TopBuild Corp. (BLD) Earnings Call Transcript & Summary

Greetings, and welcome to the TopBuild acquisition of Specialty Products and Insulation SPI in an all-cash transaction valued at $1 billion conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, P.I. Aquino, Vice President, Investor Relations for TopBuild. Thank you. You may begin.

Good morning, everyone, and thanks for joining us on such short notice. With me today are Robert Buck, our President and CEO; and Rob Kuhns, our CFO. Earlier this morning, we issued a press release announcing that we've completed the acquisition of Specialty Products and Insulation or SPI, a leading specialty distributor and fabricator of mechanical insulation solutions for commercial, industrial and residential end markets. Many of our remarks today 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 and in the company's SEC filings. The company assumes no obligation to update any forward-looking statements because of new information, future events or otherwise. Please note that some of the financial measures to be discussed during this call will be on a non-GAAP basis. These non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We've provided a reconciliation of these financial measures to the most comparable GAAP measures in today's press release and presentation, both of which are available on our website at topbuild.com. Let me now turn the call over to our President and CEO, Robert Buck.

Good morning, thank you for joining us. SPI noted, we announced this morning that we have successfully closed on the acquisition of SPI in an all-cash transaction valued at $1 billion. This is an exciting day for TopBuild and our shareholders as we're taking another step forward to deliver on our growth strategy. Let me start by covering the SPI business at a high level and our strategic rationale, and then I'll turn it over to Rob to talk about the financials before we open it up for Q&A. SPI is a leading specialty distributor and fabricator of mechanical insulation solutions in the U.S. and Canada. The company is based in Charlotte, North Carolina and has 90 branches and approximately 1,000 employees across North America. We've had the pleasure of getting to know Ray Sears and the SPI team over the last few years, and they've done a great job driving steady growth and profit improvement. Both TopBuild and SPI have similar corporate values and culture with a strong emphasis on people, safety, integrity and execution. We're excited to welcome SPI's experience and talented team to the TopBuild family. The SPI acquisition represents the next phase of expansion in our mechanical insulation business, bringing together 2 special distribution leaders, each with a strong presence in the commercial and industrial end markets. SPI is a great complement to our existing specialty distribution business and enables us to further expand our installation solutions for customers across all verticals, data centers, energy, industrial manufacturing and marine, just to name a few. For those of you that are less familiar with mechanical insulation, it is any form of insulation design to insulate equipment in commercial and industrial facilities and is used in both high- and low-temperature applications. It includes the protective coverings applied to pipes, ducts and other equipment to regulate temperature, reduce noise and improve energy efficiency. It also helps protect workers from exposure to extreme temperatures. The transaction extends our geographic footprint and expands our value-added fabrication capabilities for engineered mechanical insulation parts better enabling us to serve our customers' needs. The combination of SPI and our current mechanical insulation business creates opportunities for us to drive operational excellence throughout the organization. In the presentation, we've included a map showing the combination of SPI and TopBuild's mechanical insulation branches. And as you can see, SPI's branch network is complementary. SPI also enables us to expand into some key white spaces such as Florida, where today, we don't have a mechanical insulation distribution presence. SPI has a strong presence in the Southeast and Northeast both of which are important markets for mechanical insulation. We also see strong potential to share leads and capture cross-selling opportunities for our building envelope installation and commercial roofing installation services. The SPI transaction also improves our noncyclical revenue mix. More than half of SPI sales are driven by maintenance, repair and replacement activity. As a result, the acquisition improves our revenue resiliency, something Rob will get into more detail in his remarks. Finally, the transaction drives strong return on invested capital and leverages our core strength in M&A. The complementary nature of SPI's business gives us great confidence in our ability to drive $35 million to $40 million in annual run rate synergies within 2 years. Those of you that have followed TopBuild closely have heard us talk about our core strengths and specifically, M&A being a core competency. We have a clearly defined strategy and process and are very disciplined around identifying and executing strategic M&A. Having now completed 45 acquisitions in the last 10 years, we have a strong track record of success. We're experienced at integrating companies, converting them onto to our ERP and realizing synergies. Through the acquisition of SPI, we're once again putting our M&A expertise to good use. With that, let me hand it over to Rob to discuss a couple of other very attractive features of the deal.

