TopBuild Corp.

Ladies and gentlemen, thank you for standing by. Greetings and welcome to Top Build's first quarter 2025 earnings conference call. At this time all participants are in listen-only mode. The question and answer session will follow today's formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time I'll now turn the conference over to your host, P.I. Aquino, Vice President of Invest Relations. P.I., you may begin.

Good morning and thanks for joining us today. I have with me Robert Buck, our President and CEO, and Rob Coons, our CFO. Our earnings release, senior management's formal remarks, and a deck summarizing our comments can be found on our website at topbuild.com. Also available is our recently published 2024 sustainability report. 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. Thank you for joining us today for our first quarter 2025 earnings call. I'd like to start our call today with a few words on the macro landscape and current operating environment. New residential construction demand remains soft with choppiness continuing across various geographies. The spring selling season was slower than anticipated as interest rates remained elevated and economic uncertainty has eroded consumer confidence, both of which negatively impacted housing demand. Despite this backdrop, the fundamentals of the underlying housing market are strong and we remain confident in the long-term prospects of our business. On the commercial and industrial front, we are encouraged by the number of projects moving into production and ongoing bid activity in the CNIN market. More specifically, there's been an acceleration in data center construction along with positive trends in healthcare and certain subsectors of manufacturing, such as chemicals. While tariffs and trade restrictions between the United States and other countries are top of mind for everyone, including investors, the potential direct impact of currently announced and effective tariffs for our top-billed business is minimal. We're actively working with our supply base to mitigate the anticipated impact of current tariffs and we will take price and actions to the extent necessary. The direct and indirect impacts of tariffs on the economy overall and on housing demand specifically remain uncertain and we are monitoring the environment closely. Turning to our results, our first quarter performance was in line with our expectations. Total top-billed sales declined .6% to $1.2 billion as weakness in new residential construction impacted the business and was partially offset by growth in commercial and industrial. Our adjusted EBITDA totaled $234.8 million and EBITDA margin was a very solid at 19%. Our installation segment, which comprises about 62% of total top-billed sales, reported a -single-digit sales decline driven by the residential end market. Our commercial installation business sales were flat in the quarter with heavy commercial outperforming light commercial. Our special distribution segment, which represents approximately 38% of our total revenue, grew sales low single digits. While we saw declines in our service partners business as residential demand softened, we are pleased with our DI mechanical installation business in both US and Canada, which drove very healthy top-line and bottom-line growth. If you'll remember, we saw some project delays mid-2024 across commercial and industrial, which are moving forward this year. The last point on make-regarding special distribution is that recurring revenue represents about 25% of segment revenue. Certain industrial verticals such as oil refinery, L&G production, chemical and petrochemical production lends themselves to recurring installation revenue. These industries require regular inspection and replacement of installation materials. We are positioned for success and expect to continue to capitalize on opportunities given our diverse set of commercial and industrial customers, both in distribution and installation. New commercial and industrial facilities are being planned, and we anticipate continued meaningful growth. On the operational improvement front, our common technology platform, inclusive of our single ERP system, allows us to continually analyze data and gather insights that help provide an in-depth understanding and control of our business, something we believe is a core strength of Top Build. In the first quarter, our field leadership teams and special ops teams executed upon a footprint optimization project that the team had been designing for a few months. This allowed us to consolidate 33 facilities, which will drive ongoing efficiencies across the Top Build operations footprint. We are often asked if we have more opportunities to drive improvements in our business. This operations footprint optimization project is a great example of our team's ability to continue to drive operational excellence and meaningful improvements throughout our business. Let me say a few words on capital allocation. Acquisitions continue to be our highest priority for capital allocation, and in April, we are pleased to close the acquisition of Seelright. We continue to conserve our server opportunities of various sizes as our pipeline is very healthy. As I noted in previous quarters, we continue to evaluate opportunities to increase our total addressable market under the lens of our ability to leverage our core strengths, including our people and teams, our ability to successfully operate a dispersed branch model, a common technology platform, our strong supply chain and customer relationships, and our disciplined financial and strategic approach. As always, we will remain disciplined and focused on driving strong shareholder returns. We're also committed to returning capital to shareholders, and in the first quarter, we bought back nearly 694,000 shares of our stock. Before I turn the comments over to Rob to share additional details on our results and outlook, I'd like to highlight a few points. This year, we are excited to be celebrating our 10-year anniversary as a public company. Our success over this time is driven by our people. Our employees continue to focus their efforts on leading and growing their business, driving improvements, and working safely every day. We're pleased to have earned the designation as a great place to work for the third year in a row, a reflection of our ongoing commitment to our culture and our teams. We also recently published our 2024 sustainability report, which is available on our website. Our business inherently drives sustainability as our work and the services we provide enables enhanced energy efficiency. We have a unique and proven diversified business model, so even with the near-term macro uncertainty, we are bullish about our medium and long-term opportunities. Our teams are strong, and we're working together to turn challenges into opportunities. We know how to adjust and outperform in a changing environment and remain committed to driving shareholder value. Rob?

