TopBuild Corp.

Greetings and welcome to Top Build's third quarter 2024 earnings conference call. At this time, all participants are in 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, P.I. Aquino, Vice President Investor Relations. Thank you. You may begin.

Good morning and thank you for joining us today. I'm joined by Robert Buck, our President and Chief Executive Officer, and Rob Coons, our Chief Financial Officer. We've posted our earnings release, senior management's formal remarks, and a presentation that summarizes our comments on our website at topbuild.com. Many of our remarks today 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 and in the company's SEC filings. The company assumes no obligation to update any forward-looking statements because of new information, future events, or otherwise. Please note that some of the financial measures to be discussed during this call will be on a non-GAAP basis. These non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We've provided a reconciliation of these financial measures to the most comparable GAAP measures in today's press release and in our presentation, both of which are available on our website. I'd like to now turn the call over to our President and CEO, Robert Buck.

Good morning, and thank you for joining us today. We're proud to share that in the third quarter, we reached another historic high for top-build sales and adjusted EBITDA performance. Our teams did a very good job across both our installation and special distribution segments, posting top-line growth and bottom-line profit expansion. This quarter is a prime example of our ability to perform well in any environment. The landscape for building products in the third quarter was, in many ways, much like the second quarter. Although we've seen improvement in inflation metrics and the labor market is strong, housing demand in the second half of the year has been slower than anticipated. Single-family residential starts still vary widely across the country, even as mortgage rates drifted lower ahead of the Fed rate cut in September, homebuyer behavior suggests that consumers are holding out for a lower rate environment and election certainty. More recently, mortgage rates have been on the rise again. On the multifamily side, we're still working through our backlog. Multifamily demand has slowed, and we're not expecting it to improve in the fourth quarter and as we move into 2025. As a reminder, multifamily units typically require about 40% of the installation when compared to a single-family unit, and our business is much more weighted towards single-family, consistent with the industry. On the commercial industrial side, bidding is still very active, and we have a strong backlog going into 2025. As we talked about last quarter, some project starts have been pushed out, primarily for financing reasons. We have not seen an uptick in cancellations, so we anticipate that when the financing environment improves, these projects will move forward. Turning to our results, we performed very well in the third quarter, given the macro environment. Sales increased .6% to $1.37 billion as volume grew, benefiting from acquisitions and realizing pricing across both installation and specialty distribution. Our adjusted EBITDA totaled $285.1 million, and adjusted EBITDA margin was 20.8%. We've been able to alter operations with over 14,000 employees. We are a people business, and every day, excuse me, everyone plays a key role in what we achieve every day. We continue to be pleased with our ability to attract labor, align incentives, and develop and reward our employees accordingly. On the material side, fiberglass is still in allocation. Planned and unplanned maintenance remains persistent with the manufacturers, and the new manufacturing facility in Texas has been slower than anticipated coming online. Our teams are doing a good job managing in the continued tight supply environment. Our special ops team continues to be an important part of our story and how we continue to improve productivity and drive profitability. As you see in our results. As I've done on recent calls, I want to spend time highlighting a particular area of our business to provide a better understanding of our differentiated model. Today, I want to briefly touch on Crossroads, our Canadian specialty distribution business in mechanical and metal building installation. Crossroads joined top build through the acquisition of Distribution International in 2021. With its long history in Canada, they're a leader in the commercial, marine, and industrial end markets. We operate out of 18 facilities located in key markets across Canada, and our focus is to deliver the best service possible for our customers. Our value-added specialty fabrication capabilities differentiate us from competition and enable us to be the go-to supplier of innovative products and resources for our customers. Our focus includes both the ongoing maintenance of commercial and industrial facilities and a diverse and impressive list of new construction projects. One of our more notable projects for which we are currently the lead supplier is the Liquefied Natural Gas Project on the west coast of British Columbia. This is the largest infrastructure project in Canada's history. We're also the lead supplier for a large shipbuilding program for the Canadian Coast Guard, as well as numerous nuclear power and oil sands projects. Our Crossroads management team is highly accomplished, and we're very proud of their hard work. They've been driving the business forward and have consistently achieved growth above the market. Turning to capital allocation, M&A is a core competency of top build, and acquisitions continue to be our number one capital allocation priority. We have a solid track record of generating strong returns for shareholders. We are pleased to have recently announced the agreement to acquire Shannon Global Energy Solutions, a mechanical installation company servicing multinational commercial and industrial customers. Shannon is based in upstate New York and generates approximately $11 million in annual revenue. This brings our 2024 -to-date acquisition count to seven for a total of approximately $118 million in annual revenue. Given our robust pipeline and very active M&A environment, we're allocating more resources to support our M&A efforts as we evaluate several opportunities across our end markets. We continue to concentrate on our core of insulation, and we're also learning about opportunities that have the potential to expand our total addressable market. Importantly, we will stay disciplined as we focus on those opportunities that best leverage our core competencies. Also in the third quarter, we continued our share buyback program, repurchasing 1.07 million shares for a total of $413.9 million. As you saw in our press release this morning and considering today's macro environment, we are tightening our outlook on 2024, which Rob will cover in more detail. Before I turn it over to Rob, let me reiterate that we are performing very well in a macro environment. That has been shoppier than anyone anticipated at the beginning of the year. Despite this, 2024 will be another strong year of profitable growth for Top Build. We are very well positioned to capitalize on improving demand that we believe will materialize as 2025 progresses. We participate in a great category in industry, and as we differentiate, and we have a differentiated business model, the underlying fundamentals are strong, an underbuilt housing market in the US, rising household formations, and a prospect for lower interest rates. These factors, coupled with the critical role that installation plays in driving energy efficiency and meeting strengthening building codes, demonstrate why we're bullish about the long-term growth opportunity for Top Build.

