TopBuild Corp.

Greetings and welcome to the top-billed first quarter 2021 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I'll now turn the call over to Ms. Tabitha Zane, Vice President of Investor Relations. Thank you. You may begin.

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 topbill.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 gap 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. The residential new construction market remains incredibly strong, with builders reporting robust first quarter order growth and March new housing starts at a pace of 1.74 million, on a seasonally adjusted basis, well above industry expectations. This demand is greatly outstripping the number of homes available for sale, both new and existing, and is being fueled by low interest rates, increasing household formations, an improving economy, and a COVID-enhanced consumer appetite to relocate from densely populated urban communities to suburban rural locations. In fact, An article in the Wall Street Journal noted that a recent analysis by Freddie Mac showed that the U.S. housing market is nearly 4 million homes short of buyer demand. As the residential construction industry drives to meet this demand, all trades are facing material and labor constraints, effectively tempering the speed at which new homes can be built. As a result, assuming interest rates remain low and home affordability stays in balance, we should see several years of strong housing activity. ThoughtBuild continues to capitalize on this housing growth as our solid first quarter results demonstrate. Revenue increased 13.7%, adjusted operating profit grew 38.3%, and adjusted EBITDA increased 31.1%. Adjusted operating margins expanded 230 basis points, adjusted EBITDA margins expanded 210 basis points, and adjusted net income per diluted share increased 47.4% to $2.02. While John will review our financial results of both True Team and Service Partners, I want to congratulate the teams at both segments for outstanding execution in this accelerated growth environment, challenged by both labor and material constraints and weather-related issues in our Southwest and Midwest markets, which John will discuss in a few minutes. Our True Team branches are working diligently every day, winning new projects, allocating labor and material appropriately, and meeting tight builder schedules. The team is doing an excellent job of managing price and customer expectations. Given the extended build cycle, customer price increases are being realized as we expected. As we move through the quarter, pricing improved, and it continued to strengthen in April. At ServicePartners, given the steep demand curve and extreme material shortages, material cost increases are passed through to customers much more quickly, and this is reflected in ServicePartners' results. The team is also doing an outstanding job of managing customer service and expanding their customer base in areas such as gutters and commercial products. Our commercial business in both business segments continues to improve as delayed projects get back on track, and bidding activity for both light and heavy commercial, is strong. On a same-branch basis, commercial revenue increased 8.1% in the first quarter compared to a year ago. On the heavy commercial side, we believe our success rate in winning new projects is due to our strong value proposition that includes expertise in a broad array of insulating products, adherence to strict safety standards, and excellent quality control, all from an established and financially stable company. We also continue to expand our relationships and services with general contractors across the country. The types of heavy commercial projects we are bidding on and winning include hospitals, distribution centers, corporate campuses, as well as public works jobs such as schools, universities, and public safety facilities. We expect our commercial business will continue to strengthen as we move through the year. On the capital allocation front, we completed two acquisitions in the first quarter, LCR Contractors and Ozark Foam, and repurchased slightly over 49,000 shares. We discussed LCR on our last call, and as a reminder, this company primarily services heavy commercial customers and is expected to generate approximately $58 million of annual revenue. Ozark Foam, acquired in March, is a residential and light commercial insulation company that primarily installs spray foam insulation For customers in Missouri, Arkansas, and Oklahoma, Ozark is expected to produce close to $8 million of annual revenue. Subsequent to the end of the first quarter, following the expiration of the HSR pre-merger waiting period, we closed on our acquisition of American Building Systems, or ABS. With $144 million of annual revenue, ABS operates 34 branches that primarily service the eastern United States with branches in high-growth markets in Virginia, the Carolinas, Georgia, and Florida. On April 7th, we acquired Creative Conservation, a residential light commercial company serving customers throughout Virginia. Creative generated almost $7.5 million of annual revenue in 2020. These four acquisitions are expected to generate approximately $217 million of annual revenue. Our integration teams are hard at work ensuring a smooth transition for our new customers and employees as we integrate these companies onto our systems and operations. Looking ahead, based on our pipeline of prospects, you can expect us to remain active on the acquisition front. Regarding material availability, all trades in our industry continue to experience constrained capacity. While fiberglass has been on allocation for a number of months, our industry experienced a significant shortage of spray foam in the first quarter as a result of the severe weather in Texas, which forced the temporary closure of a number of chemical plants. These plants are back in operation, and we expect this situation to improve over the next few months. Regarding material pricing, fiberglass manufacturers have just announced a third cost increase effective at the end of June, the first two effective in January and April of this year. We're also seeing cost increases for spray foam and other building products. In light of the current environment, we expect both crew team and service partners to drive higher selling prices throughout the year. Many of you asked how we manage these material costs and selling price increases. Within our branch-wide system, our sales force utilizes a tool that sets the order margin thresholds at which a job can be bid. This range is established by our regional leadership team on a market-by-market basis in response to changes in material pricing and demand. Our goal is to strike the optimal balance, market-by-market, between price and volume with consistent emphasis on profitable growth. If the sales rep submits a bid outside of the established range, it is escalated in the system for review by the branch manager and regional leader as appropriate. As we look to the rest of the year, we are confident in our ability to fully offset material cost inflation with higher selling prices, and our track record supports this conviction. This type of inflationary environment, strong demand coupled with material and labor constraints, is one in which top build can excel. John, I will now turn the call over to you.

