This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Greetings and welcome to Top Build Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a 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 today, Ms. Tabitha Zane, Vice President of Investor Relations. Thank you. You may begin.
spk08: 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 topfield.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.
spk06: Good morning, and thank you for joining us today. I want to start by thanking our entire Top Build team for their continued hard work and dedication. Our strong second quarter performance is a direct result of their commitment to excellence in all that they do. This continues to be a great operating environment for Top Build and one that we believe could last for the foreseeable future. Unlike the housing boom of two decades ago, which featured excess supply, rampant speculation, and weak credit controls, this current housing growth is being driven by strong pent-up demand, extremely limited housing inventory, and improving economy and low interest rates. Governing this growth and elongating the cycle are material and labor constraints for all trades in our industry. Evidence of this is clearly indicated by completions which have remained relatively flat over the past year. While we are optimistic some of these supply chain constraints will begin to ease by year-end, the extension of the build cycle has created a healthy backlog. Turning to our second quarter results, we again demonstrated the strength of our operating model and our ability to pass material cost increases through with selling price adjustments. Revenue increased 29.1%, 18.3% on a same-branch basis. Adjusted operating profit grew 55.5%, and adjusted EBITDA increased 39.1%. Adjusted operating margin expanded 270 basis points. Adjusted EBITDA margin expanded 130 basis points, and adjusted net income per diluted share increased 64.3% to $2.76. As expected, True Team saw a strong sequential increase in customer pricing from the first to the second quarter. With material and allocation and labor constrained, every branch is focused on striking the optimal balance between price and volume, understanding that at the end of the day, our goal is driving profitable growth. Service partners continue to do an outstanding job managing cost increases and customer pricing. reporting its highest adjusted operating margin since the spin in June 2015. The team also continues to expand its contractor base and grow share with existing customers. John will cover more segment details in his prepared comments. Turning to material, with fiberglass on allocation, spray foam supplies slowly normalizing, and demand remaining strong, we expect both crew team and service partners to continue to drive higher selling prices throughout the year. Knopf and Johns Manville are on track to bring on their loose fill lines in the fourth quarter, and current capacity is under constant review within the industry. Our commercial business in both segments continues to improve as delayed projects resume and new projects are initiated. Bidding activity for both light and heavy commercial remains strong, and our backlog is healthy. On a same branch basis, commercial revenue increased 20.8% compared to the second quarter of last year, making the fourth consecutive quarter of commercial revenue improvement. Our heavy commercial teams are busy, and the types of projects we are winning and working on include health care facilities, large distribution centers, and warehouses. Regarding light commercial, As residential homes are built, demand for services such as restaurants, strip malls, and other infrastructure to support these new communities should grow significantly. The vast majority of our residential branches perform like commercial installation, and the teams at our local branches are keenly aware of these opportunities and the importance of establishing relationships with small general contractors in their respective markets who control these types of projects. We remain very bullish with regards to the $5 billion commercial market, both heavy and light, and we expect our commercial business will continue to strengthen as we move through the year. On the capital allocation front, we completed three acquisitions in the second quarter, American Building Systems, Creative Conservation, both of which we discussed on our last call, and RJ Installation, which closed in June and is expected to generate approximately $4 million in annual revenues. Year-to-date, we've completed five acquisitions, which are expected to generate approximately $221 million of revenue on a pro forma, full-year basis. Over the six years, we've acquired 19 companies that combined are generating over $800 million of annual revenue, and they are creating tremendous value for our stakeholders. During this same period, we expanded and enhanced our M&A team, and the integration of acquisitions is a core competency. Our focus remains on acquiring well-run installation and distribution companies around our core of installation, as well as related adjacent products. With a robust pipeline of prospects, we expect to stay very busy on this front through 2021. We also used our capital in the second quarter to repurchase almost 74,000 shares, and year-to-date, we've repurchased 123,000 shares. We are