Rob? Thanks, Robert. Robert, I'd like to extend my thanks to our teams for their hard work in delivering another excellent quarter. As Robert noted, record high sales of $1.37 billion grew .6% versus prior year, with both segments showing growth year over year and sequentially. M&A, Net of a Disposition, contributed 2.3%, while price was up 1% and volume improved 0.4%. Third quarter pricing of 1% reflects the continued realization of higher fiberglass pricing, net of new price reductions on spray foam driven by increased supply. Turning to our segments, installation sales grew .2% to $856.4 million. Net M&A added 2.7%, pricing contributed 1.1%, and volume was up 0.5%. Residential sales improved slightly from the second quarter and grew .7% versus prior year due to M&A and single-family growth, partially offset by slowing multi-family sales. Commercial sales improved slightly from the second quarter and grew .8% versus prior year due to M&A and timing of projects. Specialty distribution sales rose .1% to $600.4 million in the third quarter. Volume improved 3%, acquisitions added 1.4%, and pricing contributed 0.8%. Sales to the residential end market improved slightly from the second quarter and grew by .5% versus prior year. Sales to the commercial and industrial end markets slowed slightly from the second quarter and grew by .9% versus prior year. Third quarter adjusted gross profit of $421.8 million or a .7% margin was 100 basis points lower than last year. As we've discussed in the past, our 2023 third quarter results included a one-time benefit of approximately $15 million from higher than normal margins on multi-family and commercial projects in the installation segment. Excluding this, adjusted gross margin improved by 10 basis points versus last year as we continue to focus on driving productivity and profitability across our operations. Third quarter adjusted SG&A as a percent of sales was .8% and improvement of 40 basis points versus last year. Top build adjusted EBITDA in the second quarter totaled $285.1 million or a margin of 20.8%. Excluding the $15 million margin benefit from last year, we expanded adjusted EBITDA margin by 50 basis points. Installation segment adjusted EBITDA margin was 22.3%, a 40 basis point improvement after excluding last year's $15 million benefit. Adjusted EBITDA margin for the specialty distribution segment expanded by 20 basis points versus 2023 to 18.4%. Other income and expense of $16.1 million in the third quarter was $3.3 million higher than prior year due to lower interest income which was driven by lower cash balances. Third quarter adjusted earnings per diluted share of $5.68 improved .6% compared to last year. Moving to our balance sheet and cash flow, total liquidity was $693.6 million at the end of the quarter. Cash was $257.3 million and we have $436.2 million of availability under our revolver. We ended the quarter with net debt of $1.14 billion and our net debt leverage ratio was 1.06 times trailing 12 months adjusted EBITDA. Working capital as a percentage of sales was .1% and improvement of 50 basis points compared to prior year. Free cash flow for the trailing 12 months totaled $698 million representing a .6% improvement over the same period prior year. We continue to strategically allocate these strong free cash flows and our capital allocation priorities remain unchanged with acquisitions our top priority. This year we have announced seven transactions and we continue to have a very healthy pipeline. Our second priority remains returning capital to shareholders and in the third quarter we bought back $413.9 million or 1.07 million shares. That brings our year to date share buybacks to $919.2 million or 2.3 million shares. As of September 30th, $235.2 million remains under our current share repurchase authorization. Finally, turning to our outlook, we are narrowing our full year guidance. We expect to finish the year with sales between $5.3 and $5.35 billion which represents year over year growth of .5% at the midpoint. We have also tightened our adjusted EBITDA expectations to $1.055 to $1.085 billion. While the macro environment has not played out the way we originally thought this year, 2024 is shaping up to be our ninth consecutive year of sales and profit growth, something we are very proud of. While the choppiness of our end markets is likely to continue into the first half of 2025, we think the underlying fundamentals for demand in our industry remain strong and we are confident that we will continue to drive profitable growth and increase shareholder value. Robert?

