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Earnings call: TopBuild raises outlook after solid Q1 performance

EditorNatashya Angelica
Published 05/07/2024, 04:38 PM
© Reuters.
BLD
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TopBuild Corp. (NYSE:BLD), a leader in insulation installation, has reported a steady increase in sales and profitability for the first quarter of 2024. The company's total sales climbed to $1.28 billion, up 1.1% from the previous year, while adjusted EBITDA grew 6.5% to $253.8 million.

TopBuild also announced an expanded share repurchase program and the acquisition of Insulation Works, signaling confidence in its growth strategy. Despite the termination of the SPI transaction, the company's outlook remains positive, with expectations of a robust single-family market and significant industrial projects on the horizon.

Key Takeaways

  • TopBuild's Q1 sales rose to $1.28 billion, a 1.1% year-over-year increase.
  • Adjusted EBITDA improved by 6.5%, reaching $253.8 million.
  • The company raised its full-year sales forecast to $5.4-$5.6 billion and adjusted EBITDA to $1.065-$1.155 billion.
  • A new $1 billion share repurchase program was authorized, adding to the previous $154 million.
  • Acquisition of Insulation Works, a $28 million business, aims to bolster the company's market presence.
  • TopBuild remains optimistic about the single-family market and commercial/industrial sectors for 2024.

Company Outlook

  • TopBuild expects a healthy single-family environment and progress in commercial and industrial business for the remainder of 2024.
  • The company's mechanical insulation business, including large industrial LNG projects, is anticipated to drive future growth.
  • TopBuild's financial position is strong, with $1.4 billion in total liquidity.

Bearish Highlights

  • Specialty Distribution segment saw a 2.3% decline in net sales, attributed to lower residential insulation sales.
  • Material supply remains tight, although some relief is noted in products like spray foam.

Bullish Highlights

  • Installation segment net sales grew 4.1% to $798.7 million, bolstered by multi-family and improving single-family sales.
  • Gross margin expanded by 100 basis points to 30.3%.
  • TopBuild is recognized as a Great Place to Work for the second year in a row.

Misses

  • The termination of the SPI transaction due to pricing disagreements.
  • The recent acquisition and potential price increases are not factored into the raised guidance.

Q&A Highlights

  • Executives expressed confidence in managing price increases and navigating material supply challenges.
  • The impact of energy code changes and HUD announcements is expected to increase demand for insulation products.
  • TopBuild's M&A strategy remains focused on the commercial building and mechanical spaces, with a strong pipeline for future acquisitions.
  • The company is monitoring the commercial market closely, with no slowdown in bid rates observed for industrial projects.
  • The Knauf plant's expected production start in Q3 will partially address tight material supply, but challenges are anticipated to persist throughout the year.

TopBuild's first-quarter performance and strategic initiatives reflect a company poised for continued growth despite some market challenges. With a strong balance sheet and a clear vision for expansion through acquisitions and organic growth, TopBuild is well-positioned to capitalize on opportunities in the evolving construction landscape. The company's next earnings update is scheduled for August, where it will present its second-quarter results.

Full transcript - Topbuild Corp (BLD) Q1 2024:

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.

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.

Susan Maklari: Okay. All right. Thank you for that. And then, maybe thinking a bit about price and price/cost. Now, you mentioned the announcements, the price increases that have come out from the suppliers. Just any thoughts on how that can roll through the business and your ability to continue to offset those incremental increases?

Robert Buck: Yeah. This is Robert. So, obviously confident, we've talked in the past about, number one, how we manage those, given our ERP system and that touch with each branch at the local level. Two, I think we've demonstrated, our teams in the field have demonstrated great track record with that. I think relative to, how that plays out, we'll see how the single-family starts play out. We think it's going to be a positive back out of the year, which will keep material tight and probably goes well for the traction relative to what happens with price and the price increase. So, more to come, but you're definitely confident in our ability to manage that appropriately.

Susan Maklari: Okay. All right. Thank you for the color. Good luck with everything.

Robert Buck: Thank you.

Operator: Thank you. Our next question comes from the line of Ken Zener with Seaport Research Partners. Please proceed with your question.

Ken Zener: Good morning, everybody.

Robert Buck: Good morning, Ken.

Ken Zener: So, it's an interesting combination here where price is positive. You talked about on the distribution side, supply actually impacting your volume. If I understood your language correct, is that correct?