pleased that our Board of Directors approved a new $200 million share repurchase program, demonstrating a high level of confidence in our financial performance and our strong cash generation. Since implementing our first share repurchase program in 2016, we have returned over $410 million to shareholders. One area that is growing increasingly important for all stakeholders is ESG. This remains a priority, and we recently dedicated additional resources towards this effort. Our approach includes maintaining our focus on safety and continuing to improve the well-being of our employees, ensuring that our workforce reflects the diversity of the communities in which we operate, incorporating energy efficient solutions in our residential and commercial projects, and tracking and reporting energy usage and waste generation across our footprint. On the environmental front, in addition to our core insulation business, which drives improved energy efficiency in all the communities in which we operate, I would remind you of our top built home services group, which is at the forefront of building science and building code compliance. Our expertise in this area is concentrated on advancing environmentally conscious construction. For example, our Environments for Living program helps builders construct high-performance homes that save energy and reduce greenhouse emissions. In addition, our extensively trained home energy raters provide the evaluation, testing, and independent verification required to be considered an ENERGY STAR compliant home. Before turning the call over to John, I wanted to note that in late June, we were pleased to learn that TOTDO was moving from the Russell 2000 to the Russell 1000 index. Some of you may remember that at the time of the spin in June 2015, our market cap was approximately $1.1 billion. Today, it is over $6 billion, more than a 450% increase. This move is clearly a recognition of our strong growth and the tremendous value we have created for our stakeholders over the past six years. Looking ahead, we are confident in our ability to grow our business and continue to provide great value for our stakeholders. John will now discuss our financial results.
spk05: Good morning, everyone. As Robert noted, this is a great operating environment for Topfield, and our strong second quarter results provide solid evidence of the strength of our business model and our ability to successfully manage and optimize our input cost and pricing, as well as our overall cost structure. Moving to our results in the second quarter, net sales increased 29.1%, $834.3 million, primarily due to an 11.8% increase in sales volume, a 6.5% increase in price, and $70.2 million of revenue from six acquisitions, Garland, LCR, Ozark, ABS, Creative Conservation, and RJ Insulation. For the first six months of 2021, net sales increased 21.4%, primarily driven by increased selling prices, sales volume, and $97.6 million of revenue from acquisitions. Adjusted gross margin increased 140 basis points in the second quarter and 90 basis points in the first half of 2021 to 29.2% and 28% respectively, driven by higher selling prices, lower depreciation expense and insurance costs, primarily offset by material inflation. On a same branch basis, adjusted gross margin expanded 190 basis points in the second quarter. Adjusted operating profit in the second quarter grew 55.5% to $129.9 million, with the corresponding margin improvement of 270 basis points to 15.6%. For the first six months, adjusted operating profit increased 47.7% to $227.1 million with the corresponding margin improvement of 260 basis points. Adjusted EBITDA for the second quarter was $149.8 million compared to $107.8 million in the second quarter of 2020, a 39.1% increase, and adjusted EBITDA margin expanded 130 basis points to 18%. As a reminder, In the second quarter of last year, our depreciation expense was approximately $5 million higher due to a reduction in the carrying value of older assets that the company was no longer utilizing. For the first six months of 2021, adjusted EBITDA grew 35.5% to $265.7 million, and adjusted EBITDA margin was 16.8%, a 170 basis point improvement over first half 2020. Second quarter SG&A as a percent of sales was 13.8% compared to 15.1% in the second quarter of 2020. The year-over-year decrease was primarily the result of higher sales, lower share-based compensation, and lower legal fees. Adjusted income for the second quarter was $91.6 million, or $2.70 per diluted share, compared to $55.7 million or $1.68 per diluted share. For the first six months of 2021, adjusted income was $158.7 million or $4.78 per diluted share, compared to $101.6 million or $3.04 per diluted share. Second quarter adjustments to net income were $1.6 million, primarily related to acquisition expenses. Adjustments to net income in the first six months of 2021 were $16.7 million, primarily tied to a $13.9 million of debt refinancing costs and the remainder related to acquisition expenses and the COVID-19 leave plan initiated last March. Our effective tax rate for the quarter was 26.1% and 24% for the first six months of the year. Interest expense in the second quarter of 2021 was $6.1 million compared to $8.3 million in the prior year, primarily driven by lower interest rates on our new senior notes and borrowings under the amended credit agreement. CapEx