TopBuild Corp. (BLD) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us. My name is Mike Rehaut. I'm a senior analyst at JPMorgan covering the homebuilding and building products sector. And we're very excited to have with us as we continue the afternoon session of our second day of our 14th Annual JPMorgan Homebuilding and Building Products Conference, we're excited to have with us, TopBuild Corporation, CEO, Robert Buck; and CFO, John Peterson; along with Investor Relations guru, Tabitha Zane. This is exciting for me since we've had the pleasure of TopBuild participating in many conferences, and this is the first one where we're officially under coverage. So it's exciting to -- we've had a great experience getting to know the company a lot more over the last several months and very much appreciate TopBuild's participation in the conference. As well, TopBuild being the leading installer of insulation through its TruTeam division as well as being a leading distributor of insulation and other building products through its Service Partners unit. I'm going to turn it over to Robert Buck for some opening remarks on the company. That will be followed by some questions that I have prepared in a fireside chat format. And for those that have dialed in, we also have the ability to pass along your own questions. [Operator Instructions] So with that, I'll turn it over to Robert.

Yes. Thank you, Michael. Thanks for hosting us today. I know that John, Tabitha and myself are glad to be part of the JPMorgan virtual conference. Hopefully, this time next year, we're on the same room together and can be face to face. So just a few remarks, as you said, we reported a strong first quarter a couple of weeks ago. Our teams are really happy with -- our teams, both TruTeam and Service Partners, how they're performing really well, given this accelerated growth environment, challenged by both labor and material constraints, which I'm sure we'll get into in the first quarter. Obviously, some weather-related issues in the Southwest and our Midwest markets as well. The commercial business, a real bright spot, continues to improve as delayed projects get back on track. And the bidding activity really for both light and heavy commercial is really strong, and we're seeing projects really pick up pace. Capital allocation, always an important topic. We've completed 4 acquisitions this year, which are expected to contribute almost $220 million of annual revenue. The M&A front and acquisitions still remain our #1 capital allocation priority, and the pipeline is really solid and a lot of good prospects under evaluation. We recognize that the industry capacity, both material constraints and inflationary cost pressures, are top of mind to a lot of folks at the conference and on the call. Fiberglass remains on allocation. The manufacturers continue to work on productivity gains at their plants, and additional loose fill capacity will be coming online here in the second half of the year. But we're also seeing some good strengths with spray foam, given the happenings of weather in Texas, several chemical plants were shut down for a time period. They're back up and operating now, and production levels are ramping back up. So as we think about looking out the rest of the year, we're really confident in our ability to execute, really confident in our ability to offset the material cost inflation with higher selling prices. And I think our track record, as TopBuild proves that, including looking at first quarter, where we had gross margin expansion, I think that really supports our confidence and how we'll proceed with the selling price increases and offsetting the inflation the remainder of year of 2021. So in summary, this type of inflationary environment, really good, strong demand and coupled with the material and labor constraints, it's really an environment where TopBuild can excel. And we expect really great execution from our teams as we move forward through the rest of 2021. So those are the opening comments. Michael, I'll turn it back over to you to direct the Q&A.

Great. Thank you, Robert. I appreciate that. Maybe to start off with, you kind of mentioned in your remarks some of the capacity constraints in the industry, spray foam being affected by some of the storm activity back in February in Texas, some of the disruption there. We also talked about some of the loose fill capacity coming online in the back half of the year, some -- on the margins, some incremental insulation capacity coming online. What I think struck us and a lot of people looking at -- coming off of the first quarter call and the guidance was you had an updated outlook for starts, total starts around $1.45 million to $1.5 million, and that's up 4% to 8%. Last quarter, starts kind of came down a -- last month, I guess, earlier this week, starts came in a little bit. But even outside of that, the average over the last few months has been significantly above the 1.45, 1.5 level. So the question is, to the extent that, that higher level, if we're out at maybe 1.6, 1.7 throughout the rest of the year persists, what is the ability that the industry has to allow your organic growth outlook right now at about 10% to 14%? And a portion of that is price, obviously. What allows for the industry and yourselves to be able to scale up to the extent that starts continue to operate at a higher level?

