TopBuild Corp. (NYSE:BLD) Q3 2023 Earnings Call Transcript

TopBuild Corp. (NYSE:BLD) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Greetings and welcome to the TopBuild Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tabitha Zane, Vice President, Investor Relations. Thank you, Tabitha. You may begin.

Tabitha Zane: Thank you and good morning. On the call today are Robert Buck, President and Chief Executive Officer; and Rob Kuhns, Chief Financial Officer. We have posted senior management’s formal remarks and a PowerPoint presentation that summarizes our comments on our website at topbuild.com. Many of our remarks 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 or supplement forward-looking statements that become untrue because of subsequent events. Please note that some of the financial measures to be discussed on this call will be on a non-GAAP basis.

A technician meticulously inspecting a corrosion-resistant insulation panel for a fire-protection system.

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 third quarter presentation, which can also be found on our website. I will now turn the call over to Robert Buck.

Robert Buck: Good morning and thank you for joining us today. With one quarter left in 2023, this year has exceeded our expectations with solid profitable growth. Our strong results are testament to our team’s hard work, perseverance and strategic focus on growing our multifamily and commercial work as well as our continued emphasis on operational excellence and driving improvements throughout all areas of our business. Total sales for the nine months were up 4.4%, our gross margin has expanded 130 basis points to 31%, and our adjusted EBITDA margin has expanded 160 basis points to 20.4%. Reviewing our third quarter results, our Installation segment was able to drive efficiencies and grow revenue 4.9% despite volume contracting from the slowdown in single-family starts earlier in the year.

To offset the single-family decline, our branches have actively and successfully targeted multifamily and light commercial work. On the commercial installation front, our dedicated heavy commercial branches are reporting strong bidding activity and are winning their fair share of projects, building up our already solid backlog. As a reminder, we are agnostic as to the types of projects we work on and are not over-indexed to office or any other type of heavy commercial job. Current projects we are working on include renovation of the SeaTac Airport in Washington State, the new Hard Rock Casino in Virginia and several large medical projects. In total, our commercial installation business grew 9.4% in the third quarter compared to the third quarter of 2022 and year-to-date, it is up 13%.

Turning to our Specialty Distribution business. Overall sales in the second quarter declined 2.1% primarily as a result of a 1.9% decline in price. The greater availability of fiberglass and spray foam in the quarter put pressure on market pricing. As residential distribution volumes continue to normalize, our teams are doing a nice job of identifying and building attractive new areas of growth, as our overall results demonstrate. We are pleased to see a 1.7% increase in sales from our commercial and industrial channels. Our Specialty Distribution segment continues to support many major commercial and industrial projects, including the Salt Lake City International Airport and the new Intel chip factory in Arizona. We’re also seeing quite a few major projects being planned across several diverse industries fueling the demand for mechanical insulation.

Maintenance and repair work on many commercial and industrial sites is also being scheduled and this revenue stream should serve as a continued stabilizing revenue driver. We remain very optimistic about the opportunities for growth in both the commercial and industrial end markets in the US and Canada. We’ve also entered into the second phase of our growth strategy and operational improvement initiatives relating to our specialty distribution model. Over the past two years, we’ve identified many cross-selling opportunities, including areas of the country where either DI or Service Partners does not have a presence but where there is demand for their respective products and services. In 2024, we plan to co-locate some DI and Service Partners operations, effectively expanding our footprint where we already have existing operations and established customer bases without the investment generally associated with opening a greenfield location.

More details to come next year as we continue this process to drive organic growth. Moving to material in the quarter, fiberglass is more readily available than it had been earlier in the year. As a result, some of the manufacturers have pushed the September price increase out until later in the year. Over the past month, however, material has started to tighten. Obviously, single-family starts will be an important bellwether for the industry as a whole as they move through 2024. Also, as a reminder, maintenance on production lines has an impact on product availability, and we work closely with our suppliers to effectively manage our inventory. On the capital allocation front, year-to-date, we’ve completed 4 acquisitions, which are expected to generate almost $173 million of revenue on a pro forma full year basis.

One of these acquisitions was completed this month, Panhandle Insulation, a residential installer generating approximately $5.3 million of annual revenue. In July, we also announced our intention to acquire Specialty Products and Insulation, or SPI, a North American specialty distributor and custom fabricator mechanical insulation and a special distributor of building insulation to the industrial, commercial and residential end markets, generating approximately $700 million in annual revenue. This transaction is currently going through regulatory review, and we expect to close in 2024. We are working closely with the SPI folks to ensure the integration process is smooth once the transaction closes. As we’ve got to know the SPI team even better, our confidence about the potential of this transaction has only increased.

This well-run company has a strong operations team and a culture that aligns well with TopBuild. In the first 12 months, our focus will be integrating SPI onto our systems and supply chain and to further identify operational efficiencies and improvements across our entire organization. We are very confident we will achieve the $35 million to $40 million of run rate cost synergies we’ve targeted over the first 24 months. Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical insulation specialty distributors. We expect to remain very active on all three fronts going forward. Acquisitions remain our number one capital allocation priority, generating, by far, the greatest return for our shareholders, as evidenced by our return on invested capital, which increased from 8.6% in 2017 to 18.5% at year-end 2022.

