Q3 2020 TopBuild Corp Earnings Call
Greetings.
Welcome to the Topbuild third quarter 2020 earnings call at.
At this time all participants are in a listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator.
Since during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Tabitha Zane.
Thank you and good morning on the call today are Jerry Volas, Chief Executive Officer.
Walk President and Chief operating Officer, and Jon Petersen, Chief Financial Officer.
We have posted senior managements formal remarks on the Investor Relations section of our website at Coffeyville Dotcom.
As shown on slide two of todays presentation. Many of our remarks will include forward looking statements concerning the company's operations and financial condition.
Forward looking statements include known and unknown risks, including those set forth in this mornings press release as well as in the Companys filings with the FCC.
The company assumes no obligation to update or supplement forward looking statements that become untrue because of subsequent events.
Please note that other than it otherwise.
Stated the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We.
We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release.
And in the presentation accompanying this call. Please turn to slide three I would not turn the call over to Jerry Volas.
Good morning, everyone.
Thanks for joining us today.
We're pleased to report another strong quarter, that's the Topbuild team continues to perform very well in this environment.
Despite the ongoing negative impact of COVID-19 on the overall economy.
Moving industry remains a positive story.
Our builder customers are reporting very strong traffic and record order growth.
It is October homebuilder analysis and forecast report John Burns cited the environment has the quote strongest current housing market conditions ever.
And one of our builder customers on their third quarter conference call. A few weeks ago stated that coal demand is through the roof.
We recognize that part of this trend is driven by COVID-19 impacts such as.
Buyers looking to escape dense urban environments work from home policy is driving demand for more space.
And after the adults seeking to avoid senior residential facility.
And while all of this is currently having a positive impact on our industry. The long term fundamentals of the housing industry also continued to remain strong.
Most notably historically low interest rates increase.
Increasing household formations and very low inventory.
These won't be short and long term factors are translating into strong housing starts.
And our expectation is that this will continue.
And we will benefit from this growth.
We acknowledge that labor and material will likely be gating factors elongating, the build cycle, which we didn't see in the third quarter, but our team has demonstrated its expertise and navigating these waters.
As Robert will discuss in a few minutes.
Turning to slide four our third quarter results again reflect the strength of our diversified model.
And the ability of the Topbuild team to perform well at all points in any cycle.
Net sales increased 2.2% to $697.2 million.
Despite delays in some of our commercial projects through the social distancing protocol.
We're particularly pleased with the expansion of our adjusted operating and EBITDA margins of 280 basis points and 270 basis points respectively.
What's drove adjusted net income to $2.10 per diluted share an increase of 37.3% over the same quarter last year.
Regarding capital allocation on slide five.
Our acquisition team is back to executing on our top priority as we close garwin insulating on October the purse.
Garland was one of the largest locally owned or operated installation companies in Texas.
He built a strong reputation through 70 years of outstanding customer service.
We're very pleased to have this company and their excellent management team as part of the topic of organization.
Looking ahead, our pipeline is filled with outstanding potential partners several of which we expect to join us over the next few quarters.
In addition to acquisitions, we returned capital to our shareholders through the repurchase of almost 50000 shares at an average price of $155.63 per share.
Before turning the call over to Robert I want to remind you that this will be my last analyst conference call. This will be retiring as CEO and member of the board effective December 31st.
I'm very proud of what topic was accomplished since becoming a public company on July. The first 2015, the result of a well timed spinoff the masco our previous parent company.
We have significantly increased our national scale with 14 acquisition and have demonstrated the strength of our diversified business model with both insulation installation and distribution serving both the residential and commercial markets.
The culture built around safety operational improvement and customer service had become 40 ingrained in everything we do every day.
As a result, we have performed well in many different economic environments and have increased our market cap from approximately $1 billion to over $5 billion today.
In fact on Friday, we were pleased to learn the Topbuild placed 47 on Fortune magazine's list of the 100 fastest growing companies.
Most exceptional is the team that will be taking top go forward, Robert Buck will be assuming the role of CEO and director.
Since the spin Robert has been B C O. The primary architect of the numerous operational improvements that have driven our outstanding financial results.
Having worked closely with Robert for many years a different stops throughout our careers I'm fully confident that Robert will be an outstanding CEO and drive further value.
Surrounding Robert.