for the second quarter was $16.3 million, or 2% of sales, and for the first six months was $28.6 million, or 1.8% of sales, consistent with our long-term guidance of 2% of sales. Working capital as a percent of trailing 12-month sales was 9.9% versus 10.5% a year ago. This decrease was due to improvement in past due accounts receivable at both true team and service partners. We ended the second quarter with net leverage of 0.9 times using trailing 12-months adjusted EBITDA. Total liquidity at June 30, 2021 was $640.5 million, including cash of $261.7 million and accessible revolver of $378.8 million. Operating cash flow was $202.2 million for the six-month end of June 30. Now let's turn to our segment results. True Team sales increased a robust 29.8% in the second quarter to $605.6 million. On a same branch basis, revenue grew 15.4%. The increase in sales was driven by revenue from acquisitions, same branch volume growth, and higher selling prices. Second quarter adjusted operating margin for True Team was 16.6%, a 140 basis point improvement. Service partners' second quarter sales were up a strong 26.4% to $273.4 million, driven by an increase in both volume and higher selling prices and to a lesser degree acquisitions. Second quarter adjusted operating margin for service partners was 15.7%, a 410 basis point improvement from 2020. Moving to 2021 annual guidance, based on builder orders, commercial activity, low housing inventory and anticipated low interest rates we remain optimistic this will be a very good year for residential and commercial construction and Topville will benefit from this healthy environment however as we noted in May our guidance assumes some level of industry-wide material and labor constraints which have already led to an extended build cycle and higher than normal backlog on the flip side these constraints coupled with low inventory and strong demand should lead to a healthy residential and commercial construction environment for the foreseeable future. Based on our first half results, acquisitions completed since our last earnings release, and internal forecast, we are now projecting total sales to be between $3,290,000,000 and $3,370,000,000, a $70,000,000 increase on the low end of the range and a $50,000,000 increase on the high end. Adjusted EBITDA is now expected to be between $565 and $590 million, a $33 million increase on the low end of the range, and a $28 million increase on the high end. This assumes a range of residential new housing starts at between $1.475 and $1.525 million, which is an increase from first quarter guidance based on recent housing activity. Now let me turn the call back over to Robert.
spk06: Thank you, John. Our entire company remains focused on achieving profitable growth through operational excellence and thoughtful and balanced capital allocation. As we look to the rest of the year, we expect solid four-year performance of both crew team and service partners. The housing market is strong, fueled by low interest rates, pent-up demand, and very little inventory. This is a good operating environment for Topfield and should remain so for the foreseeable future. As always, I thank the entire top-notch team for their focus on working safely to deliver value, quality, and service to our customers. Operator, we are ready for questions.
spk09: Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. Once again, that's star one at this time. One moment while we pull for our first question. Our first question comes from Stephen Kim with Evercore ISI. Please proceed.
spk03: Thanks very much, guys. Good result, as always. The first question I had for you relates to the effect of cycle times on pricing, particularly in True Team. Obviously, True Team probably has more impact from that. Last quarter, I think it was somewhere in the range of about 100 basis points, headwind to pricing, these extended cycle times at the builders. Curious what you think that was in 2Q, and also non-insulation products, I think you also mentioned might be a bit of a headwind to pricing, and just wanted to see if you could quantify that as well.
spk05: Yes, Stephen. So this is John. You're right. Going back to first quarter results, we talked about it on the call last time that True Team, because of the extended build cycle, the ability to drive pricing and get pricing into RP&L basically was delayed a little bit. So as we said on that call, we expected the second quarter to be significantly better and really you know, almost current. And I think you've seen the result of that in what we reported today. So much, much better in terms of the timing on the True Team side. Some very small delay tied to the build cycle, but very de minimis in terms of versus what we had. And you're right, last quarter was about 100 basis points delay. Service partners, obviously, first quarter and second quarter, much more timely in terms of the ability to drive pricing and get into the market. And again, second quarter, great performance there on SP. There are other products, as you mentioned, where we are seeing, as a matter of fact, most products have, I'll say all products, have some level of inflation tied to it. And I think we've been successful pretty much across the board in terms of, you know, adjusting our selling prices accordingly and, you know, and getting full value of what we need.