In summary, we had a great third quarter, and we are on track to report another solid year as evidenced by our increased 2023 guidance, which Rob will discuss. Our team continues to execute well, and our diversified model positions TopBuild to outperform in any environment. Rob?

Robert Kuhns: Thanks Robert and good morning everyone. We are pleased to report another strong quarter of profitable growth, a reflection of the continued success of our focused strategy and the hard work of our teams. Our third quarter net sales increased 1.9% to $1.33 billion. Breaking that down, our Installation segment’s third quarter net sales were $821.7 million, an increase of 4.9%, driven by M&A of 4.8% and price of 3.6%, partially offset by a 3.5% decline in volume. While multi-family sales remained strong throughout the quarter, we did not see the traditional second quarter to third quarter increase in single-family activity due to the slower single-family starts earlier this year. As the third quarter unfolded, single-family sales began improving each month in line with the growth in single-family starts that occurred beginning in May.

I also want to highlight that the strength of our diversified end market strategy was evident as our commercial sales for the Installation segment grew 9.4%, driven by strong activity from both light and heavy commercial projects. Specialty Distribution net sales were $571 million, a 2.1% decline from prior year, primarily due to lower prices. Specialty Distribution residential sales were down 7.5% as a larger percentage of construction activity continues to be focused on multi-family, a channel with lower participation from the smaller installation contractors we service. Specialty Distribution’s commercial and industrial sales were up 1.7% in the quarter. Third quarter gross margin expanded 130 basis points to 31.7%, driven by operational efficiencies and strong margins on Installations multi-family and commercial projects.

Normally, the margins on these larger commercial and multifamily projects are similar to what we see on the single-family side. However, on many of our recent projects, our teams have done a tremendous job delivering higher margins through outstanding execution. Third quarter adjusted EBITDA increased 9.4% to $283.7 million, and our adjusted EBITDA margin was 21.4%, a 150-basis point improvement compared to last year. Adjusted EBITDA margin for our Installation segment was 23.7%, up 210 basis points and driven by the gross margins discussed earlier. Despite lower sales, Specialty Distribution segment delivered an EBITDA margin of 18.2%, a 20-basis point improvement from productivity and continued realization of synergies from our acquisition of Distribution International.

Other income and expense was $2.1 million lower than prior year as higher interest expense on our variable term loan was more than offset by higher interest income from our cash on hand. Adjustments to net income were $8.4 million and primarily related to acquisition-related costs and the opportunistic disposition of a small non-core business. For the quarter, adjusted earnings per diluted share were $5.43, a 13.1% increase from prior year. Moving to our balance sheet and cash flows, our working capital as a percent of trailing 12-month sales was 14.6%, 90 basis points lower than a year ago. We have worked hard over this past year to get working capital in line with our long-term guidance of 12% to 14%, and this has helped drive our 75% increase in year-to-date operating cash flow from prior year to $588.5 million.

September year-to-date CapEx was $48.1 million, approximately 1.2% of revenue. In addition, year-to-date, we have allocated $147.6 million to acquisitions. We ended the third quarter with trailing 12 months EBITDA to net debt leverage of 0.79 times. Total liquidity at September 30th, 2023, was $1.1 billion, including cash of $615.6 million and an accessible revolver of $436.2 million. Moving to annual guidance, we expect to close out 2023 with a strong fourth quarter and have adjusted guidance accordingly. We are projecting total 2023 sales to be between $5.13 billion and $5.21 billion, a $105 million increase on the low end of the range and a $35 million increase on the high end. Breaking that down, same-branch residential revenue is expected to be relatively flat for the year, and same-branch commercial and industrial revenue will be up mid-single-digits.

We have also raised our 2023 guidance for adjusted EBITDA to be between $1.025 billion and $1.055 billion, a $75 million increase on the low end of the range and a $55 million increase on the high end. Our long-range modeling targets are unchanged. I will now turn the call back to Robert for closing remarks.

Robert Buck: Thanks Rob. As 2023 draws to a close, we are very pleased with how this year has progressed and our results once again demonstrate the strength of our operating model and the hard work of our TopBuild team. In addition to successfully managing inflation, we continue to make operational improvements throughout our organization as we drive both growth and profitability. I’m also pleased to report that our MSCI ESG rating improved from A to AA, a direct result of the hard work of our dedicated sustainability team. We made great strides over the past few years, and our ratings improvement reflects this progress. In closing, I thank the entire TopBuild team for their focus on working safely to deliver value, quality, and service to our customers. Operator, we are now ready for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Mike Rehaut with JPMorgan. Please proceed with your question.

Mike Rehaut: Thanks and good morning everyone. Congrats on the results.

Robert Buck: Thank you.

Mike Rehaut: I wanted to focus first — you kind of mentioned some of the improvement that you saw during the quarter from single-family new res — from, I guess, some of the improving trends in the second quarter. Given how that’s trended through year-to-date, I was curious if you had any early views around — at least the first half of 2024? And as the market is kind of shaping up — and obviously, there’s a lot of volatility currently in the market. But any thoughts on how single-family, and for that matter, multifamily and non-res, are at least shaping your views early on for the first half of 2024?