Well be not only John its habit that would be you know well from their investor related activities, but also many other excellent professionals in all areas of the company.
Topbuild isn't very good huh.
Robert.
Thanks, Gerry and good morning.
Echo Jerrys remarks, Topbuild is performing very well, our quarterly and nine month results demonstrate our team's success and continued to drive solid financial performance and focus on operational excellence.
Starting with Truteam third quarter financial results on slide six sales fell 1.2%, primarily driven by a decline in the volume of our commercial business, partially offset by increased selling prices of 1.2% and acquisitions, which contributed 1% despite.
Despite this drop in commercial revenue true teens, adjusted operating margin expanded a robust 300 basis points to 17% in the third quarter and improved 170 basis points to 15% for the first nine months of the year.
This is a direct result of our continued focus on improving labor and sales productivity and implementing operational efficiencies throughout the business.
Residential housing starts continue to climb which I'll discuss further in a few minutes. We are very excited about the overall environment for our Truteam business.
Turning to slide seven service partners third quarter sales were up a strong 10.5% driven by a 12.2% increase in volume, partially offset by a 1.7% decline in selling prices as a result of cost reductions are two commodity products gutter coil and spray foam.
As you know we made some important decisions and changes at service partners over the past two years, including stepping away from some low margin business and focusing on our mix of customers and products offer.
We also made some key leadership changes and now have a very entrepreneurial and Ford focus team.
We received these benefits are these moves as evidenced by our strong volume growth and our adjusted operating margin, which was 13.4% and the third quarter, a 280 basis point improvement and 12.5% for the first nine months, a 200 basis points improvement.
We are excited about the prospects for continued growth of the service partners business.
As we look ahead, our builder customers and contractors remain extremely optimistic as they report historically high order rate and continued strong traffic.
The acceleration of housing starts we've seen over the past few months is positive for both of our business segments and our company is well positioned to capitalize on this growth.
However, given several constraints and the homebuilding supply chain. We expect these housing starts to be slow coming out of the ground well I get into the first quarter and perhaps even the first half of 2021.
The slower ramp will elongate the cycle and provide a solid pipeline of activity for topbuild.
You can be assured we are ready to service. These new housing starts and we will continue to leverage our operating platform to help drive solid financial results.
Our commercial business as shown on slide eight specifically on the heavy commercial side continues to be negatively impacted by project delays due to safety program protocols related to cope in 19.
On a same branch basis commercial revenue for all of Topbuild fell 6.8% in the third quarter and is down 6.9% year to date.
While we've seen a few projects canceled the vast majority of projects. We've been awarded continued to be delayed due to social distance the rules, which limits the number of trades on a job site.
Our long term outlook for our commercial business is still bullish.
Our backlog remains robust and we're bidding on projects well under the 2022.
As a reminder, this is a $5 billion cross industry bigger than residential new construction and we have an 11% market share. So.
Well, we'll likely see a slow recovery on the heavy commercial side, we see plenty of room to grow and our bundled solutions approach continues to appeal to general contractors.
As Jerry noted a few minutes ago, we were pleased to acquire Garland insulating last month.
The integration is going well in our footprint has been significantly enhanced in the hybrid state of Texas.
Our M&A group continues to seek out well managed profitable companies with strong management teams that will enhance our footprint in similar high growth regions.
As we said on many calls good acquisitions, our high priority for our company and we are excited about the prospects in our pipeline.
I also want to touch on a few other areas highlighted on slide nine that are top of mind for our customers concerning the homebuilding supply chain.
First is labor, which will likely continue to tighten across our industry as we move through this robust housing environment.
Our team is always there isn't labor challenge as PERC in this environment creatively given us an advantage in attracting and retaining labor.
For example, we recently introduced our recruiting program.
Through our 10000, plus coworkers asking them to invite their friends and family to join our Topbuild team.
The high level of engagement, having our employees and Bob to bring their friends and family to our company is a win for everyone and we're providing an attractive refer a bonus to support this program.
This regimens and have been very well received throughout our organization and it's already beginning to yield results.
Once we get a candidate installer onboard we offer a comprehensive benefits package, which helps make us an employer of choice.
This includes health benefits I'm actually four one k. plan tuition reimbursement and a career path, which can eventually lead your branch management position.
