TopBuild Corp.

greetings and welcome to top build earnings conference call at this time all participants are in a lesson only mode a question and answer session will follow the formal presentation if anyone should require operator assistance during the conference please press star 0 on your telephone keypad as a reminder this conference is being recorded I would now like to turn the conference over to your host Ms. Tabitha Zain, Vice President, Investor Relations.

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 GAAP measures in a table included in today's release and in our fourth quarter presentation, which can also be found on our website. I will now turn the call over to Robert Buck.

Good morning, everyone, and thanks for joining us today. We're pleased to end the year with a strong fourth quarter. reporting solid top line growth and a 17.1% adjusted EBITDA margin. For full year 2021, we again demonstrated the strength of our diversified business model and our season management team and delivered on our objective to achieve profitable growth. Revenue increased 28.3% and adjusted operating and EBITDA margins expanded 160 and 130 basis points respectively. Full year 2021 was also very productive. Highlights include reporting our best year ever with regards to our safety and personal injury rate, managing both material and labor constraints while moving resources across our network to meet the needs of our customers, successfully managing material cost increases with appropriate selling price adjustments, putting over $1 billion of capital to work through the acquisition of 11 companies, including Distribution International, or DI, establishing Top Build as the leading distributor of mechanical insulation, entering the industrial insulation end market and broadening our insulation capabilities and services, more than doubling our specialty distribution network, including expansion into Canada, and maintaining our focus on driving operational efficiencies throughout the organization. We've also evolved as a company compared to where we were when we went public in 2015. To give you some context, six years ago, approximately 84% of our revenue was derived from residential housing. Today, on a pro forma basis, it's about 63%, with commercial now representing 29% and industrial, 8%. We've also expanded our specialty distribution business, which again, on a pro forma basis, accounts for 42% of our revenue versus 35% in 2015. Perhaps most importantly, we've successfully demonstrated our ability to outperform in any environment as evidenced by our exceptionally strong adjusted operating and EBITDA margin expansion every single year. While we've seen important changes as a company, what has remained constant over these same six years is our unwavering focus on our core business, insulation. We've doubled our revenue over this timeframe and increased the percentage of sales from insulation and insulation-related accessories by 400 basis points to 80%. We are the market leader in all three installation end markets we serve, giving us unparalleled size, scale, and leverage. Permanent operations, I'll start with specialty distribution, and specifically DI, which had a very strong fourth quarter. beating the high end of the sales and adjusted EBITDA guidance we gave on our third quarter call. DI's adjusted EBITDA margin for the fourth quarter was close to 11%, a substantial improvement from DI's full-year 2020 pro forma adjusted EBITDA margin of 8.2%. DI has been an outstanding acquisition for Top Build, providing us with a leadership position in the $5 billion mechanical insulation market. With the DI acquisition, we have expanded our core business, joined forces with a very talented, experienced, and knowledgeable team, welcomed over 13,000 new insulation customers, gained a recurring revenue stream driven by an MRO business and industry leading fabrication capabilities, entered the Canadian market with a strong leadership team in place in that country, further enhanced our partnership with the manufacturers of fiberglass insulation and expanded our M&A prospect pipeline to include industrial, commercial, and, of course, residential. Looking ahead, we expect solid performance this year for mechanical installation in both the commercial and industrial end markets, including new projects and maintenance and repair work. As far as the integration, while still in the early stages, it's going really well. In fact, in some areas, we're even ahead of schedule. Making this success possible are the strengths of our talented operating teams, working closely together, forged by a similar culture focused on safety, integrity, and operational efficiency. We are highly confident we will achieve the $35 to $40 million of run rate synergies in the first 24 months of ownership, as we outlined when we announced this transaction last September. Service partners also had an outstanding year with strong margin expansion as our team successfully balanced material cost increases and other inflation factors with customer pricing. Volume growth in the quarter was challenged by material constraints in both fiberglass and spray foam. Spray foam, which represents about 18% of our legacy insulation sales, continues to face supply chain challenges and prices have significantly increased over the last 12 to 18 months. We are hopeful the situation will ease in the back half of the year. Speaking of material, we did see additional loose-fill capacity come online late last year from Knopf and anticipate additional capacity coming online from