spk03: So what I'm hearing is really not much of a meaningful headwind to call out from either the extended cycle times or the non-insulation products, right?
spk05: That's exactly what you're hearing, Stephen. Thank you.
spk03: All right. The second question I had relates to, more broadly, again, the cycle time impact. But this time I'm curious about its potential impact on volume and your overall overhead leverage. What we're hearing is that The time it's taking the builders to build homes is lengthening. I think a lot of builders said it lengthened by a couple of weeks for the large public builders in the last quarter. I think private builders probably have had more of an impact than that. But I'm curious as to whether you think that this extended cycle time that's happening here in the middle of the year is going to lead to unusual seasonality in the business as it relates to when your products get installed, if you think that that could lead to unusual seasonality and or could there be a consequent bulge or surge in your activity as you head into, let's say, the winter months of this upcoming year. And then kind of part of that, in general, is cost. Is consolidation in the home building business a headwind or a tailwind to your market share?
spk06: Hi, Stephen. It's Robert. So I'll try to answer that from three or four different perspectives. So start with seasonality. I mean, I'd say given the strong backlogs that probably the industry has built, not just us, I'd see that seasonality being smooth as we go through the winter, unless there's a harsh winter coming at us. We would expect, you know, third quarter's always busy as the public builders are trying to get through all their closings. I'll come back to that in a minute, but, you know, fourth quarter and going into first quarter next year, given the backlog, we'd expect a smoother curve versus, you know, some seasonality we'd previously see. You know, I think if you think about the public builders with their closings coming up here in the, I'll say, October, early November timeframe, you know, I think as the industry, it'll be interesting to see how much of that gets through the funnel here as the entire industry is facing some constraints here. We would say material is getting slightly better as we're going into the back half of the year, but I think what we see and what we hear from other trades is labor continues to pop up as a continued constraint here. It'll be good to see. I think there's a healthy backlog for the industry. I think we expect to see less seasonality because of that, but to your point about is there a spike coming, I think it'll just be depending on how much the industry as a whole can get through that funnel as we work through the next, I'm going to say, two quarters here, especially given the public builder closings and going towards the end of the year. And then your last point on the builder consolidation, any questions on that before we get into builder consolidation, Stephen? Okay, builder consolidation. You know, I would say, you know, relative to us, I mean, obviously we do, we service builders of all sizes, great relationships with large public builders. So we're seeing some of that consolidation coming. You know, I'd say that's nothing less than a positive for us given our relationships and the footprint of what we cover across the country with, you know, the public builders, some of the regional builders are doing some consolidation as well. So I'd say for us overall a positive. And as we look at our kind of makeshift among builders. We haven't seen a huge change there from that perspective.
spk03: Okay, great. Thank you very much.
spk09: Our next question comes from Phil Ng with Jefferies. Please proceed.
spk00: Hey, good morning, guys. This is Maggie on for Phil. I guess kind of following up on Stephen's question just now, you know, we've been hearing pretty broadly from the home builders this dynamic of slowing order growth to catch up on backlogs and such. I guess, how are you seeing this play out in your business? And are there any differences to call out between national versus more regional builders? And what type of impact do you expect this to have on your demand over the next few quarters?
spk06: Yeah, so, you know, definitely do we hear that from the builders? The answer is yes. We're hearing where some of them are, you know, tapping the brakes, if you will. But there is a good healthy backlog in the industry as well. So I think all of us are going to be working through that backlog. We'll see how the whole industry, again, works that backlog through the funnel here. But there's a healthy backlog even as some publics, as you've heard, as we've heard, are tapping the brakes in some markets from that perspective. Relative to the large publics and the regionals or the custom builders, You know, some of that lag time or cycle time could be extended for some of the regionals and the smaller builders a little further out than the public builders. You know, typically we've said in the past that, you know, we're on the job sites in, you know, about 60 days or something like that. But I would say we've seen that, Maggie, go out as much as 30 to 60 days in additional time to that, just given the cycle time what's happening to trades in front of us. I think if you look at some of the you know, builders reporting where the biggest delays are, if you think about framing some of those trades that come before our trade, I think we see that in some of those cycle times getting elongated really across all builders, maybe more on those regional and custom builders, but the publics are obviously seeing it as well.
