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spk00: Greetings. Welcome to Top Build Third Quarter 2021 Earnings 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. Please note this conference is being recorded. I will now turn the conference over to Tabitha Zhang, Vice President of Investor Relations. Thank you. You may begin.
spk01: Thank you, and good morning. On the call today are Robert Buck, President and Chief Executive Officer, John Peterson, Chief Financial Officer, and Rob Kuhn, Vice President and Controller. We have posted senior management's formal remarks and a PowerPoint presentation that summarizes our comments on 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 our third quarter presentation, which can be found on our website. I will now turn the call over to Robert Buck.
spk03: Good morning, and thank you for joining us today. We are pleased to report another quarter of solid performance for Top Build. Our team continues to successfully manage material cost increases with selling price adjustments and to navigate material and labor constraints. Driving profitable growth remains a cornerstone of our operating model, and the strong margin expansion we've achieved throughout this year is a testament to the significance of our scale, size, and continuing focus on operational excellence. Taking a step back and looking at our industry as a whole, home builders, general contractors, and building product companies continue to be impacted by supply chain disruptions and labor shortages. These challenges are delaying the completion of projects and elongating the build cycles of both residential and commercial construction projects. While we had initially hoped these industry-wide supply chain bottlenecks would be resolved by year end, we now believe that a more realistic scenario falls well into 2022. On a more positive note, demand for residential housing remains strong, interest rates are low, and inventory remains tight. In addition, With a longer build cycle, our backlog continues to grow. It is reasonable to assume we should not experience the traditional seasonal slowdown in the fourth quarter of this year or the first quarter of next year, barring any unusual harsh winter weather. Looking at our third quarter results, revenue grew 21.3% and 10.6% on a same branch basis, driven by a strong pricing in the quarter at both crew team and service partners. Gross margin expanded 120 basis points, adjusted operating profit grew 35.2%, and adjusted EBITDA increased 32.8%. In addition, adjusted operating margin expanded 170 basis points, and adjusted EBITDA margin expanded 160 basis points to 18.7%, the highest in the company's six-year history as an independent public company. Turning to material, fiberglass and spray foam remain on allocation. Given the supply scenario, three of the four fiberglass manufacturers have announced a 10% increase effective December or January. On the capacity side, we were pleased with Canossa's announcement that they plan to build a new facility in Texas that should be online later in 2023. This new facility should add about 180 million pounds of insulation or approximately 3% to 4% additional capacity. In addition, Knopf and JM's new blowing wall lines should be up and running sometime later this quarter or early first quarter next year, adding an additional 3% to industry capacity. Spray foam, which represents about 18% of our insulation sales, continues to face supply chain challenges and prices have significantly increased over the last 12 to 18 months. Supply was initially impacted by MDI shortages, the A-site chemical component, then The major freeze in the south central states and significant bad weather along the Gulf Coast caused additional production disruptions and delays. Further compounding these issues are delays at U.S. ports affecting delivery of key chemical components. Based on what we're seeing and hearing, we believe Top Build is faring better than most on both the material and labor fronts. Over the past year, we've partnered with key suppliers to get our fair share of fiberglass and spray foam. Our company-wide ERP system gives us the ability to efficiently manage material and labor throughout our branch network to successfully support our customers. Let me give you one recent example. A few weeks ago, a large production builder asked if we could leverage our resources to help them complete almost 600 homes in one of their key regions by the end of October. Teamwork across our operations leadership and our shared ERP system enabled us to quickly move material and crews from across our network and complete this work within the condensed timeframe. I don't believe any other service provider in the US could have accomplished this. Hats off to our true team branches for making this happen and driving immense value for our customer. On the capital allocation front, year to date, we've completed eight acquisitions, which are expected to generate almost $1 billion of revenue on a pro forma, full year basis. Since our last call in August, we completed three of these acquisitions, Valley Gutter Supply, California Boating Products, and Distribution International. Valley Gutter acquired in mid-August as a fabricator and distributor of gutter products and specialty metals to contractors in the Los Angeles area. Approximately 70% of Valley Gutter's customers serve the residential market and the remainder focused on light commercial. Currently, the distribution and installation of gutters comprises approximately 6% of Top Build's total revenue. California Building Products, which we acquired in early October, is a residential and light commercial installation company serving Northern California. The company brings along a solid customer base and strengthens our operations in this high-growth region. And finally, we announced in October that Distribution International has successfully gone through HSR regulatory review and joined the Topville team. We are now the leading North American specialty distributor in the $5 billion mechanical insulation market and the leading supplier of energy-saving insulation solutions in three critical and expanding end markets, residential, commercial, and industrial. We added 101 branches to our specialty distribution network, including 17 in Canada, increased our customer base by close to 13,000, and welcomed 1,300 DI Associates spot builders. Our teams are working closely to ensure a smooth transition as we integrate DI into our systems and supply chain over the next 12 months. As noted previously, we anticipate $35 to $40 million of run rate cost synergies over the next 24 months. Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical installation specialty distributors, and we expect to remain very active on all three fronts going forward. We also used our capital in the third quarter to repurchase 60,000 shares, and year-to-date, we repurchased just over 183,000 shares at an average price of $194.15 per share. Before turning the call over to John and Rob to discuss our financial results in further detail, I want to emphasize once again that our strong operating performance quarter after quarter is a direct result of our uniquely diversified model and the ability of our experienced and cycle-tested leadership team to manage our business well in any environment. John?
