TopBuild Corp.

Greetings and welcome to Top Build's third quarter 2024 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, 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 Koons, 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 topbills.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 reach another historic high for top bills 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 percent 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 3.6% to $1.37 billion as volumes 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%. Moving on to our 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 teams 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 a long history in Canada, they're a leader in the commercial, marine, and industrial end markets. We operate out of 18 facilities located in the 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 a 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 year-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 choppier 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 we have a differentiated business model. The underlying fundamentals are strong, an underbuilt housing market in the U.S., rising household formations, and a prospect for lower interest rates. These factors, coupled with the critical role that insulation plays in driving energy efficiency and meeting strengthening building codes, demonstrate why we're bullish about the long-term growth opportunity for top build.