TopBuild Corp.

Greetings, and welcome to the top-billed fourth quarter and year-end 2020 earnings call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tabitha Zane. Please go ahead, ma'am.

Thank you and good morning. On the call today are Robert Buck, President and Chief Executive Officer, and John Peterson, Chief Financial Officer. We have posted senior management's formal remarks and a PowerPoint presentation that summarizes our comments on the investor relations section of our website at topbills.com. Many of our remarks will include forward-looking statements which are subject to known and unknown risks and uncertainties, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Please note that some of the financial measures to be discussed on this call will be on a non-GAAP basis. 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 the presentation accompanying this call. I will now turn the call over to Robert Buck.

Good morning, and thank you for joining us today. We're pleased to report a strong fourth quarter with volume growth and margin expansion at both business segments. This casts a year of opportunities and challenges for our company and our industry, framed by a national pandemic and unprecedented demand for residential new construction. I want to start by thanking our entire top-level team for their dedication, enthusiasm, and hard work. Our team quickly adapted to a changing world, working from home in some cases, and adhering to strict safety standards at all of our facilities and on job sites. At the same time, the team continued to provide our customers with the level of service and support they expect from our top-billed companies. While John will discuss our financial results in detail, I want to highlight our full-year 2020 results. Revenue increased 3.6%, adjusted operating profit grew 22.8%, and adjusted EBITDA increased 21.6%. Adjusted operating and EBITDA margins expanded 200 basis points and 240 basis points respectively. And adjusted net income increased 32.6% to $7.28 per diluted share. These solid results are a testament to the strength and resiliency of our top-billed team during the pandemic, and especially given the four states where we have significant operations deemed construction not essential for an extended period of time. In 2020, we completed three acquisitions, Hunter Insulation, Garland Insulating, and Cooper Glass, which combined are expected to contribute almost $80 million of annual revenue. We likely would have welcomed additional companies to our team during the year, but made the decision to pause our acquisition program in late first quarter and through the summer in response to the many uncertainties related to the pandemic. Turning to our outlook for 2021, from my point of view, Our industry hasn't been this strong since before the Great Recession. The combination of significant pickup demand, low levels of new and resale home inventory, historically low interest rates, and a COVID-enhanced consumer appetite to relocate from densely populated urban communities to suburban rural locations are all contributing to our extremely favored outlook for the long-term growth and health of our industry and our companies. Top builders is an excellent position to capitalize on this housing growth with a national footprint, supply chain focus, and a flexible labor force that can be shared across multiple branch locations. However, we also recognize there will be some constraints throughout the entire housing industry, primarily from labor material, that will impact how quickly orders convert into permits, permits into starts, and ultimately into work for top builders. these constraints will likely lead to a longer build cycle extending to housing recovery. Regarding material availability, all trades are experiencing constrained capacity. While fiberglass is on allocation and spray foam raw material is in short supply, we will see additional fiberglass capacity come online later this year and spray foam availability should improve by the end of the second quarter. Owens Corning is adding fiberglass capacity in Kansas City in the second quarter, and Knopf and Johns Manville are each bringing on glowing wool capacity in the third and fourth quarters of this year. As far as material pricing, we saw an increase last September as well as this January, and a number of manufacturers have announced price increases effective this April. We feel very confident in our ability to manage these cost increases as evidenced by our track record in 2018 when we saw significant material inflation. This is a testament to our strong operations leadership and local branch managers, as well as the quality of our partnerships with our suppliers and customers. Labor constraints remain top of mind within the industry as well. As it relates to labor at Topfield, our friends and family recruiting program, which I discussed last quarter, is yielding great results. We have added several hundred new installers through this program and continue to receive referrals daily. We're also focusing on improving the productivity of our current labor force, including getting into the job site faster using routes optimization tools. In addition, having all of our branch locations on the same ERP system gives us a distinct advantage in servicing our customers. We move crews, equipment, and material among our branches every day to ensure we meet our builder customer's project timelines. No other installer has this capability. This is yet another reason, in addition to achieving supply chain efficiency, we quickly move acquisitions onto our operating platform. Our commercial business, which slowed last year due to pandemic-related project delays, is showing solid signs of improvement. On a same branch basis, revenue was flat compared to a year ago in the quarter. Bidding activity remains very strong, and our backlog is growing. Our long-term outlook for our commercial business remains bullish, and we expect to see meaningful improvement as we move through this year. Acquisitions remain an important component of our growth strategy and our continued number one capital allocation priorities. In January, we announced the acquisition of LCR Contractors, a fireproofing and insulation company generating approximately $58 million in annual revenue and servicing the Texas markets of Dallas, Austin, and Amarillo, and the Tennessee markets of Knoxville and Asheville. This is a great addition to True Team as it significantly enhances our heavy commercial presence in these high-growth regions. Since 2016, we've acquired 15 companies which combined are contributing almost $650 million of annual revenue. Our focus remains on acquiring installation and distribution companies in core installation. Our scope is wide and includes companies installing many different types of installation products beyond just fiberglass and spray foam. With a robust pipeline of prospects, we expect to stay very busy on this front in 2021. Before handing the call over to John, I want to highlight our annual leadership meeting, which we held in mid-January, virtually, of course. Everyone is extremely optimistic and excited about what they see as robust growth in our business. We took the opportunity to set forth our goals for the year with a continued focus on driving improvements throughout the business. Towards that end, our team is focused on driving organic growth, successfully integrating new acquisitions into our family of companies, expanding our efforts to think differently in order to simplify processes, leverage fixed overhead, manage expenses, and improve productivity, developing and building the talent and diversity of our team and striving for zero safety estimates. We are looking forward to a great 2021. I'll now turn the call over to John.