spk10: Good morning, everyone. As Robert noted, we had a solid quarter despite the industry-wide supply chain shortages and labor constraints tempering top-line growth. Our team once again demonstrated their ability to successfully manage and optimize input cost and pricing and drive operational efficiency throughout the business. Moving to our results, in the third quarter, net sales increased 21.3% to $845.8 million, primarily driven by a 10.8% increase in price and $74.5 million of revenue from seven acquisitions, Garland, LCR, Ozark, AVS, Creative Conservation, RJ Insulation, and Valley Gutter Supply. For the first nine months of 2021, net sales also increased 21.3%, primarily driven by increased selling prices, sales volume, and $172.2 million of revenue from acquisitions. Gross margin improved 120 basis points in the third quarter and 100 basis points in the first nine months of 2021 to 29.6% and 28.5%, respectively, driven by higher selling prices, and lower insurance costs, partially offset by material inflation. Adjusted operating profit in the third quarter grew 35.2% to $137.4 million, with a corresponding margin improvement of 170 basis points to 16.3%, driven by the same positive factors that I just mentioned that led to gross margin improvement, but partially offset by increased travel and entertainment activity, and the initial absorption of fixed cost of new acquisitions. For the first nine months, adjusted operating profit increased 42.7% to $364.5 million, with a corresponding margin improvement of 220 basis points to 15%. Adjusted EBITDA for the third quarter was $158.2 million, compared to $119.2 million in the third quarter of 2020, a 32.8% increase, and adjusted EBITDA margin expanded 160 basis points to 18.7%. For the first nine months of 2021, adjusted EBITDA grew 34.4% to $423.9 million, and adjusted EBITDA margin was 17.5%, a 170 basis point improvement over the first nine months of 2020. Third quarter SG&A as a percent of sales was 13.8% compared to 13.9% in the third quarter of 2020. The year-over-year decrease as a percentage of sales was primarily the result of higher sales partially offset by increased travel and entertainment and the initial absorption of fixed cost of acquisitions. Adjusted income for the third quarter was $97.7 million or $2.95 per diluted share compared to $69.6 million, or $2.10 per diluted share. For the first nine months of 2021, adjusted income was $256.4 million, or $7.73 per diluted share, compared to $171.2 million, or $5.14 per diluted share. Third quarter adjustments to net income were $3.6 million, all related to acquisition expenses. Adjustments to net income in the first nine months of 2021 were $20.4 million, primarily tied to $13.9 million of debt refinancing costs and the remainder related to acquisition expenses, and the COVID-19 lead plan initiated March of 2020. As of July 1, 2021, that plan is no longer active. Our effective tax rate for the quarter was 25.7%. and 24.7% for the first nine months of the year. Interest expense in the third quarter of 2021 was $5.5 million compared to $7.7 million in the prior year, primarily driven by lower interest rates on our senior notes issued in March 2021 and borrowings under the amended credit agreement. During the fourth quarter, we successfully closed on a $500 million senior notes offering priced at 4.18%, and maturing in 2032. In early October, we amended our credit agreement, increasing the revolving credit facility from $450 million to $500 million, and adding a new $300 million delayed draw term loan. This was used, along with the proceeds from our senior notes offering and cash on hand, to fund the purchase of Distribution International, which officially joined the top bill team two weeks ago. CapEx through September 30th was $42.3 million, or 1.7% of sales, slightly below our long-term guidance of 2% of sales. Working capital as a percent of trailing 12-month sales was 10.3% versus 10.1% a year ago. This slight increase was due to higher inventory on hand, which is being driven by inflation, M&A, and the timing of inventory receipts. We ended the third quarter with a net leverage of 0.7 times, using trailing 12 months adjusted EBITDA of $545.3 million. Total liquidity at September 30, 2021, was $709.8 million, including cash of $327.9 million and accessible revolver of $381.9 million. Operating cash flow was $309.5 million for the nine months ended September 30th. Assuming the inclusion of DI and associated debt acquired to finance the transaction, September 30th net debt would have been 2.2 times on a pro forma basis pre-synergies. I'm now going to turn the call over to Rob Coons, our Vice President and Controller, to discuss our segment results. As announced last month, I will be retiring from my position as CFO at the end of March, and Rob will be assuming this role. Rob and I have worked closely together for over three years, and this succession plan has been in place since he joined the company. He's built a great team and is involved with all aspects of the company's operations, and we couldn't have selected a better replacement. Rob?
