TopBuild Corp.

If they're definitely, if people look to maybe re-insulate, if you will, to drive some energy efficiency or some rebates, we'll get after that business on our special distribution side. If you think about that smaller contractor that may be doing that work, that's definitely our primary customer on the special distribution side, especially residential. If you think about some of the other infrastructure piece, I mentioned the Salt Lake City Airport as an example. Those types of infrastructure projects, that would definitely benefit us some on the industrial commercial side. Hard to quantify that, but given, again, we play across that entire space, we'd expect to see some nice tailwind from that as those bills come into play, both, again, commercial and industrial.

Okay, super. Great job in retooling the portfolio to kind of tap into some of these growth avenues. Next slide.

Yeah, thank you, Phil.

Thank you. Our next question comes from Steven Kim with Evercore ISI. Please proceed with your question.

Thanks very much, guys. Appreciate all the help and the guidance. Congrats on the quarter. You made an interesting comment near the beginning. I think you said that 1Q, when you were talking about the residential, well, your overall market or your overall sales, I think you said 1Q came in roughly in line with what you expected. But clearly in the residential side of the business, the 1Q sales environment and therefore planning for 2Q by home builders and so forth has pretty greatly exceeded the industry's expectations. So I just want to confirm that you saw that too. You see that and you hear that as well. um and in fact kind of as a follow-on to that one of the things that we're anticipating is that you might see a little bit more market share shifting to the larger builders because they may have the balance sheets and the open lines of credit to be able to do more of the spec building which i think you mentioned versus small privates they may have a little bit of difficult time you know increasing their spec activity uh you know given the regional bank stress so I guess I'm wondering, is it reasonable to assume that if you see this market share shift, that that might lead to a slightly lower incremental margin in the residential install side of the business later this year?

Yeah, so I'll start off, Stephen, this is Robert on that and try to hit it, and I'm sure Rob will add on some comments as well. So I think on your large production border comment, I think you're exactly right. I mean, what we're seeing and obviously what the builders are saying around the spec home piece and having the balance sheet to support that, seeing those come out of the ground. Yeah, I think you're absolutely right about that. They'll get ahead of the curve here, things stabilize, and that'll allow for some share gain piece of it. I think given the material situation, the labor situation, our relationships with those production builders, we're not too concerned from the margin perspective if that shift happens or that share shift happens with the production builders. So no concern from that perspective. Back to your Q1 comment. And then I'll head over to Rob if he's got any add-ons. I think whatever we say in line, we saw what happened to single family. It was pretty flat. Multi-family was up. Really, really healthy given what our teams in the field have done, exactly what we expected. We talked about distribution volumes, commercial industrial strong, what we expected. A little bit down on the residential distribution side given some lowering of inventories by the smaller contractors as well as that shift in multi-families. As we thought, those were some of the dynamics we thought would play out in the quarter, and they did.

Yeah. Yeah, Steven, I'd just add, I mean, I think, you know, when we made that comment, we're talking in total, right, or about where we expected. I'd say on the install side, a little better from a volume perspective. You know, the team did a great job getting out there, getting a lot of multifamily work. And like we mentioned in the prepared remarks, you know, residential volume on the specialty distribution side, downtown. Slightly, we saw people taking inventory out, anticipating the slowdown, as well as with the shift in multifamily mix, some of those smaller contractors that go for residential products, especially distribution, had a little bit less share in the quarter. Those are the two things, but overall, like I said, right in line with our expectations for the quarter.

if I could sort of follow up on that, um, your comments there on the residential side within spec distro, I think you said that, um, uh, well, first of all, would it be right to guess that the residential side of the business within spec distribution was down maybe about 4%. Um, if, if that's wrong, if you could correct me, that would be great. Um, but then you, you, I think attributed, uh, you know, resi being weaker than the commercial industrial due to, I think small, uh, your your small installation your smaller customers basically other other small installers and whatnot reducing inventory i'm wondering are those inventories in your estimation right sized from a level that was too high or maybe given what we've seen here in one queue sales for homes could we be maybe too low now and then you said also multi-family mix impacted it could you talk a little bit about why and how multi-family the mix is impacted negatively What is it about the multi-fam versus the single-fam that particularly affects the sales?

Yeah, Steven, this is Robert. So I'll try to get all those answered here. Relative to the, you know, talking about the special distribution residential, yeah, low single digits, which, by the way, given if you look around the industry and stuff, we think execution in the field and outside business was fabulous. So the team did a great job in the other areas, other products, accessory products, some of that. We think fabulous results from how the team handled that shift. On the multifamily side, the smaller contractors which we get after on that residential special distribution side, they're probably participating less in that multifamily work. They're more maybe the custom builder, the smaller regional builder, the repair remodel type work. That's what that specific smaller contractor will be going after. If you think about the multifamily, you've got I also kind of speak as to where we picked up share there on the install side, but if you think about that multifamily side, major fluctuations in the amount of material needed, the amount of labor needed in a week's time frame or something like that. It's harder to obviously react to that, and that's why we're able to move. Whenever we talk about moving equipment, material, labor around, that plays well for us on the multifamily. I'm sure as you've seen, there's a lot of that multifamily work today coming up, but it also has A lot of it has this light commercial work with it where the first floor is, you know, could be, you know, retail, and then you've got the multifamily above it. And so with the fact of how we're playing that light commercial and multifamily, it's allowed us to pick up some nice projects due to that, you know, ability we have across multiple projects, if you will.

Got it. Thank you so much. That's very helpful. Thank you.

Thank you. Our next question comes from Carl Reichardt with BTIG. Please proceed with your question.

Thanks. Morning, everybody. Thanks for taking my question. Albert, you talked about the TAM for the business overall being $17.5 billion. What percentage of that do you think is the MRO recurring revenue side?

Yeah, so as we think about it, you've probably seen what we published around that commercial industrial space. We call that opportunity I'd say, you know, call it five and a half, you know, call it six billion type of total addressable market. I'd say if you look at, you know, look at our business and stuff, the MRO is about, you know, 50% on the industrial side. And so, you know, and we've probably done a really good job getting our fabrication capabilities of getting after that work. So I'd say is it maybe a little less than 50% of the total, Tim? I think it probably is. I can't give you the exact number. I just know how we're kind of, oriented towards that and, you know, how we've given our capabilities fabrication. We've tried to, you know, make sure and get after that opportunity and gain share in that space.

Okay, thanks for that. And then, Rob, you talked about the working capital as a percentage sales target going down to 12% to 14%. What are the key drivers to get that number down? I recognize there's probably some seasonality in there. And then, as you look beyond 23, where do you think that number ultimately can go? What would be your target? Thanks.

Yeah, I would say our long-term target is still in that 12% to 14% range. I think the opportunity right now lies a little bit on the AR side, but also on the inventory side. So with things potentially slowing down here the back half of the year, definitely an opportunity to squeeze some of that working capital out and generate strong free cash flow. One of the great stories of our first quarter was our free cash flow week. generated $154 million of free cash flow, up 117% for the year. And for the full year, with the numbers we have out there, we should be north of $600 million of free cash flow. So we feel really good about that, and we think 12% to 14% will probably be closer to the high end of that as we close out this year, but long-term, you know, towards the middle of that.

Great. I appreciate the color. Thanks a lot, guys.

There are no further questions at this time. I would like to turn the floor back over to President and CEO Robert Buck for closing comments.

Thank you for joining us this morning. We look forward to reporting Q2 results in early August.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.