TopBuild Corp.

Greetings and welcome to the Top Build Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Tuesday, August 4, 2020. I would now like to turn the conference over to Tabitha Zane. Please go ahead.

Thank you, and good morning. On the call today are Jerry Bolas, Chief Executive Officer, Robert Buck, President and Chief Operating Officer, and John Peterson, Chief Financial Officer. We have posted senior management's formal remarks on the investor relations section of our website at topbill.com. As shown on slide two of today's presentation, Many of our remarks will include forward-looking statements concerning the company's operations and financial conditions. These forward-looking statements include known and unknown risks, 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, other than as otherwise specifically stated, the financial measures to be discussed on 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 reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in the presentation accompanying this call. Please turn to slide three. I will now turn the call over to Jerry Bolas.

Good morning, and thank you for joining us today. Let me begin by acknowledging the ongoing impact that COVID-19 is having on our employees, their families, and all of our other stakeholders. We understand it's a difficult time for everyone. Here at Topfield, we continue to manage every aspect of our operations. to provide a safe environment for our employees, our supplier partners, and our customers. At our branch support center in Daytona, we continue to work remotely, with technology keeping us connected and effectively supporting our broad network of branches throughout the country. At every one of our branches, we have implemented best practices in terms of sanitizing and disinfecting, and we enforce social distancing there and on job sites. As we look back on the month since our last call in early May, we've seen the resiliency of the residential new construction industry. We started the second quarter with extreme uncertainty. As the country was under a national lockdown, our installation and distribution businesses were deemed not essential in four states, and unemployment reached levels not seen since the Great Depression. Yet as we reported to you in May, our April financial results were still relatively strong. and they continue to improve as the quarter progressed. We're also encouraged that while second quarter housing starts are lower than last year, our builder customers are reporting a steady increase in traffic and orders. This should lead to improving housing starts as the year progresses. Historically low interest rates, very little inventory, and a growing desire to escape cramped urban environments are many of the key factors contributing to this quick rebound. While we recognize that there will likely be bumps in the road as our nation continues to manage through the pandemic, we remain bullish on the overall fundamentals of the U.S. housing industry. Turning to our second quarter financial results on slide four, net sales declined 2.1%, primarily as a result of the COVID-19 pandemic. Despite this revenue drop, we continued our strong margin expansion at both True Team and Service Partners. Top filled in total, our adjusted operating and EBITDA margins increased 130 basis points and 250 basis points respectively, which drove adjusted EPS to $1.68. We feel very good about this performance, which once again demonstrates the flexibility and strength of our operating model in any type of environment. Turning to slide five. On our last call, we noted that Given the current level of uncertainty, we were hitting the pause button on further acquisitions. We had a full pipeline of prospects at that time, and thanks to the ongoing hard work of our M&A team, that pipeline has expanded over the past few months. With a clear outlook of the positive trajectory of the housing industry and a strong balance sheet with almost $650 million of liquidity, we are resuming our acquisition program and should close on a number of these deals in the next several quarters. And having developed a core competency, integrating acquisitions onto our systems and supply chain, we expect to drive meaningful synergies quickly from these deals. As a reminder, our primary focus remains on acquiring core insulation companies. So we continue to evaluate a number of glass companies that would fit well within our existing $160 million business in this product adjacency. Before turning the call over to Robert, I wanted to note that in late June, we were pleased to learn the top bill was moving from the S&P small-cap 600 to the S&P mid-cap 400, effective June 30. Some of you may remember that at the time of the spin in June 2015, our market cap was approximately $1.1 billion. Today, it is over $4.5 billion, more than a 300% increase. This move is clearly a recognition of our strong growth and the tremendous value we've created for our shareholders over the past five years. I will now turn the call over to Robert.