spk12: Thanks, John. Starting with True Team, sales increased 24.5% in the third quarter to $612.9 million. On the same branch basis, revenue grew 10.3%, driven by an 8.4% increase in price, and a 1.9% increase in volume. Residential and commercial markets saw healthy demand in the quarter, but the industry-wide material shortages and labor constraints tempered growth. We are pleased with True Team's third quarter adjusted operating margin of 17.2%, a 20 basis point improvement from the third quarter 2020, even given the significant contribution from M&A. Our teams did a great job managing both price and cost in this environment and our backlog remains strong. Looking at Service Partners' third quarter, sales grew 13.2% to $276.4 million, driven by a 16.5% increase in price, partially offset by a 5.2% decline in volume. Service Partners' top line was challenged by material constraints in both fiberglass and spray foam. In addition, last year, Service Partners' third quarter volume increased a robust 12.2%, so this quarter was a difficult comp. A high note was Service Partners' third quarter adjusted operating margin of 17.1%, a 370 basis point improvement from third quarter 2020. Our Service Partners team continues to do an outstanding job managing cost increases, customer pricing, and operating costs. John?
spk10: Thanks, Rob. Moving to 2021 annual guidance. a number of factors were taken into consideration as we put together our outlook for the remainder of the year, the most relevant being the industry-wide supply chain shortages and labor constraints which are impacting everyone's ability to meet the continued strong demand for new residential housing and commercial projects. As a result, looking at legacy top build, which excludes financial results from VI, we are reducing the midpoint of our 2021 sales forecast by $55 million to a range of $3,255,000,000 and $3,295,000,000. For the adjusted EBITDA as a result of improved operational efficiencies and strong input cost management, we are maintaining the midpoint of our previous guidance of $577,000,000, but are narrowing the range and now expect the adjusted EBITDA to be between $570,000,000 to $585,000,000. We expect DI to contribute revenue between $170 and $180 million and adjusted EBITDA between $15 and $20 million. As a reminder, this acquisition closed on October 15th, so the guidance provided is for approximately two and a half months. In total, we are projecting sales to be between $3,425,000,000 and $3,475,000,000 and adjusted EBITDA to be between $585 and $605 million. We are not providing a projection of housing starts for the remainder of the year as there is a weak correlation between starts and our performance due to the continuing extension of the build cycle tied to the constraints previously mentioned. That said, we remain very bullish on the demand profile of all three end markets we serve. Looking ahead, we will provide our 2022 outlook when we report our fourth quarter and year end results in mid-February. Now let me turn the call back over to Robert.
spk03: Before opening up the call for questions, I wanted to mention that in September, we hosted our annual strategy session with our board and key members of our leadership and operating teams. During the two-day meeting, we took a deep dive into all aspects of our strategic plan, including our ongoing ESG efforts. This was a great planning session with the goal to continue to create great value for all our stakeholders. Also, let you know that we plan to host a Top Build Investor Day in New York City on Tuesday, March 15th. This will be a great opportunity to meet the leaders of our business. Looking ahead, we anticipate the industry will continue to be impacted by supply chain disruptions and labor constraints into next year. From Top Build's perspective, we believe we are faring better than most in terms of both material and labor due to our size, scale, strong relationships with our suppliers, and our engaging recruiting methods and productivity improvement initiatives. Our company-wide ERP system also facilitates the sharing of these limited resources, enabling us to best serve our customers. Our teams throughout Topville continue to do a great job successfully navigating the current environment as demonstrated by our solid third quarter results. We're also extremely excited about our entry into the mechanical insulation specialty distribution space through our acquisition of Distribution International and their leadership position, distributing and fabricating products for the industrial and commercial end markets. This acquisition also solidifies Topfield as a leader in supplying energy-saving insulation solutions to a broad range of businesses and industries across North America. To conclude, our team manages the business with constant mindset of driving improvements and achieving operational excellence. We're proud of our track record of producing strong financial results, and we recognize our success is the result of having the best and most talented operators in the field and a dedicated and experienced group at our branch support center in Daytona Beach. Our goal is to create sustainable shareholder value in every operating environment. Operator, we are now ready for questions.
