TopBuild Corp. (BLD) Earnings Call Transcript
August 9, 2022
Earnings Call Speaker Segments
All right, everyone. I'm Phil Ng, Jefferies building products analyst. We're delighted to have the TopBuild management team here to join us. Representing the company, Robert Buck, CEO; Rob Kuhns, CFO; and then we got Tabitha Zane out there on the IR side of things. Robert, I'll hand it off to you. I think you had some prepared remarks to kick things off.
Okay. Thanks, Phil. Thanks for hosting us. Great to be back in person here at the Jefferies conference this year and seeing everybody face-to-face. So just a few remarks. We reported a strong second quarter last week, thanks to great work by our team across the country in U.S. and Canada. Our financial performance continues to improve the strength of our operating model, really the ability of our team to really navigate both the opportunities and the challenges. As we mentioned on our call last week, really pleased with our DI's performance, that acquisition we made last year. Both revenue and margins expanded. The integration process is going really well ahead of schedule, both on integration as well as standpoint of our projected cost synergies with the acquisition, our largest acquisition to date in the history of TopBuild. On the capital allocation front, since July of last year, we completed 11 acquisitions, including 5 this year, which are expected to contribute over $800 million in [ annual ] revenue. Our focus remains on acquiring well-run installation and distribution companies around our core of insulation, and we have a robust pipeline really across all 3 end markets: residential, commercial and industrial, and expect to be active in that area. Looking at the rest of the year, the fundamentals of the business are strong, and we have raised our revenue and EBITDA guidance that we reported last week. Our confidence is really based on two primary factors. First, our experienced and cycle-tested team, we believe, is the best in the industry, knowing the levers to pull proactively. And second is our unique operating model, which combined with our size and scale are key competitive advantages. With a total addressable market opportunity of over $16 billion, encompassing the 3 end markets, residential, commercial and industrial, we see a long runway for growth and a lot of white space for TopBuild. So as we said last week on our call, I'd say again today, as a leadership team, we're really confident with our ability to perform well in any environment. So with that, Phil, ready for Q&A.
Sounds good. I mean, generically, the question we get asked a lot, what's different this cycle? What gives you the confidence on the housing side, it's more of an air pocket versus a multiyear contraction?
Yes. I'd say, as we are a lot different from now versus '07 and '08 last time where we had housing starts running above $2 million, and buyers being highly leveraged at that time and an oversupply versus demand. This time, very little inventory out there, a pretty steady environment going into COVID. And now with the peak demand both from the COVID consumer as well as where the millennials are in their aging, we see strong demand in a housing environment that's been underbuilt for over 10 years. I think some of the numbers we've seen, I'm sure you've seen some of the same. Probably, the U.S. housing market is underbuilt by at least 3.5 million to 4 million units. So demand is not going away. Demand is strong. I think we're facing an affordability issue, not a demand issue here. So we see it very different than last time. We don't see it as a multiyear contraction. I think you heard the builders say, and we would say the same, if rates stabilize and supply chain constraints, which we think some of those -- we see some visibility of some getting better, prices will get back in line, and we think that will continue to drive a steady demand in the housing industry. So at the end of the day, folks want to own a home, and we think the fundamentals in the industry are very strong, midterm and long term.
Great. And then more importantly, under you and your team's leadership, you guys have done a lot of great stuff, costs, shifting the portfolio. But kind of help us unpack some of the stuff that you guys have done that should help moderate some of the cyclicality in the nature of your business.
Yes. A very different business than versus where we were back in 2007, 2008, 2009. I mean one is, a business that's very focused on our core of insulation. If you remember back, the previous business had a really broad variety of products. We're very focused on our core of insulation since then, really a streamlined company with an optimized footprint across the country, taking out the appropriate cost of the business as well as really a different culture where the business -- we're plus or minus 420 local businesses between the U.S. and Canada, really a culture where the teams feel locally empowered. There's a real entrepreneur spirit that lives in the business, and folks are driven from an incentive perspective as well. One thing that we [ tap ] a lot is we have a common ERP system across those 420-plus local businesses, which really gives us a huge competitive advantage, allows us to really have a pulse of the local business on a real-time basis. You put that with, again, a seasoned and cycle-tested team and a lot of talent that came back to the business over the years, we feel like we're very well equipped for the future as TopBuild addresses really a huge addressable market and really great opportunities.
