuild has from an M and A perspective. Again, across all three, residential, commercial and this commercial industrial space as well.

Speaker 12

Great. I appreciate all the color and I'll leave it there.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from the line of Mr. Mike Rehaut with JPMorgan. Please proceed with your question.

Speaker 6

Thanks. Good morning, everyone. Thanks for taking my questions.

Speaker 4

Good morning.

Speaker 6

First, I just wanted to Kind of circle back to the M and A question just asked. Obviously, with SPI, There's still a tremendous amount of opportunity in the mechanical and industrial side, and that's been A big part of your focus and thesis and it looks like there's a lot more to come over the next 2 or 3 years. How should we think about the residential Obviously, you continue to do various acquisitions there as well. But from a revenue standpoint, they appear

Speaker 9

a little

Speaker 6

smaller. Should we expect that kind of trend to continue where perhaps from a revenue standpoint, The bulk of the opportunity is more on the commercial, industrial, mechanical and still some opportunity on the resi side, but more Singles versus doubles and home runs on the other parts of the business?

Speaker 2

Yes, Mike, this is Robert. I'll start off. So look, let's start Mechanical side of it, definitely plenty of opportunities there as we talk about the fragmentation there in that space And big players, small players, mechanical, metal buildings are really across that space. But we see The same on residential, and I just want to point to our performance here. I mean, so this year, 2 sizable acquisitions, much larger than the average In the space with SRI that we acquired in our Q1, so about a $62,000,000 Residential installer there in multiple locations.

Speaker 2

And then we're really excited about BEST Insulation, which we announced in July, a $100,000,000 Company as well. So we like the small ones. We like the medium and the big ones, and you see us delivering at all levels there. So I think on the residential side, you should think about continued opportunity. It is fragmented as well.

Speaker 2

And just Returns that happen with those acquisitions of all sizes and the execution is excellent for our shareholders. So you're going to see it's active across all of them.

Speaker 3

So just before I hit

Speaker 6

on the second one then, you're saying that companies like SRI and BEST, There's still a bunch of those types of companies out there and available?

Speaker 2

We still see some sizable companies in the I will call, where I say, size will higher than the averages, if you will, some of the smaller ones, or particularly average of the ones Done across the industry. So there's still some nice sized targets out there.

Speaker 6

Okay, great. Just secondly, The EBIT margin for TruTeam, I mean, continues to come in above expectations, I think above your expectations Well, even if you assume that 80 bps of gross margin, I guess, one time is More concentrated in TruTeam, which I would take a guess and say perhaps it is. You're still looking at a 20% plus Margin there. So just trying to get a sense over the next year or 2, I mean, what's as we try and think about The level of sustainability, in the margins that you're seeing in the first half of twenty twenty three, What's kind of pushed that to the next level, so to speak? You highlight productivity.

Speaker 6

I'm just trying to get a sense if There's been a structural change in the profitability of the segment itself, perhaps related to Pricing better for the services you provide in the marketplace against the tighter resource backdrop. Just trying to understand how much of this improvement is structural as we think about the next couple of years?

Speaker 2

Hey, Mike. It's Robert. So let me start with that. I really focus on the execution in the field, Supported by the great support functions we have. I mean, it's just if you look across things driving and Rob hit on all of them.

Speaker 2

When you talk about labor productivity, how we utilize our network with our ERP system, not just residential but commercial, Our teams have done a nice job even on the multifamily side. I think in historical past, you hear people talk about multifamily Margins, our team has done a nice job there. So the team makes the most of the having a great operations team in the field. They make the most of the opportunities whenever they come along. They keep pushing improvements in the business and the execution just drives the numbers And our team stays very focused on that and our leadership in the field stays very focused on that as well.

Speaker 2

And we're constantly working bottom quartile. I mean, it's just it's part of our DNA. It's part of what our leaders in operations push It's constantly looking at pushing the performance in the business. So I really point to our execution. No one single factor To talk about there are nothing structural other than just continue to execute on our plan.

Speaker 3

Yes. Mike, I'd just add Our guidance implies we expect to continue to expand. I mean that EBITDA margin It's great this quarter, right? 23.4 percent for the install side of the business, but we guide to then being on the higher end of our incremental Margin ranging to 22% to 27%. So the quarter over quarter improvement won't be as great, but if we continue to add 7 and a lot of times as you know, we're doing much better than 27.