Thank you, Jerry. Beginning on slide six, and before reviewing True Team and Service Partners' financial results and our continued operational response to COVID-19, I want to thank our entire Southville team for their dedication, teamwork, and ongoing push for operational excellence especially during these difficult times. Everyone from our installers to our warehouse workers, drivers, office and sales staff, field leadership, and branch supporters center team have pulled together to deliver our very strong second quarter results. Moving to slide seven, as we respond to the current environment, our cornerstone value of safety for our employees, their families, our customers, and supplier partners remains the guiding principle for all decisions. We enforce social distancing and sanitizing both in our branch operations and on job sites, and our work-from-home policy at certain operating facilities, including our Daytona Branch Support Center, remains in place. Internal communications have become even more important, bringing our employees together for themes including safety, diversity, and inclusion. We push these values throughout every level of our organization, building a stronger team, creating a better workplace, and helping us win in the marketplace. On the next slide, I want to stress that our strong results are due to many factors. Most importantly, our flexible business model enabling us to quickly adapt to changing market conditions, our ability to attract and retain labor, our integrated systems that allow us to share labor, equipment, and inventory, our strong supply chain which ensures we can meet customer demand, our long-term customer and supplier partner relationships, and our company-wide focus on operational efficiency and sales and labor productivity. As such, when the pandemic hit, we were confident in the steps we needed to take to care for our employees, serve our customers, and ensure the financial health of top-level. Turning to slide nine, we entered the second quarter operating in all but four states, New York, Pennsylvania, Washington, and Michigan, where residential and commercial instruction have been deemed non-essential. As a reminder, Washington represents our fourth largest state in terms of annual sales. At that time, in response to the shutdown and overall uncertainty due to the pandemic, we began pulling multiple levers to take costs out of the business, including eliminating most discretionary spending and nonessential capital expenditures, cutting overhead, and reducing labor in those states where construction was deemed nonessential. We also implemented a COVID-19 leave plan, paying impacted team members for a period of time to help provide assistance to them and their families. We did this to create goodwill and to increase the probability they would return to Top Build when conditions improved. It has definitely been a success, enabling us to quickly ramp up in those four states where construction has again been deemed an essential service. As we moved through the quarter, our branches stayed busy. working on a strong backlog. In addition, our builder customers' optimism grew steadily as they saw buyer traffic and orders increase along with consumer confidence fueled in part by very low interest rates. Moreover, based on recent builder surveys, there appears to be a shift of buyers moving to more urban rural areas. We're optimistic this shift will stimulate demand for single family homes. Along with this good news, by late May, early June, the four states that had deemed construction nonessential had reopened and our crews quickly got back to work. Looking at True Team's second quarter results on slide 10, sales declined 3.4% in large part due to our being shut out of commercial construction in several metropolitan areas in addition to the four states I mentioned previously. Sales improved as we moved through the quarter and June revenue increased compared to the same period a year ago. Despite this drop in revenue, True Team's adjusted operating margin improved 100 basis points in the second quarter to 15.2% and increased 110 basis points for the first half of the year to 14%, clearly demonstrating the strength and flexibility of our business model and our focus on bottom line results. Turning to service partners on slide 11, in the second quarter, total sales grew 1.3%, and for the first half of 2020, sales increased 3%. Service partners' adjusted operating margin for both the second quarter and first half of the year was 11.6%, an increase of 170 basis points and 160 basis points, respectively. As you can see on slide 12, We introduced a new product line at Service Partners, professional-grade sanitizing and disinfecting supplies and equipment. We're marketing to contractors who are already in the commercial cleaning industry, as well as to contractors who may see this as an opportunity to create a new revenue stream. While relatively small in terms of revenue generation thus far, it demonstrates our team's creativity and flexibility in meeting new market demand with minimal investment. Moving to slide 13, Our commercial business on the same branch basis declined 12.9% in the second quarter and is down 6.9% for the first six months. We have seen a number of large commercial projects delayed or slow to ramp up due to new guidelines governing the density of construction crews on site. Pre-COVID-19, it was not uncommon to have 10 or 12 trades working on the job site at the same time. Obviously, that has changed with social distancing rules elongating project timelines. We've also seen some projects canceled, but during the same timeframe, we've been awarded a number of new projects that have helped offset some of these cancellations. As a reminder, comps this quarter and last were very difficult as commercial revenue increased almost 22% in the second quarter of 2019 and close to 25% in the first quarter of the same year. On the heavy commercial side, bidding activity remains strong and we're looking at a potential job that will start dates through early 2022. A lot of the products we are working on and have been awarded are distribution centers, healthcare facilities, and infrastructure projects. Overall, the commercial recovery will be slower than residential, but we remain confident in the long-term growth of our commercial business. Material costs are holding steady and it's too early to predict whether we'll see a second cost increase this year. Labor is still tight, though in certain markets, particularly those hit hard by the steep decline in oil and gas and hospitality industries, we believe there could be an increase in the available labor pool. However, this will depend in part on the federal government subsidies of unemployment benefits, which are yet to be determined. Looking ahead, we, like all of you on the call, are closely monitoring how things start and are optimistic the industry will continue to see strength as we move through the year. Thank you again to the Topfield team and congratulations on another strong quarter. John?