Robert Buck: That's correct.

Ken Zener: So, could you give a little context? I know, like, north of $1.4 million starts, things are pretty tight. That's supporting the price of what had been slowing activity. It's obviously accelerating again. But did you guys know when nobody's going to home? I don't hear allocation like people going to Home Depot (NYSE:HD) per se, or did you talk to how it was so tight and perhaps why we didn't see greater price dynamics, more favorable prices, supply was so tight, I guess, is one of the things I'm trying to understand as that goes to the -- perhaps tension that we might see in price in the second half.

Robert Buck: Yeah. Ken, so I'll take the first part of material and Rob will handle the price detail piece of it. So, yeah, so material, definitely still tight. I mean, I would say even say that we've had to buy some material through third-party, if you will, given the tightness. Now, as we mentioned back in February, some of that is planned maintenance, but there's also been some downtime in the industry, as well unplanned downtime in the industry that caused material to be tight. I think what we've seen is, you see given some of the code adoption, you're seeing some momentum with other products. We mentioned on our prayer remarks around spray foam. So, I think you see that relieving some of it relative to the installation side of the business. And then we talked about fiberglass. There was also some commercial products that were very tight in the first quarter as well, mainly around mineral wool and some of the manufacturers' issues of that product as well, but that's definitely improving. So, we think material stays tight, but we think we'll be in a good position here given some of the other products. Rob will talk about the price piece.

Robert Kuhns: Yeah. So, around price, Ken, I mean, the way to think about the first quarter, a couple things impacting that and probably making it a little less than if you just look at fiberglass in a vacuum. One is the timing of the fiberglass increase. I'd say it was more of a mid-quarter implementation. So, we should see that improve as we go into the second quarter. And then, the other thing you have is the carryover impact of some price decreases we saw last year, primarily around spray foam. And that's going to continue on in through the second quarter, offsetting some of the price increase we see on fiberglass.

Ken Zener: Okay. And then, can we talk to -- obviously, the deal didn't go through, but mechanical is a huge area, right, where you can keep doing acquisitions given your mid-teens share for quite a while. But perhaps, is there something different that as you do these mechanical, acquisitions that will change the incremental margins of Specialty Distribution, or is it still expected to largely be, let's say, 75% material, 25% perhaps value add. So, the incrementals of that business over time will still be in that low to mid-teens range that I think you guys have described before?

Robert Kuhns: Yeah. I mean, I think from what we've seen, I think we'll expect most of the distributors in that space will probably see EBITDA margins when we acquire them, kind of in that mid-teens type, or low, I'd say more low, 10%, 11% type range, maybe low-teens, but then just like with DI, and the synergies will be able to drive, we'd expect to be able to get that up into the mid-teens, and the incrementals over time, once you get that first year fixed cost behind you there and you're leveraging that fixed cost base, we'd expect the incrementals to be in that 22 to 27 that we target, over the long-term. We talk about distribution being more towards the low end of that and obviously install more towards the high end.

Ken Zener: Thank you very much.

Robert Kuhns: Thank you.

Operator: Thank you. Our next question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.

Michael Rehaut: Thanks. Good morning, everyone. Thanks for taking my questions. I just wanted to circle back for a moment. Don't mean to beat a dead horse here, but obviously a lot of focus around the mechanical vertical. And I was wondering if you could give a little more color around, what the metal building insulation represented as a percent of sales of SPI, what it also represents as a percent of the $5.75 billion mechanical vertical that you posted on the slides. And I noticed that you didn't change the overall TAM of that vertical relative to your prior presentation. So, I'm just kind of wondering around this subsector if you still see it as a viable part of the industry. And again, just trying to get a size of SPI in the broader sector and if it changes your view around this subcategory as still being an area as part of your acquisition strategy within the broader space.

Robert Kuhns: Yeah. Michael, this is Rob. I'll start on that one. I mean, when you look at MBI for us today, it's roughly about 6% of our revenue. It's important to also clarify for people it falls into that middle vertical or that middle market on our slide for the commercial building envelope. It's not the mechanical space. It's the commercial building envelope. And from our view, when you go to insulate a metal building, there's multiple options you can do, right? Laminated fiberglass is one option and that's what we do and that's what SPI did as well. For them, it was about 15% of their total revenue. So relatively small pieces for both of us. That's where it's a small niche within that commercial building envelope. When you go to insulate a commercial building, you could use laminated fiberglass, you can use spray foam, you can use insulated metal panels and that's how we thought about the market more broadly, but the DOJ narrowed in on that laminated fiberglass, which is a much smaller piece of the overall market there. So, in terms of our M&A strategy going forward, it doesn't really concern us, we're already obviously a large player in that very small niche and we're not as big a player in the rest of the commercial building space or in the mechanical space and that's where we'll continue to do M&A going forward.