Before I open up the call to questions, let me reiterate some of my opening remarks. We have a proven differentiated business model, a disciplined capital allocation approach, and an ongoing focus on strong execution and driving improvements throughout the business. As we look ahead, the macro fundamentals of our business are supportive of construction demand growth. We are inherently well positioned to capitalize on the opportunities for increased energy efficiency and strengthening building codes. We can even have a significant opportunity to drive growth through M&A. Our pipeline is healthy and we are very active. We have a great track record of evaluating, acquiring, and integrating businesses, generating solid returns. We remain committed to building on our track record of delivering increased shareholder value and we expect 2024 to be another strong year of profitable growth. I'll conclude by thanking our teams for their continued dedication, focus on our customers, and commitment to safety. We want to thank you for your efforts to consistently execute and drive improvements across our business. With that, operator, we're ready to open the line for questions.

Thank you. We will now be conducting 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 your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Phillip Eng with Jefferies. Please proceed with your question.

Hey, good morning, everyone. This is Maggie, on for Phil. Rob, you called out some of the current choppiness continuing into the first half of next year. Can you give us a framework for how to think about 2025? Do you have enough levers to continue driving organic top line and EBITDA growth even if we don't see a meaningful acceleration in single family starts next year?

Yeah, Maggie, this is Rob. Obviously, we haven't put out our guidance for 2025. But as we look ahead, we're optimistic about 2025. That could be our 10th consecutive year of sales and profit growth. Obviously, we're dealing with some choppiness in the end markets right now. But overall, like we've talked about, the fundamentals we know are strong. We're optimistic that rates will come down next year. And for Rezzy and commercial, that should be good for end market demand. So while we know the headwinds on multi-family, we started to see that hit us in Q3. We're going to continue to see that into Q4 and into early next year. It's important to remember that 10% of our total business right now, our bidding activity there has actually picked up some. So we're optimistic that things may have bottomed out there and that could be getting better. And then the rest of our business, even if that was down 30% for the whole year, which we don't think it would be, we think given the share we've taken there, the bidding activity we're seeing, we're not going to be down anywhere near what the market is. But the rest of our business would need to be up, if that's down 30% next year in line with what starts are down year to date, we need to be up a little over 3% in the rest of our core business, which we think is definitely doable. So long answer to your question, yes, we still see paths for sales and profit organic growth next year.

Okay, that's really helpful. And then wanted to dig into pricing. You have the mid-year fiberglass increase. Can you talk about realization for that? We've been getting some feedback that builders are getting some pricing fatigue. So just wanted to, if you could go through how some of those conversations are going. And then on the spray zone side, you mentioned price reductions. Are you starting to see prices stabilized or are there going to be continued headwinds in that category?

Hey, Maggie, it's Robert. So on the fiberglass, I think as Rob pointed out his remarks, and we definitely saw improvement quarter over quarter Q2 to Q3 on fiberglass. But look, it's been a lot of definitely conversations, thousands of conversations with the builders, given the choppiness and stuff. So overall, we feel like, as you can see in our performance, the team's done a nice job there. But it's a, as you might imagine, region by region, local geography by geography conversation and situation. But overall, the team's done a nice job. Yes, spray foam, definitely. I think there was a lot of upbeat talk about spray foam to go back to the end of the year with changing energy codes. And it just hasn't penciled out for the builders. So in anticipation of what folks were thinking, you see a lot of supply come into big markets like in Texas, and that's created a competitive situation. We would think that's not sustainable what's happened relative to the decline. So we would see that stabilizing here coming out of 24 going into 25.

All right. Thanks so much,

guys. Thank you.

Our next question comes from line of Stephen Kim with Evercore. Please proceed with your question.

Hi, this is Atish for Steve. Thanks for taking the question. Just sticking with pricing there, outside of fiberglass and spray foam, how should we think about the pricing dynamics of the other products in the quarter and kind of going forward? Was there a deflation there? So if you could touch on that, that would be helpful.