Good morning, everyone. As Robert noticed, we finished 2020 with a strong fourth quarter and enter 2021 well-positioned to capitalize on the robust growth in the end markets we serve. We'll begin with a review of our 2020 results, then provide our outlook for 2021. Starting with our fourth quarter results, net sales increased 8.9% to $721.5 million, primarily driven by increased same-branch sales volume, revenue from acquisitions, and a more favorable mix of single-family versus multifamily homes, partially offset by a slight decline in price. The price decline was driven almost entirely by lower spray foam and gutter costs and the resulting impact on selling price. Sales for full year 2020 increased 3.6% to $2,718,000,000, principally driven by an increase in sales on the same branch basis, sales from acquisitions, and higher selling prices. Fourth quarter adjusted gross margin expanded 160 basis points to 27.5%, driven by increased volume, lower spray foam and gutter material costs, lower insurance expenses, and continued gains in operational efficiencies, partially offset by a slight decline in selling prices. For all of 2020, gross margin expanded 150 basis points to 27.5%. Adjusted operating profit in the quarter grew 35.7% to $104 million, with a corresponding margin improvement of 280 basis points. On a full-year basis, adjusted operating profit improved 22.8% to $359.4 million with the corresponding margin improvement of 200 basis points. Fourth quarter adjusted EBITDA was $121.5 million compared to $92.5 million, a 31.2% increase. And our adjusted EBITDA margin was 16.8%, a 280 basis point improvement. Both adjusted operating and EBITDA margin improvements were driven by the previously mentioned factors impacting gross margin, as well as cost reductions initiated in the second quarter and lower travel and entertainment expenses. For full year 2020, adjusted EBITDA grew 21.6% to $436.7 million, and our adjusted EBITDA margin improved 240 basis points to 16.1%. Our fourth quarter drop-down to adjusted EBITDA margin was 48.9%, driven by higher sales volume, strong cost controls, and continued leveraging of our platform, partially offset by higher material costs. On a full-year basis, the drop-down to adjusted EBITDA margin was 82.7%. Adjusted income for the fourth quarter was $71.3 million or $2.15 per diluted share compared to prior year fourth quarter of $50 million or $1.48 per diluted share. Fourth quarter 2020 adjustments were nominal at just under $900,000, primarily tied to acquisition-related expenses and the COVID-19 leave plan put in place last March. This plan provides assistance to our employees directly impacted by the virus. Adjusted net income for full year 2020 was $242.5 million or $7.28 per diluted share compared to $188.9 million or $5.49 per diluted share for full year 2019. Full year 2020 adjustments total $4.6 million primarily related to restructuring charges taken in the second quarter, acquisition-related expenses, and our COVID-19 lead plan. Interest expense in 2020 decreased from $37.8 million to $32.5 million, primarily driven by lower LIBOR rates and a lower balance due on our term loan. CapEx for full year 2020 was $40.9 million, approximately 1.5% of revenue, and lower than our targeted long-term range of 2%. As we have noted on previous calls, at the start of the pandemic, we pared back our planned 2020 CapEx spend. In 2021, however, we do expect CapEx to return closer to our guidance of approximately 2% of sales. Working capital as a percent of trailing 12-month sales was 9.3%, 100 basis points lower than prior year. This decrease is primarily due to improvements in our accounts receivable aging and a richer segment mix of our service partner's business, which covers lower working capital requirements. Our effective tax rate decreased from 24.7 percent in 2019 to 23.5 percent in 2020. The higher rate in 2019 was primarily related to a revaluation of deferred tax assets and liabilities as a result of state filing position changes. We ended the year with net leverage of 0.88 times trailing 12 months adjusted EBITDA. Total liquidity at year end was $719.6 million, inclusive of the available balance on the revolver of $389.6 million and cash of $330 million. Operating cash flow was $357.9 million for 2020. Now let's turn to our segment results. True Team sales increased 6.9% in the fourth quarter and 1.9% for the year. The increase in sales in the fourth quarter was driven by same branch volume growth, revenue from acquisitions, and a richer mix of single family homes, partially offset by a decline in our same branch commercial business and a slight decline in price. True Team's same branch commercial revenue was down 4.9% on a year-over-year basis an improvement from third quarter when same-branch commercial revenue declined 10.7% from third quarter 2019. Fourth quarter adjusted operating margin for True Team was 16.1%, a strong 270 basis point improvement. For full year 2020, True Team's adjusted operating margin improved 200 basis points to 15.3%. Service partners' fourth quarter sales were up a strong 12.7%, to $251.5 million, driven by a 13.3 percent increase in volume and partially offset by a slight decline in price. For the full year, service partners' revenue grew 7.4 percent to $926.2 million. Fourth quarter adjusted operating margin for service partners was 13.4 percent, a 210 basis point improvement from the prior year. For full year 2020, service partners adjusted operating margin increased 200 basis points to 12.5%. Moving to 2021 annual guidance, based on builder orders and our expectations that interest rates will remain low, we are optimistic this will be a very good year for top build. However, it's important to note that our guidance assumes some level of industry-wide material and labor constraints, which has already led to an extended build cycle and higher than normal backlog. We are projecting total sales to be between $3,050,000,000 and $3,150,000,000 and adjusted EBITDA to be between $505,000,000 and $535,000,000. This assumes a range of residential new housing starts of between $1,425,000 and $1,475,000. It also includes revenue from LCR contractors which we acquired in January but does not include any additional acquisitions we expect to make this year. We've also provided our long-range modeling targets for a number of metrics. The range for working capital is now 9.5 to 10.5 percent of trailing 12-month sales compared to 10 to 11 percent when we last gave guidance a year ago. The range for same-branch incremental EBITDA is 22 to 27 percent and 11 to 16 percent for acquisitions unchanged from prior year. We are now projecting $90 million of revenue for every 50,000 increase in residential housing starts. We're also projecting commercial sales growth to average between 7.5 and 10 percent annually, partially impacted by project delays discussed earlier. Our normalized tax rate is unchanged at 26 percent. Finally, we project CapEx at 2 percent of sales, also unchanged from previous guidance. I will now turn the call over to Robert for closing remarks.