Our installer trainee program is also a comprehensive and covers not only all facets of working safely, but also how to become a more efficient and productive installer. This.
This is important because the majority of our installers work on a piece rate, which means as they get more productive it creates better earnings power for them and for our company.
And an average installer earns 45000 to $50000 per year, plus benefits and our properties in us dollars are making six figures.
Just a reminder, we have a unique advantage a differentiator with our ability to share labor among our divisions as they are all on the same ERP system.
For example, there have been a couple regions, where our competitors have struggled to meet deadlines because of labor shortages.
We were hired and body crews from two or three neighboring divisions to insulate 90 to 100 homes in a very short period of time and meet the customers' deadline.
The second issue that's top of mind is building material supply, including fiberglass capacity.
As starts have accelerated capacity has tightened for all building materials part.
Part of this tightness is due to some slowdown of production lines earlier in the year when the pandemic first hit.
We do expect to see capacity additional capacity come online next year last week I was quoting announced they are restarting their Kansas City, BAF and rose line and it should be up and running by the second quarter.
That's why I had 2% to 3% the industry capacity.
In addition, Johns Manville has informed us they are moving full steam ahead with their new line and it should be producing material in early fourth quarter.
We also understand that can offer is moving forward with our plans to bring on additional capacity in the second half of 2021.
In addition, the manufacturers are also improving their operational efficiencies increasing capacity with the addition of existing lines.
From top builds perspective, as the largest purchaser of fiberglass the United States are nearly two times. Our nearest competitor we are comfortable with our supply chain.
We buy from a wide variety of building material suppliers and while we have no more no long term contracts, we do provide them with monthly forecasts and are confident in our ability to meet the growing demand from our builder customers.
As far as material pricing, we saw an increase in September and Owens Corning. It can often out last week, an 8% increase for January is likely the other manufacturers will follow suit.
We feel very confident in our ability to manage these cost increases demonstrate 2018. This is a testament to our strong local division managers and the quality of our partnerships with our builder suppliers and customers.
Brand over to John who would like to make a quick comment on Jerry's retirement into this year on the behalf of the board of Directors management team over 10000 co workers. Thank you Gerry for everything you've done for Topbuild.
Speaking for myself, it's been a pleasure working with you for over 20 years first at Masco is hot and cold you've been a mentor and a friend and I look forward to seeing you enjoy the years ahead.
John.
Good morning, everyone to Echo Robert Gerry you will be missed and we thank you for all that you've done for everyone at Topbuild.
Moving to our financials on slide 10, we are pleased with our results, particularly our strong margin expansion again, demonstrating the strength of our diversified business model.
Starting with the third quarter net sales increased 2.2% to 600 $697.2 million, primarily driven by increased same branch sales volume.
Revenue from acquisitions and increased selling prices.
Revenue for the first nine months of 2020 rose, 1.8% to 1 billion $996.6 million.
Adjusted gross profit margin increased 220 basis points in the third quarter to 28.5% and for the first nine months of 2020 expanded 160 basis points to 27.6%.
Gross margin improvements were driven by volume gains increased selling prices lower gutter and spray foam material costs lower insurance costs and continued gains in operational efficiencies.
Adjusted operating profit in the third quarter grew 26.2% to $101.7 million with a corresponding margin improvement of 280 basis points to 14.6%.
For the first nine months adjusted operating profit increased 18.2% to $255.5 million with a corresponding margin improvement of 180 basis points to 12.8%.
Adjusted EBITDA for the third quarter was $119.2 million compared to $98 million in 2019.
21.6% increase and our adjusted EBITDA margin improved 270 basis points to 17.1%.
Both operating and EBITDA margin gains were driven by the previously mentioned factors impacting the gross margin improvement as well as cost reduction initiatives implemented in the second quarter, and lower travel and entertainment and legal expenses.
The first nine months of 2020, adjusted EBITDA grew 18.3% to $315.3 million and adjusted EBITDA margin was 15.8%.
220 basis point improvement over the first nine months of 2018.
Third quarter SGN as a percent of revenue was 13.9% compared to 14.5% in the third quarter of 2019.
The year over year decrease was primarily the result of lower travel and entertainment expenses and savings from cost reduction initiatives.
Adjusted income for the third quarter was $69.6 million or $2.10 per diluted share compared to $52.7 million or $1.53 per diluted share in 2019 third.
