TopBuild Corp. (NYSE:BLD) Q1 2024 Earnings Call Transcript

TopBuild Corp. (NYSE:BLD) Q1 2024 Earnings Call Transcript May 7, 2024

TopBuild Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the TopBuild’s First Quarter 2024 Earnings Release. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to your host, PI Aquino. You may begin.

PI Aquino: Good morning and thanks for joining us. On our call today are Robert Buck, President and Chief Executive Officer; and Rob Kuhns, Chief Financial Officer. We have posted our earnings release, senior management’s formal remarks and a presentation that summarizes our comments on our website at topbuild.com. 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 as well as in the company’s filings with the SEC. 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.

The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today’s press release and in our presentation, both of which are available on our website. I will now turn the call over to President and CEO, Robert Buck.

Robert Buck: Good morning and thank you for joining our call today. Our first quarter performance got the year off to a solid start for TopBuild and was in line with our expectations, as our results continue to demonstrate the strength of our business model and our teams’ ongoing drive to improve. As you saw in our release this morning, we are also raising our outlook and guidance for the remainder of 2024, which Rob will cover in his remarks. Let me start with a couple of comments around our recent announcements. Most of you saw our press release of two weeks ago terminating the SPI transaction. Since last July, we worked through the HSR review process to help the DOJ better understand the entire business and transaction details.

The DOJ focused on a small subsegment of metal building insulation, laminated fiberglass and defined the business and distribution of the product very narrowly. Laminated fiberglass is one of several options that contractors have when insulating a metal building. This view from the DOJ led us to explore the possibility of renegotiating the transaction to buy SPI excluding the MBI business. While doing so would have likely allowed us to receive regulatory approval, we were unable to agree on price with the sellers and ultimately decided that pursuing the transaction further was not in our shareholders’ best interest. As good stewards of your capital, we will continue to be very disciplined in our approach to acquisitions and capital allocation.

Next, we announced today that our Board authorized a new share repurchase program of up to $1 billion. This is in addition to the prior authorization which has approximately $154 million remaining. This brings our total availability for share repurchase to $1.15 billion. This authorization shows the strength of our balance sheet and our management team and Board’s confidence in our business and strategic direction. Turning now to our first quarter. We’re pleased with our start to the year. Total company sales grew 1.1% to $1.28 billion and adjusted EBITDA rose 6.5% to $253.8 million. Good price realization in the quarter, coupled with productivity initiatives, drove adjusted EBITDA margin expansion of 100 basis points to 19.8%. On a same branch basis, in the first quarter, our single-family installation business improved sequentially each month.

In fact, March was the first time in more than a year that single-family improved on a year-over-year basis, which is very encouraging. As you have heard from the public builder’s sentiment and order volumes being reported, we expect a healthy single-family environment for the remainder of 2024. Our installation results also benefited from continued strength in multi-family in the quarter, which grew more than 20% versus a tough comp from last year. As we noted last quarter, starts and bidding activity for multi-family have slowed, but we have a healthy backlog of work that we anticipate will continue throughout the balance of 2024. Across the commercial and industrial landscape, we are seeing solid progress in the business and our bidding activity and win rate continues to improve.

Our proprietary lead app tool is driving organic growth in this part of the business. We see many major projects being bid and coming online. We have several heavy commercial and mechanical insulation projects that we are working on across multiple verticals. We have added slides nine, 10 and 11 to our earnings deck so you can visualize these verticals as well as our highly fragmented $18.25 billion TAM, or total addressable market. These slides will also help you understand our customer base, product breadth and service reach. As you can see, we have a lot of white space across our core insulation business for both organic and M&A growth. Turning to M&A. Acquisitions will continue to be our number one capital allocation priority as they generate great returns for increased shareholder value.

Identifying, evaluating, and integrating acquisitions is a core competency of ours, and we have an excellent track record of results in this area. We continue to have a robust pipeline of acquisition prospects. In fact, yesterday we announced an agreement to acquire Insulation Works, a $28 million Arkansas-based installation business with national expertise in agricultural buildings. We are excited to have another great addition to the TopBuild family of companies and expect to close this transaction later this month. To date in 2024, we’ve announced five transactions totaling approximately $68 million in annual revenue. Let me make a couple of industry comments before turning to our operations. On the material supply side, fiberglass continues to be on allocation.

We anticipate Knauf’s new facility in Texas will come online successfully in Q3, however there is quite a bit of maintenance and downtime planned at several other fiberglass facilities which will likely offset any new production capacity this year. We are feeling the impact of the tight supply situation in our distribution business, mainly our Specialty Distribution volumes, which Rob will touch on in his comments. On the other hand, we are seeing momentum with spray foam given the code adoption tailwinds I will discuss later. Recently all four of the fiberglass suppliers have announced material cost increases effective in June or July. We expect to successfully work through any cost inflation that may take place, as we have consistently demonstrated.