We are very confident 2021 will be a strong year for Topville. The external environment points to solid growth in residential and commercial construction, and our diversified business model enables us to capitalize on the strong demand. Our team is executing exceptionally well, and we expect to close on additional M&A opportunities, which will further add long-term value for our company. Operator, we are now ready for questions.

Thank you. At this time, I'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question is from Michael Rehot, J.P. Morgan. Please go ahead, sir.

Thank you. Good morning, everyone, and congrats on the results. My first question, I'd love to get a finer sense around the revenue growth outlook for 2021 and if it's possible to try and break that down by volume of volume mix versus price, as well as acquisitions.

Hi, Michael. This is John. So, as you know, we've reinstated guidance, haven't done it for the last couple quarters. What we've done and what we'll continue to do is provide, you know, our best assessment of sales and adjusted EBITDA with a range. I can talk about some generalities. I won't get into real specifics, but I think As we think about guidance for 2021, I think it starts with the fact that, well, obviously, we assume very strong, continued strong residential demand, which has obviously been increasing throughout 20, and we expect that to continue into 21. Continued improvement in commercial, you've seen that trend line in 20 in our numbers, but, again, we anticipate that that's going to continue into 21. Improved selling prices in response to higher material costs is certainly in an inflationary environment right now. It does have our two most recent acquisitions, Garland, which we did on October 1st, and LCR we did in mid-January. And it actually includes some trend of improved single-family mix, which I think we've seen the last four or five months' worth of starts. I think on the other side of the coin, though, there are some costs which we've got the benefit of in 2020. Certain line items like travel and entertainment and group health, which we will start to normalize, have started to normalize, and will continue to normalize throughout 2021. And then finally, I think the biggest, I'll call it constraint, is just around material and labor constraints. Our numbers would be stronger and better for sure based on unconstrained demand, but certainly where we're at right now and we think will continue for a period of time is constraints around labor and probably even more so around material and not just insulation, obviously. It's a broad range of product categories right now that are playing catch up. So that really is kind of the regulator on our numbers that's tempered it somewhat because, you know, as Robert and I sit here today, we've never seen a demand profile like we're seeing now. And so it really is going to depend on how quickly the industry can continue to de-bottleneck certain areas that are currently constrained today.