Good morning, everybody, and thanks for joining us. Let me reiterate how excited we are to announce the SPI transaction. We believe the transaction provides significant value for our shareholders and is great use of capital. We're acquiring a well-run company that is complementary to TopBuild and has a solid track record of driving profitable growth. Let me start with the financial details of the transaction. The cash consideration for SPI was $1 billion. Revenue for the trailing 12 months ended June 30, 2025, was approximately $700 million. The company generated $75 million of EBITDA for the same period, representing a margin of 10.7%. This represents an acquisition multiple of 12.4x trailing 12 months EBITDA inclusive of a $70 million tax asset. We expect annual run rate synergies of $35 million to $40 million within 2 years, which takes the transaction to an 8.3x EBITDA multiple post synergies. We have a consistent track record of achieving synergies and expect to drive a combination of supply chain savings and operational improvements. The transaction closed on October 7 and was funded with cash on hand including the proceeds from our $750 million senior notes issuance in September. Pro forma for the transaction, our net debt to adjusted EBITDA as of June 30, 2025, is approximately 2.4x. We've included a slide in our presentation that gives you a view of TopBuild's trailing 12 months pro forma revenue. Total pro forma revenue for TopBuild is $6.4 billion for the trailing 12 months ended June 30, 2025. Specialty Distribution inclusive of SPI will now account for 43% of our annual revenue. Revenue from the commercial and industrial end markets will now account for 47% of total top build revenue. This transaction also improves TopBuild's revenue resiliency as our noncyclical revenue is now approximately 22% of total sales. In closing, I would like to welcome the SPI team to TopBuild, I'm extremely confident that the combination of our companies will be a success for our customers, our employees and our shareholders. With that, let me hand it back over to Robert to wrap up our prepared remarks.

The acquisition of SPI is another important step for TopBuild. Bringing together 2 leading specialty distributors with a strong commercial and industrial end market mix reinforces our leadership position so that we can drive innovation and better meet customers' needs. SPI's geographic reach and fabrication capabilities enabled us to extend our footprint and create opportunities to drive operational efficiencies across our branch network. The acquisition also increases noncyclical revenue mix, improving our revenue resiliency. Finally, the SPI transaction drives strong returns and leverages our core strengths around M&A. With the transaction closed, we've hit the ground running, and we're already working on integration. We're confident we can achieve the run rate synergies within the period outlined. We are very excited to welcome SPI to the TopBuild family. We hope all of you will join us at our Investor Day on December 9 to hear more about our progress as well as our plans to continue driving sustainable, profitable growth and creating value for our shareholders. With that, operator, let's open up the line for questions.

[Operator Instructions] Our first question comes from the line of Stephen Kim with Evercore ISI.

This is Aatish on for Stephen. And congrats on the deal. Just a quick high-level question in terms of market share for SPI in the Mechanical Insulation segment. If you can give us a sense of that. I think with DI at the time of acquisition, like mid-teens for DI. So I just want to get a sense of kind of market share for both.

This is Robert. So I would say, if you looked at the footprint and the reach that SPI has, we would put their market share somewhere in the ballpark of high single digits, maybe 10% in that type of ballpark. And so we've always kind of talked about our share being somewhere in the low double digits. So probably somewhere in the ballpark of that 20% is probably what you could look at our scope today relative to mechanical insulation.

That's very helpful. And just 1 more, just anything structurally -- has anything structurally changed in SPI since the last conversations and post-termination that we should be aware of? I know the deal no longer includes the MBI, so in a sense there?

Yes, nothing significant. You heard that this transaction obviously excluded the metal building insulation business. So this is really the core mechanical business they have, and they have a small piece of building installations. So nothing has really changed in the structure. They've done a couple more acquisitions in the space since last time. But great management team is still in place there, great talent in place. And as we said, we've kept the relationship there. So we're super excited about having that team join TopBuild, but no significant changes.

Our next question comes from the line of Phil Ng with Jefferies.

Congrats. You guys have been really busy on the M&A front. I guess perhaps a question for Rob, can you provide the major buckets in terms of the synergies you have laid out? And then how that kind of layers in the next 2 years? When I look at margins for SPI, obviously not fully integrated, it's obviously lower than your core service partner business, your confidence of bridging that gap within that 2-year time frame.

Yes, Phil, this is Rob. So yes, the synergy number we've signed up for is $35 million to $40 million of run rate synergies by the end of year 2. With that fully synergized EBITDA, that would take the EBITDA today that's at 10.7% to around 16%. So getting it right there in the range of where our existing distribution business falls. We've got a high level of confidence in these synergies. We've obviously had a lot of time to spend study in that piece of it. But the breakdown, it's roughly, I'd say, 50% supply chain savings, 50% operational. The operational has got a number of different buckets that can be back office, indirect spending, et cetera, insurances, IT costs, things like that. So we feel really good about that. And like I said with that, we'll get it up to the kind of mid-teens type EBITDA margins.

Will the existing management team be sticking around post this deal?

Yes, absolutely, the existing team plans on staying with the business. And again, we built some long relationships across multiple years there. So absolutely, and we're very excited about that.