Thanks, Robert. I want to start by thanking our teams for delivering a solid first quarter in a challenging macro environment. While the choppiness in the residential markets continued, our teams did a great job driving growth in our commercial and industrial end markets. Jumping into our results, our first quarter sales declined .6% to $1.2 billion. Volume declined 7.4%, which was partially offset by M&A of .6% and pricing of 1.2%. As a reminder, the first quarter had one less business day, which negatively impacted volumes by 1.6%. Our installation segment sales were down .7% to $745.5 million in the first quarter. Installation volume declined .6% due to weakness in single-family, multifamily, and light commercial, which was partially offset by strong growth and heavy commercial, M&A of 1.8%, and pricing of 1.1%. The installation segment's pricing was primarily driven by the carryover impact of price increases in the middle of last year. Specialty distribution sales grew .6% to $559.8 million in the quarter. Volume declined .2% as slower residential sales were partially offset by commercial and industrial sales growth. Acquisitions added .4% and pricing contributed 1.4%. The incremental pricing was primarily driven by Q1 price increases on certain commercial and industrial products. As Robert mentioned earlier, as part of our ongoing work to optimize our branch footprint, we consolidated a total of 33 facilities across both installation and specialty distribution. As a result of these consolidations, we incurred one-time costs of $13.9 million, which are primarily related to non-cash lease impairment charges. Separately, in the first quarter, we also made headcount reductions to align our cost structure with current demand levels. These reductions resulted in one-time severance costs of $1.5 million. Excluding these one-time costs, our first quarter's adjusted gross profit of .6% was 70 basis points lower than last year. The margin decline was driven by lower sales volume and pressure on distribution pricing for residential products, primarily spray foam. Adjusted SG&A as a percentage of sales in the first quarter was .9% versus .5% last year. The increase in SG&A percentage was primarily due to lower sales volume in the quarter. First quarter adjusted EBITDA for top build was $234.8 million. Adjusted EBITDA margin of 19% represents an 80 basis point decline when compared to last year. Installation segment adjusted EBITDA margin was 21.1%, 90 basis points below last year. And specially distribution adjusted EBITDA margin of .3% declined 60 basis points year over year. Other income and expense for the quarter was $11.5 million, an increase of $4 million due to lower interest income related to lower cash balances. First quarter adjusted earnings per diluted share was $4.63, $0.18 lower than last year. Turning to the balance sheet, total liquidity was $746.4 million at the end of the quarter. We finished the first quarter with $308.8 million in cash and $437.6 million in availability under the revolver. Net debt totaled $1.07 billion and our net debt leverage ratio was one times trailing 12 months adjusted EBITDA. Working capital as a percentage of sales totaled 13.7%, which compares to 14% last year. From a capital allocation perspective, we closed on the acquisition of Sealright, an Omaha based residential installation business with about $15 million in annual revenue. Acquisitions remain our top capital allocation priority and our pipeline is very active. In addition, we returned $215.6 million in capital to shareholders through our share buyback program, finishing the quarter with $972.4 million remaining under the current authorization. Before we turn to guidance, let me say just a few words on tariffs. Our exposure to tariffs that have been announced is minimal. Our products that could face tariff impacts include a chemical input for spray foam, gutters, and certain mechanical insulation items. We estimate the potential impact of tariffs as announced at less than 5% of our cost of sales. As Robert noted, we are working to mitigate any impact to top build. Moving on to guidance, as you saw in the release, we are confirming our full year outlook for sales of $5.05 billion to $5.35 billion. While our expectations for single family volumes have come down since the start of the year, that decrease is being offset by slightly stronger commercial and industrial sales and the addition of Sealright to our M&A assumption. At the midpoint of guidance, our key assumptions are as follows. We expect residential sales will be down high single digits for the full year. Commercial and industrial sales will be up low single digits. Both of those are on a same branch basis, including price. M&A carryover along with Sealright will add approximately $85 million to total sales. As we think about the sales cadence in comparison to prior year, the remaining three quarters will all be lower than the comparable quarter of the prior year. The second quarter will likely have the largest year over year decline of the remaining quarters. We are also maintaining our adjusted EBITDA guidance of $925 million to $1.075 billion. The savings from our branch footprint optimization project and the headcount reductions we made in the first quarter are included in this range, as those projects have been ongoing for several months and were contemplated in our initial guidance. With that, let me close by expressing my great confidence that our teams will continue to tackle the challenges ahead of us to ensure top build will continue to outperform in any environment. Robert?

I'll close our call today by saying that we are confident in our unique and proven business model and the underlying fundamentals for our business. We have a cycle-tested team with deep understanding and control of our business and a diversified business model. We will continue to work diligently to outperform in this changing environment while driving profitable growth and continued shareholder value. With that, operator, let's open up the line for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw 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, we'll be polled for questions. Thank you. Thank you. Our first question will be coming from the line of Steve and Kim with Evercore ISI. Please receive your question.