spk00: Okay, great. Super, super helpful. And then my second question is the guidance revision up implies full-year margin expansion well ahead of what you were initially forecasting. So can you just walk us through some of the pieces in there and what's driving your confidence and the more favorable outlook on margins?
spk05: Sure, Maggie. This is John. So first of all, obviously, we're three months further along. So, you know, more certainty, obviously, as we're now halfway through the year. I think, you know, a little more confidence around, you know, our ability to manage input costs. Obviously, you've seen some great results in the second quarter of our ability to manage the inflationary pressure primarily on material vis-a-vis selling prices. And another three months of our productivity initiatives kicking in. So I think, you know, what you saw was just, you know, the next step as we do guidance, obviously, we always attempt to refine that each quarter. And so you're just seeing a little more confidence around top line, around our ability to deliver price vis-a-vis an inflationary environment. And again, great confidence in what the operations teams are doing from a productivity standpoint. So...
spk00: Great. Thanks, guys.
spk05: Thank you.
spk09: Our next question comes from Adam Baumgarten with Zellman & Associates. Please proceed.
spk02: Hey, good morning. Thanks for taking my question. I guess starting out, given some of the pretty robust pricing trends you guys are seeing that seemingly are accelerating, how should we think about the formula that you guys have laid out in the past that for every $50,000 Increase in starts, you guys generate $90 million in revenue. Should that be higher at this point, or is it too preliminary to kind of move that up?
spk05: Yeah, Adam, I think this is John. We do that typically every year when we do our initial guidance. We'll give the long-range modeling that you're referring to, and you're right. What we've said is for 50,000 starts, it's $90 million of revenue on the residential side of the visitor top. I would say we're not going to update that number probably until next year time we do the 2022 guidance, which would be our fourth quarter call. But I would say generally, you know, if your suspicion is the number is higher than 90, then you're correct between, you know, especially pricing, additional acquisitions, et cetera. Yeah, the number would be north of that. But again, we'll get more specific on that as we enter 2022 and give guidance.
spk02: Got it. Okay. And then just on some of the capacity shifts that are out there, you know, primarily by OC, any impact you expect from their kind of capacity movements around the western part of the U.S.?
spk06: No, I think they talked about in their earnings a net neutral. So I think as they sell Santa Clara and as they open up more capacity in Utah and Arizona, I think they expect a net neutral in that type of move. And I think generally with all materials out there, be it fiberglass, be it foam, be it cellulose, we would say that capacity of plus or minus 1.5 million housing start capacity out there. That seems about the appropriate number that you've probably heard us say before. Got it.
spk02: Thanks.
spk09: Our next question comes from Michael Reholt with JP Morgan. Please proceed.
spk01: Thanks. Good morning, everyone. Wanted to focus for a moment just on the bigger picture from an acquisition standpoint. You know, obviously this year, you know, it's been pretty active, and I believe you said in your opening remarks that the pipeline still looks pretty robust. You know, at the same time, you have a pretty broad footprint, and, you know, the industry is consolidating at a decent rate. I was hoping if you could give us kind of a bigger picture view of, you know, the amount, if you have any type of studies in terms of the amount of opportunity that remains, you know, particularly from a mid to larger size standpoint that's out there. And in particular, I'm focused on the residential side. Obviously, the commercial part of the business is wide open. But, you know, how do you think about the, the remaining piece of the pie that's out there from the residential side over the next two or three years?