Yeah, Atish, this is Rob. So I'd say overall, the other product categories, no meaningful change. The two movements from quarter to quarter was, as Robert said, we saw improvement in price realization on the fiberglass side from Q2 to Q3. And then in Q3, the new news there was the spray foam price decreases that we saw. We got decreases on the supply side as well as, as Robert talked about, things got a little more competitive in certain markets with new supply coming online. So that had the opposite impact, ending up with kind of the muted 1%. But the other product categories didn't have a meaningful impact.

Hey, guys, it's Steve just jumping in. I guess my question, I had kind of just a housekeeping item first, that wanted to confirm that you actually had an extra day this quarter, which you included in your volume, and I assume that also you have an extra day in the fourth quarter. So just if you could confirm that. And then a larger question about the commercial projects, the C&I delays. I think last time we met, Robert, you thought that most of those projects were likely only going to be delayed by like a couple of months or something, because if they were going to be delayed longer than that, I think you had indicated that the customers would probably like come back to you asking you to extend your quoted pricing. And they weren't doing that. So you said probably, you know, they're only delayed a couple of months. I'm curious, has that changed? Are we looking at longer delays now? And if maybe you could describe if so, what does that make you think about for fiscal 25? Are you going to have more of a bunching of projects in 25? So are we actually going to see more C&I activity in 25 than you previously thought? Or how many think through the dynamics there?

So morning, Stevens Roberts. I'll take the first part of that, the commercial industrial side. And then Rob can talk about the days in the quarter. So, yeah, I think a great question that you have there. So there have been more delays. I think the positive is no cancellations that have happened. I think last time, whenever I saw you, we were talking about some big data center projects that we were working on that had been delayed three or four months at that point. Now we're seeing some projects delayed three or four months or even a couple of quarters into 2025. So as Rob talked about, I think in his remarks, we talked about special distribution and the volume there. We're pretty happy. So what was driving that has been some good maintenance and repair work that is hit from the C&I side of the business. So that would say that we expect assuming a stable finance environment and things improve there, bigger pickup in the capital projects and the bigger projects on the commercial industrial side in 2025. So bidding remains active, no cancellation, uptick. So I'd say we're positive from that perspective. But definitely continued delays in projects. Some is a little bit longer. If you take like you may say, well, give me a mega project or give me some verticals that you may talk about. EV and battery plants have been a great example of some demand has slowed there. Projects are getting delayed, pushed out, not canceled. So that would be an example of that that we see that are a little more extended delays.

Yeah. And then just hit on your housekeeping items there. You're correct. It's plus one day and Q3 and Q4 on a year over year basis.

Perfect. Thanks so much,

guys. Thank you.

Our next question comes from the line of Michael Rehaut with JP Morgan. Please proceed with your question.

Hi. Thanks. Good morning, everyone. Thanks for taking my questions. First, maybe a little bit also of a housekeeping question, just to kind of better appreciate the degree of magnitude here, given the variety of your end markets and products that you offer. If you could just remind us roughly what percent of sales, you know, does commercial represent, as well as on the residential side, spray foam as a percent of your your overall sales. Or if it's more relevant, installation, your installation segment, just to kind of better appreciate, you know, the again, the impact of some of the the mixed trends in these areas. Sure,

Mike. This is Rob. So pretty straightforward answers there. You know, commercial industrial for for our business on the install side, where it's about 15 percent of our of our total sales, especially distribution. It's about 60 percent. And, you know, that puts it at top build kind of around 35 percent spray foam between the segments on the install side. You're talking 15 to 20 percent of total sales distribution around 10 percent. And that puts the overall top bill at the 10 to 15 percent type number.

OK, great, great. And then. And I assume when you kind of talk about, you know, the commercial projects being delayed, that is kind of broadly speaking, referring to the overall, you know, commercial industrial numbers that you just quoted.

Yeah, that's correct. So no particular, you know, geography to point out or anything like that. And it's pretty neutral across the across the country and even thinking about verticals that I spoke about earlier.

OK, all right. Because I think also a part of that is, you know, there is a portion of the commercial industrial business that's kind of more recurring. So I don't know if that would be kind of outside of those percentages, so to speak.

Yes, I mean, inside of the 35 percent is the recurring revenue. So and like Robert said, the recurring was strong in the quarter and our overall C&I for the quarter was up four percent across the company. So, you know,

more in

line with our, you know, actually a little better than the reduced assumption we had coming into into the back half of the year here. We were thinking more kind of low single digit growth and that that was a little better than we thought in the quarter.