spk00: Thank you. 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Steven Kim with Evercore ISI. Please proceed.
spk07: Yeah, thanks very much, guys. Thanks for all the info. And I guess my first question relates to DI. I know that you're going to be giving more specific guidance for the business overall on the 4Q call, but as we think about trying to model out DI, can you give us a sense for how we might be thinking about the sales growth opportunities for that small portion of your business, because it's a bit discreet? And then, in addition, what kind of incremental margins, excluding synergies, should we be thinking that business can carry?
spk10: Yes, Stephen, this is John. So we will be giving guidance in the fourth quarter call sometime mid-February. We're going to be putting – we're going to be lumping together the DI with the rest of the business. So we'll provide one sales number, one adjusted EBITDA number, and a range, obviously. I would say – Looking forward, though, in terms of the market, we're pretty bullish on the industrial market in terms of both the current status of where it's at, and I think our breakout this quarter of DI reflects that in terms of the revenue we've baked in. And then going forward, along with residential commercial, we're extremely bullish in terms of that market. In terms of your last question around the range, similar to service partners, as we think about our spread to 22 to 27 on an incremental basis, We always talk about service partners being at the lower end of that range, and DI is the same type of position, so around that 22% on an incremental basis is the way to think about it on a long-range basis.
spk07: Okay, that's helpful. Thanks for that. And then I guess second question relates to this unusual environment of home builder constraints. Obviously, we all see what's going on, and it makes sense that you've called that out. I'm curious as to whether or not this unusual period of time, though, provides any market share implications or opportunities for top build. In other words, is there anything about the current dysfunctional environment where you have seen an opportunity to lean in and invest, maybe change some things in an effort to grow your market share opportunities as we come out of it?
spk03: Yeah, good morning, Stephen. It's Robert. So, yeah, I think absolutely it's the case. I mean, I talked about a good example on the phone of where, you know, the production home builders, they're heading towards this time of the season, heading towards their year ends and stuff. That's definitely created some opportunity. If you think about what's happening in the supply chain and, you know, upstream from us, downstream from us, like whenever we would get those homes coming at us, they would come in slugs of life. 30 or 40 homes at a time because the previous trades are backed up and the previous trades are just, there's no smooth, even flow of production coming in. That's a strength for us because even though they're bringing those 30, 40 homes on in a day or two, what we're doing is we're able to move crews around, move our resources around, and we can basically insulate those homes for them in the same day or the next day, if you will. We've seen that. We absolutely think, given what we've done relative to labor and material, there's definitely been some game sharing. I think as we look at our results in Q3 and we look at our residential volume and compare that to what the builders are reporting as well, we feel really good about our residential volume, what's happening there and the results that we produce. I think good environment for top building, good environment for us to leverage our strengths and I think we're seeing that on a day-to-day basis across the country.
spk07: Yeah, that's very clear. Thanks for that. And just to clarify, is that an opportunity on sales or margins or I should say sales or pricing or both? I think it's volume or pricing.
spk03: Yeah, I would say both, Stephen. I think as we think about share, but I think also, you know, as builders are pushing for this and stuff and, you know, labor constraints, concern about supply chain, we're obviously pricing appropriately to drive value for us and for them.
spk07: Yeah, got it. Thanks very much, guys. Welcome.
spk00: Our next question is from Ken Ziener with KeyBank. Please proceed.
spk02: Good morning, everybody. Good morning, Ken. Good morning. So very interesting times here. Pricing's up 8% on the install, distribution 16. Both of those numbers are about half that on a two-year stack basis. With the December increase of 10% on price and volumes flat, maybe up a little bit, really over the next six months based upon what the builders are saying, can you maybe give a little context for this type of pricing situation amid flat volumes? And I'm asking this specifically as it relates to the conviction you have to hit the 22 to 27% operating leverage historically, which usually, you know, we talk about more efficient drive times, et cetera, et cetera. So maybe if you could just kind of lay out how your business model fits into, you know, a high pricing but not such high volume environment related to your operating leverage.
spk03: Hey, Ken. Good morning. It's Robert. So I'll take the first part of that, and John will take the second part. I think given that material is still constrained and thinking about even what's coming online here, which is loose-fill material, the bath side is still constrained as well, spray foam is still constrained, and growing backlog. There's a lot of work stacked up here as hopefully the supply chain continues to improve, even though we think that's well into 2022. It still creates an environment of supply and demand dynamics that will allow for the appropriate pricing. As we think about this December, January increase coming, I think we're pretty comfortable from a pricing perspective, appropriate conversations, and again, given that supply-demand dynamic and what's in the backhaul coming as well.
