TopBuild Corp. (BLD) Earnings Call Transcript & Summary

It is 2:00. So I will go ahead and get started. First, thanks, everybody, for joining us this afternoon. I'm Trey Grooms. I cover building products and materials for Stephens. And joining us this afternoon is TopBuild, their CFO, John Peterson; soon to be CFO, Rob Kuhns; and Vice President of Investor Relations, Tabitha Zane over there. And so first, I want to say thank you guys for the -- and gal, for the time today. I always appreciate it. TopBuild is the largest new residential installation installer and distributor in the U.S. And their recent acquisition of DI or Distribution International expands their presence in industrial and commercial end markets as well.

And I'm just going to go ahead and kick off the M&A -- excuse me, the Q&A. But let's go ahead and talk about M&A, though. And then I'll turn it over in a moment to the audience as well. So DI. If you wouldn't mind maybe giving us some additional detail on kind of the -- what they do, how it kind of fits into the TopBuild framework. And yes, kind of what it adds for you guys?

Yes. So Trey, thank you. Rob and I are going to trade off today in terms of some of the responses. So yes, starting with DI, yes, obviously, a significant acquisition for TopBuild, $ 1 billion invested. So as you know and as you just said, we're the largest player in residential and commercial insulation. And there's a third end market, which we haven't participated in, and that's the industrial side. So as a result of the acquisition, we're now the largest in all 3 end markets for installation, residential, commercial and industrial. So we have been looking at it for a long time and talking to the people that owned it, the private equity company that had -- And the timing was just right for us. So when we think about what DI does, they are a distributor of insulation primarily in the industrial space. They actually sell -- about 55% of their revenue was in the commercial. And when I talk about commercial for DI, a little bit different than what we talked about for TopBuild legacy. The TopBuild legacy would be the building envelope and the installation required for that. The commercial portion that DI does is around the medical side of the installation that goes into a commercial facility. They also do metal building installation. About 20% of their revenue is tied up in MBI, metal building insulation that similar to, by the way, what Service Partners does, about 10% of the Service Partners revenue is metal building installation. And that's where we actually fabricate. We take fiberglass insulation, we [indiscernible] on a laminate. And that's used in commercial applications. Everybody in this room has probably been in a Costco or something that you look up, and you'll see like a foil type of insulation product that's [indiscernible]. So we fabricate and distribute that. 20% of DI is that also. 45% is industrial. And of that 45%, 80% is maintenance repair. And that's another really nice attribute we like about the DI business. About 50% of the revenues are MRO, which is really kind of a recurring revenue stream that will be -- that we'll have under our build as part of that acquisition. The other thing that's very similar. So insulation is the core, so we advertise the fact that DI's historical LTM EBITDA pro forma was about 10%, about $75 million at the end of June 2020. Now that had been, I'll say, disproportionately impacted by COVID. But what we signed up for as part of the acquisition, and I think what we feel great about today, is the synergies we're going to drive from that acquisition. So we've signed up for $35 million to $40 million of synergies on the $75 million business, which will take that 10% well into the mid-teens. So similar to what you've seen, Trey, with our acquisitions on the residential and commercial insulation side, we think we get great synergies on the industrial side, too. A lot of that around the supply chain, where we, of course, we have the same type of suppliers they do. So the larger suppliers, the DI would be the Owens Corning, the Keops, the Certainty of the JM which, of course, are our largest suppliers also. So lots of nice leverage there. And then on the other side of synergies, we're looking at back-office consolidation. So by the end of September, we'd expect to have DI fully integrated into our systems. All of our other acquisitions, by the way, are already integrated into our core ERP systems today. And then the last piece would be around operational efficiencies we'd expect to get. So we are well into the acquisition now, well past the point where we've acquired it. And I think Rob and I would say sitting here today, we feel better today about the prospects for those synergies and that mid-teens type of EBITDA margin in the future for DI.