I appreciate that. I guess You know, the other kind of related question I might have on the outlook is the starts assumption, you know, with a midpoint of around 1.45 million. You know, obviously the last two or three months of starts has been solidly above that. So, you know, to the extent that there's upward potential, upward revision potential as the year progresses on that number, Would we assume a similar type of upward revision, that $90 million number, you know, to the extent that, you know, starts coming a bit above that?

Yeah, I think, Michael, that's a good number to use in terms of, you know, adjusting our number based on a change in the starts environment. But certainly... You know, that 1,450,000 midpoint is driven by our assumption there will be constraints in the industry for sure. But, yes, to the extent we're being conservative and that number gets beat, I think that's a good benchmark to use in terms of our growth in relation to the growth.

Great. One more quick one, if I could squeeze in. The commercial annual same-branch revenue target of 7.5% to 10%. Correct me if I'm wrong, that seemed a little less than perhaps the 10% that you were targeting before. I presume that the opportunity is still pretty large in front of you, so just curious around what drove that slight downward revision, if I have that right.

Sure, Michael. This is Sean again. So, yeah, I think that's just really driven by the fact that this call of non-resi or commercial right now is coming off of a dip in 2020 that I think was in the 20-plus percent range. So we do anticipate that's going to continue to recover. We just think 21 will be a year of recovery. So that's why we've tempered a little bit as you think about a three-year outlook. We are still extremely bullish on commercial. We are under-indexed in terms of our share versus our residential share. And we think from TAPO's perspective, there are many opportunities to continue to grow there. But I think there will be, you know, a little bit of a slower growth rate in terms of the 21 timeframe, but certainly mid to long term, we're extremely bullish. Good. Thanks so much.

You're welcome. Our next question is from Adam Baumgarten, Credit Suisse.

Please go ahead, sir. Hey, good morning, everyone. Just curious, are you seeing a meaningful change difference in labor and material constraints for the large builders versus smaller. You know, the large guys are kind of talking to it, but not saying it's a huge headwind, and some of their delivery guidance is pretty robust. I'm just curious if the other kind of two-thirds or so of the industry is seeing a bit more issue on that front.

Hey, good morning, Adam. This is Robert. I would say not necessarily a difference. I mean, think about the big builders. I mean, they're good at giving you some forward-looking projections, how many – you know, developments are coming up, how many starts they have. So you can do some pre-planning with those big builders that allows us to plan in advance from a material perspective and from a labor perspective. And then also, you know, they have that density of starts in a neighborhood or in a development. So, you know, we'll go out and, you know, you can do three or four homes or five potentially given the size in a day with a crew. So I wouldn't necessarily differentiate between the larger production builders and the smaller builders from the constraints perspective.

Okay, got it. And then just to clarify in commercial, do you expect revenue growth in 2021 to be within that long-term range, or should it be maybe below that and then building over the subsequent two years?

Hey, Adam, this is John. So, we don't get a breakdown, the guidance in terms of specific percentages or dollars, but the assumption we have baked in, there will be a continued improvement as we saw the back half of last year. So, sequentially, I think you're going to see commercial continue to grow and certainly be a plus. We're just not providing the specifics of what that is.

Okay, got it. And then just lastly, quick one on insulation price increases. You know, we've seen two so far announced. Does your guidance contemplate additional price increases in the balance of the year from the manufacturers? Yes.

Yeah, so in terms of, again, in terms of what we projected in the guidance, we anticipate further inflationary cost impacts on material and the resulting impact on our selling prices for sure. So that's baked into our numbers. Got it. Thanks a lot. You're welcome.

We have a question from Ken Zumer, KeyBank Capital Markets. Please go ahead, sir. Good morning, everybody. Morning, Ken.

Morning. Good morning. So 2018 pricing skyrocketed as loose fill capacity, you know, was maxed out. How is, you know, and you're basically incrementals went from kind of net 30% on, on true team down to about, you know, 15% for the year. Now you guys were very, it was started at 21% leverage and one Q kind of fell into that low to mid teens. And then it recovered probably within a two quarter basis. I mean, cause prices were going up so much. Could you just walk us through, you know, we've had a September increase for January 8th. April looks like it's coming up at 8th. Can you talk about or refresh us on those dramatic increases that were steeper and more numerous than we have in the pipeline now? But just to walk us through so we can understand how your leverage cadence will kind of unfold as you see it right now.