spk10: Ken, this is John. I think in terms of any environment, we've shown pretty good evidence of operating well, whether it's low growth, low price, or high growth, high price, or Right now, we're seeing some challenges, certainly in terms of the volume coming through the pipeline, but a very inflationary environment. So I think our businesses have shown great capability in terms of performing well under any of those scenarios. And I think what we're seeing right now in the third quarter is just one of those cases where, and we've said this many times, and I think you've heard this on many other calls from builders and distributors and building product companies, that Demand is extremely strong, but unfortunately, the pipeline continues to be the issue. When we get to our guidance as an example, we're back in August. We were counting on some slight incremental improvements throughout the third and fourth quarter, and we're just not seeing that right now. But I think in response to that, our teams have done extremely well in terms of obviously dealing with an inflationary environment, taking advantage of that volume, and again, the margin expansion you saw is great evidence of that. So, again, I think we're comfortable under any scenario you kind of point to us, and I think we've got pretty good evidence of performing that way.
spk02: Good. And just my second question is specifically on distribution. The operating model, the margins seem to be moving up along with sequential pricing, you know, first quarter, second quarter, third quarter. Is there any reason to assume that dynamic would change? I'm just thinking about how, you know, the business looks sequentially and specifically in the next year with that same net pricing structure seemingly in place. Thank you.
spk10: Hey Ken, this is John. So again, I think really we don't anticipate a change. I think as we look forward, if in fact we were to see some type of correction in terms of the industry or a slowdown, I think that there's two things that will happen pretty much simultaneously. Certainly from an external standpoint, there will be some pressure on top line pricing. But, you know, again, I think, you know, there will also be some probably excess material. And, of course, we're going to put pressure on suppliers in terms of material pricing. So I think, you know, we'll balance those as well as possible. So I think, you know, again, we'll manage that well, I think, going into the future. And I think it plays out well for top though. Thank you. You're welcome.
spk00: Our next question is from Phil Ng with Jefferies. Please proceed.
spk06: Hey, guys. John, thanks for all the help through the years. It's been a pleasure. And Rob, looking forward to working with you a little more intimately going forward. I guess to kick things off, the constraints you called out obviously weighed on three key volumes, and your guide implies still some hangover effect in the fourth quarter. But of any color, if some of these constraints are beginning to ease a little bit, wouldn't you kind of expect volumes to kind of reflect some of the underlying demand that you're seeing at this point?
spk03: Good morning, Phyllis Roberts. Still tight in the industry. We talk about this pipeline, the pipeline and the congestion, if you will, both labor and material. We would say we're definitely faring better than most, but material's still tight. Let's talk maybe fiberglass and spray foam. Fiberglass, bath and blow, we've got a little bit more blow capacity coming on end of this year, beginning of next year. That'll help, but at the same time, as you've heard me say before, these plants are going to have to have maintenance. Some of that additional capacity will be eaten up with maintenance activities that have to happen in 2022. On the spray foam side, it's really been a roller coaster. I've spoken the prepared remarks about things even pre-COVID, there was some tightness relative to input chemicals. We had to freeze and we've had some things relative to the ports and materials coming in from overseas. There's continued to be issues in the spray foam side of the business as well. So we see these going into 2022, as we mentioned. But I'm sure all trades are working on that, on the pipeline piece of it. And we would hope as we get into 2022, maybe mid-year or in back half of next year, we start to see some of that ease. But given those backlogs and stuff, we would think materials are going to continue to be tight. And I spoke specifically about spray foam and insulation, fiberglass, but it's really across all products. Trades before us, trades after us, and even some other products we do like, garage doors as an example. There's major constraints there given all the component items, and you can think about some of those components come from overseas as well.
spk06: Got it, Robert. That's helpful. I think some of the builders have talked about maybe some of these supply chain easing to more normalized levels. by spring. So could you see that pickup and certainly some of that capacity that's coming on on the loose fill? Or are you trying to signal that your volume is going to be really compressed into the back half of the next year, which seems a bit draconian, but any color on that front would be helpful. And then I guess bigger picture, with some of this capacity coming on in the next few months and then longer term with the Knopf expansion, have you guys looked to secure some of that supply in a more solidified you know, approach, or it's still kind of an ongoing negotiation? Thanks a lot, guys.