Yes. And I would just add to that, where we've changed even in the past year, if you look back a year ago, our revenue was roughly -- it was a little over 80% tied to the residential housing market. Sitting here today, we're about 63%, right? So the DI acquisition has moved us more heavily into the commercial and industrial space. So we're not nearly as tied to the residential market as before. The other thing we've done throughout the last 5 years or so is really focused on our fixed cost, right? A lot of our margin expansion over the past 5 years is due to how we've leveraged our fixed cost and managed our fixed cost. And in doing that, we've kept our model very flexible, right? We've got a model that's got 70% variable cost, which is going to allow us to flex that in an up or down environment.
Got it. And when we look at the Census Bureau data, the spread between completions and starts, pretty massive. It kind of implies that your backlog potentially be, call it, 10 months out. But if we kind of had to think it through, right, obviously, the big unknowns are how long if we do see an air pocket and how deep, right? And that will give us a gauge on how much backlog you still have to chew through some of that volatility. But let's say the builders are talking about double digit, low double-digit declines. If we have a 3- to 4-quarter air pocket, do you have enough backlog to kind of power through that?
Yes. I mean, to your point, right now, the houses under construction in the U.S. are [ 1.7 million ] with the last census data. That's a record number. The number has never been that high. So we would estimate that probably half of those -- because our work typically comes in around the halfway point. Roughly half of those have yet to be insulated. So put that at about 850,000 houses to be insulated. And then from a completion standpoint, which we'd tell you our revenue has been more closely tied to completions due to all the supply constraints over the past year. That would -- completions are running 1.3 million to 1.4 million. So that 850,000 is going to put you around that 8 months or so of supply. So for us, it's going to be about monitoring the situation. I mean it's really a unique time for us because we keep talking about the downturn that's coming, but we're coming off a record quarter from a sales and profitability standpoint. And so we're as busy as can be, and we have good line of sight to the end of this year that we think we're going to have a really good year. But we're certainly monitoring what's going on with the builders very closely. And like I said, we've got a flexible cost structure, and we'll be ready to react when and if the time is needed to.
That's a great perspective. We could all probably agree, Robert, that it's not a demand issue right now that we're seeing, it's more affordability. How quickly do you think the builders can pivot to kind of address the affordability dynamics? And then what does that potentially mean for you? You're [ free-diagnostic ], whether it's multifamily versus single-family. But what kind of impact could that have in terms of your P&L?
Yes. So relative to the builders, I mean, obviously, they're smart and proactive. So the type of product they're coming to market with, the type of product they're working on is obviously very much -- they're very much so aware of the environment. So some smaller footprints. You see some builders, some townhomes or even some of the bigger builders getting involved in the multifamily space, to your point, Phil. Value engineering. They're good at doing that, and they do that in these times as well to help with affordability issue. They're providing opportunities for folks to lock in the rates, are encouraging adjustable rate mortgages. So they're doing things from their perspective to help with this proactively. And I think from our perspective, look, we're evenly, I'd say, calibrated to the market, based on the starts, single-family versus multifamily. So it's a little smaller take per unit, obviously, on a multifamily start versus a single family. But we have a lot of that work in backlog. There's no doubt about that. That's going to be a very healthy part of the business going into 2023, that multifamily mix. And so we're well situated, both single-family and multifamily.
Got you. We spent a lot of time just now talking about the housing piece, and Rob reminded us that you have gotten bigger in commercial and have gotten bigger in industrial. Talk us through what are you seeing in those markets, whether it's your legacy commercial business versus, let's say, DI, which has been a nice addition.
Yes. So from a commercial and industrial perspective, I think we said it last week on the call. So bidding activity is very robust. So if we think about commercial, we think about light and heavy commercial. The light commercial follows the residential trends. So as there's been the buildup in residential, there's quite a backlog of light commercial work following heavy commercial, where we have more line of sight into projects, into 2024. A lot of bidding activity in those backlogs continue to grow. I would say, in the commercial segment, we've definitely seen those cycles start to elongate more around the labor perspective, somewhat materials as well. But I think we've heard others that are big players in the commercial space state the same. Relative to the industrial side and the mechanical, a lot of big projects coming online there. Projects have got held up maybe because of COVID, the past couple of years. I think we reported last week, we had a great project delivery in Q2 in the DI business, which is a component of that business. But some great projects coming online relative to oil and gas, and some other large projects that got delayed that are now coming up as well. So we see good, steady demand in the commercial, industrial space. And we, again, think the diversification that we've by design, built into TopBuild really will allow us to outperform in the future.