Moving to our operations. As I noted on our last call, we expanded our special ops team in 2023. This is a small team of highly seasoned operators whose mission is to focus on our branches whose metrics fall into our bottom quartile. By leveraging this team’s knowledge and experience, we’re able to identify opportunities to drive improved performance. This quarter we saw the benefit of this special ops work in one of our larger distribution and fabrication locations on the East Coast. Through work that started in 2023, this business was relocated to a better geography to service our customers. The facility was right sized to drive improvements operationally, including productivity and overhead. Better inventory management helped reduce transfers and improve service levels.

Strategic decisions were made and actioned regarding sales productivity and talent. Mix of business was reviewed and actions taken around new verticals for the business. What is the outcome? The special ops focus has improved profitability in this business from low single digits to now mid-teens profit performance. The work on our bottom quartile is ongoing, as we drive to improve our business and our special ops team continues to focus on the opportunities across our network. Next, for those of you who might be less familiar, I’d like to spend a couple minutes on our mechanical insulation business and the opportunity going forward. When you consider an industrial facility, they are full of pipes, ductwork, and mechanical systems. These environments may have systems that need to be maintained at a certain temperature or systems that require sound control via an acoustic barrier.

They may also need protective insulation barriers to keep employees safe. We have the capability to supply any mechanical insulation solution required across many diverse industries. This is accomplished through a variety of products including custom fit jacketing and pipe covers made from insulating materials like fiberglass, foam glass or aerogel, just to name a few. Our distribution business provides these materials and custom fabricates coverings to contractors and mechanical installers. The standards for these industries are very prescriptive, often regulated with specific replacement schedules. We’re currently working on several large industrial LNG facilities, liquefied natural gas in the U.S. and Canada. Mechanical insulation plays a key role for LNG facilities.

Many are being built along the Gulf Coast and you’re dealing with a high humidity environment and using cryogenic temperatures to compress natural gas. Let me give you an example of a multiyear LNG mega project in Louisiana where we are a primary distributor of mechanical insulation. The facility will sit on more than 600 acres and take three to four years to complete. The facility will contain massive storage tanks, energy turbines and multiple segments of pipeline totaling over 20 miles throughout. Some pipes will be more than 3-feet in diameter. Our initial scope included supplying products and fabrication services for modules being constructed off site. Our national footprint allowed us to supply these prebuilt modules from multiple distribution international facilities across multiple states.

This represented over $12 million dollars in revenue in 2023. As the project has progressed, our scope has expanded to include more hot and cold insulation applications, fire protection and sound remediation insulation for on-site construction, which will deliver an additional $20 million dollars of revenue. This is a great example of our scope on a multi-phase project that enables us to leverage our product breadth and expertise, fabrication capabilities, project management focus and national footprint. As we mentioned in the past, these projects may be lumpy over time in regard to revenue, but they play to TopBuild’s Specialty Distribution strengths. In addition, the replacement cycles for the projects vary from 18 to 24 months for certain equipment to a plantwide refurbishment every five years, so we will see recurring revenue from this project and others.

Let me transition to discussing the future of our overall business. We have several dynamics across the industry that will allow our differentiated business model to continue driving profitable growth. Whether it be the large mega projects that should come online in the next few years and the recuring revenue that will follow or our expanded commercial reach across North America. At a more macro level, the United States continues to face a housing shortage, the result of the last decade of underbuilding. So, fundamentally we expect housing demand to be strong for the foreseeable future. We also see tailwinds for TopBuild and the industry coming from energy code adoptions and recent HUD announcements. Given our expertise in all things insulation-related, we expect these energy code changes will help fuel additional demand for years to come.

All these dynamics along with our relentless drive to improve and focus on talent fuels our confidence that TopBuild will outperform in any changing business environment. Finally, I’ll close my remarks today by thanking and congratulating our entire TopBuild team. TopBuild has been recognized as a Great Place to Work for the second consecutive year. This recognition demonstrates that we’re building a workplace that supports development, provides career opportunities, ensures fair treatment and values each employee. On behalf of our entire leadership team, thank you to our employees, your passion, drive, and commitment to success have played a significant role in earning this certification once again. Let me now turn the call over to Rob.

Robert Kuhns: Thanks, Robert, and good morning, everyone. I want to thank our teams for their hard work in delivering another quarter of profitable growth for TopBuild. As we mentioned on the February call, the first quarter of last year was our highest sales growth quarter due to the carryover of a strong single-family backlog. We also had a slow start to this January due to weather across the country. Our teams came back and delivered strong results in February and March and our first quarter saw sales grow 1.1% to $1.28 billion, in line with our expectations. Across both segments we did a great job covering the fiberglass cost increases that hit during the quarter. These fiberglass price increases were partially offset by the carryover impact of lower material prices on spray foam from last year.