spk05: Michael, this is John. Right now, starting with a little bit of history here in terms of the past 10 months, I think we've done roughly revenue tied around $280 million worth of acquisitions, most of that in our core space of residential insulation, some around commercial insulation. We think there's plenty of white space going forward in terms of opportunities. You know, I do think that you can never predict exactly when something gets across the finish line from a mergers and acquisition, but I think, you know, we have a very, very active pipeline, so we remain very confident that we're going to consume most of our, call it, excess liquidity or capital in the world of M&A. So, you know, and that can be, you know, your focus on residential insulation certainly is probably where you know, a large portion of our acquisition targets are, but also commercial. And then we constantly look at other options available to us, other ancillary products, you know, other areas of insulation, et cetera, as opportunities for us. But we remain pretty confident that we're going to continue to see the majority of our capital deployed in those areas. And again, for all the right reasons, we love it, right? It delivers good, strong top and bottom line results. And we drive, as you know, significant synergies as we do M&A, and good history of delivering that, obviously.
spk06: Michael, this is Robert. Just to add on to John's comments, I mean, we put more, I think we said earlier, we put more resources in this area, and we really think that we absolutely have a core competency in the integration of what we do with these acquisitions after they've acquired to drive that value that John talked about. So really confident in our M&A strategy, confident in our approach, confident in our targets, as we're selective with who we go after and how we execute post-acquisition. So really confident in our strategy.
spk01: Okay. I appreciate that. I guess secondly, perhaps just on the margin front and also kind of a bigger picture question, over the next two or three years, I believe for both True Team and service partners, perhaps more so for True Team, but You know, you've talked about, you know, incremental margins. I believe, and I apologize, it's either 20%, 25% or 22%, 27%, but kind of in that low to mid, you know, 20s range. So there's still further runway for both businesses. You know, as you look at the margin expansion this year, you know, I was hoping to get a sense from you of, what percent is driven by volume versus positive price cost, and how we should think about the opportunity over the next two or three years in terms of the primary drivers of further expansion.
spk05: Yeah, Michael, this is John. So I think what's gotten us to this point, right, it's great, great leverage on our fixed overhead, and we think there's plenty of that left in our future, certainly. Good acquisitions, integration of acquisitions and the synergies they bring, again, plenty of that left in our future for sure. Great productivity at both segments between true team and service partners. And again, we're constantly working at both in the back office and at our branch locations from an execution standpoint. So I do think, you know, this year I think to date we're at something north of that 27% or just about that 27% in terms of our pull-throughs on the same branch basis. But, you know, we feel pretty confident about the ability to continue to deliver that on a go-forward basis. If you take our guidance, you know, the back half of the year and you take the midpoint, I think we're at the upper end of that range in terms of the same branch pull-through once you back out the M&A that we've done. So, you know, I think there's plenty of room left for us to continue to expand margins With good tailwinds in the industry, again, good fixed cost leverage, good productivity, and good management of our input cost of labor and material, which, again, good evidence of that, and I think there's plenty left in our future.
spk01: All right. Thank you so much. Thank you. Thank you.
spk09: Our next question comes from Ruben Gardner, the Benchmark Company. Please proceed.
spk04: Thank you. Good morning, everybody. Morning. Morning. Just looking at True Team versus Service Partners, Service Partners' volume the last four quarters has been very strong. As we move into the back half of the year, should we expect maybe those trends to reverse? I think the comps are a little easier for True Team. Anyway, any color that you have on that dynamic?
spk05: Yeah, this is John. So we don't break out the guidance in terms of segment information or top line. I think both businesses, if you look at our second half growth based on our guidance, both businesses are going to do great in terms of pricing. And I think from a volume standpoint, both are going to be around the total that we provided. You're right, the comps on service partners get a little bit more difficult in the second half of the year But generally, I don't think you're going to see a major swing between what we've had and what we expect to have.
spk04: Got it. And then my second question is more of a clarification than a reminder. I think you've talked about this in the past, but the starts outlook that you have, I think around 1.5 million at the midpoint, that would imply, I guess the first half was closer to 1.6. It would imply a slower second half. Is that actually a true... Starts outlook, or is that more, you know, I know completions have been closer to 1.4. Is it more of a combination of starts and completions? How do you guys think about that? Are you really expecting, you know, the housing start number to go back to 1.4 in the second half, or are you kind of incorporating the labor challenges in your, you know, addressable market, so to speak, for this year? Yeah, it's the latter.