Okay. And then -- and Robert, you gave a little color already. But considering this deal doesn't include the MBI business, it's impressive sales and EBITDA looks pretty similar to what you initially gave us a framework a few years ago. Appreciate they had done some deal, but any color how the organic growth profile has looked for these guys the last few years? And how is your backlog in booking? I know your legacy business is looking quite good just given how strong C&I has been, but just any color on how this business has progressed organically and the outlook going forward?

Yes. I'll hit the last part first, and Rob will talk about the organic growth. So backlogs are healthy there, great bidding activity, active bidding activity really across all the verticals. Again, another thing we like about the business, SPI participates across multiple verticals, just like we do in our current mechanical insulation business. So nice backlog coming along, great bidding activity there as well. Rob will talk about organic.

Yes. Yes. So I mean if you went back in time to when we first announced this transaction, I mean, the business we're buying today, it's ironically around the same sales and EBITDA now. The business we're buying now back then was roughly $600 million of revenue and its growth since then, has been around kind of mid-single-digit organic growth. And then like we mentioned, they've done a handful of kind of bolt-on acquisitions that have added kind of low single-digit growth to that number. So that's gone in from the roughly $600 million to $700 million they have today.

Our next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is on the revenue opportunity. In your remarks, you mentioned that there's some cross-selling opportunities between the businesses. Can you talk a bit more about that?

Yes, absolutely, Susan. So 1 thing that -- and we've already seen this playing out with our deal with progressive roofing, but -- and the crossover between mechanical and roofing and even our building installation business and the same contractors, the same contacts with those and how we're handling leads and bidding those jobs. And so I think we gave a story in our last earnings call where we were on a big data center campus in Arizona, where our TruTeam business had done the building envelope a few months earlier and at the same time, Progressive was doing the roofing systems on those buildings. DI was delivering the material. So we now see with SPI, we're going to have that same type of formula that same type of ability to share leads, which is going to allow us to bid the same jobs and really provide that total solution, whether it be the envelope or now the mechanical solution across the footprint. So excited about that. We're already seeing that work with Progressive and our current DI business and our current TruTeam business. So we only expect that to expand now as a proven formula with the addition of SPI.

Okay. That's great color. And then you've done obviously 2 really significant deals this year already. How are you thinking about future uses of capital what's your willingness to do additional deals and maybe the types of things that you're going to be looking at across the business. versus perhaps focusing on integrating the Progressive and SPI and getting those 2 fully into the core of the business.

Yes, Susan, this is Rob. So I mean, obviously, right now, our net debt leverage, we've taken it up a bit with this deal. We're up to about 2.4x on a pro forma basis. I think just like in the past, when we've gone up into that type of range, you'll see us hopefully quickly delever from that. And come back down kind of in that 1 to 2 range, where we've historically been. I think even at this range, though, you're going to continue to see us do bolt-on acquisitions. And we're going to continue to use our cash to grow the company to do M&A. That's been our #1 capital allocation priority and it's going to remain that way. But obviously, we're going to focus our efforts on making sure we integrate these companies correctly and generate the returns we've signed up for.

And I'll just add on to that, Susan. I think the nice thing, too, is SPI comes in with a pipeline. And so we've got a lot of opportunities here, busy, very much so on the M&A front. So to Rob's point, you'll see more opportunities coming here with bolt-ons. We're going to do -- the team is very focused on the integration of Progressive and SPI, but we've got the resources and the, if you will, the muscle relative to continue to do some nice transactions here.

Our next question comes from the line of Keith Hughes with Truist Securities.

Just digging more on the 50% of synergies in supply chain. Historically, those have come pretty quickly on distribution acquisitions. Anything here that would delay that versus what historically has happened?

Keith, I think you're thinking about it right. I mean we'll obviously work the process here. We'll have to look at the footprint. We've got some great tools as if you think about optimization. Rob talked about some things around or may have talked about things around logistics and freight, those types of things. So we'll quickly be able to look at footprint, where is material coming from, where we're shipping to those types of things. So -- but you're thinking about it right. I mean, we think we'll deliver a nice part of the synergies in the first year. and then the total amount that Rob talked about by the end of year 2.

And are the suppliers similar to DI and quite honestly, TopBuild in general?

Very much so, definitely overlap in the supply base in places where we have great partnerships, relationships and SPI has as well, but very similar supply base, absolutely.

Our next question comes from the line of Rafe Jadrosich with Bank of America.

Just a couple of quick modeling ones. Just how do we think about the cost of debt here in like the incremental interest expense. And then what's the seasonality of SPI relative to the legacy BPLD business?