spk03: Yeah, Phil, so I think really that first question with the builders, I think they're probably thinking exactly what we spoke to earlier. There shouldn't be the seasonal slowdown here in Q4 and Q1, given seasonality, assuming no harsh winter weather, as we mentioned. So given that seasonality factor should be smooth, you know, they would expect some catch-up that would happen as part of that, and so would we. That's why we said We don't expect a seasonality. So I think the builders are thinking through that as well, which going into March and April, whenever things start coming out of that spring selling season, I think we'll see demand ramp up again. So I think that's probably what they're thinking from a seasonality perspective. To your second question about Knopf, I would say we work very closely with management at Knopf in the planning of that capacity. And so we've absolutely secured a majority of that capacity for top build. and we have a great relationship with the Knopf management team. I'm so glad to work with them on that.
spk06: Thanks a lot. Really appreciate it.
spk00: Our next question is from Mike with J.P. Morgan. Please proceed.
spk04: Thanks. Good morning, everyone. First question, I just wanted to kind of review a little bit, if possible, just the mechanics of you know, how the manufacturer price increases flow through because, you know, take, for example, um, you know, the, the upcoming 10%, uh, price increase, um, you know, there's, you know, you have a portion of, of, um, in, you know, true team sales that are, um, you know, not residential oriented. Obviously you have a, uh, a smaller portion of service partners that is not residential insulation. Is there kind of a good rule of thumb to use when you think of like a 10% insulation price increase through the industry, assuming that all of it goes through, how much proportionally you'd see that come through in each of your segments?
spk10: Yeah, Mike, this is John. So, we're not going to provide a number, a rule of thumb. I think you know that, you know, all the manufacturers, of course, we have relationships with, and each time there are price increases announced by them, we obviously sit down and negotiate both the timing and the magnitude. So, you know, and that is a little bit of the secret sauce of Top Build, certainly, in terms of the scale and the leverage and, you know, the value we bring them and the vis-a-vis the value they bring us. So, Yeah, we're not going to give those type of percentages because, quite frankly, they vary by time period and by segment. I think if you look at by segment, you're typically always going to see a higher number on the service partner side on a time where there's material inflation because, of course, material makes up a much larger piece of the P&L. So, you know, as our numbers reflect in the third quarter, second quarter, and first, service partners' price percentages are higher, but that's That's really required because, you know, material obviously is a much bigger piece of what flows through. But, yeah, we really can't provide any type of guidance in terms of, you know, by segment or timing because, again, it varies. But we do think we've done a great job, certainly, in terms of getting that into our bids in both areas. And I think it's reflected in the performance we've had this year.
spk03: And, Mike, this is Robert. I'll add on. So, you know, the manufacturers do a nice job of getting the announcements out, you know, 60, 90 days in advance. To John's point, we start the discussion with the suppliers, but at the same time, we start informing and start the discussion with our customers as well. As you can imagine, on the crew team side, there's thousands of builders we start the conversations with, but we also start communicating with our contractors and our customers on the specialty distribution side of the business as well.
spk04: Okay. I appreciate it. I guess, secondly, just shifting to DI for a moment, Can you just remind us again the amount of synergies that you expect out of that acquisition and as you've spent more time over the last month or two, what perhaps is not included in those synergy numbers and as you become more and more comfortable with the acquisition, how to think about that from potentially an upside scenario?
spk10: Yeah, so what we provided, this is John, by the way, what we provided on the call was a $35 to $40 million total synergy on the business. The first year, by the end of the first year, the run rate's 17 to 20. By the end of the second year, the full 35 to 40 run rate achieved. And that breakdown, by the way, was about 40% supply chain, about 35% back office, and another 25% operational improvement. In terms of where we sit today, Mike, we obviously had done a lot of work in advance of the transaction closing mid-October, but in between that September sign period and the close period and up to right now, we've been very active in terms of working the integration strategy and digging more into the synergies. I can tell you we feel extremely good about the guidance we've provided. We're not going to sit here and tell you there's upside to that at this point in time. We're certainly going to be pushing for that. And I think, you know, as we drill in, we're going to look for those opportunities. But I will tell you, we feel extremely good today about that projection we provided you back in mid-October when we closed the transaction.
spk04: Fair enough. Thanks, guys. Appreciate it. Thank you.
spk00: Our next question is from Adam Baumgartner. With Zellman and Associates, please proceed.
spk08: Hey, good morning, everyone. Thanks for taking my questions. I guess you haven't really touched much on the commercial business. Can you maybe give us some color on what you're seeing there? Are you seeing some project push-outs due to labor and material constraints?