Robert Buck: Hey, good morning Mike, it’s Robert. So, as we mentioned, the quarter started out slower on the single-family side as we progressed through the quarter, we saw single-family activity pick up as we think about ending the year going into first quarter next year. The public builders continue to be optimistic. You’ve heard it on their call. Majority of them are looking for growth next year. That’s what we hear from them and see as well. Some of the smaller builders, a little more, I’d say, talking more flat next year. But right now, heading out of Q4 heading into Q1, we expect single-family and given some of that pickup in starts that you saw coming in May and June to carry forward. From a multifamily perspective, definitely, backlogs are down slightly, but we say still very healthy.

We think that demand carries into 2024 as well. So, I think overall, we remain positive. We’ll see what happens here with the single-family starts as we finish up Q4. And that will be the bellwether as we get into Q1, Q2 of 2024.

Mike Rehaut: Great. Great. No, I appreciate that. I guess, secondly, when you think about insulation capacity currently and perhaps what the industry has planned for the next six or 12 months, do you anticipate any significant change in either availability of product, or for that matter, pricing to the extent that capacity might change and, let’s say, in a more stable or just moderately improving backdrop, how that might impact industry pricing or the ability to push through price increases over the next six or 12 months?

Robert Buck: Yes. So, as we mentioned in the remarks, materials had tighten as we finished Q3 and now in Q4, with definitely at least one manufacturer documenting allocation in the market. And I think that’s supply driven, given the maintenance that’s going on really across the industry. So, I think gets into two dynamics. You’ve got maintenance, which a lot of manufacturers have maintenance planned and announced. And then, again, the single-family starts will be that kind of bellwether point. So, as maintenance and single-family keeps up, from a curve perspective are growing, I think you see material stay tight as we head into 2024 into Q1 here and possibly definitely into Q2, again, given that maintenance schedule and if we see the single-family starts continue to grow.

Mike Rehaut: Great. Thanks so much.

Robert Buck: Thank you.

Operator: Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim: Yes. Thanks a lot guys. Appreciate it. Just to clean up a couple of those that Mike just asked. So, first of all, regarding the rebuilds, our sense is that we’re going to have an unusually high level of rebuilds across the fiberglass industry in 2024, which we’re expecting to at least offset the capacity additions that are planned. Curious as to whether or not you would agree with the magnitude of the rebuild in 2024 being higher than normal? If you could just sort of comment on that, relative to what a normal year is? And then regarding the drag from single-family being offset by the multifamily and light commercial, just to get a sense. I’m wondering whether the drag from single-family was about equal to the 7.5% decline you saw in your spec distribution business that you referenced? And if so, does that mean that multifamily and light commercial sort of recovered back about 400 basis points, just strictly talking volume?

Robert Buck: Hey, good morning Stephen, it’s Robert. I’ll take the first part of that on the material and rebuild side. So, yes, I think it is a little above average, what we’re seeing scheduled for the rebuilds in the industry and enough Q4 and heading into 2024. Some of the manufacturers haven’t exactly nailed down when those rebuilds start. So, it’s kind of hard to say what that does with the capacity coming on. But given those rebuilds and if that single-family start number continues to improve, yes, I think you could see material stay tight in 2024, at least to start the year until some of those rebuilds get finished. And that new capacity comes on, just a reminder that new capacity comes on sometime around end of Q2 and early Q3. And as always, we’re staying close to the manufacturers, we have good insight into that.

Robert Kuhns: Yes, Stephen, and then this is Rob. On the second part of your question there around the single-family decline we saw on the install side. I’d say you’re in the ballpark there. The decline we saw was definitely in that mid-single-digits that we saw in the Specialty Distribution side, right? And that really just goes to show you what we’ve been talking about here in terms of multiple avenues for growth. What we were able to do on the installed side of the business this quarter by completely offsetting that with growth for multifamily and commercial.

Stephen Kim: Okay, that’s encouraging. And then you talked about the fact that margins in commercial and multifamily were stronger than single-family, and that’s rather unusual. I was wondering if you could comment a little bit on maybe what drove those higher margins in commercial and multifamily. And you talked about multifamily demand carrying into, I think, the middle of next year. But given the starts we’re seeing in multi, is it also reasonable to think that maybe that might crest in midyear and become a little bit of a headwind in the back half of 2024?

Robert Kuhns: Yes. So, Stephen, to your question on margins, we talked a little bit about at last quarter that on the commercial side, the multi-family side of things, these larger, more complicated projects on average, the margin is going to be similar to single-family. But back in Q3, we mentioned it, we probably had about 80 basis points of benefit, about $10 million due to just out performance, both operationally as well as — we bid a lot of these projects early on. And — I meant back in Q2, we had that happen. We bid these projects, maybe anticipating some inflation. So, we’ve performed very well on those jobs. And here in Q3, we probably had another 110 basis points, call it, about $15 million of benefit from that. So, that benefit we’re not baking into our guidance going forward.