Super. On the DI side of things, it's been a great fit so far. How do you think about growing that business over time? A lot of that more inorganic? Or do you want to bolster that with some M&A as well?
Yes. I would say, both. It has been a great acquisition from a few different perspectives. It's, one, got us into Canada. So a new geography for expansion. It's got us to the #1 position in Canada and the #1 position in the U.S. So we see organic and M&A opportunity in Canada as well as in the U.S. It's the mechanical insulation space, both industrial and commercial, very fragmented. So there's a lot of opportunities from an M&A perspective. Some chunkier, larger acquisitions in that space, either privately held or held by PE firms. So we think there's a great M&A path in industrial and commercial. But then also organic, you probably heard us talk about during the acquisition, there's some good greenfield opportunity in that space, which we're investing in, if you think about the Southeast and a few other areas in the DI footprint. So we think there's a nice M&A as well as an organic path in the business that we're starting to see, and we will realize.
Got you. A question for you, Rob. I believe your business is a fairly capital-light business. But let's say if we do have an air pocket, how should your free cash flow kind of hold up in that backdrop? Your comfort level to continue to invest and pursue M&A, is that an optionality that could help offset some choppiness on the housing side?
Yes, absolutely, Phil. I mean when we look at it -- I talked about our flexible model in terms of 70% variable costs. So we'll be able to bring down our costs quickly in a downturn. We're a very capital-light model, as you referenced. Our working capital runs 11% to 13% of sales, typically. CapEx runs 1.5% to 2% of sales. So with that, we generate a lot of free cash flow. And even in a down market, we're going to continue to generate cash flow. So we'll look at M&A -- M&A, for us, has been a great growth path. It's been a great return on investment for us, and we're going to continue to look to do that. Because typically, with the deals we do, we're paying 5x or 6x pre-synergy. And post synergy, that's 3 or 4x EBITDA. And those synergies, because of our operational expertise and the material synergies we can drive, are pretty much low risk, right? So those returns have been great. So in a down cycle, we are going to look to continue to grow through M&A.
On the synergy side of things, appreciating bigger deals like a DI and USI take a lot more work on that front. But help us unpack the path towards unlocking that. What are some of the big buckets? And on the flip side, it's smaller deals, I think they come pretty quickly, but just kind of help us think through the process and your ability to kind of extract that synergy.
Yes. So on the DI side, right, we signed up for $35 million to $40 million of run rate synergies. As you can see from our results in the last quarter, those are starting to kick in. And we'd say, we're ahead of schedule right now, and we know we're going to meet or exceed that $35 million to $40 million target. With the DI deal, it was roughly 40% in material synergies, 30% from back-office consolidation, which is underway, and then 25% in operational efficiencies. And I'd say right now, from a bucket perspective, we're not too far off of what we targeted there. To your point, on the smaller deals and part of why we love them, the bulk of those synergies tend to be in the material bucket, and so they kick in the first day, and we get them right away.
Got it. From a pricing standpoint, you guys have always gotten pricing regardless of your material cost. How are you thinking about pricing in the next few years? Let's say, if demand is down, is there a risk that fiberglass prices could fall pretty hard? What's your view there, and that impact on your business? And just the risk of your suppliers looking to -- I'm sorry, your customers looking to squeeze your suppliers, what's the value proposition you have on the pricing side?
Yes, I'll start with that. Rob will add in as well, I'm sure. So fiberglass is still tight. So we would say, in the industry today, there's about 1.5 million housing start capacity of fiberglass. That's if the lines are running 100% 24/7, which isn't practical. So there's definitely still tight supply there. Even if there was a drop in some demand, we'd still be tight from a fiberglass perspective. There's been some new capacity come online late last year, early this year. That's basically been eaten up through maintenance that had to be done and some seasonality from a retail perspective. So I think it's important as we think about our Installation business, obviously, we're providing material and labor. It's a bundled package. And if things do slow, it's got to slow quite a bit before labor still is not a constraint in the industry. So I think there's been -- seen a lot of value in the labor and the services that we provide, the timeliness of our service, our ability to flex up and down, given peaks in demand that maybe our builder customers have as well. So I think from that perspective, we think that inflation may slow a bit, but we think there will continue to be inflation in the industry, and we'll continue to be able to manage that appropriately across the business.