spk03: Yeah, good morning, Adam. This is Robert. So, yeah, on the commercial side of the business, yeah, definitely projects have been delayed relative to, you know, the Delta variant wrapped up. Even though we saw some nice year-over-year performance from the commercial side, it definitely was slower than we anticipated, especially to have more heavy commercial projects, if you will. Then I think, as on the residential side, we saw some of the material constraints earlier. We've seen some of those, let's say, drift in more on the commercial side of the business, like in Q3 as well. really bullish on the health of the industry. The prime indicator for us is the backlog and the bidding activity of what's going on. Our backlog continues to grow bidding projects, not just in 2023, but actually some bigger projects in 2024 right now. Our contract flow coming in is still very healthy. A little slower than we would have anticipated on the commercial side, given some of the supply chain constraints, and I'd say probably more specifically COVID hitting on the commercial side of it, but really like what we see longer term there. And again, the mix of projects there is driving the health of that. If you think about the warehouse projects, the healthcare projects, even education, if you will, it's very healthy, and that's what we see the type of projects that we're bidding as well.
spk08: Got it, thanks. And then just on the strength and incremental margins and service partners, How should we think about, you know, what's driving that? Is part of that perhaps accretive pricing given the tight supply environment? How much of that's maybe related to fixed cost leverage? Is most of the growth being driven by price versus volume? So if you could maybe walk us through the moving pieces there.
spk12: Yep. Hey, Adam, this is Rob. You know, our True Team operations team has just done an excellent job, you know, continuing to execute at a very high level and providing customer service. For sure, what's driving their bottom line performance is a combination of strong price management with demand so strong and supply tight. They've done an excellent job managing that piece of it. They're extremely focused on their cost controls, so they've done a great job around cost controls. And then we did get a little bit of benefit on our insurance costs in the quarter. Some of that's driven by our focus on safety, but we also had a benefit on our medical costs as well.
spk08: Got it. Thanks.
spk00: Our next question is from Keith Hughes with Truist Securities. Please proceed.
spk11: My question is service partners. Great margins this quarter. I've seen that's price of a cost. Can you just talk about moving forward? Will that lessen over time as the industry sort of catches up with increases before the new announcement hits next year?
spk10: Yes, so Keith, this is John, and I think that was an earlier question, too. You know, listen, we're confident. We've obviously been seeing margin expansion there over the past six-plus years that we've been a public company. Certainly our team has been doing a great job of managing an inflationary environment right now, both segments, obviously, but service partners also. And, you know, and again, we've been leveraging that fixed overhead base we have, albeit smaller than True Team. So I think on a go-forward basis, as I said, you know, if there is some type of correction in the industry or when there will be some type of, we're confident that we can manage both the top line in terms of selling prices and the material cost side of it because, you know, I think, again, we're going to have to balance those out and manage that throughout any type of downturn, but we're confident we'll be able to work that into the future and maintain the margin base that we have today.
spk11: And moving forward, will DI be included with the distribution segment combined together for reporting purposes?
spk10: Yeah. So, you'll start to see that on our fourth quarter call. We'll report on two segments, installation and specialty distribution. So, service partners and DI will be consolidated under one segment. Okay. Thank you. You're welcome.
spk00: Our next question is from Noah
spk05: Good morning, and thanks for taking my question. So, first, you know, I understand you're not giving guidance for next year yet, but just how are you thinking about the pricing frequency and magnitude that you're expecting from manufacturers next year? At least maybe can you compare it to what we've seen this year? It sounds like capacity effectively isn't really changing much, and you've got very elevated demand and backlog. So just curious on your thoughts there.
spk03: Yeah, good morning, Noah. It's Robert. So, I mean, I think if you look at this year, you know, you've seen four really announced increases, basically one per quarter, probably two in the second quarter there. So, you know, I think it is supply and demand. As we mentioned earlier, we expect supply to stay tight. into next year, again, with the backlogs that we have and stuff. So I'm sure the manufacturer's going to look at that. I mean, obviously, three of the four have announced here for call it December, January. My guess would be they'll be evaluating as we come out of spring selling season, given the demand and the starts and stuff, and they'll be evaluating. But definitely expect to see additional increases, additional inflation in the 2022 frequency and how many. A little hard to say, but I think we all are pretty bullish on the residential environment, the commercial environment of the next year and what that's going to drive. We definitely expect to see more inflation and multiple increases next year. Hopefully, we see the spray foam side of the industry stabilize next year as some of that supply chain gets under control, both the input materials from overseas as well as some of the domestic blending and manufacturing as well.
spk05: Thanks. That's helpful. And then I guess kind of a similar question, but on sort of what you've got going on in the M&A pipeline outside of big deals like DI. Obviously, you know, this year's been – there's been a lot of activity. So just kind of what you're seeing now and maybe your expectations in the 22 on sort of smaller to medium-sized deals.
