TopBuild Corp.

Greetings, and welcome to the Top Build second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Ms. Tabitha Zane, Vice President of Investor Relations. Thank you, Ms. Zane. You may begin.

Thank you, and good morning. On the call today are Robert Buck, President and Chief Executive Officer, and Rob Coons, Chief Financial Officer. 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 second quarter presentation, which can also be found on our website. I will now turn the call over to Robert Buck.

Good morning and thank you for joining us today. 2023 is shaping up to be a solid year for Topville. We continue to operate in a favorable environment and remain focused on driving profitable growth, a cornerstone of our operating model. The volume growth and strong margin expansion we've achieved not only this year, but also over the past eight years since becoming a publicly traded company, is a testament to our entire Top Bill team and our continuing emphasis on operational excellence and driving improvements throughout all areas of our business. Also on display is the strength of our diversified model, which affords us multiple avenues for growth and gives us the ability to outperform in any environment. Total sales for the first six months are up almost 6%. Our gross margin expanded 140 basis points to 30.7%, and our adjusted EBITDA margin grew 170 basis points to 19.9%. We are increasingly optimistic about how the rest of the year will unfold, based in part on recent positive commentary from our builder customers, single family starts data over the past two months, and our continued strong commercial performance. This improved outlook is reflected in our full year guidance for 2023, which Rob will discuss in further detail. Reviewing our second quarter results, a positive mix of installation business kept our branches busy. While we did see some slowdown in single family work, we definitely outperformed the single family market. We also demonstrated the strength of our operating model with outstanding multifamily and commercial execution. Our new lead app continues to identify commercial opportunities, and our installation branch managers are aggressively pursuing these projects. Their focus resulted in a 22.6% increase in commercial revenue this quarter. On the heavy commercial front, we continue to drive improvements throughout this business, which has enhanced our win rate for many projects across the country. Our installation crews are working on a wide range of projects, including the Nashville International Airport, the UCI Medical Center in Irvine, California, and the revitalization of Two Penn Plaza in New York. We are agnostic as to the types of projects on which we work and are not over-indexed to Altus or any other type of heavy commercial work. Looking ahead, our commercial backlog remains robust and we're bidding jobs into late 2024 and early 2025. Turning to our specialty distribution business, overall sales in the second quarter declined 2.3%, primarily as a result of our smaller contractor customers continuing to reduce inventory and as more construction activity has shifted to multifamily. We did see a 2.1% increase in sales from our commercial and industrial channels. Coming out of allocation, as residential distribution volumes continue to normalize, our teams are doing a nice job of identifying and building attractive new areas of growth as our overall results clearly demonstrate. Our special distribution teams are supporting a number of major industrial manufacturing projects, including two large chemical plants for Chevron. We're also seeing quite a few major projects being planned across several diverse industries, fueling the demand for mechanical insulation. Maintenance and repair work on many commercial industrial sites is also being scheduled, and this recurring revenue stream should serve as a continued stabilizing revenue driver for our specialty distribution business. We remain very optimistic about the opportunities for growth in both the commercial and industrial end markets in the US and Canada. To touch briefly on labor materials, labor remains tight. While fiberglass is no longer on allocation, some supply is still constrained, and no new capacity is expected until second quarter of next year. Our M&A team has also been busy this year. To date, we've closed three residential insulation acquisitions, which combined are expected to contribute approximately $170 million of annual revenue. These are SRI Holdings, which enhances our presence in Georgia, Michigan, Ohio, Florida, Alabama, and South Carolina, Best Insulation, which serves high-growth regions in the Southeast and Southwest, including Florida, Texas, and Arizona, and Rocky Mountain Spray Foam, operating in Colorado. We were also excited to announce our planned acquisition of SPI last week. This highly strategic core transaction will bring together two specialty distributors of mechanical insulation, reinforce our position as a leading specialty distributor in the highly fragmented $17.5 billion insulation industry, further differentiate our unique operating model, and reduce the cyclicality of our business by increasing the percentage of recurring revenue driven by maintenance and repair work. As a reminder, this is an all-cast transaction valued at $960 million, and we expect to achieve between $35 million and $40 million of run rate cost synergies by the end of year two, post-close. Looking ahead, acquisitions will continue to be our number one capital allocation priority and a key component of our growth strategy, and our pipeline is filled with outstanding potential partners. In summary, we had a great second quarter And as you can see from our revised guidance, we're on track to have another strong year. Our team continues to execute well, and our diversified model positions Top Build to outperform in any environment.