TopBuild Corp. (BLD) Earnings Call Transcript & Summary

Kicking off our next meeting here and joining me today is TopBuild's CFO, Rob Kuhns, and investor relations, Tabitha Zane. First off, I want to say I thank you to the TopBuild team, as always, for joining us. TopBuild is the largest new residential insulation installer and distributor in the U.S. with also a strong presence in industrial and commercial end markets. I'm going to just jump right into Q&A. I'll start it off and then open it up for the audience to ask questions as well. So don't be shy. And -- but thank you again for joining us.

And I guess, first off, if we could maybe just talk about the demand, kind of what you're seeing out there from a demand standpoint on the residential side? And then maybe given what we've seen from orders and the commentary from some of the homebuilders and things like that, kind of any thoughts you could give us on your outlook there?

Yes. So on the resi side, for us, it's been an interesting year, right? We came into the year with a nice strong backlog on the single-family side of things that really carried us into the second quarter. We had seen the decline in starts that happened on the single-family side late last year and coming into this year. And so we knew that was coming and could plan and get ahead of that and really build up our backlogs on the multifamily and light commercial side of the business, which has been a great story for us this year to help offset the slower single-family we saw in Q2 and Q3. The good news then that we've seen this year is starting around the April-May time frame, we saw starts start to accelerate a little bit on the single-family side. We started seeing some of that benefit in Q3 sequentially. Throughout Q3, our single-family revenues got better from July to August, August to September. Still not quite back to prior year levels, but coming back. And then that -- like I said, that multifamily activity has been very strong. So sitting here today with what we know today, looking out into 2024, we see multifamily start slowing, our bidding activity slowing on that side, but we know we've got a really good pipeline of multifamily should last us well into next year. And then on the single-family side, things are good. What we're hearing from the builders is they plan to grow next year. And so we're optimistic there that we'll start to see a shift back more to the single-family side of things. Obviously, if we get some relief in rates next year, that could even be an additional tailwind on that side. And the important thing to know on our business is a unit of multifamily and a unit of single-family are not equal, right? We get more revenue, more insulation per unit, almost double -- a little more than doubled on the single-family side than the multifamily side. So looking at that, as we look at next year, we think next year could be another year of growth for us.

Great. And that's specifically around just the residential side. How about the non-res side for you guys commercial?

Yes. So that's been a great story for us this year. So we're up year-to-date around 6%, 6.5% as TopBuild consolidated on our commercial industrial side of the business has been a nice offset to the slowness on the single-family side. Our backlogs there are still good, both on -- we do commercial work both on the install side of the business as well as on the distribution side of the business. It's a little bigger on the distribution side. I'd say on the install side, we're about 85% resi. And on the distribution side, it's about 40% resi. So as we look at that business, obviously, some of the leading indicators out there, ABI, some of the Dodge data showing some signs of weakness out there. Those tend to be 9- to 12-month leading indicators. Nothing that we've seen show up in our business yet. Our bidding activity is still good. The backlog is still really strong. So we look at '24, we see potential growth on the commercial side as well. And an important part to remember there, too, is on the distribution side, we're distributing building insulation like we use on the install side, but we also distribute mechanical insulation. And that business has a little less cyclicality to it because there's a heavy repair replacement recycle -- repair replacement cycle that goes on with mechanical insulation. So on the distribution side of our business today, about 1/4 of our revenue is from that maintenance and repair, which is more of a recurring cycle. So between that and what we have in the backlog, we feel good about next year.

Great. I guess on the last earnings call, you mentioned some increased availability of materials. Could you speak to what you're expecting as far as from a capacity increase or anything like that or just availability of insulation today and looking forward for the backdrop that you just described for your outlook?

Yes. I think -- I mean, it was an interesting quarter from a product availability on the fiberglass side. So we started Q3, I'd say, with material a little bit looser in the industry. And by the end of the quarter and sitting here now, going back on allocation with a couple of the manufacturers. So things have tightened up. Some of that's on the demand side, like I said, single-family starts -- or our single-family revenue, single-family completions basically improve throughout the quarter. So again, without using more insulation per unit, that definitely affected things on the demand side. And then on the supply side, you've got some of the manufacturers taking some maintenance, some downtime on their production line. So that's also had an impact as well. So sitting here now, like I said, tight supply. Looking at next year, potentially accelerating demand. I think it's going to be another year of tight material for us on the insulation side of things.

Okay. All right. And that usually bodes well for manufacturers kind of going after price. Is that kind of -- I guess, what's your expectation there on the pricing front? Because the last one I think you said had gotten pushed. So I guess with things -- was the reason it was pushed is because things were a little loosened up at the time, and then now they're tighter. So what's your thoughts now?

Yes. I mean, you're exactly right. So as that one was announced, we were sitting in that third quarter with a little bit looser material. I didn't see as much stickiness with that price increase. But sitting here today, as we look into next year, I won't be surprised to see the manufacturers taking price increases. It's all going to depend on the demand environment. It's going to depend on what starts do. Obviously, November and December starts will be important for that in Q1 as well. But given what we know and what the builders are saying today, I think demand will be good and that will make for tight material and likely some price increases.