Hi, this is Atishan for Steve. Thanks for taking the question. I just want to touch on the commercial and industrial side. At the end of last year, as mentioned, a lot of these projects were delayed mainly due to financing issues and now you're seeing these projects kind of moving forward. It's not so obvious why the financing environment would have improved, so any color there would be helpful.

Thanks. Hey, Kish. Good morning, it's Robert. So yeah, I think some of the delays we saw projects move forward, I think folks have just come to accept the current financing environment and some of the bigger projects and those projects were justified. So we've seen many of those come online. I would also point to, I think our teams in the field are absolutely doing a great job of executing what we call the vertical market strategy, which means they're into, they're bidding jobs and they're doing work across multiple verticals, whether you think about oil and gas, food and beverage, pharmaceutical, manufacturing. So I think there's share gain in there as to how the team is executing that showing up in the numbers as well. So I'd say a project coming online and great execution, the vertical market strategy by our field teams.

Great. Hey guys, it's Steve, Kim. Thanks for that. A second question I guess we have relates to the pricing environment. You know, at a high level, I think generally there's two ways that top build can benefit from pricing dynamics. The first one is that you can participate in manufacturers' pricing power when capacity utilization for the manufacturers is very high. But you can also, I think, bring your relative size to your advantage, allowing you to get preferred pricing versus your smaller competitors, maybe when capacity utilization for the manufacturers is a little lower. And so I think that over the last few years, you've really benefited from the former as capacity utilization has been really tight. But as we look forward here with utilization rates maybe dropping a little bit, some manufacturer capacity additions being announced, like just last yesterday from Knopf, I'm wondering whether or not you think that your relative competitive advantage on pricing would offset any slower rate of industry or manufacturer pricing. I think you could just sort of comment on that dynamic. Is that the way you think about it and what kind of outlook for pricing you think that we can look forward to as a result of that?

Yeah, good morning, Steven. It's Robert. So yeah, I think you hit on some good points there. Obviously, material and the current environment is a fluid situation, but as you very well know from our history and conversations that we've had, we're constantly partnering and talking with the manufacturers relative to excess supply, where that excess supply exists. And you're right. We've had three of the four announced additional capacity expansions here, some maybe a little bit hitting in 26 and some more coming in 27. So I think that's favorable for top build. I think if you look even at current results, I mean, the teams have done a nice job. We wouldn't expect necessarily any new pricing per se here in 2025, but I think you can tell the teams have done a nice job holding on and leveraging for the obviously the services and products that we provide there. So we'll stay close to our manufacturing partners as material loosens up. And again, we have the ability to take that wherever it exists in the country and across our footprint.

Thanks. So I just want to clarify, Robert, you said you don't expect new pricing in 2025. I guess you mean industry manufacturer pricing. Is that what you meant by that?

Yeah, that would be our look sitting here, you know, call it sitting here in Q2 of the year. That's why we would view it.

Yes. Okay. Just wanted to clarify. Thanks very much. Appreciate it.

Thank you.

The next questions are from the line of Michael Reha with JP Morgan. Please see with your questions.

Thanks. Good morning, everyone. Thanks for taking my questions. First, I would love to get a sense, you know, in terms of the the guide is obviously reiterated the top line and EBITDA, but I believe slightly lowered your resi outlook to down high single digits from down mid single digits. Previously reiterated commercial industrial up low single. So just want to understand what kind of was the offset to the slightly lower resi outlook. And, you know, if it's just kind of playing with the ranges here, maybe before you were at the high end of the down mid single. But just any sense of what some of the puts and takes are if, you know, you had an incremental slightly more conservative outlook for resi.

Sure, Mike. This is Rob. I'll take that one. So, yeah, as you noted, you know, we've lowered our range on residential from from saying we were going to be down mid single digits to high single digits. And that's really driven by what we're what we're anticipating on the single family side of things where things are expected to be a little slower. So as we came into the year, we were kind of expecting, you know, things to be a little bit flattish on the on the single family side. We're now expecting that to be down slightly for the year down low single digits. So when you roll that in, you know, pricing held up a little better in Q1 than expected. So that's that's a partial offset in there as well. On the commercial industrial side, we're still at low single digits. But I'd say we're more towards the higher end of that now between volume and some pretty good pricing we're seeing on that side, a little more optimistic on that side. And then we did do one acquisition, which has taken up our assumption on M&A by 10 million, and we're not taking up the overall overall range as a as a as a result of that. So so net net, we're getting back to the same same midpoint, just a little bit of play between the pieces there.

Great. That's that's helpful. Rob, appreciate that walkthrough. I guess secondly, you know, it's interesting to hear, you know, about the footprint optimization, the consolidation of 33 facilities, you know, that seems a little bigger perhaps than, you know, some of the more, I don't want to say generic, but sort of the ongoing efforts that that you have from a perspective. I'm curious if, you know, you could kind of help us better appreciate the magnitude or the impact of the footprint optimization from a dollar perspective, what what that's, you know, kind of represents in terms of a tailwind that this year, if that indeed was part of of the original guidance when you gave it a couple months ago, or if it's incremental and sort of continuing to help out, you know, your ability to realize, you know, the EBITDA guidance.