Good morning, everyone. As both Jerry and Robert have noted, our strong financial performance is a direct result of the hard work of our outstanding team, both in the field and at the branch support center, and provides great evidence of how we can quickly flex our business model to respond to changing market conditions. With 70% of our costs being variable, we are able to initiate cost savings fairly rapidly, which we did in March as the pandemic hit. These savings help bolster our robust margin expansion this quarter. To a lesser degree, the margin expansion also benefited from COVID-19 curtailed expenses, such as travel and entertainment costs, which at some point were expected to return to normalized levels. Starting on slide 14, in the second quarter, net sales decreased 2.1% to $646.1 million, primarily due to a 3.6% reduction in sales volume driven by the impact of COVID-19, partially offset by revenue from three acquisitions, Viking Insulation, Hunter Insulation, and Cooper Glass. For the first six months of 2020, net sales increased 1.6%, primarily driven by increased selling prices and acquisitions, with overall volume flat due to the negative impact of COVID-19. As a reminder, we were still shut out of four states at the beginning of the quarter and were not operating in all of our markets until late May, early June. Adjusted gross margin increased 130 basis points in the second quarter, and first half of 2020 to 27.8% and 27.1% respectively, driven by increased operational efficiencies, cost reduction initiatives, and lower insurance costs, partially offset by higher depreciation expense. Adjusted operating profit in the second quarter grew 9.3% to $83.5 million, with the corresponding margin improvement of 130 basis points. For the first six months, adjusted operating profit increased 13.5% to $153.8 million with a corresponding margin improvement of 120 basis points. In addition to the items discussed in adjusted gross margin, operating margins were favorably impacted by lower travel and entertainment costs. Adjusted EBITDA for the second quarter was $107.8 million compared to $94 million in 2019 and adjusted EBITDA margin expanded 250 basis points to 16.7%. For the first six months of 2020, adjusted EBITDA grew 16.4% to $196.1 million, and adjusted EBITDA margin was 15.1%, a 190 basis point improvement over first half 2019. Second quarter SG&A as a percentage of sales was 15.1%, compared to 15% in the second quarter of 2019. The year-over-year increase was primarily the result of a lower sales volume and higher restructuring expenses, offset by savings from cost reduction initiatives and lower travel and entertainment costs. Depreciation for the three months ended June 30, 2020 increased $6.1 million compared to the same period a year ago. This increase in depreciation expense was primarily related to the reduction in the carrying value of older assets that the company was no longer utilizing and an increase in expense on assets the company has purchased over the last 12 months. On a six-month basis, depreciation increased $7.8 million compared to the same period a year ago. Adjusted income for the second quarter was $55.7 million or $1.68 per diluted share. compared to $49.5 million, or $1.43 per diluted share. For the six months of 2020, adjusted income was $101.6 million, or $3.04 per diluted share, compared to $86.1 million, or $2.49 per diluted share. Second quarter and first six-month 2020 adjustments were $3 and $3.6 million, respectively, primarily related to restructuring costs as a result of COVID-19. Our effective tax rate for the quarter was 23.2% and 20.5% for the first six months of the year. The 2020 effective tax rates are lower than the normalized tax rate we guide to of 26% due to a discrete tax benefit of $1.4 million and $6.9 million related to share-based compensation for the three and six months ended June 30, 2020. Interest expense in the second quarter of 2020 declined from $9.6 million to $8.3 million versus prior year, primarily driven by a 188 basis point decline in the average interest rate on our term loan compared to the second quarter of 2019. Moving to slide 15, CapEx for the first six months of the year was $20.9 million, 1.6% of sales, below our targeted long-term range of 2% to 2.5%. As we noted on our last call, with the advent of the pandemic, we pared back our planned 2020 CapEx spend. Working capital as a percent of sales for the trailing 12 months was 10.5% versus 11.9% a year ago. This decrease was due to improved collections and reduced past due amounts across the True Team portfolio, as well as lower volume in our commercial business, which tends to have longer receivable terms. As you can see on slide 16, we ended the second quarter with net leverage of 1.21 times using trailing 12 months adjusted EBITDA. Total liquidity at June 30th, 2020 was $648.5 million, including cash of $258.8 million, and accessible revolver of $389.6 million. Operating cash flow was $178.2 million for the six months into June 30th. Due to continued uncertainty related to the COVID-19 pandemic, we are not providing revenue and EBITDA guidance for 2020 at this time. However, as Jerry noted, we remain bullish regarding the long-term health of the residential and commercial markets we serve and our confident Top Builds flexible business model will continue to drive our strong performance. Jerry?

Thank you, John. Our business is strong, our team is focused, and our future is bright. We recognize there is still a great deal of uncertainty related to the pandemic, but we're confident we will successfully meet whatever challenges lie ahead. Many people are looking to escape crowded urban living and with historically low interest rates, now is a great time for them to pursue their dream of owning their own home. As we move through the second half of 2020, Scottville will continue to focus on achieving operational efficiencies while keeping our employees safe. Our flexible business model combined with our team's creativity and hard work will remain key cornerstones of our success. Operator, we're now ready for questions.