Good morning, everyone. As Robert noted, we had a strong first quarter with revenue growth and margin expansion at both businesses. In the first quarter, net sales increased 13.7% to $742.8 million, driven by increased same-branch sales volume, revenue from acquisitions, and higher selling prices. First quarter adjusted gross margin expanded 40 basis points to 26.7%, driven by higher selling prices, savings from cost reduction initiatives, lower insurance costs, and operational efficiencies, partially offset by material inflation. Adjusted operating profit in the quarter grew 38.3% to $97.2 million, with the corresponding margin improvement of 230 basis points. First quarter adjusted EBITDA was $115.8 million, compared to $88.4 million, a 31.1% increase. And our adjusted EBITDA margin was 15.6%, a 210 basis point improvement. Both adjusted operating and EBITDA margin improvements were driven by the previously mentioned factors impacting gross margin, as well as lower stock-based compensation expense, reduced travel and entertainment activity, lower legal fees, and continued good leverage on our fixed overhead. Our first quarter drop down to adjusted EBITDA margin was 30.6%, 39.9% on a same branch basis, driven by higher sales volume, strong cost controls, and continued leveraging of our platform, partially offset by higher material costs. Adjusted net income for the first quarter was $67.1 million or $2.02 per diluted share, compared to prior year first quarter of $45.9 million or $1.37 per diluted share. First quarter adjustments to net income were $15.2 million, primarily tied to $13.9 million of debt refinancing costs and the remainder related 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. First quarter interest expense decreased from $8.7 to $6.6 million driven by lower LIBOR rates and the lower balance due on our term loan. During the quarter, we successfully closed on our $400 million senior notes offering priced at 3.58% and maturing in 2029, using the proceeds to redeem our $400 million 5.58% senior notes maturing in 2026. This 200 basis point interest reduction will generate $8 million in annual interest savings going forward. In addition, During this same period, we amended our secured credit facility, extending the term loan maturity by one year to 2026, and removing the half percent LIBOR floor, which had contributed to our term loan and revolver borrowing costs. First quarter capex was $12.3 million, approximately 1.7% of revenue, and lower than our long-term target of 2%. For full year 2021, we continue to expect CapEx to be approximately 2% of sales. Working capital as a percent of trailing 12-month sales was 10.2%, 30 basis points lower than first quarter 2020, primarily due to improvements in our accounts receivable aging and a richer segment mix of our service partner's business, which carries lower working capital requirements. Working capital did increase 90 basis points sequentially, primarily due to higher sales growth towards the end of the quarter. Our effective tax rate was 20.7% in the first quarter, compared to 17.4% for the comparable period in 2020. The higher rate was primarily due to a smaller benefit related to share-based compensation, partially offset by state tax adjustments. The end of the quarter, with net leverage of 0.87 times trailing 12 months adjusted EBITDA, Total liquidity was $709.2 million, inclusive of the available balance on the revolver of $389.6 million and cash of $319.6 million. First quarter operating cash flow was $89.4 million. Now let's turn to our segment results. True Team sales increased a solid 12% in the first quarter. The increase in sales was driven by revenue from acquisitions, same branch volume growth, and higher selling prices. First quarter adjusted operating margin for True Team was 13.9%, a 120 basis point improvement. Service partners' first quarter sales were up a strong 17.4% to $251.6 million, driven by an increase in both volume and higher selling prices. First quarter adjusted operating margin for service partners was 14.1%, a 260 basis point improvement from 2020, and the highest in service partners history since becoming part of Topfield in June 2015. Both true team and service partners were impacted by the severe weather experienced in many areas of the Southwest and Midwest, but most significantly in Texas where we have 27 branches, a number of which were shut down for an extended period. As a result, We estimate volume was 2.8% to 3% lower compared to a year ago, and the build cycle was further elongated. Moving to 2021 annual guidance, based on builder orders and our expectation that interest rates will remain low, we are optimistic this will be a very good year for top build. However, as we noted in February, 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. Based on our first quarter results, acquisitions completed since our last earnings release, and internal forecast, we are now projecting total sales to be between $3,220,000,000 and $3,320,000,000, a $170,000,000 increase on both the low and high-end range, and adjusted EBITDA to be between $532,000,000 and $562,000,000 a $27 million increase on both the high and low-end range. This assumes a range of residential new housing starts of between 1.45 and 1.5 million, which is an increase from our original guidance based on recent housing activity. Our long-range modeling targets are unchanged from those we published on February 23rd. I will now turn the call back to Robert for closing remarks.