Hey, Ken, this is Robert. So I'll start off and then John will hit the last part on the leverage discussion. So if you remember back in 18, there was an overnight happening in a plant that really caused 20% of the capacity to leave the industry overnight, if you will. So, you know, those increases came on quickly and, you know, were not announced in advance given that capacity had dropped out of the industry very, very quickly, i.e., overnight, if you will. So, you know, what's happening here coming out of 20 into 21 is very different. It's capacity constraints on both, you know, fast and blowing wool. Back in 18, it was just blowing wool. And these increases have been announced in advance. If you go back to the September increase, the January increase, and now, as of last week, the April increase has already been announced by many of the manufacturers. So, you know, that's, you know, I would say that's very different from an 18 perspective. And again, we do a really good job in our field operations from a pricing perspective and getting ahead of that. You know, I think we've talked in the past the controls we have in place, system controls we have in place around bidding, around approvals, that type of thing. So I think very different from 18 compared to 20 and the dynamics that are happening from that perspective.

Ken, your question was on incrementals. Just to make sure I follow up between 2018 and 2020, just repeat what you said around that, so.

Morning, John. Yeah, I was looking at your incrementals in 18, you know, kind of dropped from what had been your normalized range into the low teens. And I realized what Robert just said, right, is that it was overnight pricing. You couldn't communicate that out. The indication being when you communicate it out, you're going to stay within your 22% to 27% organic range. Therefore, what's the cadence in 2021, if you can provide us some idea?

Yeah, so we're not going to provide a cadence in terms of, you know, a quarterly look. But, you know, if you do the math on our guidance, recognizing I think we're up about 14% at the midpoint on revenue. And if you break out the M&A portion of that, it's about a little over 10% on a same-branch basis. So if you do the same on EBITDA, you kind of back into the midpoint of our pull-through, which is just under 25% on a same-branch basis. In terms of how that's going to play out in the year, if that's your question, we're not going to provide any quarterly type of look at that. But I think sitting here today, we feel pretty good about the number in total and certainly will update as we move through the year. Good. Appreciate it.

Had a try. Last thing, the starts lagged. If you do the last two quarters, it's kind of up about 20%, and your guidance seems to fall below that. Is there a way to think about where lag starts are versus what you're able to see coming through? Because it seems like it's, you know, at least in the front half, about a 10% gap, you know, 5% to 10% gap between where starts are and actually your businesses. Yeah.

So, Ken, this is John again. So, the numbers we provided would be un-lagged starts. Certainly, I think what you're hitting at is what we'd expect. We're going to see lagged starts probably perform better than un-lagged starts. I think the back half of 2020 certainly indicated that with very, very strong starts profile the back half of the year. Completion's not necessarily keeping up, so we pushed a lot of the starts into 21. So yeah, we do expect the un-lagged picture to be better than the lagged. I'm sorry, the lagged picture to be better than the un-lagged, and that should play as we enter the year. Thank you.

You're welcome. We have a question from Phil Ng, Jefferies. Please go ahead, sir.

Hey, John. Just following up on that point you made, just given some of that capacity on the bouts and roll coming online in February, should we expect some of these constraints that have kind of contained your growth the last two quarters to see a larger inflection by 1Q where you play a little more catch-up? And some of the labor constraints Robert may have called out, Is that more in the trade, or you're seeing some of that tightness in your labor force as well?

Yeah, Phil, I'll hit the last part first. This is Robert. So on the labor side, I'd say it's other trades ahead of us that are causing those constraints, really. Look, I'm really happy with what our field teams have done, this friends and family recruiting and how they're building up their labor force, training folks in advance, getting them productive quickly. as well, so I think definitely trades ahead of us. I think we're, you know, this constraint is really across the industry, but I think we're in great shape from that perspective, and our field teams are really ready for the demand as it's starting to ramp, and then also, you know, we have that ability to move things around, whether it be equipment, labor, material, as need be whenever we see fluctuations by service area, by market.

Phil, this is John. So I think the challenge on the other side of the equation on material is that it's not just insulation, obviously. There's a broad range of product categories that are right now constrained. And so, you know, the question is, obviously, what will be and how will they be debottlenecked and where will we see the improvements come? And we're confident that's going to happen throughout 2021, but I do think we're going to be left with this type of constrained environment for, you know, a period of time here that's certainly going to keep the numbers tempered. So really difficult to predict the timing of when things are going to accelerate or pick up here, but we're confident, again, the industry will be getting better as the year goes on.

Okay, that's helpful. We've seen some weather-related issues in Texas and the South. Has it been disruptive for your operations? And that aside, do you see one queue – you know, typically it's a seasonally slower quarter, but given your backlog, should we expect some counter-seasonal trends, and hopefully you guys play a little catch-up here?