Got you. We've seen actually a few bills being passed the last few years and even more recently with the Infrastructure Bill, the Chips Bill and potentially this Clean Energy Bill that's on the horizon. Walk us through how you're exposed to some of these trends potentially.
Yes. I mean for the most part for our business, most of the code changes are going to be tailwinds to our business, right? So if you look across all 3 end markets, residential, commercial and industrial, the -- all the code changes are moving towards more insulation in the home, more insulation in the buildings, more insulation for the mechanical products. So while a lot of those code changes are managed locally and controlled by local governments, these bills are helping to push things in that direction and should be a tailwind to our business, moving forward.
Anything on the clean energy or onshoring dynamic?
Yes. So some of the clean energy -- some of things that were mentioned in those, one from -- there's kind of an energy credit that goes back to the builders through the government or through some of the local municipalities. So we play a big part in that relative to, one, helping test the homes, but then also to helping folks process those credits they can get back. So there's definitely some opportunity there. Again, I think Rob said it well, there's tailwind for us relative to that. Some may be around the remodel -- repair, remodel perspective, which our Service Partners business does a great job of servicing those contractors. So could be some benefit, especially in some of the tax credits. And maybe, I think you mentioned infrastructure, as there is some infrastructure like airports, that type of thing, that would be a major area that we would play in.
Any questions in the audience? I will continue then. From a cost standpoint, Rob, you kind of alluded to being more of a variable cost business. Can you kind of help unpack that? How should we think about decremental margins and your ability to kind of manage it down, if there is an air pocket in demand?
Yes. So when we think about our playbook in a downturn, right, we've got the 2 cost buckets I talked about, 70% variable. By far, the largest piece of that is material. And so we've got no long-term supply agreements. So that cost can go away in a downturn. The second piece of that variable bucket is our direct labor, so our installers, the majority of which are paid on a peace rate. So if they're not working, they're not getting paid. So that peace will variabilize. And then as you look at the semi-variable/fixed cost bucket, the other 30% of our total cost, by far, the largest piece of that is salaries and wages for our back-office support. So in a downturn, our playbook is pretty simple. It's going after head count reductions. We did this during COVID when COVID first hit in March of '20. We saw our sales dip about 20%. And so we quickly laid out our playbook and action plans, and we started taking those actions in the second quarter of that year. Now luckily, COVID, by the third quarter, it become a tailwind to the housing industry, and we didn't have to implement the whole playbook. But we'll be ready to go with that, both from our branch side of things with our 400 branches. Our branch managers have their playbooks in terms of who are their top salesman that they're keeping, who are their top installers back to the branch support center, same type of thing from the office support side of things.
Got you. And then from a scale standpoint, I think part of the benefit of having that in the ERP is being able -- being flexible. Talk us through how -- if there is an air pocket, your ability to kind of move labor around and maybe even move labor around between end markets.
Yes. Definitely, the ERP system we have, which again, encompasses all those 400-plus businesses, is absolutely a huge competitive advantage for us. One, the visibility gives us real time across the footprint, down to the local level, down to local sales rep, local installer. It gives us incredible visibility across our business. So proactively being able to look at that real time, understand what's happening with the local markets, whether it be starts or completions, it does allow us to adjust and pivot. So it's simple for us to move labor, move equipment, move material around in our footprint. And that happens daily today as we see spikes in demand in certain areas. So that tool really gives us the opportunity to be proactive, make good, educated decisions that actually allow you to -- where do you remove some of the productivity, if you will. And so at the end of the day, it can be a real advantage to how we do this proactively. It's a very, very powerful tool for us that over the years, we've honed. And again, we think, it allows us to really get ready for any type of environment that we may face.
Got you. From an M&A standpoint, it's obviously been hugely accretive for TopBuild. Talk about -- talk us through how the M&A team works, how you kind of source deals? And then from a pipeline standpoint, any color on how robust it is, multiples, any end markets that stand out in terms of opportunity set?