Speaker 3

We should be able to continue to expand.

Speaker 6

Great. Thanks so much. Thank you.

Operator

Thank you. And our next question comes from the line of Mr. Rafe Jadrosich with Bank of America. Please proceed with your question.

Speaker 11

Hi, good morning. Thanks for taking my questions. Robert, I just wanted to sort of clarify a comment that you made earlier. I think you said that you would expect Residential to trough in the second quarter. Is that for the industry in terms of starts or is that your own business?

Speaker 11

And then if it's for the industry, when would you expect resi to trough within the installation and distribution business?

Speaker 2

Yes. So good morning, Rick. This is Robert. So I'll start with a couple of comments there. So one, we said it could have troughed in the second quarter.

Speaker 2

Obviously, others have been making comments as to their view on that. I think it's hard to ignore the starts and the momentum in the starts looking at May June. So If that momentum keeps going to that direction, you'd say the industry probably saw that. It will depend on that trajectory of the starts, but Definitely given recent trends, recent commentary from builders, specs that we see coming out of the ground, we'd say that's a good possibility That we and the industry saw it

Speaker 3

in the Q2, but we'll

Speaker 2

see what happens here coming up in the next couple of months.

Speaker 3

Yes, Rafe, I'll just add I was just going to add to that. I mean, from a STARZ perspective, obviously, we saw that it looks like STARZ trough around April, right? And now it's come Back May, June and we hope to continue that pace. And then we're obviously lagged from that 3, 4 months. So whether that trough exactly hits us in Q2 or Q3, that's the question at this point.

Speaker 3

But it definitely looks like Yes, we're going to be coming out of that here in the second half of the year if this trend on starts continues.

Speaker 11

Great. I hear that. That's very And then just the increase of the outlook on the commercial industrial side for the year, you took that up Slightly. Can you talk about like is there any end market that's driving that improved outlook specifically? Like what are you seeing by end market, I guess, mostly on the distribution side that's driving the commercial higher?

Speaker 11

And then have you seen any Improvement in the bidding activity as you look into next year as well.

Speaker 3

Yes. Rafe, I'll start off. This is Rob and Robert will add on. I mean, I think the increase really is driven by our outperformance here in the first half, right, which was really driven on the install side Of the business where we saw revenue up in the 23% range year over year. I mean, we are seeing nice growth on the distribution side, but it's in about the range that we guided to for the year.

Speaker 3

But the outperformance has On the install side, a variety of big projects, Robert can probably add some color there as well, but it's Across both light and heavy commercial, we've seen both sides grow in that 20% plus type range here in the quarter.

Speaker 5

Great. Very helpful.

Operator

Thank you. And our next question comes from Mr. Reuben Garner with Benchmark Company. Please proceed with your question.

Speaker 7

Thanks. Good morning, everybody.

Speaker 9

I hopped on a touch late, so apologies if this is a repeat But I was just wondering if you're seeing any tangible evidence that the Inflation Reduction Act is driving some of your new Your homebuilder customers to upgrade their insulation whether it's to spray foam from fiberglass or fiberglass from Volus or any other just upgrades taking advantage of the credit?

Speaker 2

Hi, Reuben. It's Robert. So I think it's a good question, interesting question you're asking. So I think if you look at some of the custom homebuilders and we're seeing some of the, what I'd say, We think about installation packages as good, better, best. I'd say we're seeing some custom builders going more to a better, best type of package.

Speaker 2

Part of that could definitely be driven by what you're talking about. I think some of the custom builders are trying to continue to differentiate themselves as well. So I think you could see that. I think that 45L tax credit or credit that comes with the Inflation Reduction Act, they've made it a little more stringent from what it was previously, but they've also upped some of those credits as well. So I think you get think it's getting the attention of some builders, both production and custom homebuilders.

Speaker 2

And I think maybe the custom homebuilders could We see it as an opportunity to differentiate themselves in the package that they're offering. So I think the way we always think about this is definitely tailwind In the industry, and there could be some early signs of it.

Speaker 9

Great. Thanks. Congrats on the results, guys, and good luck.

Speaker 3

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Robert Buck, President and CEO for closing comments.

Speaker 1

Thank you for joining us today.

Speaker 2

We look forward to talking with in October and our early November in our Q3 results. Thank you.

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Earnings Conference Call
TopBuild Q2 2023
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