Robert Buck: And obviously, Mike, that's where the focus was really around that small niche of the MBI side. So, no concern across the rest of the business and there's really not much that takes off the table relative to the MBI other than the decision we just made.

Michael Rehaut: Right. So, I guess, just kind of following on that and appreciate the additional color there. As you look at the landscape of potential targets across, the commercial industrial space, the building envelope and the mechanical, in the past you've kind of said that there were maybe half a dozen or less kind of larger potential acquisitions, medium to larger and you kind of walk through the different -- relative sizes. With SPI off the table, to the extent that some of these other medium to larger size potential targets also have MBI, I'm just kind of curious if that kind of changes the calculus or the likelihood of some of those other larger players or was this kind of a one-off where the other kind of larger medium to larger targets wouldn't necessarily have this niche issue that the DOJ kind of zeroed in on.

Robert Buck: Great question, Mike. So this is Robert. So, you hit on it there. The other players really don't have the MBI niche piece of the business. That's why we keep saying it's really zero concern for us from an M&A strategy perspective. So, it doesn't really exist in any of the other targets. So, we talked about in the past or, any of the ones that we're focused on. So really not an issue.

Michael Rehaut: Great. And then one last quick one if I could. When you talk about raising the guidance and you kind of said that it was driven off of the better first quarter profitability and the 1Q acquisitions. Just wanted to clarify that whether or not it included the most recent acquisition of the Arkansas installer and also if it reflects any level of success with the June-July price increases.

Robert Kuhns: Hey, Michael. This is Rob. So, it does not include either one of those. So, it doesn't include -- we don't include any acquisitions that we haven't yet closed. So, the Arkansas acquisition that we announced will be incremental. And then, likewise, we haven't baked in any incremental pricing at this point. We've put in -- obviously what we know from the Q1 price increase, but we haven't baked in that additional price increase, that potential price increase later this year.

Michael Rehaut: Okay. Thanks so much.

Robert Buck: Thank you.

Operator: Thank you. Our next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question.

Shaun Calnan: Hi, guys. This is actually Shaun Calnan on for Rafe. So, Spray Foam has come up a couple of times on this call. Can you talk about your current exposure to spray foam either in terms of volume or revenue? And then are you seeing the demand pick up for that as the price begins to narrow between that and some of more of the traditional insulation products?

Robert Kuhns: Yeah, Shaun, I'll give you a couple of quick numbers and then Robert can expand on what's going on in the industry a little bit with spray foam. But from a unit's basis, in terms of the houses we insulate, it's probably roughly 10% on the unit's basis. From a dollar's perspective though, it's going to be north of 20% because the cost on spray foam's roughly 2X, maybe a little more than that, closer to 2.5 in some places in terms of the cost per unit. But Robert, can talk a little bit about some of the dynamics there with spray foam right now.

Robert Buck: Yeah. So, you're definitely seeing the momentum in the product, Shaun. One is, definitely a big tailwind coming from the codes that we've talked about. So, you see even from the production of home builders are becoming very interested in that product to reach the 45L. Rebate piece and make sure they deliver upon that. So, yeah, definitely momentum with the product, both smaller builders, custom builders, but then also even with production builders. And then, last point I would just say is around commercial. We see more spray foam inspect in commercial projects as well. So, it's got some momentum really across the board.

Shaun Calnan: Got it. And then, in yesterday's Installation Works announcement, you guys specifically called out the agricultural market. Can you give us a rough estimate of how much that segment currently contributes to sales, and then what you think the market opportunity is there?

Robert Buck: Yeah. For us today, it's a pretty small piece for us. We do that across the country in different parts. I think about the Northeast as an example. Southeast, we do it, but what we love about Installation Works and the ownership group there is they really are a national player in that. Great relationships, great expertise, even with some of the large poultry producers across the country. So, they're bringing a whole new level, which will really be something we can build upon across the country for TopBuild.

Operator: Thank you. Our next question comes from the line of Philip Ng with Jefferies. Please proceed with your question.