spk05: Certainly, you know, as we said in our prepared remarks last quarter and this quarter, you You know, the data we're providing and projecting is based on a very constrained environment, both material and labor, more so material than labor. So, yeah, it's more like the starts that we get to work on at the phase and the stage that we work on the project. So I would expect probably when starts are done at the end of the year, probably going to be slightly higher than what we projected. But, yeah, ours is more of a what can we get to from a work standpoint and deliver. Perfect.
spk04: Very helpful. Congrats on the quarter, guys, and good luck going forward. Thank you. Thank you.
spk09: The next question comes from Keith Hughes with Fund Trust Robinson Humphrey. Please proceed.
spk05: Thank you. A question on pricing, you know, pricing up in both segments. A good bit more in service partners. Can you talk about what's allowing them to get more price given that the input inflation? That would be pretty similar, I would guess, between the two. Yeah, Keith, it's really a function of the P&L. If you look at the service partners P&L versus the true team, the material content is obviously much, much greater on service partners. So as you're trying to recover the impact of inflationary input costs, service partners are going to have to drive a higher selling price as a percentage in order to maintain or expand margins. So it's really a function of the fact that just the percentage of cost that material makes up is just much, much greater at Service Partners. A very small piece would be that timing thing we talked about where Service Partners is able to deliver pricing a little bit quicker to the market than True Team, but by far the bigger piece is the material content as percent of the total. Okay, and second question. In the breakout of residential commercial same-brand sales, commercial was actually a little bit faster growing on a same-brand sales. This is a little surprising. Can you talk about pacing of business there? Is that one-time projects or is this something that this commercial finally got its legs under it right now? Keith, this is John. Are you referring to the year-over-year performance? I am, yes. Yeah, so I think really a function more probably that a year ago commercial was disproportionately hit versus the residential business. We talked about Last year we talked about some states actually locking down. We talked about the extended build cycle had a much, much more – social distancing a year ago had a much more dramatic impact on our commercial business, especially heavy commercial where you can only let so many trades on the job site at a certain time. So that's really the function you're seeing is that we're back on the job sites now at normal social distance – or I should say normal cadence – And so you're just seeing a better comp year over year that's disproportionately benefiting commercial. Okay. Thank you very much. You're welcome.
spk09: Our next question comes from Ryan Gilbert with BTIG. Please proceed.
spk10: Hi. Thanks, everyone. First question is on pricing and True Team. It seems like there are some indications that homebuyers are becoming more maybe a little more price sensitive than they were in prior quarters. And I don't think that's necessarily filtered back to the builders yet in the sense that their primary focus is just getting homes closed. But I'm wondering if you've noticed any changes in your negotiations with home builders as it relates to increasing prices in True Team.
spk06: Hey, Ryan, this is Robert. So, you know, I think you've seen that there's been additional material cost increase announcements come out. I think in fiberglass there was You know, definitely the one in June, one supplier pushed that to September, so call it here, you know, early third quarter type of increase from that perspective. And then I'd say others, John mentioned it earlier, but other materials, if I think about garage doors, other products as well, all those have come out with increases, including spray foam, which has been some dramatic increases given the MDI component that was limited in the fall of last year. Then take the Texas freeze situation, what happened to the industry from a petrochemical standpoint back in February. So inflation has continued. Obviously, we're still working with our builder customers. I think the team actually did a great, great job here in the second quarter, continues to work with our builder customers on pricing here for the back half of the year. But I think if you think about a builder today and you think about those elongated cycle times, service and being there whenever you say you're going to be there and having the material to do the work for them is extremely, extremely critical to the builders right now. So we're doing a great job of delivering that service, delivering on the time that we're supposed to be there, having the material for them, sticking to commitments so we don't hold up any other trade. I think that's something we're seen for and that's a big value out of top build because remember, we can move labor around, we can move material around, we can move equipment around. Our systems allow us to do that which gives, you know, I'd call five-star service to the builders in this type of environment.