And the mechanical piece, can you go -- there's -- I'm not sure everybody has a full understanding of really what that means when you say mechanical. What is it that, that is doing [indiscernible]

So when you think about mechanical customers -- so mechanical would be pipe wrap would be the best example of that. So when you think talking about industrial facilities, and you're trying to protect against either extreme conditions around coal, extreme conditions around heat or it could be just to protect the actual pipe being involved. So about 15% of the overall revenue is tied in fabricated products that are that. So these would be things like pipe covers, curve pipe segments, things like elbows that go on. So what DI does is working with the engineering groups of their customers, along with the engineering department within DI. They develop the fabricated -- the product for that, which is another nice hook into the customer, by the way. Certainly, as you start to develop those products, you get the relationship improves. And the margins on those products are even on the higher end of their overall business. So that's the industrial space, selling into things like power plants, petrochemical facilities, marine facilities, et cetera.

Okay. Got it. And the recurring piece, is that across all of their different kind of line items? Or is that specific to one?

Yes, lots around the fabricated products because they have to be replaced due to wear and tear and conditions. The other thing I think we're optimistic about is just generally code changes taking place today that when you think about the big freeze that took place in Texas back in the second quarter of last year, which got a lot of more first quarter maybe last year, significant impact, right, to those facilities in the Southwest, in Texas, Louisiana, et cetera. So we're already starting to see some code changes requiring some additional insulating capabilities. So that's all tailwinds for the business at this point.

Okay. I've got a lot of questions, but I'm going to pause here and see if anybody from the audience may have.

What is the structure of that market in [indiscernible] that fragment. [indiscernible]

It's about a $5 billion market. So interestingly enough, if you think about the end markets we sell into, the residential market, residential insulation or the R&C market, at today's volume level and starts is about a $5.5 billion market for us. Commercial insulation is about a $5 billion market and now industrial is about $5 billion. So all relatively in the same size and scope. So we have about 10% market share with the DI acquisition, which makes us the biggest player now in that space. So we're the biggest player in all 3 insulation categories today. And the end use, the end customer we're selling to would be insulation contractors that do the install work. It could be direct to the Exxon Mobils or world folks like that, that have their own installation groups in their own [indiscernible]

[indiscernible] next fragmented in that market.

Yes. They're more than double the size of the next player. So it's a highly fragmented market after that.

On the recurrent piece, can you give some color on [indiscernible] are in this business? Like [indiscernible]

You mean how often the product is replaced?

Yes.

It depends. It depends on the location. It depends on the weather. It depends on a lot of things. But typically, a 2- to 4-year cycle for a lot of the products, I think, is typical in terms of that. And again, code changes may even affect that in terms of the frequency when you change the product.

But typically when it is time to replace it, they go back to the [indiscernible] ?

Oh, yes. Yes. Typically, it's -- again, talking about the fact that we've already got the engineering plans in place and understand how to build the product and how to make and fabricate it. So yes.

Because it's a pretty [indiscernible] product's for the use [indiscernible] is it like somewhat of a [indiscernible]

No, it's custom fabricated, a lot of it. So that's what makes them come back to DI for those products then.

And is the second time the cheaper for the long [indiscernible] DI?

Well, I think probably cheaper because they don't have to start from scratch with somebody. So yes, it's more efficient for them to do it that way.

[indiscernible] some market you want to consolidate more?

Oh, yes. Yes. They were -- so under private equity, they did about 11 acquisitions. I think revenue was roughly $300 million, I think, in the acquisitions they did. So we are really excited. We've inherited a very, very strong pipeline. As Rob said, there's some big players out there, not at the size and scale we are, but still some sizable groups out there. And a lot of smaller ones to roll off, quite frankly. And you've seen TopBuild do that, right? So that $5 million to $30 million type of business, there are dozens and dozens -- and hundreds of them out there basically at this point. So we inherited a strong pipeline, and we inherited a good team that can help execute on that pipeline.