Philip Ng: Hey, guys. I guess, my question is do you have any chunkier deals in the pipeline, especially on the C&I side. And just given how strong your balance sheet is in free cash flow, perhaps Rob, how are you thinking about pacing this buyback is, like at least on my math, a $1 billion buyback, not saying you would buy the whole thing this year. It would still get you to a balance sheet like one times or less from a levered standpoint. So, one, color on chunkier deals, and two, how are you thinking about pacing this $1 billion buyback authorization program you just announced?

Robert Buck: Hey, Phil. This is Robert. I'll take the first part. So, yeah, I mean, definitely, the pipeline looks good from that perspective. Obviously, we were waiting to see if we got the SPI across the finish line. And so now that we've moved forward from that, made our decision to remain disciplined on the M&A front, then we'll be -- moving forward over some of our other opportunities that we have. So, yeah, so feel good about the pipeline, really across all three end segments, including the C&I side as well.

Robert Kuhns: Yeah, Phil, and this is Rob. In terms of buybacks, like I said earlier, we're not going to be able to give any guidance exactly of how that's going to play out. We're going to obviously see how the M&A pipeline flows, prioritize that. But as you point out, we're sitting in a very healthy balance sheet position today. So, we'll see how many of these M&A deals we get to the finish line, and we'll certainly balance that with the buybacks moving forward. Like we've talked about in the past, we think net debt leverage somewhere in the one to two is probably the right type number, and we're obviously at 0.42 at the end of this quarter. We were anticipating using a significant portion of that cash on the SPI deal. So, obviously, we're pivoting from that, and hence the announcement of the billion-dollar authorization.

Philip Ng: But Rob, I guess, if there's no deals, the game plan wouldn't be to build excess cash, right? The plan would probably still stay within that leverage ratio, or maybe closer to the low end. Am I thinking about it right?

Robert Kuhns: Yeah. I mean, I think if we spent the majority of that, we'll probably still end up on the low end of our -- of that one to two right now.

Philip Ng: Okay. All right, that's helpful. And then from a material availability standpoint, a little surprise how tight it is. I know it's tight on allocation, I'm a little surprised on your some limitations on getting material. Did I hear you correctly, Robert, that the Knauf plan is coming on sometime in 3Q if that was supposed to come on July? So that might create even tighter environment. Certainly, there's price increases out there for fiberglass and mineral, but rates are high for longer now. So, how are you thinking about your ability to kind of push this through, and how do you think about supply demand overall?

Robert Buck: Yes. I think that was a good question. So, the plan is coming up and call it June, July as far as winter starts up. If I may get running -- if you will at maybe a steady pace, you're probably talking definitely into Q3. And as you think about materials we talked about, there's still maintenance to be done in the industry. And we've seen some unplanned downtime, which gives you a little bit of Knauf for concern. So that's why we think materials stays tight the remainder of this year. And then if you take the single-family starts, which we think even if you just take the order information from the builders, I think we think single-family will be strong the back half of the year. So, we think there's good possibility of protraction there in material. And then we'll see how 2025 plays out here. Those lines should be up full production by then. And then we'll see what's happening from a start's perspective as well. And some of this code piece of it that we talk about, you'll see some central pounds coming into play there relative to capacity needs. So, should line up well here for the back half of the year, but let's keep playing the allocation piece as well.

Philip Ng: Sorry to sneak this one in, Robert. I mean, you were talking about how code changes would be a good guy for demand. Materials clearly tight. Single-family should pick up in the back half. Are you hearing anything from your suppliers in terms of potentially adding more capacity that could potentially be a relief next year? I know Owens Corning (NYSE:OC) is taking that are hard to look at any long-term plans on the capacity front. But any incremental uplift that you see perhaps next year at the head of Knauf ramping up more fully and perhaps from a maintenance standpoint, things being a little better spot.

Robert Buck: Yeah. I think maybe two things I'll say, Phil. I think one, people are evaluating, that's for sure, but I think people are evaluating multiple insulating products whenever they're doing the evaluation if that makes sense.

Philip Ng: Okay. Thank you.

Robert Buck: Thank you.

Operator: Thank you. Our next question comes from the line of Trey Grooms with Stephens Inc. Please proceed with your question.