Right. Right. Second question relates more to the M&A backdrop. And, you know, we see the the continued activity this year. I think, you know, going back to the beginning of the year, you know, with the SPI deal that fell through for for reasons that obviously we're all familiar with, that was a relatively larger deal. And, you know, I think there is some maybe concern out there that similar larger deals may be harder to come by. So, you know, I'm just kind of curious your thoughts around you kind of continue to talk about the M&A backdrop remaining robust, a lot of activity, a lot of opportunity, you know, kind of on the medium to larger side. I was wondering if you could kind of review your prospects across your three different verticals. I guess it's more, you know, relevant to the medium to larger opportunities are more on the commercial industrial side, but kind of where you stand, you know, with those types of acquisitions and how should we think about the next, you know, two or three years as it relates to the potential for, you know, additional medium to larger deals.

Yeah, Mike's Robert, so I'll take that from a few different angles. So, you know, if I look at the current pipeline, what we have under NDAs and deals that we're closer to there, it's really across all three of the end markets there that we service. And, you know, there's some nice chunkier deals in there, 40, 50, $60 million type of deals, and then there's the smaller 15, $20 million type of deals as well. So, so very active right now, not just active, but I think a lot of things that we're working from an M&A perspective. I think your question is a good question, as you think longer term here. I mean, obviously, you know, the SPI just remind on that point is a very small piece of that business that got focused on around the MBI piece. So we still see, you know, mechanical, you know, industrial side as great opportunity. That's why, you know, we do call out Shannon because as we were working on SPI, you know, we kind of slowed some of those in that space, and now we're seeing that activity pick back up, which is great. I think we're excited about what's happening there. But as we think two or three years, I think it's a key point that we talk about, and that is really we're focused on, you know, the core competencies that Top Build has. And our core competency is we're very comfortable and, you know, have a competency of running this dispersed branch network type of model with, you know, central support. Obviously, we, you know, from a culture perspective, what we built relative to this like local ownership, local empowerment piece surrounded by the safety and, you know, the technology we have in place. And then obviously, you know, we're known for the labor and how we've been able to attract and retain labor. So, you know, models that fit that along with how we leverage supply chain and then, you know, able to build through, you know, not just organically through M&A. You take those core competencies, which are like eight things that I just mentioned, we think that opens up avenues for us that are great, you know, great opportunities and stuff that, you know, are very close to what we do. So we're pretty optimistic and good line of sight for the next two to three years how we think about it.

Great. Thanks so much. Thank you.

Our next question comes from a line of Susan McClory with Goldman Sachs. Please receive your question.

Thank you. Good morning, everyone.

Morning.

Good morning. My first question is around the energy efficiency initiatives that you had mentioned. As the builders are struggling with the affordability headwinds and rates are continuing to move higher versus lower, can you talk about how some of that is perhaps flowing through and how it may come through over the course of the next year or so?

Yeah, I'll start with that, Susan. So, yes, as I mentioned earlier, whenever we're talking about spray foam, there's been some excitement, but at the end of the day, the builder's just getting that to pencil out, you know, hasn't really come to fruition. So there are other insulation, i.e. fiberglass alternatives there that definitely, if you think about, you know, like a blown-in blanket, which you may have heard the term bibs in the industry before, that can definitely accomplish and meet the codes as well. So as you know, given our model, we're pretty agnostic. We can go with a lot of different solutions for the builders, and that's what we're giving them today. So we definitely see a plan out where, you know, these codes are going to be a tailwind, and we're going to be able to satisfy those with fiberglass solutions or other solutions. And, you know, there'll be some place, I'm sure some folks will use spray foam to meet those codes, maybe in the custom or even in the regional sector there. But I don't think it will hold back the implementation of some of the code, more stringent codes, if you will.

Okay, that's helpful. And then maybe thinking about the cost environment a bit, can you just talk about labor, the availability that you're seeing there? Has that changed at all? Has it gotten any better for you, how you're thinking about wage inflation? And then I guess, you know, as it relates to that also, just some of the company-specific efforts that you're pursuing as it relates to being more productive and efficient, especially on some of the distribution efforts there.