Could we -- I mean, since we talked about DI. Can we shift to the residential side? Obviously, there was a lot of orders and a lot of traffic and a lot of starts and a lot of things going great for the homebuilders earlier last year -- I guess, still this year. It's already fast forwarding too much here, which -- and then I kind of took a little bit of a pause. But at some point -- and you guys have had a couple of quarters where you're starting to see some good volume. But how are you thinking about that kind of flow through that we -- when you've seen all these big start numbers and big orders numbers and how that kind of flows through into your business?

I mean, year-to-date, to your point, starts are up 17%, but completions are only up 4%, right? So what's really going on there is we've got all kinds of supply chain challenges throughout the production cycle for builders, right? And that's the million-dollar question we get in every meeting is when is that going to get better, right, because there's a lag. There's a good backlog of starts for us to complete, plus there's a lot of demand still out there. And at this point, we're looking at the second half of next year where we hope that gets straightened out. But at this point, in Q4, we'd say it's pretty much sideways with what we saw in Q3.

Got it. And on the commercial side. I mean, now you guys are -- you said you were the largest, before DI, in the commercial side of things. How are things looking on that side of the business?

Yes. So really strong. I think we break commercial down between light commercial and heavy commercial. So light commercial has been extremely strong, really following residential, the strong growth we've seen there because any time there's a new community goes in, you need a drugstore, you need a bank, you need a restaurant, you need a strip mall, you need a hotel, and that is light commercial construction. So we're seeing some nice tailwind in terms of what residential has provided there. On the heavy commercial side, again, strong. I think some were impact in the third quarter by COVID again. So I think you saw in our results, Trey, that we had a difficult 2020 in heavy commercial, where the comps were negative because basically, work stopped on project sites, right? And so that started picking up again, third quarter. Fourth quarter, you saw us with -- in first and second quarter, quite frankly, with nice growth comp year-over-year. But then in third quarter, we went backwards a little bit again, and that was entirely driven by COVID. And the fact that, again, general contractors kind of slowed the process of bringing trades on to a job site. So hopefully, that starts to get better, and we'll all track the latest variant coming out and what that means or if that means anything at all. But generally, bid patterns have been very strong, and our backlogs have never been better in commercial than they are today.

Got it. Okay. So shifting back to res. Obviously, the suppliers have been somewhat of a constraint too, I guess, and they -- they've been -- fiberglass specifically, I guess, and spray foam too. And they've been pushing prices. As a result, understanding there is some capacity coming on, but how are you guys looking at the kind of the supply picture as we look forward? I mean, can -- are we going to have enough capacity out there to see continued growth? Or what's your take on the supply side of things?

Right. So as far as on the fiberglass side, as far as capacity that's coming online. We know about 3% that's coming on between Knauf and JM here at the end of Q4 of this year and early Q1 of next year. CT has some plans to add about 1% over the next year or so. And then Knauf announced a new large plant that will be coming online late 2023, late -- or early 2024, and that will add about 4%. So we have line of sight to maybe 8% coming on by the end of 2024. But what to keep in mind for next year is these plants have been running full out since Q2 or the end of Q2 of last year, and they've got to come down for some scheduled maintenance, right? So that 3% that we may get next year is probably going to get eaten into with some maintenance. So we're anticipating continued tight supply on the fiberglass side. We're anticipating more price increases next year on the fiberglass side. On the spray foam side, it's an interesting case study there in terms of supply chain and all the things that happened there. I mean, just an example of all the dynamics. They've had plant shutdowns in Asia for one of the component chemicals, MDI that goes into it. Then once the product does get shipped, some of it's getting stuck at the ports in L.A. The freeze John mentioned in Texas slowed down some of the production in that area as well as some of the storms in the Gulf Coast, right? So spray foam this year has actually been even tighter than fiberglass, and we've seen even more price increases on that side. Now that one -- hopefully, some of those were onetime type things that we won't see recur next year, and that supply chain will improve. But that's just an example of what's happened this year.