Yeah, Mike, good morning, Robert, I'll start with the first part of the project itself, and then Rob will tackle some of your questions around the numbers. So, you know, this is something that we've been working for, you know, a few months as part of our technology, we have an optimization tool called Logility that we're able to look at, you know, customer delivery points, we're look, you know, able to look at some logistics, that type of thing. So this was really, you know, maybe a handful of M&A overlap, if you will. So it's really a combination of being able to put all those pieces together in a very, very targeted and systematic way. And so, you know, we got, really, consolidations of, you know, can be, you know, a true team location into maybe a DI location as an example, or maybe even some distribution locations, co-locating, if you will, from a DI service partner's perspective, or even our our MBI business as well. So I think it was very targeted and done in a very, you know, calculated way, if you will. So I think it's just the power of the of the model here and the confidence that we have to look at that across and make some very, you know, very strategic moves and good moves for driving efficiencies in the business. So that's a little bit of, you know, something we've been working on, I think, answers questions, how we continue to have room in this model. I'll let Rob talk about some of the tailwind piece of it.

Yeah, yeah. And so as Robert said, this is something we've been working on, obviously, implementing that tool and that technology has taken time. It's something, you know, we were very careful and, you know, we want to do it in a way that we don't, you know, damage the top line at all. And so we're confident we're not going to do that. But as a result of this, obviously, we've got, you know, we've got the one-time charge. So about, you know, 13.9 million related to the consolidations. That's primarily non-cash, you know, right off of lease, leases for those facilities. And as we move forward between, you know, the combined savings, I'd say between this lease consolidation as well as, you know, the right sizing of some of our headcount around current volumes should be about 30 million or more of additional annual savings. But as we talked about in the prepared remarks, that is baked into our guidance. This is something we've been working on for a while and something, you know, we implemented to help offset some of the volume and price cost pressures we're seeing in the market.

Great. Thanks so much.

Our next question is from the line of Adam Baumgarten with Thelman and Associates. Please receive your question.

Hey, guys. Good morning. Just on the pricing side, just given the commentary that you were talking about about carryover pricing from mid last year impacting the early part of this year, do we expect the -over-year price contribution to moderate as we move through the year given that dynamic?

Yeah, Adam, this is Rob. I'd say that's definitely baked in as our assumption right now. So we would expect pricing to moderate, particularly on the install side. We did have some incremental CNI pricing that definitely impacted more on the SD side to start this year. So obviously that should hold up throughout the rest of the year. But the fiberglass increases from the middle of last year should go down as the year moves on.

Got it. And then just on the material side, have you started to see prices for the materials you're buying on the installation side come down or have they been kind of flattish for a while?

Yeah, good morning, Adam. I'd say flattish. There's still, you know, some fluctuations across the industry, including still some maintenance and stuff that's going on. So I'd count flattish. Great.

Thanks,

guys. Our next questions are from the line of Susan McClary with Goldman Sachs. Please receive your questions.

Good morning, everyone.

Morning.

Good morning. My first question is on the labor side. You've talked about in last quarter taking some of the labor on the install side, especially out just to adjust to the market. I guess with your revised expectations on the resi side, are there any further changes that you're making there and any thoughts on how you're balancing the near term relative to the longer term outlook for housing?

Yeah. So, so Susan, I'd say this is Rob, I'd say, you know, it's an equation we're constantly balancing market by market, looking at what's going on with volumes, looking what's going on with bidding and adjusting our headcount accordingly. So it's something that continues to go on. You know, we're hopeful that the adjustments we made in Q1, we won't have to do anything that significant moving forward. It'll be more kind of tweaking as we go. And we definitely feel like, you know, we haven't cut muscle, right? We've talked about the fact that, you know, we don't want to cut muscle. We're definitely, you know, from our perspective, we still want to grow. We want to do M&A. We think this is a good time to do some M&A. And so, you know, we're hopeful to be able to add some volume to the business through M&A. And as a result, we don't want to cut too deep too quickly here.

Okay,

that's helpful. And then maybe building on that, Rob, you know, can you talk a bit about the M&A pipeline, any changes that you're seeing there and what you're seeing perhaps on sort of the more traditional, you know, install side of the business relative to some of the deals on the CNI side?

Yeah, good morning, Susan. It's Robert. So very healthy. And I'd say a variety of, I think I mentioned in the prepared comments, a variety of sizes of deals in there. And it's really quite honestly across all the end segments, the residential CNI for sure and across the businesses. So really healthy, you know, pipeline and busy time for us from an M&A perspective. But as always, you can expect us to stay disciplined and do what's right for shareholders here. So, but we're pretty excited things that are going on there.

Okay, thanks for the call, guys. Good luck with everything.

Thank you. Thanks. Our next question is from the line of Phil Eng with Jefferies. Please receive your questions.