Thank you. If you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, as a reminder, to register for a question, please press the 1 followed by the 4. Our first question is coming from the line of Ken Ziener with KeyBank. Please proceed. Your line is open.

Good morning, everybody. What a quarter.

So 70% of your costs are variable. You had up dollars sequentially in True Team despite down sales, I believe. Can you talk to – I recognize you're not giving guidance, but you have talked about operating leverage generally. your business opens up again, especially in these four states, could you just comment on how we should think about incrementals, given that orders are very strong for home builders, A, and B, it seems like labor is going to be very tight. So that pricing on top of whatever units happen seems to be very favorable for you. I'm just trying to understand your cost actions as opposed to the underlying industry structure that enables you to get the incremental margins.

Yeah, Ken, this is John. So just a couple comments, and I'll drill down a little bit more in terms of some of the performance versus what I gave in the prepared work. So first of all, we are pleased with our margins. And again, you know, we said it multiple times throughout the prepared comments. We think it's a great, great indication of what we've been talking about for the past five years, that we've got a very flexible model that can adapt to puts and takes in the industries we service, certainly. We did get on it pretty quickly in March when the pandemic hit. So we did take certain cost reductions. I think you saw in our data that we had about 2.4 million bucks worth of rat charges that we basically provided. So we did get some benefit from that, probably a million dollars in the quarter. And on an annualized basis, roughly 5 million in terms of the cost reduction activities we took. We also did get a benefit from what I'll call COVID-19 delayed or deferred expenses or reduced expenses. And probably the best example would be travel and entertainment. So, you know, our best example estimate in terms of the benefit we received in the quarter that at some point is going to normalize and come back would be probably roughly $4 to $5 million worth of benefit in the quarter that we got. But again, the vast majority of the benefit we did get in the quarter was certainly operationally driven. So when we look at that on a go forward, we don't know how quickly that's going to normalize those COVID-19 reduced costs. It'll really depend on the pandemic and how things come back and how quickly we can get back to travel and other things that we normally do. But on a go-forward basis, we're not going to give any guidance, as you said. We're certainly confident in the long-term capability of our model. You know, we talk about a 22% to 27%, and we would certainly agree with that number in the long term. And we're just going to have to see how this plays out over the next three or four quarters, two or three quarters, I should say, from a pandemic standpoint. But But, again, pleased with our results and, again, operationally driven by far.

I appreciate that. I guess if you, as the largest installer of installation, therefore, you probably have the most data points as a company to what's happening on the builder side. Can you talk to this resurgence of orders tied inventory and many builders selling through finished specs? Can you talk to the industry's ability to – obviously, I think you can provide labor, and that will benefit your pricing. But can you talk to what you think might be constraints in the industry ramping up sequentially out of this COVID stuff? Because it seems like lumber is really high. Installation prices are seemingly flat for the time being. Yeah. But can you talk to what you're seeing in terms of constraints, in terms of the growth that might be happening in the industry and how that might be different versus a year ago, excluding the commercial? Thank you.

Yeah. Hi, Ken. This is Robert. So, you know, I think if you look, it's, you know, a lot of positive news coming out from the trends from the builders. And I think, you know, everybody ramping up here for a very strong finish to the year, especially the fall, which is always a seasonally busy time. You're right. I think we'll fare well from the labor perspective, but let's say, given the industry as a whole, whether it be some of the new regulations on job sites, the number of trades on job sites, whether that be residential or commercial, because there's new regulations for both. I think that combination, as well as the heavy order flow, we are seeing some elongated lead times for sure. We think the lag is extending in the industry due to some of those factors. And you're right about what you say. We do believe that labor will remain tight. You know, there could be some influx of some employees into the industry, given some of the other industries that have been constrained. That being said, the extra unemployment benefits have probably been hindering some of that recruiting up until now. So, you know, I think that will be dependent on what we see happen relative to unemployment benefits going forward. I would say from our perspective, as we look back, I think I mentioned the prepared marks. The COVID lead plan that we did really benefited us to bringing employees back as well as I think that's allowed us to get some references of attracting some new folks in. So do I think it will elongate the lead times? The answer is yes. I think the industry will have some struggles keeping up with that, which will just extend that backlog later into Q4 and could carry into early 2021.

Thank you.

Our next question is coming from the line of Phil Ng with Jefferies. Please proceed. Your line is open.

Hey, guys. Just following on that line of questioning, you know, orders obviously have picked up pretty nicely and appreciating some of these bottlenecks that could lead to more elongation. But, you know, if you kind of think that through, when do you expect the uptick in orders kind of flowing through from a timing perspective?