Yes, Ray, this is Rob. So with the new bond we issued in September at $750 million. Interest rate on that is going to be 5% and 5.8%. So that the new interest cost to factor into your model there. In terms of seasonality, I would expect it -- I mean, it's very similar to what we see on the DI side of the business. So strongest quarters kind of in the middle of the year, Q2, Q3, things slowed down a bit in Q4 and Q1 typically is a little bit soft as well.

Great. And then just on the commercial and industrials continue to grow as a percent of the overall mix, can you give a little bit more color on the specific end markets that those are sort of selling into. Is there an overweight to any specific end market does SPI have more exposure to 1 segment versus another? Is there different than DI? Just any color there would be really helpful.

Yes, Ray, this is Robert. So no, very balanced. Obviously, we dug into that. We obviously know our current mix as well. So I'd say it's pretty balanced across the different verticals, whether you're talking about data centers, oil and gas, manufacturing, education, health care, food and beverage. So no, I would say pretty balanced there across the different verticals as we look at the SPI business similar to our DI business.

Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Just 1 question going back to kind of the value proposition. You talked about kind of the sharing of leads and relationships with Progressive and the legacy business. I guess, is there kind of an opportunity to maybe centralize the bidding process and maybe simplify for some of the customers delivering the different material types and different stages of construction? Or is it more so just that relationship and leads aspect that this deal and Progressive really enhances.

Yes. Kurt. So I think what you're going to see is some good sharing of best practices and relationships from that perspective. And so we'll look at that. What we are doing and to your point about making it simpler for the customer, the way that we're bringing leads in and we're able to manage those leads and get those back out to our different businesses and stuff. And we got some centralization of some of those relationships and stuff, that will definitely make it easier for the customer relative to that. And so now they'll have some 1 point of contact on certain things, but then there can make sure that from a, I'll say, total TopBuild solution that there is a more cohesive approach to that. So I think definitely will see benefit of the customer. And then maybe to your other point, if I heard it correctly, what this really allows us to do with the footprint as well, and I think we gave this example on our previous earnings call, where we have these fairly significant-sized projects where we're going to be able to service those projects, supply those projects from different locations and can flex up and down on capacity and stuff that you think about from a fabrication perspective. Absolutely going to be the benefit to the benefit of the customer as we do that. So we see it from multiple different ways, make it easier and better service for the customer base.

Got it. And maybe just 1 on Progressive specifically. I mean the location footprint of that is much more consolidated than I guess the Service Partners business and SPI. As you think about the existing relationships that you have on the insulation side, do you think that provides you an advantage in terms of the ability to expand progressive into new markets and already have kind of a preestablished customer base?

Yes. Definitely from a contractor -- larger contractor perspective, we'll definitely share those relationships. We're already seeing some of that happen as well. And that, by the way, both ways. I mean, Progressive has some great relationships and their stronger service areas as well. So we're seeing that work both ways, but we think that's part of the strength of the model here, and we talked some about cross-selling as well, is how we can share those contracts, those relationships. So we absolutely see that as an advantage.

Our next question comes from the line of Collin Verron with Deutsche Bank.

Earlier in the call, you talked about the share being about 20% for the mechanical installation business. Just in terms of bolt-ons, are you guys looking at for additional product categories within mechanical? Is it more of a geography play where you're trying to fill some white space. And I guess what does market share look like for some of those competitors out there after a combined TopBuild SPI.

Yes. This is Robert. So hard for me to comment on anything relative to the competitors. But some of the acquisitions that we have in our pipeline and that we see in the SPI pipeline. Some of it is geographic. Some of it continues just to build upon current competencies. In the mechanical business, as an example, there's different things like some metal jacketing, some blanket systems, those types of things, things that we do today as well. So I wouldn't necessarily call them adjacency, I'd call them part of the core mechanical installation products. We'll just be adding to that. capability as well and definitely some geographic play also.

That's helpful. And I guess just any commentary around the opportunity set just maybe on how you're thinking about M&A between insulation and commercial roofing. Is there a preference for one towards the other? Or how are you guys thinking about the sort of the opportunities that's there?

Yes, Collin, this is Rob. So I mean, our strategy is unchanged there, I'd say. We think about acquisitions the same way and that we prioritize based on return on investment. So regardless of end market, whether it's residential, whether it's commercial, we're looking for the best return on the capital we're deploying. Ultimately, when you look at our TAM now, particularly with commercial roofing, there's a lot more white space in there than the existing business. It doesn't mean we're not going to do deals in the existing business. There's still a lot of deals to be done there, and we're going to continue to do transactions in that space. But we're very excited about the addition of Progressive and the roofing business and the opportunity set that comes with that.

Thank you. Ladies and gentlemen, there are no other questions at this time. I'll turn the floor back to Mr. Buck for any final comments.

We appreciate everyone joining today's call. I'll reach out with any questions, and we'll talk with you next when we announce third quarter results on November 4. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.