Looking ahead to the remainder of 2021, it should be another strong year for Top Hill, We're driving hard to achieve executional excellence in all aspects of the business, which will generate top-line growth, maximize the conversion of that revenue to the bottom line, and provide the free cash flow to fund our capital allocation strategy. In closing, I thank our entire Top Bill team for their hard work, safety lifestyle, and dedication to creating value for our shareholders. Operator, we are now ready for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. If you would like to remove your question, please press star 2. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Once again, that is star 1 if you would like to register a question at this time. Our first question is coming from Stephen Kim of Evercore ISI. Please go ahead.

Yeah, thanks very much, guys. Good results. You did make a comment about how the lag effect, basically builder lead times lengthening, resulted in maybe perhaps a little bit of a progressively better price realization through the quarter. You indicated that it strengthened through the quarter and remained strong in April. I was curious if you could give us a sense for what the exit rate on a year-over-year basis was for price growth in True Team. you know, at the end of the quarter, maybe give us a look into April. And then with respect to this production growth that we're, or the lengthening of build times, are you seeing a bifurcation developing between smaller versus larger builders in today's supply-constrained environment?

Yes, Stephen, this is John. I'll take the first question and I'll transition to Robert for the second. So I think On the pricing side, as Robert said, we saw a delay. And quite frankly, it wasn't unexpected. We anticipated that was going to be the case, driven by the fact that you have a longer build cycle. So we did sequentially get better in the first quarter, and we believe sequentially better in the second quarter. We're going to see that continued growth. We saw it through April. Yeah, I won't give you specifics in terms of a dollar, other than to say we believe that that delay was roughly a little over a point worth of pricing, essentially. that would have been delivered in the first if that build cycle had been, you know, based on historical cadence. So, yeah, I think, again, no surprise to us delivering what we'd expected, certainly getting price, and I think that's going to continue throughout the second quarter and the remainder of the year or so.