Hey, Phil, this is John. So, listen, the reason we didn't provide guidance or one of the major reasons we're not, it's not because we're not optimistic we are about both, you know, commercial and residential, but really two primary reasons. One is we tend to rely on lag starts following some type of normalized or seasonalized pattern. That's kind of out the window right now, certainly. So, what we saw was pre-pandemic, very, very strong starts profile. Then we had roughly three months' worth of relatively weak started to see that recovery in June. And we certainly expect July forward to have, you know, a nice starts profile. But it's tough for us to project, you know, the backlog we had, whether it's fully depleted as an industry, and then how quickly these new orders come online and we get to them at our job site. So that's one. The other is commercial, where, you know, we have, and as you know, that's almost a quarter of our business. And on the heavy commercial side, as Robert said, We've been disproportionately impacted there from a social distancing standpoint. So how quickly those job sites get back to a normalized type of cadence is something that we just can't estimate with any granularity at this point. So that's why it's difficult to kind of look forward and give a full projection from a guidance. But listen, we are as optimistic as everyone based on the conversations we're having with our customers. you know, what we know is out there and what we know is coming.

Say, Phil, this is Jerry. The one thing I would add to that explanation would be that, you know, we had talked about an air pocket. That's kind of been a phrase that people have used here over the last several months. I guess it's fair to say that our point of view now is that if there is one, it's probably more shallow and shorter than we probably would have said 90 days ago in looking out over the landscape. So... To John and Robert's point, we see strength out there, and we think builders are going to be responding to consumers looking at buying homes. And we think that's all going to benefit the entire industry go forward here. So whether or not there's a bump some quarter, maybe. But overall strength, I think that's the summary statement.

That's really helpful. And then your ability to kind of leverage your labor has kind of been a hallmark of Top Build. In this surging demand backdrop, you know, is that something you think you're going to be able to take advantage of even more so compared to your peers, your mom-and-pop competitors, and an opportunity for you to potentially take share?

Yeah, Phil, this is Robert. So absolutely, I mean, I think I'll hit it from multiple angles. I mean, we're always working the productivity side from a labor standpoint, and we really believe and we think it has shown through integrated systems, how we move labor around, equipment around, and how we're able to service customers. There's the peaks of demand, and if you look at these order flows coming from the builders, there's going to be some big spikes coming in some of these, the robust fall period that's coming to us. We'll be able to service that, and we think by our ability to do that, manage and leverage the labor systems, that type of thing, that we will more than gain our fair share of those of those orders that are coming. So yeah, high level confidence there.

Got it. And then just one last question for me. I mean, we use broad strokes and define non-res as non-res, but appreciating there's pockets where it's stronger, let's say warehouses and data centers and maybe stadiums and office is a little weaker. What's your ability to kind of flex your labor force between heavy commercial versus light commercial and how you kind of think about that outlook going into 2021. Appreciating you do have some tough jobs.

Yeah, it's a good question. So, you know, as you look at some of the commercial construction that's taken place, I mean, the applications and the products are kind of, you know, merging closer. So, I'll give you one good example here. We're doing several Amazon facilities today, and our residential crews can do that type of work. It's some of the same applications, some of the same board product we would use in light commercial applications. So we're leveraging that labor today to move around to some of the commercial projects. And we think that, you know, that differentiation between heavy and light commercial, you know, continues to narrow some. So it will play to our benefit to be able to leverage, you know, labor and move that around among bigger jobs.

Okay. Thanks a lot. Appreciate the call.

Our next question is coming from the line of Ruben Gardner with Benchmark. Please proceed. Your line's open.

Thank you. Good morning, everybody. Good morning, Ruben.

So I had a little bit of... static or break up on my end during your prepared remarks. So if you said this already, I apologize. But can you just talk about what the difference was in the volume profiles in the second quarter between installation and distribution? Was it as simple as geographical location? And then I guess on the same point, is should we expect that the installation pricing profile to continue to outperform distribution in the near term as you guys are selling labor increases more so than materials?

Hey, Phil, this is John. So, actually, in the quarter, you know, True Team was disproportionately impacted by the impact on commercial that Robert talked about because it was primarily heavy commercial, and that's where, you know, a greater piece of our heavy commercial business exists. So, So when you looked at the residential, I'll say just pure residential new construction, True Team was relatively flat, up slightly versus a year ago. On the other side of that, though, our service partners business was probably up close to 3.5% on a volume side from an RNC standpoint and not near as impacted by the commercial. You know, residential, I think, and especially considering what happened to us in April, I think the results were really strong. We had a nice May and June recovery and exited the quarter with some nice momentum certainly in that area. So I'm going to go for it. And by the way, the other thing I'd point out is the fact that you look at service partners. We go all the way back to fourth quarter 18 where we talked about the fact that we were actually, you know, modifying some of our portfolio of customers and We took a little bit of hit on volume there, but I think the team has been doing a great job of building that volume back up with additional customers and also getting some additional volume of the core customers we have. So I think you saw nice evidence of that in the quarter, and we'd expect that to continue.