Breaking our first quarter sales down by segment. Our Installation segment net sales grew 4.1% to $798.7 million, of which 2.6% was the net contribution from acquisitions and disposals, pricing contributed 1.2% and volume was up slightly by 0.3%. Installation’s multi-family sales remained strong due to the strength of our backlog and single-family sales continued to improve each month of the quarter. The current trend on single-family starts should be a tailwind to our business as we move through the remainder of the year. Net sales for Specialty Distribution declined 2.3% to $545.8 million for the first quarter. Volume declined 4.2%, partially offset by higher pricing of 1.5% and acquisitions of 0.4%. The volume decline was driven by lower residential insulation sales because of business mix and tighter material supply of fiberglass.

Total company gross margin of 30.3% expanded by 100 basis points versus last year due to improved productivity and higher pricing in both segments. As I mentioned earlier our teams have continued to do a great job effectively managing the price/cost relationship. In addition, our ongoing focus on driving operational improvements, as Robert detailed earlier, continues to drive margin benefits. Adjusted EBITDA, of $253.8 million, was up 6.5%, and adjusted EBITDA margin expanded 100 basis points to 19.8% compared to the first quarter of 2023. Installation adjusted EBITDA margin was 22.0%, an improvement of 60 basis points year-over-year. Specialty Distribution’s adjusted EBITDA margin of 16.9% was 110 basis points better than the first quarter of 2023.

Other income and expense totaled $7.5 million in the quarter, which was down from $16.1 million last year. Interest income from higher cash balances was the primary driver. Adjusted earnings per diluted share grew 10.3% to $4.81 in the first quarter. Turning to our balance sheet and cash flow. We finished the quarter with total liquidity of $1.4 billion, which includes cash of $968.8 million and availability under our revolver of $436.2 million. Net debt at the end of the quarter was $453.7 million, and our leverage ratio was 0.42 times the last 12 months adjusted EBITDA. Working capital as a percent of sales was 14.0% in the quarter, an improvement of 160 basis points from last year at this time, primarily driven by inventory reductions. Free cash flow for the last 12 months was $790.1 million, which compares to $502.6 million last year, an increase of 57.2%.

Our uniquely advantaged business model continues to generate strong cash flows. Acquisitions remain our top priority for reinvesting our cash flow as our disciplined M&A process has a proven track record of driving significant shareholder value. As Robert discussed earlier, our Board recently approved a new share repurchase authorization of up to $1 billion, bringing the total availability for buybacks to $1.15 billion. As we have done in the past, we will continue to balance returning capital to shareholders with our M&A pipeline. Turning now to our 2024 guidance. We are raising our sales expectation by $40 million to a range of $5.4 billion to $5.6 billion. We continue to expect total sales for residential and commercial to grow by mid-single digits.

We are also raising our Adjusted EBITDA guidance by $25 million to $1.065 billion to $1.155 billion. These increases to sales and adjusted EBITDA are driven by better than anticipated Q1 profitability and recent acquisitions. Looking to the remainder of the year, I want to remind you that last year’s second and third quarter EBITDA included $10 million and $15 million respectively of unusual profit related to our multifamily business. I’ll close today by reiterating our continued confidence in our outlook as well as the strength of the long-term fundamentals in our business. We believe that our teams will continue to execute at a high-level and TopBuild will continue to outperform in any environment. Robert?

Robert Buck: Thanks, Rob. We continue to be confident about 2024 and expect both segments to deliver another year of consistent execution and strong results. Our multiple avenues for growth stretch across a very fragmented $18.25 billion TAM. I hope the information and slides that we provided today are helpful in better understanding our insulation end markets and our opportunities. We have a proven, differentiated business model and a disciplined capital allocation strategy. Looking forward, we see great opportunity for profitable growth, both organically and through M&A. Operator, we are now ready for questions.

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

See also 20 Affordable, Promising Cities to Buy Real Estate in 2024 and 20 Best DocuSign Alternatives to Explore in 2024.

Q&A Session

Stephen Kim: Yeah. Thanks very much, guys. Appreciate all the color, as always. A couple of questions here. I guess, first, regarding the M&A pipeline, which continues to be, I think you said, your number one priority. Obviously, thanks for the color here on the metal building insulation hiccup with SPI. But as we look across the landscape, I was wondering if you could give us kind of a breakdown of how you see the pipeline looking across the three segments that you laid out. And specifically within the mechanical industrial, could you help us understand what the landscape looks like and I assume that the metal building insulation is not something which you expect to be an impediment going forward. But if you could just clarify that for us, that would be helpful. Thanks.