Yes. So this is John, Mike. I'll take a stab at that question. I think we're really in kind of an unprecedented time, at least from my history. So to your point, very strong order patterns, very strong starts patterns, permit patterns, et cetera. And that has obviously been and extended -- the build cycle had been extended by both what we've seen historically in this industry, labor constraints, but even more so now, much more so around material constraints. So we talk a lot about insulation, and Robert mentioned and you just repeated the capacity expansions we're going to see here for the remainder of the year. And I think they all do a good job of working on productivity and driving that. I think the challenge for the industry, though, is it's much broader than just insulation. That's really the constraint right now. There are dozens of product categories right now that are really causing the build cycle to be extended and lengthened. In our industry, again, I think we have hit kind of the wall in terms of some numbers here. Robert mentioned spray foam, as an example, going through a rough 2 or 3 months because of the weather in Texas. That's coming back to normal. But we'll continue to see some growth here on our insulation capacity through productivity through the back half of the year. And I think that will help certainly in terms of increasing the capacity in our area. But we're reliant as part of the entire build cycle on many, many different product categories right now that are also feeling a pinch of constrain. So I think we're confident we're going to continue to see the situation improve, but I think we are still going to be in a very tight capacity-constrained environment as far as we can see into '21 and early '22. So...

Great. I guess, moving on, Robert certainly mentioned the focus on M&A and not only the acquisitions that have been completed, but pointing to is still pretty solid pipeline. Maybe you could just take us a step back before answering going forward in terms of just reminding us, on average, how much revenue you've acquired annually over the past couple of years. I believe this year, you're coming in a bit above that with the roughly $220 million of annualized acquired sales. But how should we think about this going forward? I know it's obviously always hard to predict M&A given a lot of factors out of your control. But given what you're seeing in the pipeline, what's maybe moving through the pipeline, any directional help would be useful.

Mike, this is John again. So we don't provide -- to your earlier point, we don't give a number in terms of how much we expect to spend. I think we've done 18 acquisitions, do you have [ the number ], Tabitha?

$810 million.

Yes. So over $810 million of revenue. I think the past 7.5 months, we've acquired up to $280 million worth of revenue. The largest being ABS, which we did April 1 or April 5. So our pipeline remains very, very active. Plenty in there that we're working on continuously, some smaller ones. I think in terms of the type of opportunities, there's an awful lot on that $5 million to $30 million range typically. Now in that past 7.5 months, we've done 2 $60 million acquisitions and $140-plus million acquisition. So we continue to work on larger acquisition opportunities also, but it is difficult to predict when they're going to get across the finish line. Our own guidance only includes those acquisition targets we've completed. So we don't include anything above and beyond that, although I think all of us sitting here at this table here at Daytona Beach would expect to do more acquisitions this year, and we anticipate that will be the case. So difficult to predict the timing and the size, but we think we're going to have an awful lot of activity around the area of capital allocation. By far, we consider our #1 option and opportunity and one we think has delivered great, great value to shareholders, and we'll continue to do that.

So I appreciate that, and it's certainly helpful and a core part of the story. I guess kind of working off of M&A and thinking about not just M&A, but your organic growth opportunities, when you think about market share, the TruTeam segment, you hold roughly low 30s percent share of the insulation installation market. Do you have a goal over the next 3 or 5 years? And do you feel that, that goal would be more achievable through organic or versus inorganic?