Great. That was very helpful. Thanks, John. And let's see, to follow up on that commercial piece, is it – I think it's a piece of your business that most are less familiar with. Is it – Fair to say that because of the differences in regulation and just the differences in how the business works, that you have a longer backlog or more visibility, I guess, assuming that people can get back to the job site, that you have some runway for that business, even if there is kind of limited new projects in the coming years. a couple of quarters that you'll be able to kind of work through what was already in the pipeline, kind of coming into the pandemic. And thanks again for taking my questions and congrats on the strong results.

Thanks, Ruben. This is Robert. So yeah, longer lead times thinking ahead for commercial projects. I think I mentioned, you know, we're bidding projects into 2022. So there's a backlog that exists in that business. You know, some of those projects have been, you know, pushed out or delayed. Some cancellations, but not, I wouldn't call it a tremendous amount of cancellations that we've been able to offset with some new projects. So, yeah, there's a backlog. There's a backlog to work through. But commercial will take a little longer to ramp back up than residential. But as we said, we feel really good about the long-term growth prospects on the commercial side, both, you know, the industry as well as our ability to continue to gain some share in the commercial space.

Our next question is coming from the line of Trey Moorish with Evercore ISI. Please go ahead. Your line's open.

Thanks very much. And a great quarter, everyone. Absolutely fantastic. I want to stick on commercial for a second. It sounds kind of like the way you're talking about that your backlog in commercial is modestly down as you're looking up. So if you could kind of clarify that for me. And second on commercial, You've previously talked about wanting to expand your commercial footprint a little bit farther south and southeast. Given the job site restrictions that are happening right now, do those restrictions have you resulting wanting to accelerate that expansion into the south and southeast?

Hi, Trey. This is Robert. So, yeah, the backlog may be down slightly. from if we went back to, let's say, four or five months ago, it would be down. Again, some projects canceled or delayed, pushed out. Some new projects that we've been able to put into the pipeline. But I would say one of our leading indicators is bidding activity, and I would say our bidding activity on the commercial side has been very strong. I'd say even stronger in a positive surprise from what we were thinking as we went into the pandemic. That's the positive side. I think we do stay very bullish on the long-term piece of the commercial industry and our ability to grow there. And again, we're agnostic to the type of commercial projects. So where we may see projects such as high-rise offices or high-rise residential or convention centers, that type of thing being delayed or potentially canceled, at the same time we're seeing things such as warehousing, manufacturing, data centers, infrastructure, healthcare. We're seeing those projects pick up and we're bidding a lot of those projects as well. So I think we feel comfortable from that perspective and again, positive on the long-term look.

Got it. Thanks for that. And then just looking at your EBITDA bridge, your DNA was significantly higher this year, not only just related to last year, but also

last quarter was there something accelerated in there um or is this a new new step function higher just wondering if you could clarify that for me yeah so this is john um so yeah in the marks we talked a little bit about the fact that we have um the majority was really driven by a reduction in carrying value of older assets that the company only wanted and by far that the biggest driver was the fact that we basically adjusted our salvage values on our on our depreciation schedule, so we took a period-to-date adjustment. That was about $4.5 million of the growth. The other piece was just tied to what we've seen traditionally, which is we have been adding more assets online, basically. So, you know, the $6.1 million split about $1.6 million between just growth of our assets and the growth on our depreciation, and about $4.5 million tied to a policy change around depreciation.

Gotcha. Just a slight clarification. That four and a half, that's the acceleration. Is that something that is sustainable? Is that just a one-time thing that's going to reverse next quarter?

It's a one-time adjustment in the second quarter.

Okay. Thank you very much.

As a reminder, to register for a question, please press the one followed by the four. Our next question is coming from the line of Adam Baumgarten with Credit Suisse. Please go ahead.

hey good morning um just one of the spiking orders from the home builders and potentially some tightening capacity how should we be thinking about the potential for a price increase from the fiberglass guys maybe later this summer or early fall hey good morning adamus roberts so i think you know a little early detail um you know given that spike and stuff there could be as you as you probably remember i'll step back a little bit as you remember there were a couple of fiberglass manufacturers that pre pandemic had announced they were bringing up additional capacity late 2020, early 2021. They, after pandemic hit, they subsequently pushed that out or delayed that new capacity. So that being said, depending on that ramp up of orders and stuff, could there be some tightness of material like in labor? Potentially could be, and if that's the case, I would speculate they're probably looking at that and considering could there be another material cost increase maybe later in the year.

