TopBuild Corp. (BLD) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Phil Ng, Jefferies Building Products analyst. We're delighted to have the TopBuild team here. Representing the company, we have Robert Buck, the CEO; and John Peterson, the CFO; and then Tabitha Zane, who heads up the Investor Relations effort. Thank you for joining us today. Robert, I think you had some prepared remarks you want to kick things off, but certainly a really good quarter and solid execution as always.

Yes. Thanks, Phil, for hosting us today. John and Tabitha and myself, all glad to be part of the conference. Hopefully, in person next year versus virtual. Just a few remarks before we move to Q&A. Really solid second quarter yesterday results that we reported top line growth, strong operating margins expanded in both segments. Our teams at both TruTeam and Service Partners are really doing an outstanding job managing price, the input costs also while facing challenging labor and material constraints. Our commercial business continues to improve as delayed projects get back on track and bidding activity, both light and heavy commercial, really strong. On the capital allocation front, we completed 5 acquisitions year-to-date, expected to contribute over $221 million of annual revenue. Our focus remains on continuing to acquire well-run installation and distribution companies around the core of insulation but also related adjacent products. With a robust pipeline, we definitely expect to stay busy on this front for the remainder of 2021. We also used our capital in second quarter to repurchase almost 74,000 shares. And year-to-date, we repurchased 123,000 shares. As we announced yesterday, really excited that our Board approved a new $200 million share repurchase program as well. As we look out to the rest of the year and thinking about our guidance, we're definitely confident in our ability to fully offset the material cost inflation with higher selling prices and our track record, including what you saw in the second quarter, where we saw strong margin expansion, supports this conviction and our ability to execute. So in summary, definitely the type of -- this type of inflationary environment, it's definitely strong demand, coupled with material and labor constraints, is when TopBuild can excel. So again, really strong quarter we reported second day, excited about what's going on in the business, excited about the industry, whether it be residential or commercial, and we look forward to taking Q&A as well.

Okay. I'll kick things off with a few questions just so everyone that's dialed in understands the format. We'll leave some time for your questions towards the end. So with your dashboard, you should be able to type in some questions, and we'll go from there. So I guess, Robert, your stock has seen a little volatility just because the markets were nervous that the builders have been reining in some orders. Talk to me how that impacts your business and how that kind of flows through? It seems like it's been pretty manageable, but any color would be helpful.

Yes. So Philip, based on what you've heard from some of the public builders, while they've announced whether they're tapping the brakes or whether managing that order flow, we've definitely heard that from some of the builders out in our markets and out in our service areas. But we have a really healthy backlog. If you think about how the cycle is elongated here, a really heavy backlog heading into the back half of the year. We think that does a couple of things. If builders are attacking the bricks, it really creates for a smooth demand here for the back half of 2021. But we think it also, as you know, the public builders really push for their closings by mid-November. It also helps really smooth that curve of seasonality that we usually see in Q4 -- in the back half of Q4 headed into 2022. So that healthy backlog, we think, has some benefits, and we think we'll see the benefit of that coming here for the remainder of '21, heading into 2022.

Yes. That's really helpful. Any color on how extended your backlogs are? And when do you expect lead times to get more normalized? And we might not get there anytime soon, but any color would be great.

I think definitely driven by demand. I think one thing that we've been talking about is we'll see how much comes through the funnel with that backlog with constraints in the front end of the build cycle with other trades and on the back end as well. We don't really fill out or bottlenecking ourselves in our trade. But I think we'll see material continue to remain tight, not being the #1 constraint, but closely behind that is the labor. So in fiberglass, we see some additional capacity, albeit somewhat small coming online in the fourth quarter of this year. So we think material will remain tight, heading out of '21 into '22, and seems to be -- not a lot of people coming off the sidelines to get back into the labor market. So we expect labor to remain tight as well. We feel like we're in a great position from a TopBuild perspective, really working both sides of that material side and the labor side.

Got it. I think the market, including sell-side, buy-side investors like myself, sometimes spend too much time focusing on the headline starts number, but I think what really matters of late is the completion number, right? So that certainly lagged housing starts. But let's say, starts at 1.5 million this year. And when we think about 2022, the question we get a lot is if housing starts are flat next year, can a company like TopBuild still grow? We have a view maybe the completion dynamic catch-up should help. But walk us through how you're thinking about if starts are flat, do you have the ability to still grow next year?