Okay. Thank you, and it makes sense. So first, I just want to pause and see if anybody has a question in the audience. All right. Do you got one?

A quick one. As you look to '24, you think about potentially growth on the residential side with an improvement in starts. But is it not -- the completions have stayed really high this year. And so doesn't that create sort of a higher bar that you have to cross in order to see volume growth? And then even with those higher completions you had this year, do you still think you could see growth?

Yes. I mean our work comes -- so completions isn't a perfect metric, but it's probably the closer metric than starts today. Our work typically comes kind of halfway in between that time. But like -- and this year, more of that completions number is heavily weighted to multifamily. So that dynamic shift from multifamily to single family is what's going to help us from a revenue standpoint next year.

And there's been a, I guess, within the homebuilding industry, there's been some focus around production builders taking share. Can you talk about what that share shift means for you guys looking forward? And -- I guess, both on the distribution and the install side of the business?

Yes, I'd say on the distribution side, it could have a little bit of a negative impact. We'll start there just in that our distribution business is selling to the smaller installers, the smaller mom and pops that aren't going to participate as much with the bigger builders. But we'll get that benefit on the install side where we do participate more with the bigger builders. And so the production home, certainly less insulation than a custom home, but we do gain a lot of efficiencies from the production of builders by being able to go to one job site and knock out multiple units in a day. So ultimately, we don't see it as a major headwind to our business at all.

Yes. And I guess, is there -- with the bigger homebuilders, the more -- even a regional guy, did they do -- is the pricing a different kind of pricing set up for those types of customers? Is it more like centralized pricing or more national prices or is it all kind of the same?

No. It's all locally managed, right? So the pricing for D.R. Horton is going to vary across the different regions of the U.S., the different cities of the U.S. and it's always a local negotiation. So it works the same way with the big builders as it does for the regionals and the custom builders.

Okay. I don't know if with larger, more national guys or just even regional guys taking some share, if there was maybe some opportunity given your scale that maybe take a little share with them or along with them.

I think there is. I think because they appreciate the volume they got to do, they appreciate the scale we bring, the labor, the material, knowing that we're going to have the material. Because for them, what's important is getting past our step of the process, right? They want to get through, they want to know that the guy that does their insulation has the material, has the labor. It's going to get done, so they can pass their inspection and move onto the next step of the process.

Yes. Okay. Pause for a second. Anybody? So how are you thinking about with the -- you guys have been doing some -- the mechanical insulation you talked about. But also -- I'm not sure if it falls into the same category, but we toured a plant of yours where you did some insulation, I think, for metal buildings. So what is the -- and it seems like that's been a direction you guys have been going more is mechanical insulation and also the metal building side. So how are you thinking about specifically that industrial and kind of metal building end market as you look into next year? And is that still kind of an area where would expect you to -- or should expect you to kind of focus M&A in that direction?

Yes. Yes. So as I was saying, I think that end market, we're cautiously optimistic for next year on that mechanical metal building side of things. There's -- the metal building goes into everything from your Costco warehouses to your data centers. It can be used in schools, churches. That was an area where we have had a nice overlap. We were already in that business with Service Partners. And when we bought DI, that was about 15% of their business. And so we had a nice overlap in synergies there. And then DI got us into the mechanical space, which became kind of the third leg of our insulation stool, right? We're already in the residential, the commercial building that got us into the mechanical. And so as we look at all of that today and going forward from an M&A standpoint, it's about $17.5 billion addressable market. And we've got combined share across all 3 in the low 20%, right? We're the #1 player in all 3 markets, but we've got a lot of white space out there still to grow. Now to your point, there's probably more white space on that commercial mechanical side of things. And so it's not our strategy to necessarily grow more there. But from a pure math perspective, there's more white space there. But I point out to people all the time we did our third and fourth largest residential deals we've ever done this year as well. So there's still room for roll-up out there in that area. And what we know is we've got advantages in those markets. And we plan to continue to take advantage of that and grow both organically and through M&A.

And to that, the -- that's one place I wanted to spend a little bit of time. Can you update us what is your market share in the insulation install and then distribution side currently?

Yes. Yes. So as you go across those end markets, we talked about that make up the $17.5 billion, there's about $6 billion in the residential building insulation market. We're probably low 30% share on the install side. We'd probably touch another 10% through our distribution business. On the commercial building, which is all types of commercial structures, including the metal building, it's about -- also about a $6 billion end market. We've got about a 10% share. And then on the mechanical side, mechanical insulation, we've got about a $5.5 billion end market, and we got about a 10% share. So with the SPI acquisition, which we announced last year, which we'll be closing here in 2024, they actually serve all 3 of those end markets more heavily on the mechanical side, but they have a spray foam business that touches the residential space. They've got some metal building that touches the commercial building space. And then they also have the mechanical insulation. We'll be more kind of mid-teens in that mechanical space post the SPI transaction.