Okay, got it. Thanks. And then just on the acquisition front, is most of the pipeline filled with smaller tuck-in type deals, or are there some larger opportunities out there?

Jerry here. There's a couple larger ones. I mean, there's always a variety of potential targets, both from the standpoint of residential, commercial, insulation, glass, and then size as well. So to answer your question, there are a few that are bigger. But there are a number of ones that are, you know, what we call tuck-ins that are highly effective in terms of, you know, the returns that they provide to us. So, yeah, hopefully that gives you a little bit of color. I mean, we, as you well know, have been highly successful with acquisitions here since, you know, 2015. And, you know, we've deployed close to a billion dollars of capital. Two-thirds of that is acquisition-related. So, yeah. That train continues. We've got a team here that's highly effective in terms of integrating. You can look forward to us over the next number of quarters to be back in the acquisition game for sure.

Great. Thanks a lot.

Our next question is coming from the line of Sheldon Clark with Deutsche Bank. Please go ahead.

Hey, thanks, Operator. Is there any way you can give us a sense of where sales trended in June and into July and what impact you could be seeing from pent-up demand in either of those months? And I understand, you know, sales were down 9% organically in April, and you're not giving guidance. So even if you could just give some context around how the rate of improvement changed throughout the quarter and maybe how that compares to July. Thanks.

Yeah, Jerry here. I'll tell you that as the second quarter progressed, on a sales per day sort of a basis, which is kind of how we look at it, it improved. It improved from April into the May-June timeframe for sure. What we can tell you about July is that July continues at about that pace. And it's hard for us to know how, we just stepped into August here, how that's going to look, but Yeah, it has improved from what was the trough. So I would say April was the trough, and it's gotten better from there. And as we move into Q3, it's continuing at that level. Do you mean continue to improve or continuing at the level of where June was? I would say July is looking a lot like June at this point in time.

Okay. That's helpful. And then, you know, you typically see from QQ into 3Q, You know, a little bit of an increase in sales and higher EBITDA margins. And, again, I know you're not getting guidance, but is there any way to think about how the moving parts shake out as it relates to just normal seasonality this year, you know, given everything taking place with elongated construction cycles, you know, the various moving parts on the cost side and, you know, some potential cost creeps? you know, showing up in the third quarter or either fourth quarter. So how do we think about – or how should we think about normal seasonality this year relative to, you know, what we've seen over the past several years?

Yeah, I mean, we would love to give you some more specific guidance on that. But, you know, as John has said, you know, most of the historic relationships around, you know, lag times in the building cycle – a number of things are kind of been disrupted here because of the volatility of what's happened, you know, COVID-driven. So John may have some more specific comments, but my take on that would be that, you know, we're optimistic about the sales level and what we do, you know, from a margin standpoint, then whatever we have. And, you know, the reason we're not giving guides is just because some of the dependable relationships that we use have really been taken off the table. And that's not necessarily a negative. I mean, we are still going to perform really well just based on the flexibility that we have. And Robert and his team are just outstanding when it comes to making the most of whatever environment we're stepping into. So we would expect that to continue. John, I don't know if you have anything else to add to that.

No, I think Jerry said it well. I think on the profitability side, I think we – we're very confident on a go-forward basis. As I said, some of the benefit we got to a lesser degree was driven by expenses that were down due to COVID-19, and we expect those to normalize, but that's going to happen over time. So again, very bullish about top line and bottom line on a go-forward basis. The struggle for us or the challenge is how do we look at seasonality and And how quickly do we get back on commercial job sites, as I said before, that we've been disproportionately pulled off of?

Okay. That's helpful.

I appreciate it.

Thanks, guys. Yep.

Sure. Our next question is coming from the line of Ryan Gilbert with BTIG. Please go ahead.

Hi. Thanks, guys. First question on the distribution business. I'm just wondering how I should be thinking about volume growth going forward. It sounds like you expect to see continued increases. I think my understanding of the business that it was a little more counter-cyclical than the install business. So just, yeah, how we should be thinking about volume growth and distribution.

Hi, Ryan, this is Robert. So I think, you know, if we go back to the end of 18 and through 19, we were talking about, you know, our focus and service partners and, you know, growing the business there. And I think we're seeing some of the fruit of that lived through that, you know, selling more to existing customers as well as attracting some, some new customers as well. You know, all those small example talked about the, um, uh, the disaffected sanitizing product line that we're rolling out. So I think we're pretty positive about the service partners growth. Um, and then also, you know, we'll see potentially smaller contractors come back to us if they're having a hard time taking full truckloads of shipments that plays to, plays our value proposition. And, you know, one thing that we've always focused on and we continue to see improve is our service level. So really, you know, keen focus on service. And especially if you think about things ramping up, the orders for builders, that type of thing, you know, service becomes even more part of the value. So we're keenly focused on that. And we think, you know, service partners and True Team both will continue to see some nice improvements.