Hey, guys. Congrats on a strong quarter. I think, Rod, we talked about how margin came in better than you expected. Can you give us some color on, you know, what are some of the areas upside was the branch consolidation headcount, you know, a contributor and kind of give us a little color on how that kind of progresses. If I look at your full year guidance, you know, the midpoint calling it 19% EBITDA margins, which is a great outcome given the current back route, but it's effectively flat from one queue and typically you see that seasonally pick up in two queue, three queue kind of help us contextualize how that margin progression will kind of shape up this year.

Yeah, so I'd say, you know, looking at the quarter, you know, if you think about what what went better, what better than expected, what was a little worse than expected. I mean, in general, you know, we were pretty on top of what we expected for the quarter, as you pointed out a little better from a profitability standpoint on the volume side, single family, you know, slightly worse than we expected, but not significantly CNI, a little better on the volume side. So net, net, not too different there. I'd say, you know, pricing on the on the Rezzi side held up a little better as we talked about, you know, on our previous calls, we've talked about in markets where volumes have slowed, you know, making some price concessions where we need to to hold on to volume that, you know, that didn't surface as much as we had anticipated. So that was something good in the quarter. And, you know, price realization on CNI products that had price increases in the first quarter was good as well. So it was really price driven in terms of the better profitability, I'd say in Q1, like we've talked about the actions we took in Q1 were anticipated. So that's not driving a significant amount of the upside. And so as we move forward, right, I mean, we obviously we don't give quarterly guidance, but to your point, you know, we do typically seasonally see EBITDA go up from Q1 to Q2 and Q3 kind of flattish or slightly up to Q2. And then, you know, a drop down in Q4, really all of that driven by volumes throughout the year. So while volumes are a bit muted, we do expect, you know, kind of normal seasonality there, you know, as we talked about in the prepared remarks, you know, we expect, you know, on a year over year basis, we expect sales to be down the most in Q2 as compared to prior year, Q3 should be a little better than that. And then Q4, you know, will be flattish to down slightly, you know, as a result of basically having a little bit softer of a comp in Q4 as things were starting to slow down at that time. And so as we think about, you know, the EBITDA that goes with that, I'd expect, you know, like in most years, Q2 and Q3 will be a little better, probably a little ahead of our midpoint of our guide in 19-2 and Q4 will be a little bit worse than that 19-2. But obviously, there's, you know, a lot of time to go here. That's why we've kept the range kind of wide because there is, you know, significant uncertainty out there. But at the midpoint, that's kind of how we're thinking about it.

Yeah, that's a great call there, Rob. With pricing coming in a little better, do you still feel pretty good? Pricing, particularly on the install side, kind of hanging in there, just given some of the choppiness on the demand side. Robert, I think you're expecting, I believe, fiberglass material prices to stay pretty steady here. But there's been some spray foam increases, you know, certainly Terrace is an element of that. And I think there's been some, you know, C&I price increases for July. Like, how do you kind of anticipate pricing for your materials that's non-fiberglass? You see some upward momentum, and does that help margins as well?

Yeah, I would say from a pricing perspective, you know, we, you know, you're asking about the, you know, the environment stuff. So we would expect the teams to, you know, get paid for the great services and products they're providing. So we would expect, you know, pricing to hold. And I would say that the teams in the field who have a great command control of the business, they're doing a really nice job of, you know, looking for efficiencies and looking for ways to offset any challenges from a price perspective. And I think you see that in the results field. So I think we feel pretty comfortable with how pricing plays out here. Obviously, a volatile environment, but we have confidence in what our teams are doing and see what they're doing every day in the field level.

And then on some of the material costs, spray foam and see an eyesight, there's some price increases out there.

Yep, definitely some increases out. Obviously, some of the tariff stuff fares out as well, but there's some increases in the market out there today in the area that you mentioned. Okay,

thank you.

Our next question is from the line of trade groups with Stevens. Please receive your questions.

Hi, good morning, everyone. Just a point of clarity. Rob, I think you mentioned 2Q seeing the largest decline. And I think you were referring to the top line on that comment. But, you know, it seems like the comp is similar in the 3Q to the 2Q. So is there, does the new guide assume any, you know, you know, demand pickup anywhere in the business in the back half, or is there, you know, some other kind of timing aspect that we need to be mindful of?

Yeah, no, Trey, this is Rob. I'd say, you know, we're not anticipating the environment to get significantly better during the year. Like we've talked about, you know, we're very confident in the long-term fundamentals, and we do believe things are going to get better. But trying to predict that inflection point is difficult. So, yeah, what I was referencing when I said Q2, the worst of the remaining three quarters from a year over year, I was talking about sales growth. So, you know, our expectation is, you know, Q2 will probably look similar to Q1 on a year over year basis, just given, you know, the comps are similar between those two quarters, I'd say. You know, things, you know, kind of started to slow down late Q3 last year. So, you know, we'll see a little bit better year over year, at least from what we're thinking today in Q3. And then, you know, Q4 things were a bit softer, and we expect things to be, you know, flat to slightly down. But we're talking low single digits, you know, across the board when we're talking about the numbers there.