Yes, I'll take the approach. Maybe Rob will talk the multiples. So definitely a very strong cadence of an approach that we have, everything from building the pipeline to diligence, to integration around that. So it comes from a few different directions. I mean when we talk about the relationship, the local relationship piece of the business, so we definitely encourage our team across the country, and it works with some of our partners across the footprint as well, relative to sourcing deals. Typically, we get the first phone call, whether it be through our relationships that we have or folks that are interested in moving to that next stage or others that may bring us deals and bring third parties that may bring us deals and opportunities. So -- and I think the approach is really important in the way that we go in. And you can go in and say, "Hey, you're going to run the business our way." Or we can go in and say, "You run a great business. We want to learn from you, want you to become part of our TopBuild family of companies." A local owner feels very different in those two different types of approaches, whereas we really give them credit for how they run their business and how we can learn from them. So I think building that relationship, getting them on board, we're big on the owners staying with the business. I think that's a critical success measured to keeping the owners with the business. We've done a great job of doing that. So bringing them on, obviously, going through the right due diligence to make sure it's high quality, it's bringing along the right mix of business, the right talent with the team and how it will fit into our culture is TopBuild. And then we are very adamant about putting the companies on our ERP system day 1 or as quickly as we can afterwards. And we just think that the visibility that gets: one, to get them on our supply chain; two, to drive operational efficiencies; three, the visibility of the business. I think you probably heard us talk about before, we're very big on working bottom quartile; bottom quartile branches, bottom quartile top customers, bottom quartile products, so that we can start driving operational improvements in the business as well as get those cost synergies early on in the process as well. So it is a diligent process we go through. And then it is a dedicated team, dedicated team on the front end of sourcing the deals filling the pipeline, dedicated team on diligence and dedicated team on the back end relative to integration of the company. So we absolutely consider it a core competency and a strength of TopBuild, and I think our 30-plus acquisitions and the returns we've shown on that, I think, prove that track record.
Yes. I think definitely, I mean having completed 30 deals, we've developed a core competency around identifying, evaluating and integrating these acquisitions. Our return on capital has improved by 700 basis points over the past 5 years as a result of that. So we're very proud of the results we've been able to drive. To the multiple side of things, right, I think I referenced it earlier, typically on the small- to medium-sized deals, which is the bulk of the 30 deals we've done, we're paying 5x or 6x pre-synergy. And post synergy, which are low-risk synergies, we're paying 3x or 4x. So we love the returns that's generating for us. And it's going to continue to be our top capital allocation priority.
And just one last one. On the DI side of things, it sounds like it's coming through better than expected. What are some of the puts and takes? And help us unpack some of the end markets that you're most excited within that DI business. I assume petchems -- LNG is probably a big opportunity, but it would be helpful to add some color.
Yes. So the acquisitions absolutely exceeded our expectations. And I think some of the things that we've learned as part of that and -- one, it is core insulation, so it's right in our space. But a very talented team. So we are having a very talented team come along at the local level, the operations footprint, across the DI footprint, both in the U.S. and Canada, have them become part of our team and starting to drive those operational improvements, operational initiatives in that business. I think, figure out some similarities in the business as well. There are some definitely cross-selling opportunities. So I think we surely start to realize that. We have a big metal building insulation business. We've done some consolidation there as well. So it's really been positive on all fronts from that perspective. And then it does open up some -- you talked about petro and gas. If I think about food and beverage, even on the medical side, where we did more of the envelope, now getting into some other opportunities in that space. So it does open up, again, relationships with some new general contractors on both side, where TopBuild had the relationships before, now where DI has those relationships. So it does provide some great opportunity and really how those businesses coming together, both integration culturally and the improvements that we're driving. This is going to be a great addition to TopBuild and opens up a real platform for us for the future.
Super. Thank you, Robert. Thank you, Rob. Great job, and appreciate all the insights.
Thank you.
Thank you.
Read the full transcript via the API
You're viewing the first half of this call. Get the complete TopBuild Corp. transcript - plus 251,000+ transcripts from 12,000+ companies, speaker segments and full-text search - through the EarningsAPI REST API or hosted MCP server.
Get an API key View API docs →For developers and AI pipelines
Programmatic access to TopBuild Corp. earnings transcripts and 251,000+ others is available through the
EarningsAPI REST API and the hosted MCP server.
Quarterly plans from $105 - full transcripts, speaker segments, full-text search,
and the /api/v1/transcripts/recent polling endpoint for ETL pipelines.