Okay, thank you for that. And then the second question, just on the M&A pipeline, wondering if you can talk about your preference for completing deals within the residential end market versus the commercial end market.

Yeah, we have both in the pipeline.

You know, I think we're a bit agnostic. We've had success on both sides of that aisle. We're really good on the residential side for sure. That's a legacy of the company, and we get huge synergies when we do those acquisitions. But then on the commercial side, our scale is rapidly improving there. As Robert spoke to the future of the commercial business, there's a number of different types of projects that we think will continue to be strong in terms of starting. We're very anxious to continue to improve our footprint, and if we can do that through acquisition, finding the right partners, we will certainly do that.

Okay, great. Thank you. Sure.

As a reminder, to register for a question, please press the 1 followed by the 4. Our next question is coming from the line of Justin Spear with Zellman & Associates. Please go ahead.

Good morning, guys. Thank you. I wanted to start on the non-residential side. Just if you give us a little clarity on the revenue trends to exit the quarter there, recognizing you're down, I guess, roughly 12%, 13% in the second quarter. But as you think about the exit rate into July, how did that look?

Good morning, Justice Roberts. So, you know, if you think about it, I think Jerry mentioned it as well. So we continue to see a positive trend of revenue throughout the second quarter. We saw that revenue trend continue to improve in July whenever we do that comparison. So we think we're still working on backlog. We think also you've seen the order trends from builders. And I would say our crews are busy right now. So we're pretty positive in the trend that we've seen. And then I think previous question on service partners, some nice growth on service partners, a combination of selling more to existing customers, maybe some smaller customers that we've been targeting coming back and seeing the value and and what we do as well during this time. So I think good trends in both.

Okay, and then I guess the difference in growth between your designation, I think maybe the split between heavy commercial and light commercial would be helpful too in terms of the differences in growth in the quarter.

Yeah, Justin, this is John. I don't have the numbers right in front of me, but I can tell you that commercial was disproportionately impacted by heavy commercial, the social distancing, you know, off of some job sites temporarily. And so certainly that's where the majority of our decline was on the quarter was on the heavy commercial side. Okay.

And then it would be helpful to, I don't know if this is something that's possible, but I guess your vertical exposure across some of these areas that are stronger, the healthcare, industrial distribution centers that you mentioned, juxtaposed to maybe some of the other areas that are obviously more pressured. I don't know if you have any clarity that you can provide there too.

Hey, Justin Roberts. So we're pretty agnostic, quite honestly, as we look across the thing, across the landscape of mix of commercial business. So if you're talking high rise residential, we're talking high rise commercial, I'd say we are, you know, equally owned healthcare facilities, distribution centers. I mean, I think I mentioned earlier, I will give the number, but the number of distribution centers, including like Amazon facilities that we're on sites of right now is is tremendous, so we're pretty agnostic of that. The main thing is we're looking at the projects. We know what the mix of the projects are, the projects that we're bidding. Applications are very similar, and we're obviously comfortable with those types of projects. I talked about infrastructure projects as an example. You could say healthcare, but then also we're doing some airport projects now as well that still got some time to go on those projects also. I'll go back to my term agnostic and just say we're across the landscape of a mix of commercial projects.

Sure, and I guess I was thinking about it a little bit differently, but thinking about your actual current mix of business that is through those better growing businesses versus the verticals that may be a little bit more challenged with a little uncertainty, at least in the near term. I guess what percentage of your business is healthcare and industrial distribution centers?

Yeah, I don't really have that split or that breakdown, Justin. I would just say we're not heavily weighted in a negative way towards one or the other. Got it, got it.

And then last question for me, the pricing stability in the quarter was a positive surprise. I guess how should we think about that in the back half, recognizing there may be some inflationary impulse from the supply chain, but it seems like you did a lot better there. And I'm guessing how do you think about that in the back half potentially shaping up?

Yeah, so Justin, this is John. So, you know, the pricing you saw in the second quarter was all carryover pricing essentially from prior periods. And listen, we're not going to speculate in terms of third or fourth quarter. I mean, it's going to really depend on the market conditions at the time. And Robert referred to the fact that there's a potential out there as things continue to recover for material cost increase. We'll have to see how labor shapes. So really tough for us to speculate right now. But I think You know, one thing, and I think you've got five years of evidence of this, is we're able to adapt to any environment and any inflationary type of environment pretty quickly, and we're confident of our ability to do that and go forward.

Excellent. I appreciate your time. Thank you. Thank you.

And there are no further questions at this time.

Thanks, everybody.

Stay safe out there, and we look forward to our Q3 earnings call in November.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.