spk10: Got it. Thanks. Second question on service partners. I guess it seems like installation materials shortages have helped maybe expand or deepen your customer market share and customer base. And I'm wondering if you had any comments on how we should think about the stickiness of, you know, your market share gains or the distribution customer base as the supply situation slowly normalizes over the course of the next few quarters.
spk06: Yeah, Ryan, it's Robert again. So, you know, I think as supply comes back, which, by the way, we see that maybe it's easing a little bit, but not, you know, not much from that perspective. You know, we think it's going to continue to be tight for the remainder of the year heading into 2022. But I think service partners have done a great job of three or four things. I think one is expanding with current customers, so offering more products or broader product array with current customers. Number two is just existing customers, but also new customers, new contractors. I think I mentioned that, expanding services to new contractors. But then three, just back to that focus on service. I mean, in this time, the last thing a contractor can do can really handle is not having material or not having delivery on time. So they're not holding up the job site or holding up the next trade. And our service partners team business, the team has done a really great job of focusing on the right service metrics, communicating with customers. I think that's like one of our themes is you communicate, communicate, communicate with your customers as to what's going on. And the team's done a nice job of doing that. I think those things are going to allow us to continue to see some healthy margin performance in our distribution businesses.
spk10: Great, thank you.
spk09: Our next question comes from Ken Zinner with KeyBank Capital. Please proceed.
spk07: Good morning, everybody. Good morning, Ken. Good morning. So price is pretty strong. Your operating leverage is pretty strong. Let me start on, I guess, what I consider more the spot market, which is the distribution part of the business. the margins you've got in, are those, I apologize, are those record margin? I mean, it's been, it just seems like 16% margin, if I got that correct, is pretty high. Is that really a function of just the net pricing you're getting basically, you know, your cheaper cost inventory versus what the spot market is? Is that the main driver there? What I think about, you know, 16 percent versus the 10, 11 percent range?
spk05: Yeah, so it is a record margin in the quarter, Ken, to start with. This is John, obviously. So I think it's really a lot of things, the culmination of an awful lot of things, and we've talked about it. You know, back in 2018, you know, when we had the other called significant constraint shortage, we We intentionally walked away from some business for folks that weren't necessarily agreeing or willing to pay what we felt was the appropriate selling price. So I think, you know, we've also had a new management team put in place over the last couple of years that I think has been putting their strategy that Robert talked about and, you know, putting the capabilities, the customer metrics, et cetera. So what you're seeing, I think, is a culmination process. of a lot of those things come into play, along with, obviously, a very, very tight material constraint environment. So, you know, it's really tough to kind of pick out one or two things, because I think this is a culmination of a lot of, you know, changes, you know, bringing good people onto the team and delivering, you know, to customers what they need, which is the products when and where they need it. I think the other thing that I think we've always shown you the ability to deliver is productivity and managing our expense buckets, right? So if you look at the service partners organization, they're executing what they have with very minimal additional fixed overhead, so delivering a lot more leverage in the business. So I think you're seeing all that, and quite frankly, to the obvious point, with material as tight as it is right now, certainly from a distribution standpoint, the environment's a relatively good one to operate in. Okay.
spk07: Just sticking with that distribution, I know you provide market share data for your combined company in terms of the installation combined with distribution. It just is occurring to me. Can you talk to what you think your, I guess, share is of the distribution market, given that it seems even on that side of the business, right, the supply-demand dynamics have turned very favorable for you as opposed to, well... Have you ever talked about what your share of distribution is separate from the installation side?
spk05: Ken, this is John. No, we have not. We talked about, as you know, the fact on a residential new construction that we believe we deliver something a little bit around 10%, maybe a little north of 10% of all material from an installation standpoint. But no, we have not talked about the specifics around the overall distribution market.
spk07: Thank you very much.
spk05: Thank you.
spk09: Thank you. At this time, I would like to turn the call back over to Mr. Robert Buck for closing comments.
spk06: Thank you for joining us today. We look forward to talking with you on our third quarter call in early November.
spk09: Thank you, ladies and gentlemen. This just does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Disclaimer