Yeah, Stephen, good morning. This is Robert. So I think to your second question, talking about bigger builders versus smaller builders, I mean, If you think about building on what John said, you know, typically, you know, going into this, we would have saw POs flush through on an average builder. Maybe I'll even say like a production builder. You would have saw POs flush through in like a 90 to 110 day period. With the extended lag and with the, you know, some of the slowdowns given the supply chain through the industry, you know, that number's getting more in the, can be the 100 and 140, 150, 160 day range. That's the extension that we're seeing. And then production homebuilders, they're probably in that range, whereas the custom homebuilders, probably that range is longer and is extended out a little bit further as well. So a little bit of differentiation between the two. There's always been some of that differentiation, probably expanding a little bit now given some of the industry-wide supply chain constraints between a production big builder and what I'll call a custom homebuilder.

Yeah, that's helpful. Thank you for that. And that's what we're seeing as well. My second question relates specifically to overall national housing starts. And obviously, given your scale and breadth, that matters for you, I would think. In particular, I wanted to talk about the 2 million housing start number that we often have heard about in the past. I've kind of jokingly referred to it as like Bigfoot for the industry because it's like it's big and it's scary, but nobody actually thinks they're going to live to see it. and yet the housing start numbers have been surprisingly strong for most of the last six months. And what I'm curious about is what do you think the potential is for the industry to produce or grow into a 2 million housing start level? And over the next few years, do you think that it's likely or possible? And then what specifically would you need to do if housing starts exceed your expectations, if, let's say, you presume it's going to be, let's say, at a 1.6 level, and it turns out next year to be, let's say, 1.8, what would you need to do to be able to meet that 1.8? Could you do it? How quickly could you react?

Yes, Stephen, this is John. I think the easy answer on our end certainly is labor. We'd have to continue to ramp labor, but I think You know, currently, and I anticipate in the future, that's not going to be the major issue that we'd have to deal with here. It's going to be around material constraints. So I think a broad range of building products would have to and will have to continue to ramp. You know, there's a limitation, I think, across many, many building products, insulation one of them, that's going to be kind of the governor on that growth, basically, we're seeing. You know, I'm confident that our manufacturers, along with other building products, are all ramping up today, anticipating what you've talked about, which I think is a very optimistic outlook for residential new construction, and we share that. But the labor side, as we said, we're very confident in our ability to deal with growth, and that really isn't causing us the issue right now. It's material constraints across a broad range of products.

Yes, and... Building on that, Stephen, I mean, I think to John's point, we feel very comfortable on the labor side. I think you've heard us talk about our friends and family programming. That's just paying huge dividends for us is how we're bringing folks into the company. You know, the industry-wide, you know, labor constraint and material constraint, I agree with what John said. I think, you know, you'll continue to see, you know, later this year, speaking on fiberglass, you see excess capacity coming on with loose fills. insulation to the manufacturers, bringing back more capacity. It does give you the opportunity to use that loose fill and some wall applications, which takes some of the pressure off of that piece. As the spray foam industry improves the latter half of the year, which it will, we already see more builders are open to that idea. foam as well. So there's some alternate methods that will go in. I'm sure other trades and other products and stuff are looking at the same.

That's helpful. Thank you so much, guys.

Thank you. Our next question is coming from Michael Rahat of J.P. Morgan. Please go ahead.

Hi. Good morning. This is Elad Hillman on for Mike. Thanks for taking my questions. So first, I just wanted to maybe get a little bit more quantification around price costs during one queue and some of the lag impacts maybe in True Team and how you see kind of price costs going through the rest of the year, specifically within True Team.

Yeah, we don't, this is John, we don't typically, and we're not going to provide, you know, what our material inflation was vis-a-vis our price. But again, I think we certainly did see material inflation in both segments, including True Team. As we highlighted in our press release and we talked about in our prepared script, about a 1.1 point increase on material. And one thing I'll point out on material, certainly we do other products, by the way, you know, besides just spray foam, besides just fiberglass and spray foam. So I think You know, the 1.1% was within expectations based on the cycle line Robert talked about. As I mentioned earlier on True Team, it probably impacted another point of price, that delay, that we would have been able to do if we had a normal cadence on the build cycle. So that's probably the most I can give you at this point. But again, very, very comfortable with what we saw in the quarter, all within expectations, and great momentum as we exited the quarter, rolling into second quarter on pricing.