Yes, Michael, it's Robert. So we don't necessarily set a goal, but I would say that we feel like plenty of headroom to go, plenty of opportunity on the residential side of the business. If we look across the country, our index in certain service areas, certain markets were under-indexed in some and heavier in others. So we continue to work those organic growth opportunities. We think we've done a good job of capitalizing some of those. And we keep our teams focused on that where the growth is coming from relative to the forecast and making sure we have resources in place as well as pretty key execution targets towards that. So now during this time, we're making sure -- you hear us talk about profitable growth, that we're pushing the price equation and making sure we're balancing that with any market share gains. So that's really our focal point. But plenty of headroom there from a residential perspective, really across different markets in the country. What I would say on the share gain side of it, and I think we've got a pretty good track record of it, we see a lot of share gain opportunity organically and through M&A in the commercial space. So as we've talked about before, commercial is a $5-plus billion opportunity. We're seeing it come back, probably come back even a little quicker than we were expecting. We expect a good 2021 in that space. We have about 11% share today, which is up pretty nicely from where we were 5 years ago at about a mid-single-digit range on that. So we're really bullish on the growth side of commercial, both organically and through acquisition. And residential, you'll see us grow organically there as well. But as John said, the pipeline looks good for some acquisitions on that core residential space also.

Great. Great. And it'd be remiss not to also kind of touch on the complementary products portion of your residential business, currently representing about 20% of sales led by glass and gutters as well as some other categories like garage stores and fireplaces. Do you see this as a growth opportunity as well going forward? I know that -- correct me if I'm wrong, but in comparison to your other publicly traded peer, it appears that they might have somewhat of just a little bit of a greater focus on expanding that business, whereas you guys are maybe I'd characterize as being a little bit more selective and restrained and just trying to keep a greater amount of focus on your core insulation business. So do I have that right? And how should we think about the complementary products opportunity over the next few years?

Michael, it's a great question. I think you hit on some key points there. So you're right. We've been very focused on our core business of insulation and executing really, really well there, both residential and commercial. I would say that we've been opportunistic on some of the other products. And I think that comes a little bit from our historical perspective. So John and I came into the business, call it, 11, 12 years ago. And at that time, if you remember the older Masco, Masco Contractor Services strategy, it was a very broad array of complementary products. I think that caused some diversion from the core and execution of the core. So in a space where we see a lot of continued runway in that core space, that's where we keep our branches focused. We let them be opportunistic on some of the other products. We think that strategy has proved really well to now, and it's really allowed us to keep that focus of profitable growth. So that's the way we direct the branches and the lead way we give. And I think you'll see continued consistency from us on that. We -- the products that we are focused on outside of insulation, if you think about gutters and some of the other products that you mentioned as well, I think we've done a good job of continuing to scale those products. I think we've done a good job in both businesses, distribution and installation on those other products. And we talked about adjacencies. We always got our eyes wide open. But one thing I can promise you is we'll never lose sight of that core business. We think the execution there and executing really well is fundamental to the business, continue to perform well.

Great. Great. A couple more questions. And then I see we have a question from the audience as well, and we'll hit on those as well. We have maybe about -- I want to say, we're about halfway through the time slot here. So just kind of shifting a little bit to the margin side of the equation. Obviously, a tremendous amount of cost inflation this year, several price increases either already implemented or scheduled on the insulation side by the manufacturers. I was wondering if you could just kind of review where were you in terms of price cost in the first quarter. Were you neutral, a little bit ahead, a little bit maybe lagging? And how do you expect the rest of the year to play out in that regard?