Yes, so from a labor perspective, as you know, it's always been a strength for us. And I'd say there's been choppiness in certain markets and stuff. Labor's become, you know, more readily available. But as we look out, you know, further into 2025, as things pick back up, we definitely think labor for the industry, not for top build, will be a constraint. You know, relative to the inflation piece, we really haven't seen it. You know, just a reminder, the majority of our workforce there is on a piece rate. So whenever we talk about our special ops teams and really working productivity, that's what we're constantly doing. So we've been, you never really heard us talk much about the wage inflation side because we really worked on improving productivity and, you know, things specifically that we're working on there, some better tools that we're putting in place for our teams in the field to make them more efficient, you know, getting on job sites, you know, the install perspective as well. So we continue to work those, and that includes on the distribution side with our drivers. If you think about, you know, from a distribution model, drivers being a very important part of the team there. So, you know, working activity there to make that group more productive both in warehouses, but the drivers specifically as well.

Okay. Thank you for the call and good luck with everything.

Thank you. Thank you.

Our next question comes from the line of Jeffrey Stevenson with Loop Capital. Please proceed with your question.

Hi, thanks. It's Garrett Schmois on for Jeff. Thanks for taking my question. I was wondering if supply constraints on the fiberglass side had any impact to volumes similar to what you saw in prior quarters and, you know, maybe just speak broadly how you're positioned from inventories going into the fourth quarter, just given the supply constraints you talked about.

Yeah. Good morning, it's Robert. So, you know, third quarter saw some fluctuations relative to supply. I would say it was tighter to start the quarter eased up in some of the choppier markets somewhat during the third quarter, maybe in the August timeframe, early September. But as some maintenance started hitting and some unplanned maintenance started hitting, definitely material tightened up again here as we came through October. So a little fluctuation in that some impact in the EQ3 from, you know, tight environment. I'd say sitting here, you know, going into Q4, we think we're positioned well from that perspective as we see as we got through October. And we know they're, you know, the Kanoff plan in Texas, which you mentioned this lower coming online. We expect it to be, you know, up and going here towards the end of the year, heading into 2025. So I think we feel pretty comfortable from that perspective. Obviously, everything will be supply demand driven there. So we'll see what happens with the starts here coming up in the next 30, 60 days as well.

OK, thanks for that. And just wondering if you could provide maybe some more color just geographically what you're seeing by region.

Sure. So if I think about let me just kind of think about this a little bit, maybe going through the country. So if I think about, you know, the Northeast, maybe mid-Atlantic, maybe the Northwest, Northern California, I think we've seen some improvements there. If I look at bed activity and sales, so I'd say seeing some improvement in those areas. If I think about kind of steady, I'd say steady regions are kind of the, you know, Utah, Idaho, the Carolinas, Colorado, you know, Dallas has continued to pull through well as well as San Antonio, Denver. And then if I said some areas that use my term choppy, I'd say maybe like, you know, Southern California, certain Arizona markets. You know, Austin would be a good, you know, example of that. Houston a little bit as well. But think about Texas and then Florida some, but it's just kind of a market by market there. I think maybe on a previous call or previous conference, I mentioned like an April's area, that would be a slower one. But, you know, we continue to see Orlando be strong and Florida's got a little bit of impact to think about the hurricanes and stuff as well. So I think that one, you know, will continue to be steady and improve. But hopefully that gives you a little flavor if you go around the country. No, it does. Thanks for that.

Our next question comes from Keith Hughes with Truist. Please receive your question.

Thank you. In the fourth quarter guide, what are you expecting your multifamily business in terms of dollars and units, however you want to do it, to be down?

Yeah, Keith, this is Rob. So we don't split it out between single family and multifamily. I mean, we're still expecting, you know, our total resi sales for the full year. I'd say when you put it all together, we're looking at the full year kind of flat on total resi sales. So you can kind of back into, you know, a fourth quarter assumption that has a slightly negative from a resi side. And obviously, multifamily would be driving the bigger chunk of that.

And do you think whatever that number is, it seems like that's probably going to get worse at the beginning of the year. Is that directionally where you see the market going?

Yeah, I think multifamily will be a challenge as we move into Q1 and Q2. But, you know, like we were talking about, we've actually seen some of our bidding activity pick up there. So, you know, we think we're going to do better than the market on that side of things. And then, like I pointed out earlier, the fact that it's 10% of our total business, you know, we don't need to see too big of an uptick on the single family and commercial side to offset it. So, you know, we're, you know, obviously 2025, you know, a lot of variables still to be seen, but we're cautiously optimistic, like I said earlier, that it'll be another year of growth. But probably definitely tougher first half versus second half, I would say, next year.

Yeah, I agree. And I guess on the pricing side, it's just not been up much this year. What do you think it would take to get back to some higher inflation in terms of, you know, what you're getting from your suppliers as well as what you can put to your customers?