Great. Okay, thanks. And then just switching over to the commercial markets, the 8% same branch sales growth that you had, would you be able to split that out between heavy versus light commercial growth? And then also how much of that growth do you feel like was due to underlying market recovery versus your ability to gain share?

Yeah, good morning. This is Robert. So, you know, I think a growth between light and heavy, about equal, I would say. You know, as residential is picking up momentum or has picked up momentum, that light commercial follows right along with that. And on the heavy commercial side, we're seeing two things. We're seeing projects that were delayed getting back on track, and then we're also seeing some nice new projects come online. So, you know, if I thought about the number of Amazon facilities we've been working on heading out of last year, first quarter of this year, and ones that we're bidding for the A lot of, you know, if I think about education and think about medical, if you will. So good mix of products. As far as how much of that's coming from delayed projects, I think we're seeing momentum from both. I mean, we've started a lot of new projects that we bid in the past six months, and we're on some projects that got delayed, you know, last year. I think you put all that together. I mean, if you look at the Dodge numbers, 2021, the commercial business is down significantly. We're up, so it's a combination of projects, and we're gaining share for sure, which we said we were very confident we would do coming into 2021. And we expect this momentum in commercial to keep up for the remainder of the year, and we're bidding some nice projects into 22 and 23 as well.

Sounds good. Thank you.

Thank you. Our next question is coming from Ken Zenner of KeyBank Capital Markets. Please go ahead.

Good morning, everybody. Morning, Ken. Morning. Good morning. So, what is, you know, the record distribution margins going up that much? I mean, how much, you know, obviously there's, I believe, net pricing going on from your position. But if you look at the distribution side alone, that's generally been a pretty steady business. Is this really this extreme margin expansion year over year? How much of this has cost in I guess, you know, separate from the whole demand and pricing dialogue, what type of headwinds could we be expecting, John, to come back into the business as things, quote, normalize, you know?

Well, I think, you know, we've talked about the SP side of the business, service partner side of the business. I think what you're seeing, Ken, right now is really good execution, certainly from that team, and you've seen that the past year. almost a year now in terms of sequentially we've had really nice growth in top line and delivering great bottom line. So obviously the things driving that are we're managing our input cost vis-a-vis our selling price, the material cost versus the selling price. The delay Robert talked about or we talked about on two teams isn't in play on service partners, obviously, because there, you know, the lag doesn't affect the impact. We can – As we absorb material costs, we can push through those price increases more quickly in real time. So certainly that's what you're seeing. The other thing that business continues to do a great job of is great cost control. And I think, you know, we're growing that business expand, and it was really without adding additional fixed overhead to the bucket. So I think, you know, the model is working excellent right now, and I think, you know, as we look at the remainder of this year, I think we're really optimistic about service partners in the go forward. In terms of what could happen, I mean, And not to speculate, but certainly, you know, we're going to continue, I think, in the industry, continue to see great growth. And I think, you know, again, you're going to probably continue to see a nice expansion in that business as we go forward.

And then, Robert, for the installation business, you know, there's a lot of different things happening. When the company was in Masco during the last cycle, obviously, there's a lot of different categories, IT. So it's not exactly the same. But, you know, broadly speaking, it seems like a lot of product companies that manufacture are obviously able to pass through price, given the strong second half demand that I think has really elevated investor sentiment. So can you talk to the fact about, you know, the demand that your builders obviously are expressing to you enabling you to perhaps capture price faster than you would have expected? I mean, there's obviously all this conversation around the spray foam as well as, you know, the fiberglass, but I think there, could you just kind of put it in context, the tension demand, i.e. they want the material, end your labor, and how that's enabling you to perhaps price quicker than we saw in prior cycles, you know, big ones, or, you know, I think it was in 18 last time we had that as well.