Sid Ramesh: Hey, guys. This is Sid Ramesh on for Trey Grooms. Thanks for taking my question. Could you maybe talk about the trends you saw in April and into May on the different end markets? Anything noticeable with maybe rates taking a little higher? Sounds like single families improving, but any changes on the commercial or multifamily side?

Robert Kuhns: Yeah. I'd say, Sid, for us, no major changes. April came in about as we expected. And just like I think Robert mentioned in his opening comments, we saw March was the first month. We saw single-family with year-over-year sales growth. First time we'd seen that in a year. April, we saw that again. So, we are seeing some of the improvement from the improved starts on the single-family side, which is definitely a positive sign as we move forward here.

Sid Ramesh: Got it. And then, quickly on the mid-single digit commercial growth number, how should we think about R&R and new kind of assumed in that number? We've been hearing maybe some weakness on the new construction side. So, any color would be helpful?

Robert Kuhns: Yeah. I think, I mean, like we said in the past, I mean the R&R within our Specialty Distribution business, which is 60% commercial. It's about a quarter of that revenue. Robert -- hopefully the comments Robert made in his script today talking about that LNG facility in Louisiana helps kind of drive home the scale of what we're talking about with some of those types of jobs. I mean, that's a job where our total revenue over a couple of years is going to be over $30 million. And then you think about it, you got that recurring revenue coming after that, you're going to have ongoing maintenance and repair that happens throughout the life. And then you're going to have every five years or so a complete tear down and replacement of that. So, while we're watching the commercial industrial side of things closely too, I think, we haven't seen any slowdown in our bid rates, a lot of the work that's going on with some of these mega projects, whether it be LNG, whether it be chip manufacturing, there are heavy insulation needs for those projects that are going on, which should be a tailwind for our business as we move forward.

Sid Ramesh: Great. Appreciate the color, guys. Thanks.

Operator: Thank you. And our next question comes from the line of Jeffrey Stevenson with Loop Capital Markets. Please proceed with your question.

Jeffrey Stevenson: Hi. Thanks for taking my questions today and congrats on the nice quarter.

Robert Buck: Thanks, Jeff.

Jeffrey Stevenson: The improved monthly sequential single-family installation volumes throughout the quarter was encouraging, but with rates expected to remain higher longer, are you expecting public builders to represent a greater concentration of your mid-single digit residential demand expectations than you did in February since the regional and independent builders are more sensitive to future interest rate cuts?

Robert Buck: Yeah. I think, the first part, Rob may add on. So, yeah, I mean, as you talk to our wide variety of customers whether it be production, big builders, regional builders, small custom builders, definitely the production builders, regional builders are bullish for sure. And then, I think even the small custom builders, I think they feel positive, they're actually watching the rates a little bit closer. So, yeah, I think we feel good about that. We definitely feel good about our work with the production home builders and kind of some of the things that we talked about relative to codes and what they're pushing to make sure they get the 45L advantage, if you will. So that kind of plays to multiple insulating options in those homes. And it's quite a bit of impact for the production home builders. So, we think there's a lot of things going on with the different builders here that are positive, but definitely the production builders are well suited for what's happening.

Robert Kuhns: And Jeff, definitely not any major shift from what we had in our initial guidance or anything that would adjust our guidance in any way as a result of what's going on right now with rates.

Jeffrey Stevenson: Okay. Got it, Rob. Thanks. And then, I just wanted to follow up on the last question. It sounds like both light and heavy commercial bidding activity remains healthy and you obviously continue to benefit from your new lead app as well. That said, is there any verticals -- you have any concern of some slowdown moving forward just giving the choppiness we continue to see in leading commercial demand indicators?

Robert Buck: Yeah, Jeff, Robert. Not really. So, whenever we're looking at our backlogs and our bidding, we're looking at the verticals. And I think so -- the one that kind of comes front and center for folks is around office buildings, that type of thing, but that was something we probably worked, started talking to our teams about, make sure we were looking at our bidding activity probably two years ago. So, no real concern around the verticals and what we're seeing and then obviously making sure -- we're well represented across the many verticals there.

Jeffrey Stevenson: Got it. Thank you.

Robert Buck: Thank you.

Operator: Thank you. We have reached the end of the question-and-answer session. I'll now turn the call back over to President and CEO, Robert Buck, for closing remarks.

End of Q&A:

Robert Buck: Thank you for joining us today. We look forward to talking with you in August when we'll be presenting our Q2 results. Thank you.

Operator: And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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