spk03: Yeah, so pipeline is really active right now, really across, you know, multiple areas, residential, commercial, and then specialty distribution, which is both DI and service partners for sure. So we definitely got many things working across all three of those areas. I think we've done a good job of really focusing on integration, doing integrations right, at the same time balancing that with new deals coming along. And I think while we were working on DI, just announcing the DI piece, you saw us do the Valley Cutter acquisition. You saw us do California Boating Products. Those are really nice companies. in nice growth areas out west. So I think you can expect us to continue to be active across all three of those end areas in markets, if you will. And I think you can expect us to see activity from us. And again, the pipeline, I think John and I probably said this for the past year, year and a half, but the pipeline continues to remain really, really strong on the M&A side.
spk05: Thanks. That's helpful. I'll leave it there.
spk00: Our next question is from Ryan Gilbert with BTIG. Please proceed.
spk09: Hi. Thanks, everyone. First question is on your backlog. Appreciate the commentary around the strength of it. I'm just wondering if you could give us some details, such as how much the backlog's up on a year-over-year basis, or if you could rank order the strength between single-family, multifamily, and commercial. That would be really helpful. Thank you.
spk10: Yeah, this is John Ryan. So we don't give out and we're not going to give out absolute numbers in terms of the backlog growth. I'd say, especially with the third quarter activity, our commercial backlog is certainly strong at this point in time. As Robert said, the bidding activity has been really strong. And we saw a disproportionate impact on the volume side, the commercial, on the true team side, especially this quarter. So that backlog grew in the quarter significantly. And then In terms of the overall single-family, multi-family, single-family backlog has absolutely grown. We're out probably about 30 to 60 days on average at most of our locations in terms of our normal time between the bid and when we do the work. You've got at least a month to potentially two months' worth of backlog activity growing in our branches throughout the pandemic. And I think one thing we've expressed is real strong confidence around the fact that we're comfortable, we're not losing any share in this environment either. I think the volume struggles we had this quarter were all tied basically to the material and labor impact we talked about and a little bit disproportionate to commercial. If you look at our residential volumes, our residential volume, for instance, on True Team, X price is up over 6%, around 6%. On a year-to-date basis, up over 7%. And I think that tracks pretty well with what we've seen completions and quite frankly what we've seen builders come out with. So appreciate the question. But yeah, from an overall backlog, very, very healthy backlogs both in residential and commercial on the True Team side especially.
spk09: Okay, thank you. Second question is on distribution volume. It sounded like... Most of that drop was the tough comp and, as you said, material shortages. Is it fair to say that the customer base at ServicePartners is largely intact from 2Q21 or 1Q21, or have any customers fallen out, or have you pruned some lower margin business as you've done in prior years?
spk03: Yeah, Ryan, this is Robert. I'll take the first part of that, and John or Rob can jump in if they'd like. You know, definitely from that perspective, tough cop. If you think about coming out of Q2 last year, you know, we had an abundance of material as things were a little slow in Q2 as COVID hit. And so we came out really all guns a-blazing in Q3 with, you know, really executing well on our strategy that we let out with service partners. I think you remember last year, so your question is a really good question. You know, new customers that we were going after, smaller contractors and stuff. So the team did a great job. If I think about now, you're right, tough comp, some material constraints, but no, that team has done a really good job while material has been constrained. I'd say that team at Service Partners has done a great job of really upping the service levels for the customers. If you think about some just-in-time things that are happening from a material perspective, the Service Partners has done a great job of communicating with the customer, balancing those loads with different customers based on their immediate needs that they have as well. across fiberglass. If you think about spray foam and how big of a battle that's been, they've done a really nice job of it, even on the spray foam side as well. So I'd say no customer fallout. I'd say, if anything, Service Partners is gaining some longer-term customers just given the absolute great service that they've been able to provide.
spk12: And Ryan, this is Rob. I would just add to that just to give you a number with it. Just on that comp last year, our volume was up 12% in Service Partners last year.
spk10: The last piece I think on SP that's worth mentioning too, I think, you know, if you think about the service partners business for us, that's one of the, between the two segments, that gets disproportionately more R&R through the subcontractor base. If you think about third quarter with COVID spiking, we probably saw, well, we definitely saw less consumer acceptance to have people come into their houses. And so we were down on the R&R side in the third quarter, and that also had the impact certainly on the volume as well.
spk09: Okay, got it. Thanks very much. You're welcome.
spk00: This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.
spk03: Thank you for joining us today. We look forward to talking with you on our fourth quarter call in February.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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