Yeah, Keith, it's Robert. I think a couple of things. One is, you know, we definitely see the demands, I think, more of an even or steady increase on the single family start. You know, as we talk about, you can have a, you know, as Rob said, we're going to perform better than the market on multi-family, whatever that looks like. But a lot more fiberglass, as you very well know, goes into a single family unit. So I think the demand side on the single family. And I think you're going to see the codes continue to kick in here in 2025 as well. And I think we're seeing the builders prepare for that. I think that's going to we think material will be tight in 2025. I think we're set up well for that. OK, thank you. Welcome.

Our next question comes from a line of race. Race Chad Rysik with Bank of America. Please proceed with your question.

Hi, guys, this is actually Sean Cowman on for race. First on the spray foam price changes. Can you talk about the cadence of price changes there? Are they consistent or is this more of a dynamic pricing model versus fiberglass? And then how is the spread between fiberglass and spray foam changed over time?

Yeah, morning, Sean. This is Robert. So while I didn't that question, if you think about how it's changed over time, as you know, if you go back there and come with some of the material constraints of 2020 and 2021, you know, dramatic inflation from a spray foam perspective, that's definitely gotten more realistic or pulled back here, I'm going to say in the last 18 months. But it's still I'm going to say two and a half times or potentially more than fiberglass. And then if you think about from a, you know, a cost slash price environment, it's pretty dynamic. There was a lot of optimism fueled the early part of the year about the builders and energy codes and using fiberglass, especially in some really big markets like Texas, Southern California, Florida. Again, some of that's been harder for the builders to pencil out. So you've seen, you know, you saw more supply come on, more blenders come on, and that created some dynamics around the pricing cost side. We don't think that's sustainable. And so that's why we've said earlier we think that stabilizes heading out of 24, early 25. So that's kind of the dynamics of what's happened a little bit of history as well.

OK, got it. And then you mentioned that you guys are looking at opportunities to expand the addressable market. Can you just kind of expand on what those opportunities are that you're evaluating? Are these new products or markets? And then is it more on the installation or distribution side?

Yes, I think, you know, relative to growth and M&A, I mean, we're always looking at, you know, any opportunities in our core business. I mean, we, you know, when we think about our core business, there's so much runway still left in our core business. And everything about, you know, residential, commercial, industrial, around building insulation and commercial, mechanical, industrial insulation solutions. So a lot of runway there. So as we look at acquisitions, we're always looking at, you know, geographies where would be good opportunities for us or MSAs. So plenty of runway there. That drives into our thoughts. And as we look longer term, the two to three years, you know, it's really about these core competencies. And I think, you know, given our history of going back pre-top, we really learned a lot about M&A. And I think you've seen a very successful track record since 17 in this business. And it's because you've got to build M&A off of core competencies. And so, you know, I've talked about our core competencies, which, you know, goes from the culture to, you know, our confidence, comfort level and competency we have around M&A and running this dispersed model with central support in the background. We're very, very good at labor. We're very good at driving, you know, productivity in the model and supply chain leverage. And so we're not going to do anything outside those core competencies. And that's how we think about it. And it's given us really good line of sight as to what that looks like here in the coming timeframe.

Does that complete your question?

Yes, thank you.

Our next question comes from the line of Ken Ziener with Seaport Research. Please proceed with your question.

Good morning, everybody. Morning. I appreciate your comments regionally. I liked your positive study and choppy market definition, given that you and a competitor have probably the best data on housing, new housing activity in terms of bids. Within that context, could you maybe just comment on how your team, your, you know, your salespeople are conveying positive, steady choppy to you in terms of like the bidding? Is there price pressure? There's obviously volume pressure, given the rising number of finished homes that builders have, right? It seems like they're pulling back on starts a little bit. And obviously rates have gone up in the last six weeks. But could you maybe give us some context for this? If it's a supply issue, it's a demand issue, if, you know, your teams just say pricing is an issue or they're pushing back on us. But also, given your perspective, does this make sense what's happening to kind of, you know, micro cycles where it takes a little bit to get adjusted to interest rates? It's very interesting. And I think your view matters. Thank you.