Okay, so Robert, so it would definitely impact if you take last week and maybe the end of the previous week, if you think about that Texas area, Oklahoma, Kansas, that area, you know, definitely affected some branch operations on both sides of the business. That being said, if you think about, you know, weekend work that people can catch up, and obviously we have March is a long month. I mean, we were expecting to see the seasonality here in the first quarter, given the demand coming out of 2020. So, I definitely think there'll be catch-up here with weekend work during the month of March. And if you think about it, I mean, we talk about this, obviously, but a large percentage of our workforce is on P3. I mean, people want to be out working, right? So, there's that self-motivation that's for all of our workforce to do that. So,

That's great. And just one last one on the M&A side. Robert, I noticed a lot of deals have been a little more skewed towards commercial. Have you been able to negotiate better multiple just given commercial is still a little bit more challenge? And when we think about 2021, how's the pipeline on the core residential side and any movement on the valuation there as well just because the strong backdrop we're seeing in the broader housing market?

Sure. So relative to if you think about our acquisitions recently, I think it's been pretty even. LCR was was two-thirds commercial but a third residential, Garland really all residential. So definitely still skewed towards the residential side. I think relative to commercials, still in that range of the multiples that we talked about. The important thing with a commercial company is the mix of business they have and the mix of business that they're bidding, and we're very focused on that. There are certain parts of that commercial sector, if you think about distribution centers and warehousings, It was a positive in 19, a positive in 20, and the outlook for 21 and 22 is a positive as well. So I think still in that same range of multiples that we talked about, five to six, and as we think about, you know, there could be some, as we think about some larger companies, there could be some higher multiples paid there. If I think about the pipeline, you know, pipeline is, I'd say, very robust, but, you know, my timeframe here, Phil, the most activity from an M&A perspective, That's residential, that's commercial, and distribution as well. So it really covers the gamut. And folks are, you know, if you think about maybe coming out of the pandemic, folks are definitely very interested in talking and interested in talking to us about selling their business. And then, you know, there's a potential tax impact that's getting people's attention with their business as well. So I think we think that's driving to motivated conversations as well.

Super helpful, guys. Gratitude and a strong cord. Thank you.

We have a question from Justin Spear, Zellman & Associates. Mr. Spear, go ahead.

Hey, guys. Oh, good morning, guys. Thank you. I'd like to just start by looking at that non-residential or the commercial channel piece for you, just thinking, I think I heard on the call that you saw growth in backlog. Was that on an organic basis, or did that include acquisitions?

Hey, good morning. It's Robert. So definitely on an organic basis. You know, we communicated all throughout the pandemic. If you think about Q3, Q4 of last year, you know, the number of contracts, the bidding activity that we had was continued to remain strong. And so that growth in the backlog is definitely organic. And, you know, we continue to make more investments here, more estimators, more folks out bidding jobs, and we're seeing the benefit of that for sure.

And if we could, I don't know if you can or not, but roughly what percentage of your backlog is industrial warehouses and distribution centers?

Yeah, I mean, we take a look at our backlog, but not something that we would communicate on the call here.

Okay, okay. And then the other element on this, I think you mentioned, at least for the fourth quarter, you had some lower insurance and operational efficiency contribution to the margin profile in the quarter. Is that something that you can quantify, particularly as we look for the full year? How should we think about maybe some of the temporary cost tailwinds for 2020 as we look to 2021 and maybe some of the things you're doing to combat maybe some of those costs returning?

Yeah, so if we think about the fourth quarter, we gave some, by the way, we gave some data on the second and third quarter. I think we were roughly $5 million benefit in the second quarter on these type of COVID type of enhanced expenses, if you will, and then third quarter, about $4 million. Fourth quarter will be about a $5 million number, so T&E continues to become, kind of drop off a little bit as it normalized. We had a little bit bigger number on group health, though, again, tied to less doctor visits, less elective surgeries, those type of things. So as we enter 21, we would expect both of those numbers to continue to normalize. From a T&E standpoint, you know, Robert and I and the team are going to do everything we can, obviously, to minimize those numbers normalizing back to historical levels. Group health, there's probably not a heck of a lot we can do because that will come back. But, yeah, that's baked into our guidance. And, by the way, just while I bring up the guidance real quick, I do want to note we're going to post a slight correction to the 2021 adjusted EBITDA recon. That's the last slide of our earnings release. There's some impact interest expense and taxes, which will be modified, and we'll have that out today. Oh, thank you.

Thank you. And I guess just kind of further thinking about this, I guess the big question mark that we have is tied to the, I guess, the cadence or the sequencing of these manufacturer price increases. You've done a really good job over, particularly in recent years, particularly since the USI deal, managing through those. I think you brought up 2018. I may have missed it, but how many manufacturer price increases are you expecting or planning for in your guidance? Yes.