Johns and Anvale by the end of next month. Although total, this will add only about 3% of capacity, our outstanding partnerships with these two suppliers ensure we will secure our fair share of these new lines. That being said, fiberglass supply remains tight. Switching to the True Team installation business, we saw healthy demand throughout 2021 for residential new construction, as well as a very strong pricing environment. We're also pleased that True Team's commercial business saw positive same-branch revenue growth for the full year, despite continued project delays due to COVID, job site safety protocols, and industry-wide material constraints. Rob will cover more details for each segment in his prepared remarks. I do want to take a minute to talk about Top Build's safety performance. As I mentioned earlier, we reported our best year ever with regards to our safety injury rate. Our incident rate has steadily declined since 2017, and we believe this downward trend is an important indicator of the adoption of our safety culture and the effectiveness of our safety programs. With over 16,000 job sites visited each day, safety is not just a choice, it's ingrained in our culture and our code of ethics. Our over 410 locations strive to maintain a zero incident safety culture, and a portion of management's compensation is tied to this metric. I am really proud of our team for their passionate and personal leadership of a safety lifestyle and integrating safety within the hearts and minds of everyone at Top Build. On the capital allocation front, we completed 11 acquisitions in 2021, including four in the fourth quarter. DI, Tonks Insulation, Shepard's Insulation, and Insulating Products. Earlier this month, we added Billings Insulation, a residential insulation installer serving the Montana and Northern Wyoming markets. We remain focused on acquiring high-quality residential and commercial insulation and specialty distribution companies. All three of our end markets are highly fragmented and present great opportunities to put the strong free cash flow that our business generates to work. While we expect to remain active on the M&A front in all three end markets, the successful integration of DEI is our number one priority. In 2021, we also repurchased just over 183,000 shares of our common stock for approximately $35.6 million. We have a $200 million share repurchase program in place, reflecting the confidence of both management and our board in the long-term potential of Topfield. our strong future free cash flow position, and our firm commitment to optimizing the efficiency of our capital structure. Next, I'd like to briefly discuss our ESG initiatives and where we are in our ESG journey. First and foremost, our business is inherently ESG friendly. The installation products we install and distribute provide energy efficiency and improve environmental conditions to thousands of residential, commercial, and industrial locations every single day. Last year, we established a formal ESG sustainability program, correctly overseen by our board of directors. The program is managed by an ESG committee comprised of the company's executive officers, including me, and a newly appointed ESG leader who reports to our general counsel. In this year's 10K, we have expanded our disclosures regarding our workforce demographics, our diversity and inclusion initiatives and our OSHA recordable incident and lost time rates. Our plan is to publish our 2022 sustainability report in the second quarter. We are committed to the quality of our reporting, inclusive of our acquisitions. We'll be keeping our stakeholders informed and providing additional information on an ongoing basis. As we look at 2022, we are optimistic there'll be another good year for Top Build. The acquisition of DEI has further enhanced our growth opportunities within our core business, insulation. We believe residential new construction will remain strong despite the likelihood of interest rate hikes. Our builder customers continue to be optimistic and are still restricting sales due to outsized demand. Housing inventory is extremely tight and labor and material constraints continue to elongate the build cycle. Our backlog is very strong and is growing as the delta between starts and completions continues to widen. Turning to our outlook for our commercial business, as the threat of COVID wanes, which statistics indicate is occurring, commercial construction should get back on track. We have a solid backlog in this end market and bidding activity remains strong. And, as I mentioned earlier, we expect solid demand for mechanical installation in both the commercial and industrial end markets, including new projects and maintenance and repair work. Operationally, we remain focused on continuing to implement initiatives that drive operational efficiency and improve labor and sales productivity. Strategic acquisitions will remain our number one capital allocation priority and will continue to be an important aspect of our projected growth. And finally, we believe energy codes will continue to strengthen, providing growth opportunities in all areas of Tottenham's business. Before I turn the caller to John, I want to note that this is his last earnings call as CFO of Tottenham as he is retiring at the end of March. John has played a key role in our growth and success and has built an outstanding track record of creating strategic value for our stakeholders. I consider him a colleague and a friend and really appreciate his partnership over the years. Thank you, John.