I got you. And you think even with the commanding share you have on the residential side, that's one question I get from time to time is, is there still ability for you guys to -- is there still enough white space out there, ability for you guys continue to grow through M&A on that side of your business? And to your point, the 2 that you did this year were the largest you've done. But the answer to that would be from you, it would be that there's a long runway? Or -- I mean at what point do you feel like you've kind of saturated that side and you're going to have to kind of start looking somewhere else?

Yes. We don't feel like we have -- it wasn't our largest deals on resi. It was our third and fourth, just to clarify that so -- but it's highly fragmented, right? So there's us, there's IBP. And then after that, it's highly fragmented for the rest of the market. A lot of smaller players. So it will take some time to continue to roll up, but we still feel like there's plenty of white space there.

Switching -- look, I guess kind of going back to your last comment about SPI, can you talk about the synergies that you guys have laid out there? I think it was $35 million to $40 million. Kind of where those are coming from, and timing and expectations sort of thing.

Yes. So $35 million to $40 million of synergies, we estimate it will be about half material synergies. And then the other half, operational. And operational is going to be everything from optimization of freight. It's going to be around leveraging IT spend across the 2 companies, back-office synergies we can realize. We feel really good about that synergy number. I mean, we expect it to take 2 years to get there. We'll be at about half of that run rate after the first 12 months. But we feel really good given having done the DI transaction, DI was a very similar sized company. They were about $750 million in revenue when we bought them, about 10% EBITDA. They're now part of our Specialty Distribution segment, making mid-teens EBITDA, and we've realized the high end of the synergies on that deal. So now with SPI, we feel even better given they look a lot like DI, about $700 million in revenue, about 11% EBITDA today, get them up to our mid-teens with the synergies we've got out there. We feel really good about that. And with the synergies, even on DI, we're still continuing, Robert talked a little bit about it on our call, about kind of the second phase we're entering there now where we're really starting to take a hard look at what are the options between our legacy distribution, building insulation, distribution business, Service Partners, MDI. Where can we co-locate branches, put inventory in more strategic locations to either support sales growth strategy or to reduce freight costs, right? So that's -- we're in the early innings of that, but something that we definitely see as a big opportunity to realize a second set of synergies with DI. And when you think about putting another 90 to 100 locations from SPI onto that same footprint, those opportunities just multiply.

Yes. Is there -- that market, the mechanical insulation specifically, you mentioned your share there and kind of where it's going. But what -- is that industry also fairly fragmented? What's the competitive landscape like there?

Yes. There's another -- I'd say there's another handful of players, probably not quite to SPI size, but north of $100 million of revenue. Hard to say for sure because they're all privately-held companies. So there's a handful of chunkier deals in that space. We talked about that when we bought DI. That was one of the things we really liked about getting into that space is there would be some chunkier deals out there in the future. And SPI was certainly at the top of that list for us, and we should be closing on that here in 2024. So there's still some chunkier deals, and then it's very highly fragmented after that.

Okay. All right. So you guys are going to be generating pretty decent free cash flow. As you think about kind of next year from working capital, CapEx and so forth, is there anything to be aware of as we think about your free cash flow generation next year?

Yes. I mean it's been a great free cash flow year. We're sitting at about $540 million year-to-date. I think that's up 93% to prior year. If Q4 goes to plan, we should be close to $700 million for the full year. And it's been a great story of the business all along. I mean, we're a business that doesn't require a lot of CapEx that generates a lot of free cash flow. Our CapEx runs 1.5% to 2% of sales, basically just replacing the fleet and equipment we use on the job sites. Nothing unusual coming up there or anything unexpected coming up on that side of things. Probably the one thing to point out this year, the inventory improvement we've made this year, we've really focused on getting our inventory days down. And so we've taken 12 days out of our inventory. So that's more of a probably onetime benefit to cash flow this year. So I wouldn't plan on that for next year. But even without that, we'd be north of $600 million this year of free cash flow.

Okay. All right. And as far as -- what's kind of the normal -- so I guess, going into next year, you feel like you'd be kind of back at a more normal kind of inventory, working capital type situation?

Yes. Yes. Now where we are -- I mean we're -- we target 12% to 14%. We're still slightly above that, just above the 14%. So we're always pushing to do more. If we can take out more, we'll certainly try to, but we're not going to do anything to jeopardize sales either in that side. So with material tightening, might we take some opportunities to take material where we can, we certainly will.

Yes. Okay. Anybody in the audience have anything? I've burned through almost all of mine already. You're fishing, Rob.

We get to the answers quick.

Yes, that's right. Anybody? All right. Well, I guess with that, we'll wrap it up. So thank you so much. Well, maybe I'll ask you before we do. Is there anything that we didn't touch on that we should have?

I think we -- I mean, SPI, we didn't talk a lot about, but I talked a little bit about that and the synergies with it. Taking -- I think we initially said we thought that would close in Q4. Things taking a little longer than we expected, which is not uncommon these days with deals, but certainly nothing we think that's going to stop it. So we're confident that will get closed here in 2024, which is -- don't have a date when at this point.

Okay. All right. All right. Well, thanks a lot. We appreciate it.

All right. Thanks, Trey.

Thanks, everyone.

Thank you.

The quickest meeting of the day.