So this is John. We haven't provided that, but certainly we anticipate, obviously with the April increase announced from the manufacturers, that's baked in. But we anticipate a year where we're going to see inflationary pressure because demand we expect to be extremely strong and And I think both labor and material are going to be extremely tight. So that's an environment where I think we're going to see inflationary impacts. And on the other side of that, improved selling prices in the business. And that's baked into the guidance. Excellent. Thank you, guys. I really appreciate it.

The next question is from Noah Murkowsko, Stevens Corporation. Please go ahead.

Hi. Good morning, and thanks for taking my questions. First, I wanted to talk about your longer-term working capital target. It's improved since the last guide. Can you walk us through the moving pieces there and what's driving that change? It's pretty impressive with the increases in material prices we're seeing.

Yeah, I think there's a couple things to note in our numbers, and we talked about these in our prepared remarks. So I think, you know, the biggest one on top, we obviously have been focused on our collections processes, and so certainly from a past-due standpoint, we've lowered that balance and have improved collections. The other has a little bit more to do with mix, though. Service partners has grown substantially. That's helped to impact the number downward as a percentage of LTM sales because our distribution model has much better working capital metrics than our install model. So on a go-forward basis, I think we've gotten to a good place, I think, in terms of the performance. We're going to continue to work on that collections activity, which is where we can get the biggest bang for the buck, and I think we do expect to be in that roughly 10% range on a go-forward basis.

All right, thanks. That's helpful. And then just a quick follow-up here. Also, you're increasing your longer-term guide on the revenues per starts. Again, can you parse out the drivers there? Is that market share gains, M&A pricing? What's really driving that increase?

Yeah, so this is John. So from a year ago where I think we were at an $80 million number, that's really driven by a couple things. One is some acquisitions also bake in some prices. And, of course, that's the biggest driver in terms of driving that. A little bit of mix, too, improvement in terms of single versus multifamily.

All right. Thank you. I'll leave it there. Thank you. We have a question from Ruben Gardner at the Benchmark Company. Please go ahead, sir. Thank you.

Good morning, everybody. Good morning, Ruben. Maybe... question about the capacity coming online later this year. I understand it's an inflationary environment today and you expect it to continue to be so. How does that capacity coming online impact maybe what it looks like later into the year and into next year? Does the elevated backlog and kind of maybe the inability for the industry to grow as fast as the starts have been growing, does that help, you know, offset some of the capacity coming online and make it likely that we continue to see an inflationary environment into 22? I know that's a ways out, but what are your thoughts?

Yeah, good morning, Ruben. It's Robert. So, Yeah, I mean, I think it's really all supply and demand, right? So as we look at the, you know, robust orders that the builders are experiencing and how we think that filters throughout the year, you know, we definitely think it'll be an inflationary environment to John's points that he made earlier. You know, the capacity coming back here in call it late Q1, Q2 with Owens Corny and then some back half-year capacity with John's Manville and Knopf, which is more on the blowing mold side of the equation. I mean, that's going to be needed just to help keep up with the demand. So I think there's, as long as that demand keeps coming, then I think we'll see an inflationary environment, and I think we'll see the suppliers continue to look at their capacity, but then also look from a material cost increase perspective.

Perfect. Thank you. And transportation costs, if it's already been discussed, apologies, I don't think I heard it, but Can you just talk about what you're seeing there and remind us how that works in the industry? How does the cost get passed through to your customers? Is it a part of your overall price increases, or do you use surcharges? Just an update on how that might impact you throughout the year.

Yeah, this is Robert again. So you're right. If you think about the inbound and the outbound, mainly handled through surcharges. So we think about a lot of folks from a manufacturing standpoint, supply-based standpoint, industry. They're handling a lot of those through surcharges, and then we're taking the same approach as well, in that we have surcharges in place with our customers on the outbound side of the equation. So the team has done a good job of getting ahead of the curve there. It's obviously logistics is a bottleneck across the country, no matter what industry we're talking about. I think we've done a good job of managing that and making sure our team's in the field or ahead of the curve on that.

Great. Thank you. Congrats on the end of the year, and good luck moving forward. Thank you. Thank you.

The next question is from Ryan Gilbert, BTIG. Please go ahead. Hi. Thanks. Good morning, everybody. First question, just on the revenue growth from volume differential between the installation And the distribution business, I mean, pretty wide over the last few quarters. Can you talk generally around how you see that trending in 2021? I guess, do you still expect distribution to significantly outgrow on a volume perspective?