Okay. And, you know, kind of on the point of right sizing, you know, I guess the the workforce, et cetera, is that pretty much behind you right now? And are you where you want to be? And I guess the follow-up to that would be, you know, how quickly can you flex up if needed? Or what would you need to, you know, I guess what position are you in from that, from a footprint standpoint, as we look out a little further in an environment where maybe demand's a little better?

Yeah, good morning. This is Robert. So, you know, given the thought that went into that work over, you know, a time period, I'd say that that work got completed, really, in the first quarter. Doesn't mean we're always constantly looking, right? You know, not about us. We're constantly looking at anywhere to optimize the business. And if there needs to be more, we'll do that where appropriate. And then relative to ramping up, I mean, again, some of the, Rob mentioned the headcount that was just kind of pruning, if you will, in the appropriate areas. And we have the ability with that, say, very little issue to flex back up in some of those areas as we see demand come back or demand fluctuate.

Okay.

Thanks, Robert. Thanks, Rob. Take care.

Yep. Our next questions are from the line of Keith Hughes with Trua Securities. Please proceed with your questions.

Yeah, thank you. Did you just talk about in the quarter the performance and distribution between service partners and the AI around this kind of organic number you're reporting?

Yeah, Keith, this is Rob. So yeah, obviously, we don't break out the two, but, you know, we definitely saw weaker resi sales and stronger commercial sales in the quarter for the speciality distribution. And we do break that out in total. So on the speciality distribution side, you know, I'm just checking the number here to make sure I give you the right number. But special distribution on the resi side from a same branch basis perspective was down about 5%. And on the commercial side, which is primarily mechanical, but a little bit of service partners in there as well was up around 2%. So definitely a stronger performance. And I can say within that commercial, you know, our mechanical product definitely performed the best of the group in there as well. So it was a nice offset to the slower, you know, single family environment we're seeing.

I'm sorry, but those numbers, were those revenue or units or what specific were they? That's

revenue on a same branch basis. Revenue on the same branch.

Okay. Thank you very much. Yep. Thank you.

The next questions are from the line of Ken Zener with Seaport Research. Please receive your questions. Good morning, everybody.

Morning, Ken. So, people were surprised that you held guidance despite the, I guess, decline in housing fundamentals. Obviously, you refer to M&A cost cuts, but I wonder if you could help frame the single family market for us a little bit in more detail. Kind of in the kind of the public-private common, if you could, because public, right, they report their M&A for insert data, they're down about 10% in one queue. Their guidance kind of applies flat for the year. It seems like the privates are doing worse than the public builders, you know, or maybe they're doing better from what you could tell us regionally. But could you kind of frame that out if, let's say, the publics, which did take down guidance and they have visibility of about six months. Rob, if we were to see another 5% decline, who knows, tariffs or this or that, and I realize you're giving data that's very consistent with what the publics and privates are kind of showing you. What would a 5% decline, if volume for some reason falls off, what type of incrementals on margins would unfold in that scenario? Just to kind of frame out, you know, how you think about volatility of your guidance if, you know, we were to see another 5% decline in single family.

Yeah, so Ken, inside of there, what I'd say is, you know, what we're always targeting for the long term from a from a decremental margin, you know, we've talked about in the past is kind of that 27% that we have on the incrementals. But what we know, you know, is, you know, if we don't take out any labor or any costs with that, it's going to be much higher than that, right? And so, as we look at this year, what we have baked into our guidance, we're getting pretty close to that number when you adjust for price, cost, and some of the, you know, potential impacts we have there baked in. But if we see an additional drop of 5%, you know, we're going to be targeting to get all of that down. And so, as Ken said, it all depends on what our outlook looks like going forward, right? If we think that that 5% dip is going to stick for a while, you know, we're going to be a little more aggressive in our headcount reductions and get to that 27% quicker. If it's, you know, if we believe, you know, it's not going to last as long and the market could come back quicker, we're definitely going to take a more cautious approach. And, you know, that's been our approach here and that's going to continue to be our approach going forward.

Okay. And then Robert, can you maybe, if you would, given your guys' visibility into single family bidding, can you maybe give us a little feel, you know, there's lots of news talking about, you know, negative news led by Florida, Texas, but often I think people are missing right strikes in Midwest, Southeast, if you will, North of Florida. Can you give us a little feel for how those regions are operating differently? We don't assume, right, all your markets are down because you have good markets and bad markets. Thank you.