Yeah, maybe I'll hit on a few points there, and I'm sure John may jump in as well. So I think, you know, when I think about the demand curve, Ken, so, you know, backlogs are definitely building for sure. If you think about the order rate for the builders that come out with, you know, lag is extended in the industry, supply chain constraints. So we're seeing the backlog building. I think that, you know, things like the spray foam and others will improve. I even think that everybody's working better on the allocation side of of less substituted products, that type of thing. I think we're seeing things working better. So I think there will be some gain momentum back after the year, although things will remain tight. I think relative to pricing, we're getting into the seasonally busy time of the period, and you know how that works, especially as you get into the Q3 and the builder closings. I think the other thing I'd point out when you kind of head on and talk about differences is As I think about our differences from if you went back to like the 08, 09 versus today, it's just the discipline that we have and the systems and process that we have. I mean, you know, I talked about in a pair of remarks how we have these thresholds and these approval levels that we go through. We get real-time visibility of things that are going on in our markets and down to the branch level and to the sales rep level. That's what I remember John said, and I think I said in a remark, pricing changes. progressed as expected. That's because we had that visibility of what was happening to those lag times and what we were seeing coming back from our local markets and service areas as well. So that's why we're confident. I think we proved it up to now, and that's why we're confident with what will happen in the back half given the different dynamics that's happening to your point.

Thank you. Thank you.

Thank you. Our next question is coming from Phil Ng of Jefferies. Please go ahead.

Hey, guys. Viable is execution in a pretty tough environment. The material shortages that the fiberglass industry as well as spray foam have called out last quarter, and you called out actually, have availability started to improve? Just trying to gauge if you're going to be able to play a little more catch up in 2Q, just given how strong the starts have been, or is this more going to be a back half kind of event?

Hey, good morning, Phyllis Roberts. So let me show our spray foam first, given that was a pretty catastrophic event in Texas in February. So, you know, we definitely see that improving, improved some in April for sure. We're seeing improvement in May. You know, a few more months to go in the improvement there, but, yeah, that's going to play some catch-up in Q2, definitely catch-up in Q3. So that's definitely improving. You know, Fiberglass, as you know, owns Corning Ball Foam Inc., their new capacity back in March. At the same time, the demand curve got pretty steep, so that capacity was taken into account pretty quickly in the industry. As mentioned, there's some more loose-fill capacity coming on, I'm going to call it, around the September end of Q3 timeframe from one manufacturer and the other manufacturer bringing some back, I'm going to call it, around Thanksgiving timeframe. So that's going to help in the back half of the year. It's going to help in that busy October-November closing timeframe, if you will. And again, that will facilitate some other applications where you can use that loose fill on the wall where baths have been tight. Same time spray foam should be in a nice recovery stage by the time you get to that busy time. So long way to answer your question, yes, it'll improve throughout the year. Will things remain tight given the demand curve? The answer is yes. But we absolutely are comfortable with improvement coming for sure.

And Robert, just to expand on that and piggybacking on Steve's question earlier, you know, with some of that capacity coming on, and I know the industry was caught short on inventory, soon we normalize a little bit more end of this year. When we think about 2022, how much capacity does the, you know, insulation industry have in terms of the manufacturer supporting starch? Is it like a 1.5 number north of that? Any color would be helpful.

Yeah, I would say our best estimate on that is we're still in that ballpark of the 1-5 number. I think all the manufacturers are working on productivity initiatives to try to improve upon that number, as well as other products like the phone will help the industry as a whole. But, yeah, I'd say we're right there right now still in that ballpark of that 1-5 number.

Okay. And just one last one for me. Good to see your commercial business rebound, whether it's light or the heavy side. Are you seeing any more challenges in pushing inflation through on the commercial side of things? Just because the cycle times tend to be a little longer, so wondering if the complexity and just a pretty dynamic input cost environment has made it a little more challenging to pass it through on a timely basis.