Yes. So I'll take that one, Michael. This is John. So our reported results -- I'll start with Service Partners. So Service Partners, I think we had about a 3.7% increase in price year-over-year and significant margin expansion from an operating profit standpoint. So we did a fantastic job of pushing through that price real-time. And in distribution, it's a little bit easier. Because as you get the material cost, you can quickly push that through as you're selling to your base customers at that point. So -- and quite frankly, with, obviously, the constraints that we're involved and is still in the on the materials side, the environment for price increase is a little more robust in terms of doing it. TruTeam had about a 1.1% increase in price, and that was the first most positive price we've shown, I think, in about 3 quarters. So I think we did a good job pushing through there. I think the only challenge in the first quarter for TruTeam was the lag between when we bid the job, and then when we get on the job site to perform the work got extended even more than certainly we've seen historically and probably a little more than anticipated. So that higher selling price didn't all come through in the first quarter. Some of it got pushed in the second. And obviously, in the first quarter, we did start to absorb some of the material cost increases. So we left a little bit on the table there because of that, but that was just kind of, I'll call it, a one quarter lag. I think most of that noise is behind us. And I think sitting here today, Robert and I feel extremely good about the ability to pass on primarily the material cost inflation any type of labor inflation also because it really is a good environment to do that with extremely strong demand and constraints on the materials side. I don't think we've seen in this industry maybe forever across a broad major categories. And you kind of dovetail that with some labor tightness, too. It's a good environment to thrive. And I think our teams will have done and we'll continue to do a good job.

Yes. And I think given those constraints and that lag extension John mentioned, I mean the quarter relative to pricing came in really what we expected, given what we were seeing in that lag extension. So we were happy with what we saw and confident in -- I think we even mentioned on the call, April saw some nice improvement. So...

Okay. So fair to say then that on the TruTeam side, maybe a little bit price cost negative, but not a concern and you feel like that might turn itself around going forward for the rest of the year?

Yes. I'd say relatively a minor number. I think we talked about maybe a point of price or something like that. They got deferred until early second quarter. But again, I think what you're going to see, second quarter, to be honest, some really nice price appreciation in both segments.

Okay. Perfect. Maybe also just continuing on the margin side of the equation, but maybe just a little bigger picture. You talked about -- you've talked about incremental margins around a 22% to 27% range. 2020 EBITDA margins were 16%, roughly. So with obviously, a decent level of growth visibility certainly for this year, if not for the next couple of years, to the extent that you do continue to see good top line backdrop, where could those EBITDA margins top out over time? I mean the simple math would say, you're going to eventually get to the low 20s if that incremental continues to fall through, but sometimes that doesn't always -- the incrementals don't always necessarily fully materialize into the corporate average. So how should we think about EBITDA margins over the next 2, 3, 4 years?

So I won't give you a number per se. We do, by the way, provide some modeling assumptions. You mentioned the incrementals on same branch growth of 22% to 27%. We give a lot of assumptions around how much we can grow based on starts growth because that's really the variable. Everybody has a different opinion in the future. So people can model that information with what we provide. But I think what's gotten us here is also going to support us in the future. So what's gotten us to the pace where we've had significant margin expansion since we spun, because I think we've done a good job in a lot of areas, one is managing our largest -- our largest input costs, which are labor and material. So the labor side, I think we've done a great job of increasing productivity day in and day out. I think there's plenty left in the tank to continue to work on that. I think we've done a good job in the material side of leveraging our scale, our size. I think that's going to continue to be a strength of TopBuild on a go-forward basis. And managing any inflationary pressure, we've done a great job, I think, of moving price through our -- the system. And again, a good track record of that over the past 6-plus years we've been a public company. So those are in play. The other thing that's worked for us, I think, that will continue to work into the future will be our fixed overhead, both here at the branch support center and at our branch network, still has plenty of growth left in it without significant expansion or new brick-and-mortar, new resources here. So I think we're going to continue to scale quite nicely on the fixed overhead buckets we have as we grow this business on a go-forward basis. The only comment I'll make, I think, if you talk about 2021 specifically, the only challenge, I think, in '21 for the next 3 quarters is the fact that, as you know, last year, we and a lot of companies, had some favorable line items tied to COVID. And that would be around travel and entertainment, group health and some various other line items. Those are starting to normalize, and I think that will continue through the rest of this year. And that will be a bit of a headwind, but that's reflected in the guidance we've provided. And I think once we get past that this year, I think all those variables I talked about that have been favorable still come into play on a go-forward basis for TopBuild.