Yeah, I'm glad to take the question, Ken. So, maybe I'll just try to give a little overview of the country and try to give you some flavor around that. So, you know, if you think about years past where you talk about areas like, you know, Florida and Texas, and those were growth areas, obviously those are big markets in the Southeast as well. Those are, from a percentage basis, some of the slower markets right now. And usually if you looked around Florida, you would say it's a mixed bag, but, you know, Florida's fairly soft, maybe, you know, definitely probably Orlando better than in Naples, if you will. But, you know, North and South Florida, a little slow. Texas, I would say, you know, a little tale of North versus South. So, Dallas still continues to hold up very strong, and we see backlogs building in Dallas, and I would include, even include multifamily in that. But if you look at Houston, San Antonio, Austin, I'd say slow. On the opposite side, some markets that are building and seem to be building momentum Northeast and Midwest, or seeing it there, even say Southern Cal. And, you know, even looking at Southern California, most areas seem to be showing some positive trend there. Pacific Northwest would be right there close to Southern California, but Northern California lagging behind, and Southwest, I would include Vegas and Phoenix in that. So, that gives you a little view around the country from that perspective, and it is a little different by market, my Dallas versus the rest of, the rest of Texas is a pretty good example of that. But that's how what we're seeing from a region perspective, and, you know, you've seen what the public builders have said. And then some of those markets that I just mentioned where things are building momentum, it is, you know, like take the Northeast as an example, you know, it is some of the custom builder that seems to be getting, having some momentum there, but maybe not, that custom builder, maybe not as much in the, you know, in Florida, if you will. So, I hope that gives you a little bit of flavor you're looking for based on what we see.

It does. And I wonder where, you know, people say consumer confidence, uncertainty, you could get into the politics of it, but like what are the factors you see that are causing those markets, like in Dallas, is it just job growth and, you know, confidence is better, or in Florida, it's just, you know, there's too much supply. If you could give us a little more granularity on why those markets are different, that'd be great. Thank you.

Yeah, I think probably you had on it, right, oversupply, if you look at Florida and probably even like from a Houston perspective, other areas that maybe didn't go as far or could be some of the drivers you're talking about, job growth, you know, the Dallas area, to your point, I'd even include, you know, the Carolinas in that, if I think about Raleigh and Charlotte, you know, we're seeing some good momentum there, actually going to be in Raleigh here the next couple of days, meeting with some customers in that area. So, we're seeing some momentum, I think, in areas that just work probably as much inventory sitting on the ground, as well as maybe some positive, you know, dynamics happening in those markets.

Thank you very much.

Thank you.

Our next questions are from the line of Jeff Stevenson with Loop Capital Markets. Please proceed with your questions.

Thanks for taking my questions today. I was wondering if you could provide more color on the variance between light and heavy commercial demand in your installation segment during the quarter, and I wondered whether light commercial bidding activity remains soft or you've seen any signs of stabilization since the start of the year?

Yeah, Jeff, this is Rob. So, yeah, we definitely saw a big difference between the performance of those two on the install side in the quarter, you know, with light commercial, you know, down double digits in the quarter and heavy commercial up double digits in the quarter. So, you know, kind of a tale of two markets there. I'll let Robert talk about bidding activity on light commercial. I think we have seen some improvement in certain markets there.

Yeah, and if you think about that light commercial, I mean, Rob's right, it follows the residential trend, but we have so much opportunity there that, you know, we continue to see bidding opportunities there, opportunity for share growth, and, you know, that's how our teams will, fluctuate some of their resources, if you will. But heavy commercial, there was some nice performance there in the first quarter, and as we think about that on the distribution side, especially on the mechanical side, we would expect that to continue.

Okay, great. That's helpful. Then I wanted to shift to your M&A pipeline, which sounds like it remains active, but I wanted to, you know, focus on the residential side of the business and, you know, wonder, you know, the high level, whether you believe there could be, you know, more opportunities now given reduced seller expectations, or potential sellers now focus on, you know, navigating this period of market uncertainty.

Yeah, Jeff, this is Robert. I'd say it's a mixed bag. I would say, you know, you haven't seen multiples decline in any meaningful way. I think, you know, folks are, or look similar to what we say, right? Looking at the midterm, long term, and saying we're still underbuilt in the US, and so they see that as an opportunity. At the same time, whether it be, you know, succession planning, whether it be, you know, some folks getting tired in the current environment, we have a lot of conversations going on with potential sellers right now. So I'd say a little bit of mixed bag to your question as to what we're seeing, but it is a very active time.

Great, thank you.

Good morning,

everybody. If I heard you correctly, it seems the distribution, the ReZ portion of the distribution business outperformed the installation side. Is that in part that sort of hedge dynamic that you have in that business? Or if not, I guess, how far does that business have to, or does the industry have to fall from a volume perspective where you start to get a return of some customers that can't buy direct?

Yeah, I'd say, Reuben, this is Rob. So yeah, you're hitting on part of it for sure. You know, as markets get slower, you'll see people come into distribution to buy, you know, less than truckload orders. But the other big factor there is really that on the distribution side, we're less exposed to multifamily. And so, you know, the multifamily side, which was down, you know, in the neighborhood of 30% for the quarter, which is, you know, what we anticipated for this year, that's not impacting us as much on the distribution side as it is on the install side.