I mean, to your point, some of those projects have a longer lifeline, if you will, and And those projects from like, say, last year or maybe late 2019 are finishing up now. But as far as bidding new projects and looking out for the back half of 2021 into 2022, those are definitely bidding to those projects that we're bidding today. And some of the material constraints that exist on the residential side don't necessarily exist on the commercial side. Some different products, some different applications there as well.

Okay. Sounds great. Thanks a lot, guys. Good luck at the court. Thanks, Bill. Thank you.

Thank you. Our next question is coming from Trey Grooms of Stevens. Please go ahead.

Hey, good morning. Thank you for taking my question. So, first off, I wanted to talk about the M&A. I mean, obviously, you know, you guys are doing a great job of executing on M&A and Really just trying to unpack the change in the guide for how much was M&A related from deals you've closed since the last earnings call and then how much is from maybe the newly announced price increases or demand improvements. I appreciate the updated housing assumptions, but really just trying to unpack the guide for those components.

Sure, Trey. This is John. So we're up about $170 million on the revenue side. And if you break that down, really, as we do announce acquisitions, we do provide, obviously, the annualized type of numbers. So if you look at ABS and Conservation and Ozark, the three that I don't think were included in the original guidance, it's about $125 million of 2021 revenue we're adding to the guidance. So So back into the same branch portion, it's about $45 million, and that really is made up of improved optimism in terms of the industry, some pricing, et cetera, that's baked into that total. So that's the breakdown on the 170.

Great. Thanks, John. That's helpful. And then also maybe another one for you on working capital. As a percent of sales, it bumped up a little in the quarter, but trailing 12 months, it's down. Um, and as you mentioned, you know, a richer mix of service partners helps with that. So, uh, you know, with those things, uh, as well as, you know, movements in pricing, how should we be thinking about, uh, working capital going through the balance of, of this year? Um, and then, you know, are there any other cashflow items that, that we should be aware of as we're, we're thinking about free cashflow for the, for 21?

No, I think, um, You know, that 10 to 10.5 range, we've kind of hit the midpoint of that here in the quarter. Trey, I think is a good way to think of working capital. Yeah, you're right. I think what's helped us a little bit is that service partners' growth has outpaced True Team, and service partners does have a much leaner working capital requirement than True Team does. So in terms of one-offs from a cash flow standpoint, nothing significant barring any type of acquisitions or or share repurchase or something at this point, but we're not announcing and obviously not anticipating or providing information around that at this point. So nothing that's one-offish that I would include on a go-forward.

All right. That's it for me. Thank you. Congrats on the good quarter, and good luck. Thanks, Craig. Thank you.

Once again, that is Star 1 if you would like to register a question. Our next question is coming from Justin Spear of Zellman & Associates. Please go ahead.

Good morning, guys. Congratulations on an awesome quarter. I just had a couple questions. One, just in terms of the industry-wide situation, a very tight supply, obviously industry-wide, but specifically for fiberglass insulation, was there any mitigation to growth in the quarter from just that tightness upstream? And are you accommodating for that in terms of the potential for that tight supply to continue? Are you accommodating for that in your guidance?

Hey, Justin. Good morning, Robert. I'll have the first part of that. So, yeah, I mean, definitely impact in the quarter, but let me give you a really good example of it. Whenever those storms hit Texas and Southwest and Midwest, several of the fiberglass manufacturers have major, major facilities, Kansas City, Texas, Missouri area for one of the other manufacturers. Those facilities were shut down for close to a week. So there was no production coming out of those plants during that time. Actually, you've heard us talk about spray foam. So, yeah, definitely, you know, the industry is already running lean on inventories with the manufacturers. So you have that type of event happen. Definitely had an impact on the industry and on the supply chain in the quarter. You know, as we've said previously, do we think it improves in second quarter? The answer is yes. We've already seen some improvement happening, and we expect that will carry through the year.