Yes, I think -- the way I think about it a couple of ways is definitely healthy backlogs -- healthy backlogs heading into second half of this year, which we think will carry into 2022. I think that 1.5, 1.55 million houses starts isn't bad. That's probably a number that the industry can continue to ramp to, and I think will drive some nice steady growth as well. So I think that part of it, I think we'll see some slight improvement from a material perspective. I think not just about fiberglass but about spray foam as well in both of our businesses, both installation and distribution. But then I think about the commercial business. I mean the commercial business is showing some nice improvement. You saw that in our results that we reported yesterday. We think that will continue to strengthen back half of '21 into '22. We look at our bidding, our backlog is on what we're bidding, that goes well into 2023. And I think on the commercial side, again, we always talk about a $5 billion opportunity. We see continued great opportunities to grow there on the commercial side, and we think it's obviously back to residential or great residential environment as well for TopBuild to grow in.

Got it. Inflation is obviously very tough call for any building products company these days. Price part, I believe, was a positive for you guys in 2Q. When we think about 3Q with some of that pricing increases kind of funneling through, how do you think of that dynamic kind of playing out and evolving over the course of the year?

So Phil, I'll take that. This is John. So certainly, you're right. First half of the year, I think good performance by our sales teams, our teams in the field from an execution standpoint on price in a very inflationary environment. As we reported first quarter, a little behind in terms of the building leg on the TruTeam side, but certainly got that even or caught up to that in the second quarter, and Service Partners both quarter strong. So we think the back half of the year, certainly, there's some carryover pricing that flows into the back half of the year, and there's also -- we expect to see -- continue to see some inflationary pressure on primarily material that we'll obviously have to adapt to and work towards. So I do think we'll continue to have to deal with that from a selling price, from activity efficiency standpoint. But I think we're well prepared to do that and expect to perform well in the second half.

Got it. And then we've talked about how completion cycles are getting a little more extended, right, which makes it a little harder for you to kind of forecast and bid for that work, and you made great progress 1Q to 2Q. What are you guys doing, Robert, John, to kind of better manage and better predict that so you could keep the favorable price cost spread in this dynamic environment these days?

Yes. I think, number one, it will be driven by demand. We think demand will continue to hold up. But beyond demand of material and labor, there really is -- the other part of it is the service component. I mean the last thing a builder wants today is for their job sites to be further delayed. So our ability to do a few things; one, to have the material, have the labor, provide the service. But then something unique that we have at TopBuild is our ability to move that around across our network, right? So move materials around, move equipment around, move labor around so as a builder -- so let's say we're getting into the September, October, early November time frame where public builders are really pushing for the closings, there's going to be some spikes that are coming. We have the ability to move our resources around to meet that demand and provide that service so that from a TopBuild perspective, working with a large public builder, we're not contributing to that delay. So we think that's a great advantage to obviously see the value of that and really to pay for that as well.

Okay. And then you talked about some of the constraints, right? Labor is labor, but I think material has probably been a little more bigger constraint. How do you kind of see that evolving, call it, the next 6 to 12 months? There is some useful capacity coming on, call it, fourth quarter, but help us understand the material environment as you look out the next 6 to 12 months?

Yes, I'll talk a couple of sides. So you're right. On the fiberglass side, things still remain on allocation. We have 2 loosefill lines coming on in the fourth quarter; the Knauf line coming on early mid-October and the Johns Manville line coming on, call it, early December. So I think as those lines ramp up, we'll see the majority of that capacity to really impact early in 2022. It adds plus or minus, our estimate, about 3% capacity to the industry with what's coming back. So we think that period forward, obviously, the manufacturers are working on their productivity as well to continue to try to get more material out of current operations as they can. So we see fiberglass remaining tight. I think you'll see as these fiberglass lines have been only all out the past, call it, 12 months, you'll see some maintenance that has to happen in the industry in 2022 that will add to some of that tightness as well. The other part 2 partners talk about is spray foam. So spray foam was probably heading into 2021 (sic) [ 2022 ] given some of the tight input materials, mainly the MDI material, given what happened in Texas in the chemical petro side of the equation in February that only continue to compound the tightness on the spray foam. So that's been a very slow recovery that is slowly normalizing now, Philip. We hope to see that normalize by the end of 2021 here. So that should help provide some more steady flow of material in the spray foam side heading into 2022.

Great. And from a capital deployment standpoint, M&A has been a big part of your story for some time now. Question we get asked often is how much more runway do you have? So kind of help us understand between you and IBP, what your market share is on the install side? And when you look at the M&A pipeline, are there deals that are chunkier in nature like an ABS? Is there something, nice additions for you?