Yes. That's helpful. And then on pricing, I mean you guys have seen manufacturers. And we talked about pushing a lot of price. What's the typical kind of lag for you guys to push price? I mean it seems like you guys have done a pretty good job of holding your own there. And kind of what is the outlook given the backdrop for demand and supply that you're kind of talking about, the outlook for pricing as we go into next year?

Yes. So I mean, the suppliers announced if they give us plenty of notice on the price increases, we're pretty good at getting those pushed through timely. You'd see that in our results this year. For sure, we've stayed ahead of it through the year. What we do -- typically, if there's an announced price increase on the supply chain side, we're the biggest player in the industry. So we try to negotiate that down as far as we can, push it out as far as we can. And then on the sales side, we're reacting to what's going on in the market. But what's important to remember on our residential business is that we're selling a bundled solution of labor and material, right? And so the builders need the labor just as much as they need the material. So there's even been years in the past where material costs have come down, and we've been able to push price due to our labor. So we expect that similar dynamic going into next year as well.

How rational is it on the other side? [indiscernible] down. Capacity goes up for years out [indiscernible] cycle.

So inevitably, what will happen then is that -- and again, it depends, obviously, in terms of the fluctuation in supply and demand. And we've had this happen multiple times over the 6.5 years we've been a public company. So everything that happens then is all of a sudden, there's excess supply. And so we push hard on our -- actually, we typically don't even have to make the call to the manufacturers because they tend to start not [indiscernible], saying, hey, we have some supply that we're looking for a home for. So inevitably, that will lead to lower cost for the product. And then the same thing happens on the other side. So builders, all of a sudden and GCs have a few more options potentially. Now labor -- I think Rob brought an important point, labor has always been tight. Even in the little cycle changes we've had over 6 -- over the 10 or 11 years in the recovery, and I've been here for all of them. So if labor is tight, then you'll see the TruTeam side of the business continue to really perform well from a pricing standpoint because that is, even in times like this, probably the #1 issue that builders have to deal with. So yes, we'll balance it as we always do. We've done a nice job of balancing both our manufacturer cost that hits our books, along with selling price, and I think it worked well.

[indiscernible]?

Yes, I do. And I think there's other ways to maintain gross profit dollars to beyond just the input cost managing versus price. And we've done a nice job at that on the productivity side and the efficiency side. So there's a lot of things we continue to work on to drive a more efficient model. So yes, I do think not only maintaining, I think margin expansion for this company going forward is certainly in the cards.

So you guys have a history of taking some market share as well. How are you thinking about market share and taking gaming market share, especially given the constraints that are in the industry right now?

Yes. I think most of our folks, if you go back in the history of TopBuild, you think about the way we've operated to date. And I think it will be consistent going forward. We have -- the base share that we've had, our strategy has been to really maximize the profitability on that, right? There's certainly big constraints around labor at minimum. So we've tried to really maximize profitability. And I think we've done a nice job, right? I mean we've grown the EBITDA in this business from 6%. It's been up to 18-plus percent we just reported in the third quarter. Where we've gotten our residential share gains is through M&A, and that's been significant also in the USI acquisition and certainly a series of acquisitions, not just USI. This year, we've done -- beyond Distribution International, we've purchased over $250 million of revenue in businesses, most of it in the resi side. So I think you'll continue to see that same philosophy. Commercial is a little different, though. Commercial, we have almost doubled our share, and most of that's been organic. And that really has been from kind of the key differentiator we have, where we can bundle a whole bunch of different products, especially in the heavy commercial build for an insulation, for a general contractor and do all that work for them. And really, nobody else can do that. So beyond just fiberglass and spray foam, we can do fireproofing, fire stopping, expansion joints, air barrier or vapor barrier. And there's no other contractor that can walk up to a GC and say, hey, I'll solve all this for you for 2% of you build. And that's worked really well for us in the past 6-plus years, and that's been a big part of our doubling or most of our market share in commercial. Industrial, I think you'll see organic growth in market share gains and a lot of M&A there also in terms of the future, in terms of the [indiscernible]

On the residential side, I mean, you guys already -- you have pretty commanding market share. Is there -- where are we in the kind of white space opportunity or opportunity to continue to consolidate the residential side?