Yes. So this is John. So distribution obviously had a great year as we ended, especially the last two quarters with low double-digit volume growth. So let's talk about that for a second. That was really driven by, I think, couple of things. One is the comps were probably a little bit easier for service partners versus two team year over year. And quite frankly, the team went after it and did a great job of picking up additional share from new customers and continuing to focus on getting more share from our current customers pocketbook. So we will start to lap some of those good numbers here as we exit the first quarter into second. So I think, you know, in terms of the growth, you're going to see both segments perform really well in 2021. You probably won't see the disparity. that we had in the back half of 2020 between the segments, because as I said, we'll start to lap back with performance on the service partner side early in the year.

Okay, got it, thanks. The second question, I guess at the field level, labor remains very tight, and you would like to add. I'm just thinking about from a corporate platform perspective, if we see starts outperform 1425 to 1475 range that you've outlined, do you feel like you've got the team in place from a corporate GNA or platform level, or would you need to expand there?

Hey, Ryan, this is Robert. So, yeah, I think from a corporate perspective, you know, we're in a good place to continue to leverage as we see that ramp-up happen, and I do just want to call out, too, from a field perspective, and we hear a lot about labor constraints, I think Our field team has done a great job. Some of the programs that we put in place, you know, from a corporate perspective, branch support center perspective, and the benefits that we've seen of that in the field, I think we're very well prepared and very well equipped for that ramp-up that's happening.

Okay, great. Thank you.

We have a question from Keith Hughes, Truist. Please go ahead, sir.

Thank you. This is Judy on for Keith Hughes. If I could just do, like, one more follow-up on your 2021 guidance. On EBIT, you gave the benefit last year by the quarters, but kind of aside from that, are you looking for more margin growth in the first half or the second half? And when do you think, like, pricing would be positive here?

Yeah, Judy, this is John. Again, we're not going to give any type of quarterly or guidance around the timing of the performance. Again, we think in terms of the revenue and the growth in the industries we serve, we're going to continue to see improvements throughout the year. I think You know, the nuances around the earnings side is tied to some of those things we talked about earlier, tied to COVID-related expenses, which have benefited, which will normalize. But, yeah, we're not going to provide any type of quarterly or mid-year or half-year guidance other than what we get on a four-year basis.

Okay. All right. Thank you.

We have a follow-on question from Michael Brewhout, J.P. Morgan. Please go ahead. All right.

Thanks very much. Yeah, just I'm not sure, giving your answer to the last question, you might answer this, but just trying to get a sense of the impact of the price increases on the business. You know, obviously, in the fourth quarter, you know, pricing was down slightly due to product mix. But, you know, I would have expected at the same time the September price increase to from the manufacturers to maybe have a little bit of a greater impact. And now, you know, we're looking in January with, you know, another price increase as well as April. So just trying to get a sense if you do expect pricing to turn positive for your own business in the first quarter. and then, you know, perhaps gain some more momentum into the second quarter, if that's a reasonable way to think about it.

So, Michael, this is John. I think that's a very reasonable way to think about it. Yeah, we'd anticipate in 21, starting with the first quarter, you're going to see positive pricing, both on true team and service partners, and obviously top build in total. So, you know, what tempered it in the fourth quarter were the two commodities we talked about. It was primarily spray film and gutter. which tempered our selling prices because we did see some commodity decreases on those products. But certainly as we entered, and even throughout the fourth quarter, we started to see those numbers increase sequentially by month. So as we entered the 21 timeframe, both on the material side, the inflationary cost increases are starting to kick in. And on the selling price side, we're confident we're going to be able to drive good selling price to offset that. So you will see that. that impact in first quarter and through the 2021 calendar year.

No, that's great, John. And then just in terms of the mechanism in terms of how it flows through, would there be any type of lag in terms of, you know, you having to absorb any of those price increases before being able to – you know, pass it through to the customer base or, you know, should this be more of a seamless type of event?

Yeah, this is John again, Michael. So I think the way to answer that is I think this is a good environment right now in terms of, you know, driving selling price increases. We have really, you know, significant, you know, constraints on material and labor. We've had, you know, plenty of time to, to bake these into our bid rates and our processes so we're confident that we're going to be able to manage the inflationary increases through selling price without any degradation to the margins.

Michael, this is Robert. You've probably heard us say before we've got great systems and controls in place as to how we get ahead in the bidding process and margin controls and thresholds and stuff in the field and bands and stuff. The team has a really good way with great tools in place, and the team does a good job of managing that.

Great. Thanks very much. Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to return the call back over to Mr. Robert Buck for closing remarks. Please go ahead, sir.

Thank you again for joining us this morning, and we look forward to reporting our first quarter results in early May.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.