Hey, Justin. This is John. In terms of guidance, without question, you know, we have baked in, you know, constraints into that number. You know, left without constraints, that number would be significantly higher, and our starts profile that we provide is kind of a guardrail around that would be higher, too. Now, you know, top build certainly sits today poised to participate when that ramps and as that ramps. And again, we just baked in a little bit more into our current guidance. But yeah, we We have anticipated constraints as part of the guidance we've provided and our best estimate will be think that affects.

That's helpful. And the other, the other part of my, my questions are tied to the margin side. Just if we were to rewind prior to the, to the pandemic and even prior to the USI acquisition, I know, I think you were targeting something like something like 14 plus or minus percent, maybe mid teens, kind of EBITDA margin. and now you're tracking closer to 16%, 17%. And I'm just curious maybe if you could help us kind of look at maybe the pieces that you've done in your control, including the USI deal, but things that were in your control that have allowed you to exceed that and then maybe some of the things that you could argue maybe isn't sustainable and just kind of thinking about what the new normal is as you look at now 1.5 million starts and you're exceeding that. Maybe help us understand what the new normalized profile is for investors longer term.

Sure, Justin. This is John. So I think, you know, you pointed out one significant piece. We've done a great job on acquisitions, I think, you know, across all of them, USI obviously being the largest we've done historically. So I think, you know, the acquisitions, when we think about what we've done and what we'll continue to do, are typically in our core, our sweet spot. We understand them very well. We know how to run those businesses. We integrate them within our core platform, and we tend to deliver really strong synergies So USI is a great example. We're not only on the purchasing side, but also in terms of branch consolidations, we did along with the back office consolidation. So that has contributed, obviously, in terms of driving some significant EBITDA margin expansion. I think beyond that, the business in general has just been run and been operating very, very well. We always talk about the fact that you can manage our labor and material buckets effectively. and manage those well vis-a-vis our selling prices, then, you know, we're going to tend to perform really well. And I think we've done that in both segments. And I think that continues into 2021. And beyond that, you know, cost control, productivity initiatives are something that everybody in this business works on day in and day out. And I think, you know, we continue to have, you know, significant opportunities to work. So looking forward, you know, we provide some guidance around long-term modeling. I think those are assumptions to start with. But listen, I think we feel really good about the ability to continue to manage those input cost of labor and material, piece of the selling price, and continue to work on those projects that we continue to identify from a productivity initiative standpoint. So I do believe we'll be able to manage expansion. One last thing, I think, and we've said this before, our footprint is still set up for a higher level of housing starts. And so we're going to minimize the fixed overhead requirement we have related to the growth that we see in the future. So We're pretty optimistic about the direction we're headed and the modeling capabilities we have as a business to go and continue to expand margins.

That's helpful. I guess one follow-up on that, just the SG&A and the quarterly leverage, they're very strong. I know you've got some M&A in here now coming forward, but how should we think about that SG&A expense and corporate spend line items and your guidance from maybe a year-over-year standpoint or a normalized standpoint?

Yeah, I think we're going to do a great job on all the things I just talked about. The only thing I need to point out, and we've talked about this multiple times, is we have benefited from certain line items that were, you know, under normal spending levels due to COVID. And, you know, the best examples I can give you are things like travel and entertainment, group health costs where people have deferred elective surgeries and or trips to the doctor, and even items that affect our gross profit like shop supplies, which are things like N95 masks where, you know, a year ago, We weren't, obviously, able to buy some of those things. We didn't have people attending the doctor's office, and our travel and entertainment was low. So those are starting to normalize, and I think the back half of this year, you're going to see those numbers, you know, normalize closer to historical levels. So that'll be a bit of a headwind versus all the positives we talked about, but that's baked into our guidance also, and we anticipate that already. Excellent. Thanks, guys. You're welcome.

Thank you. At this time, I'd like to turn the floor back over to management for closing comments.

Thank you for joining us today. We look forward to reporting our second quarter results in early August.

Ladies and gentlemen, thank you for your participation and interest in Top Build. You may disconnect your lines at this time, and have a wonderful day.