Robert Buck: Hey, good morning, Stephen. This is Robert. So, yeah, across the landscape of the pipeline, I’ll start residential first. So, very healthy there, both on the installation side and some good opportunity on the distribution side as well. And it can be — by the way, it can be fiberglass, can be spray foam, the other insulation-related products that we do, that’s why it provides such fragmentation and good opportunity. And then on the mechanical side, we definitely do not see the MBI as any inhibitor. That probably only takes kind of one player off the table and that’s what transpired with SPI. So, relative to mechanical, as we said in the past, there’s a handful of larger players on the mechanical side that we obviously consider and you can count those kind of on one hand if you will.

After that, it’s very fragmented. So regional players, both in the U.S. and in Canada. And again, what you find in that space is that regional players may be participating in a certain vertical. So, they may be in oil and gas, they may be in food and beverage, they may be in pharmaceutical as an example. That’s why that space is fragmented as well. And it gives us a lot of M&A opportunity in that space. So good pipeline, that’s why we say it still definitely remains number one capital allocation priority. And I think you absolutely continue to see us be active across the space.

Stephen Kim: Okay. Great. That’s helpful. Appreciate that. Secondly, I guess, with respect to the code changes that we saw HUD, announce that change, which I guess would be effective in the new construction, residential new construction in about 18 months, moving to the 2021 code. So, I was curious if you could help us dimensionalize that a little bit across a couple of vectors. First, is it right to think that this could, the code change for 2021 on a per home basis, maybe increase the amount of insulation used in dollars, call it maybe 20%, 30%. And then what would that translate into a benefit to TopBuild from a revenue perspective in your view. And then another way of — another aspect is our understanding is that the 2024 code may be rather different.

And in many cases require less material. So, I was wondering if you could help us think through that. And then lastly, regarding the code change, what do you think the likelihood is that Fannie and Freddie adopts these changes too?

Robert Buck: Yeah. So, talk about the code changes. So, you’re right, I mean, the HUD announcement is a tailwind for sure. Now, obviously, depends on a couple of things. One is where’s the builder today? If they’re like at a 2009 or older code, you could be talking somewhere in the ballpark of maybe as much of a 30% increase, and maybe the pounds of fiberglass. If they’re more in that range of like a 2015 code, it could be more in the 15% type of range. So, we do see it as a tailwind. Obviously, there’s multiple options as to how you can go after meeting those codes that obviously could drive some of the revenue questions you ask. But look, we see it as all tailwinds for the future. And that means multiple years into the future as well.

I think 2024 is interesting, because it’s kind of more of a systems approach. So, there’s going to be multiple ways that you go after that, that code and meeting some of those requirements. So, I think we’ll see how that translates. But we know that insulation is one of the best and most comprehensive ways for builders to deliver and to meet those requirements as well. I think relative to adoption, I mean, you see that — energy codes, it seems like they’re just been really a boost of that tailwind, if you will. Even though, given the Inflation Reduction Act, 45L is a little more complex, but it is — it takes more of a systems approach. So, I think our feeling is that you’ll see more adoption to be determined. But it does seem to be — seems like in the past 12, 18 months, more tailwind for the industry for sure.

Stephen Kim: Okay. Great. Well, it’s all good news, I guess, for you guys. So, thanks very much, guys. Appreciate all the help.

Robert Buck: Thank you.

Operator: Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Susan Maklari: Thank you. Good morning, everyone.

Robert Buck: Good morning.

Susan Maklari: Good morning. My first question is just perhaps going back to the capital allocation, given your comments on the mechanical side of things, does it imply that maybe you would consider pursuing some of those smaller niche players rather than going after the handfuls, larger ones? And I guess with that, too, how are you thinking about buybacks just given the increase in the authorization that you also announced this morning?

Robert Buck: Yeah. Good morning, Susan. It’s Robert. I’ll take the first part of that question. Rob will take the second part. So, yeah, so on the landscape of the mechanical acquisition side, we’re looking across both. I mean, so obviously we have some relationships with some of the larger players and conversations that we’ve had. But then absolutely, we participate across all those verticals. And so, the local or more regional players that they play in one or two verticals we’re absolutely interested in that. We’ve had some success in that approach in the past. DI had some success in that approach in the past as well. So, we’re open to the gamut on M&A relative to mechanical, and we think it’s all open ground for it. So, I think that’s why we’re excited about it. That’s why we keep talking about the fragmentation, but also the robust pipeline as well.

Robert Kuhns: Yeah. Susan, and I’ll just add on the buyback front. I mean, obviously, we’re excited about announcing that today. It shows the confidence, our Board has in our strategy. It shows the health of our balance sheet right now. So, as Robert said, M&A is going to remain our top priority. But obviously given the cash we have on hand today, we’re going to balance that — balance our pipeline with returning capital to shareholders as we have in the past. So, like I said, we’re really excited about that. And we’re going to continue to manage that as we have in the past.