Right. And I appreciate that, John. And just to get a finer sense of those -- the comments you just made at the end around normalization of some elements of spend, can you give us a sense of what that dollar impact might be as that normalizes? And would that mostly come back into the P&L in 2020? Or is it kind of half 2020 -- sorry, 2021? Or is it more like half '21, half '22 because we -- certainly in the first half of this year, it hasn't necessarily fully gone back to normal as well?

So last year, I think for the last 3 quarters of the year, we called out about a little over $14 million of benefit. This year, in first quarter, we called out about 3 -- just a little over $3.5 million in benefit tied to those line items I was talking about. So we're not providing in our guidance how much of that's going to normalize, but not all of that $18-roughly million is going to normalize in 2021. But we have baked into our estimates some of that coming back. But I think we're going to continue to focus on continuing to manage our T&E downward. But things like group health, Michael, there's not a heck of a lot we can do about that. And I think that will come back to a level that we've seen historically. So not everything we've gained is going to roll back into our P&L this year, but enough that it's going to temper some of those numbers going forward. So...

Right. Right. Fair enough. That's actually all the questions that I have prepared. We do have a question from the audience. And again, for those that are on the line, we do have about 9 minutes or so -- 9, 10 minutes left to this presentation session or a fireside chat session. So if anyone would like to ask a question, please feel free to hit the ask a question button and we can pass those along. We do have a question though on the board right now. Question is, your largest competitor, IBP, mentioned that they have to buy from distributor retail to get to their products. Do you have to do this as well? If not, why are you more successful in navigating through such a tight market?

Yes. So this is Robert. So definitely very tight market as we talk about spray foam and talk about fiber glass. I'd say similar to IBP, we run into constraints. And we want to make sure from a service perspective and from a labor perspective that we're productive. We will buy stuff from distribution, can be a time that we'll buy from retail as well, so not too different from that perspective now. Now we try to do a lot of work upfront before we take that route relative to using our systems to move material around within the network and stuff. We've been pretty successful. But if it gets into a tight crunch, a branch would take the opportunity to go either to a local distributor or potentially to retail if that came down to that course.

Do you have any sense of what -- where you are in that dynamic today? If you have any sense in terms of like percent of your business? I'd assume in a dynamic like today, it might be a little higher than normal. So any thoughts around that?

Yes. I don't really have a percentage. I would say the allocation process, I think, how the manufacturers plan, how we plan stuff, I think we've been on allocation for a while going back to Q4 last year. So I think the process has gotten better from that perspective. So I think that's helped take some of the stumbling blocks out. So I don't have a percentage for you, but I think it's probably smooth as the planning process has gotten better.

Yes. And just -- I think it's important, too. The vast majority of our material is coming direct from manufacturers to our sites. I think to Robert's point, there's always times when, in these conditions, there's going to be some gaps that we have to fill elsewhere. So...

Right. Right. Definitely. We actually just got another question as well. That is your homebuilder customers have to get to a certain point before you can do anything on the job site. How much, if any, impact are you currently experiencing due to tight labor on their end? Could you do more at this point? If so, how much?

So we do see constraints with labor across other trades. I think it's been a strength of TopBuild, but there are labor constraints across other trades. That does contribute to the extended lag time that we talked about, both material and labor. But we definitely see it, some on the labor side and some of the upfront. The one I think we point to a lot is the framers, as an example, coming in before we do some of our [ fleet ] work that happens on kind of the steps of the cycle there. But yes, definitely labor causes some constraints that can hold us up or are holding us up in addition to the material.

Great. Great. That is actually all we have on the docket -- on the dashboard from the audience. And I've actually hit on everything I needed to hit on as well. So few minutes early here, but I think we covered a lot of ground. So I appreciate the time, Robert, John and Tabitha. Thanks so much. We will continue with the last couple of sessions at the conference at 3:10. We actually have Installed Building Products, followed by Green Brick Partners. So again, I want to thank the team at TopBuild for participating. Great to see you guys, hopefully, next year in person, if not sooner. And have a great rest of the day.

Thank you, Mike.