Hey, Kenneth Roberts. I'll start. I'm sure Rob will have some color to add as well. So, yeah, it is, you know, one good thing, one of the many good things about centralized ERP that we have is we're able to see those bid rates looking out across the country by geography, by MSA. And so that drives, you know, our commentary as well as our cadence with the field of understanding what they're seeing. But I think you're right. I think there's this calibration time period of, you know, addressing some of the political uncertainty, those types of things that's going to happen as well. So it's probably an adjustment period that happens. But I would say, you know, obviously talking to our builders, which we do about what their outlook is for 25, whether it be first half, back half, that type of thing. That's where we get our information from. And that's pretty fact based coming from a combination of our conversations, our field people, as well as what we can see from a bid rate perspective in our ERP system.

Yeah, and I'll just, I mean, I'll just add to that, Kenneth, as Robert stressed earlier, it's really a market by market situation out there. Even within states like Florida and Texas, we're seeing differences. So, you know, that's the choppiness we refer to. And I think, you know, ultimately from a broader view, you know, rate certainty, you know, we definitely saw as rates went up, you know, that rate certainty played a big, you know, player there. As rates were going up, people hit pause. And then once rates stabilized and people realized, you know, the 3% mortgages weren't coming back anytime soon, demand came back. Obviously, the buy downs from the builders have helped that a lot too. But now with rates heading the other direction, at some point, we hope, right, you know, you're kind of seeing that same pause button, I think, from some buyers out there where they're saying, okay, well, if I can get this cheaper in a few months, you know, I'll sit here on the sideline. So I think that's a big driving factor behind what we're seeing there in the choppiness.

As we said, you know, the long-term fundamentals are solid. And so as things do break loose here where people get comfortable in the environment, you know, rates do stabilize, get some of the uncertainty, you know, out of the way and maybe even filter through some of the promises that have been made from that perspective. You know, we definitely will be ready from a top-up perspective, as you know, Ken's labor is a strength for us. We feel good about the material situation, how we're situated there as well. So I think as things do improve, we're going to be ready.

I really appreciate that. Maybe if I could comment from another angle, because you have a broad perspective on the national housing, and I think people like myself get sometimes overly biased by what the public builders are saying. So many of the public builders are calling for like 10% growth. Is that kind of consistent with the public versus the private delta as they think about their business next year? Because it starts probably aren't growing 10% overall, but many builders are looking for 10% growth. Does that mean the publics are still gaining a lot of share or is that really just that we're focused on Orlando, Dallas and not enough on Michigan or, you know, the smaller markets? Thank you.

As we think about our custom builders, which we do major work with custom builders and the regional builders, their, I think, feedback is a stabilized rate environment. And while they're expecting that, they expect nice improvement in their business as well, because they haven't been able to do the buy downs and stuff that large publics have. So as you get to that more stable environment and, you know, the outlook for those moderating rates, I'd say the regionals and the small custom builders feel positive as well.

Thank you very much.

Welcome.

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of Adam Baumgarten with Zellman and Associates. Please proceed with your question.

Hey, good morning, everyone. Just on the pricing side, can you put a finer point on the magnitude of the headwind to overall pricing from the spray foam declines? Just because I know you kind of talked about the fiberglass side improving on a year over year basis from 2Q to 3Q, but I think it was offset by spray foam. So any color on the magnitude just so we can get a better apples to apples comparison on the fiberglass side?

Yeah, and this is Rob. So I'd say that the spray foam impact was about 130 basis points on the price. And then the other thing to keep in mind when you look at our price number two is it's a price mix, right? So as you see, you know, shifts in, you know, customer or regions or products, we also have some impacts there. But by far the biggest, you know, headwind to the improvement in fiberglass was the spray foam price decreases, and that was about 130 basis points.

Okay, got it. That's helpful. And then just to clarify on the kind of tightening of the guidance range and the midpoint coming down, was that solely due to lower single family or just overall residential growth in general, not any change at this point in your CNI outlook?

Yeah, I'd say it was definitely Rezzy-focused, not CNI. The drop last quarter was more, you know, given by the choppiness in CNI. This quarter, I'd say it's, you know, residential and primarily multifamily, right? Some of the backlog we thought would come through in the third quarter. We saw some delays with some of that backlog. So definitely seeing some slowing on the multifamily side. And then it's important to keep in mind the hurricanes too, right? Certainly, you know, the midpoint and higher end of our range didn't contemplate the hurricanes that we've seen in the third and fourth quarter now. I'd say it was about a 10 million impact in Q3 and roughly about 8 million here in Q4.

Okay, got it. Thanks. Best of luck. Thanks.

Thank you. We have reached the end of the question and answer session. Mr. Buck, I would like to turn the floor back over to you for closing comments.

We appreciate you joining us today and your interest in top build. We look forward to seeing many of you in person at conferences later this month and in December. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.