I mean, we feel like there's still a really good pipeline out there. Right now, our pipeline is as strong as it's ever been for M&A, and that's evidenced with what John said in this year, besides DI, we've done 9 deals for $250 million in revenue, right? And so there's more of that out there. There's not another USI. We'd love for there to be another USI, with $300 million of revenue, but there's plenty of other deals.

You've looked at and done kind of complementary or ancillary-type acquisitions to some degree. When you're looking at residential, are there are things out there that are -- that you would focus on in addition to just the insulation side? Or are there other areas that are attractive to you?

Yes. I think most of our strategy will still be around core insulation. And listen, you've seen us do other things. We just did a gutter distribution business, not too long ago with Valley Gutter. We've done some glass acquisitions historically. But I think we want to stick to the core for a lot of reasons. One is we know it better than anybody else in all 3 areas now between resi, commercial and industrial; on 2, the leverage and scale we gain is a critical part of our success, right? And not only get better each time we roll these things out, et cetera. And then from an M&A standpoint, the synergies that we gain are really, I would say, somewhat unprecedented in terms of most M&A that folks see out there. As we acquire businesses in our core, we can drive such significant synergy that we can take a 6x trading multiple historical down to that 3 to 4 within 2 months basically as we roll them into our supply chain. So that's so attractive, I think, to us and to our investor base, and that's where we want to put our dollars and really make most of our investments.

Got it.

But never say never, and we always look at other products and options, and we'll continue to do that.

Yes. So this is one that's more kind of around where you are in the overall industry versus others. It seems like -- and what that brings to you. A lot of your smaller competitors, some of those, not that small, have had to supplement some of their purchases from some suppliers, going to home centers and doing some other things like that. Has that been an issue for you guys? And how is the supply situation for you guys?

Yes. So we -- we're a little bit different than just about any competitor. And the biggest differentiator between us and then one of the big ones is we have a distribution model, right? So that's one differentiator. The other is all of our businesses are on one core system. And that's a really big differentiator for us versus anybody else out there. The reason that's significant is that we can routinely move labor, material, machine equipment around across our branch network, and we do it all the time. So especially in times like, Trey, when labor and material are so constrained, we can utilize our install network and our distribution network and move material around to kind of fill those gaps. And it's not to say that on occasion, our guys don't go to Home Depot or Lowe's or somewhere, but that is a rare, rare, rare exception. And we never move the distribution material at the expense of a distribution customer. But we have the luxury right of having roughly 300-plus branches, 400 now with DI that we can manage our footprint basically and move those scarce commodities around basically. And that's a big advantage to have today.

Got it. And does your size give you an advantage on the procurement side as well relative to others? I would guess, maybe yes?

Yes, I think we always get our fair share and maybe a little more sometimes. I think the other thing that's relevant about our position -- listen, we're really critically important to our manufacturers as they are to us, right? It's a great relationship and we rely on each other. In an environment like this right now, where there's such tight supply certainly some of the leverage swings towards the side of the supply base. But I think we still remain critically important to them. As you know, they're making -- and Rob mentioned it, they're making significant investments in capital right now in their facilities. And typically, as they do that, they want to have a good sense that, that product sold in the 2-plus years out. So when that happens, they're typically always talking to us in advance of those transactions. So we're comfortable that we'll get more than our fair share of those new -- the new capacity coming on, and it's a daily challenge each day to work the whole allocation process, but we're comfortable we're getting more than our fair share, too.

I'll pause and see if there's any other questions. No? Well, that's it for me.

Okay. We appreciate the time. Thank you.

Well, thank you very much, and thank you, everybody.