Okay, great. That's really helpful. And then what are you guys assuming in terms of the size of homes in your outlook? Are you assuming that continues to shrink? And how meaningful of an impact does that have on the volume of installation that you work through?

Yeah, Reuben, this is Rob. I mean, it's definitely been a trend, but I'd say that's been a trend for the last, you know, five years plus, and we really haven't seen a meaningful shift down in our take per unit or volume per unit. And I think really, you know, what benefits us and benefits our industry is the, you know, the code changes over time that have added insulation per square foot to the house. And so, you know, from a net perspective, we haven't seen a meaningful impact there.

Great. Thanks, guys, and good luck.

Our next question is from the line of Colin Vernon with Deutsche Bank. Pleased to see you with your questions.

Good morning. Thank you for taking my questions here. I guess I want to start with CNI. It was pretty resilient in the quarter, and you called out the backlog in orders being solid still. Can you talk about how much visibility into revenues you have in the CNI business? Are you booked out through the end of the year here? And do you see any risk of an air pocket impacting late 25 or 26, just as you've worked through the current backlogs, or just has bidding activity been strong enough to really replace that backlog?

Yeah, good morning. This is Robert. So, you know, we have pretty good visibility definitely in the backlog from a CNI perspective. I'd say, you know, six months on average would probably be a good way to think about it. You know, I'd say barring some major, you know, fluctuation in the economic environment, you know, as we said, we feel comfortable with that business the remainder of the year and what's in the guidance that Rob talked about earlier. And again, that's a combination of, you know, projects that we've secured, projects that have come online that were delayed in 2024. But I'd also say, you know, great execution in the field relative to some share gain and that vertical market strategy where, you know, field teams are going after different type of jobs, basically better agnostic to any particular vertical, if you will. So, I think it's a combination of visibility as well as confidence as the execution in the field.

Great, that's really helpful, Coller. And I guess I just wanted to ask one more on the single family side of the business, just given the macro backdrop, I guess, does your guidance assume any change in the start pace of builders here as they get later into 2025? Or do you see it being pretty steady from current levels?

Yeah, I mean, we're anticipating kind of the normal seasonal changes you would see there. And like I said earlier, kind of at the midpoint of our guidance, we'd expect kind of our single family sales to be down in the low single digits for the year net-net.

That's helpful. Thank you for taking my questions.

Our last question is from the line of Ray Zrodich with Bank of America. Please proceed with your questions.

Hi, good morning. Thanks for taking my questions. I wanted to follow up on just the price mix. I think last quarter you were, last quarter was down, this quarter was up and you were sort of expecting at the time that those pressures would continue and now the outlook's a little bit better. What's the upside versus your initial expectation? How much of the change is price versus mix? And then can you just talk about like the competitive environment relative to what you're expecting?

Yeah, Ray, this is Rob. So I'll give you a little bit more color there on price. So yeah, from a install side of things, I'd say, you know, not a huge surprise. We went from one and a half percent in Q4 to .1% this quarter. As we talked about coming into the year, we did expect in certain markets to see some pressure as we adjust to volumes and adjust as necessary out there. So I wouldn't say any big surprises there. On the SD side, as you noted, or on the special distribution side, we were flat in the fourth quarter up in Q1. That's, you know, the big driver there is really, you know, price increases on commercial and industrial products we were able to push through in the first quarter, as well as some improvement in spray foam. While spray foam, I'd say net-net on a -over-year basis is still negative. Sequentially, with some of the anti-dumping tariffs, et cetera, we did see some incremental price come through on that side of things. So that's really the difference between, you know, what we expected coming into Q1 and where we landed.

That's helpful. And then just on the rationalization, it sounds like that's more related to the long-term optimization, not really adjusting for the current environment. If single-family starts stay under pressure through the end of 25 and into 26, when would you anticipate that you would start to adjust expenses to move towards that 27% long-term decremental? How long would you anticipate that the decremental stay elevated?

Yeah, Ray, this is Rob. So I'd say, I mean, we've already started adjusting costs. I mean, the headcount reductions we've made in the quarter, like we said, we don't feel like we've cut muscle, but we've certainly started cutting into not just the variable installer piece, but also into our back office support side of things. So we are adjusting to get to that. I think, you know, if you're just looking at the decrementals, you know, on a standalone basis, I mean, first, you've got to back out the impact of M&A. When you do that, you know, you're still going to see a slightly elevated number, but we do have baked in as we talk, you know, going into the year, you know, some margin pressure related to price cost as we navigate this, you know, softer environment and navigate that price volume equation. We've got some headwinds baked in there. But when you back that out from a volume perspective, you know, we do expect our decrementals to be in that, you know, call it high 20s, low 30s type range for the year.

Thank you. At this time, we've concluded our question and answer session. I would like to turn the floor back over to Robert Buck for closing comments.

Thank you for joining us today. We look forward to speaking with you in early August to discuss our Q2 results.

Thank you. This concludes today's call. Let me disconnect your lines at this time. Thank you for your participation and have a wonderful day.