Third quarter 2020 adjustments were approximately $160000 primary room revenue primarily related to acquisition cost and COVID-19, okay.
Our effective tax rate was 25.5% for the third quarter.
For the first nine months of 2020, adjusted income was $171.2 million or $5.14 per diluted share compared to $138.8 million for $4 in two cents per diluted share a.
The adjustments for the first nine months for $3.7 million and were primarily related to rationalization charges.
19 pay and acquisition related costs.
Interest expense in the third quarter 2020 was $7.7 million and for the first nine months was $24.9 million. This.
This compares to $9.5 million for the third quarter of 2019 and $28.7 million for the first nine months of last year.
The decrease in interest expense was primarily driven by lower LIBOR rates and a lower balance due on our term loan.
Moving to slide 11, Capex for the first nine months of the year was $27.2 million, 1.4% of sales lower than our targeted long range of 2%.
As we have noted on previous calls at the start of the pandemic, we pared back our planned 2020 Capex spend however, we do expect that to return closer to the 2% range in the fourth quarter.
Working capital as a percent of sales for the trailing 12 months was 10.1% versus 11.6% a year ago. This.
This decrease is primarily due to improvements in our accounts receivable aging.
A decline in heavy commercial sales, which have longer receivable terms and carry higher working capital requirements.
And a richer segment mix of our service partners business, which carries lower working capital requirements.
As shown on slide 12, we ended the third quarter with net leverage of just under one times trailing 12 months adjusted EBITDA total.
Total liquidity at September Thirtyth, 2020 was $704.9 million, including cash of $315.3 million.
And accessible revolver of $389.6 million up.
Operating cash flow was $255.7 million for the nine months ended September Thirtyth 2020.
We remain extremely bullish about the current and future health of the residential and commercial businesses we serve.
Housing starts are strong and our commercial backlog and bidding activity remains very healthy.
However, there is still some uncertainty over the pace of this group, which is why we have not given guidance at this time, we hope to have more clarity over the next few months and are optimistic we will be able to provide annual revenue and EBITDA guidance for 2021 at the end of February on our fourth quarter call Jerry.
In closing I want to emphasize that our national scale gives us a significant competitive advantage both from a material and labor standpoint.
Just as important our diversified business model with both installation and distribution or do both the residential and commercial markets gives us the ability to perform well and then in any environment.
Our year to date results clearly demonstrate the value of this business model.
Finally, I'd like to conclude our formal remarks by thanking our 10000 employees for their hard work and commitment to our company because of you.
Five and a half years at Topbuild had been one of the most enjoyable and rewarding times in my 40 year business career.
Although somewhat difficult to step away, it's a bit easier knowing that the company is in such good hands.
Operator, we're now ready for questions.
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May press Star two if he would like to remove your question from the Q4.
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One moment, please while we poll for questions.
Our first question is from Stephen Kim with Evercore ISI. Please proceed with your question.
Thanks, very much guys and a strong result.
I guess my first question relates to some of the new capacity that you were talking about opening up JM can often also see announcing that the Kansas City lines I'm curious if you could just review for us.
Whether there are any incremental opportunities that you typically see emerge for topbuild. When you have a new plant opened up in a local market.
And I know you talked about not having long term contracts, but I My my my perception was that.
Big Company given your scale you usually can be helpful. In base loading not plants volume and I was curious as to if that's true and if that typically spans you know a period of a couple of years two to three years kind of a thing as your base load that plant. So its if you can just help us with the opportunity set when you have new capacity open.
Yes, Hi, Stephen this is Robert so yeah. That's a great question and so I think that is a real strength of our top they'll given the footprint given our ability to really forecast demand as well so as a as a manufacturing partner is bringing up that new capacity will work with them wanting to be able to provide a forecast as to the man, especially.
Okay to the location of that plant or where that capacity is coming back and then we can absolutely help them level load those lines as they are coming back up as we can provide them ongoing ramp of demand coming into that of which that demand will forecast and so it's really good for them that they're starting up those lines that they're testing those lines and that's the furnaces there.
Our coming up that capacity, that's really a strength of ours. So we'll do that with a with the manufacturers as they are bringing up the new line and then you know will help the level of that line for the foreseeable future as they're bringing up capacity because that line may ramp up for a while.
As they continue to get a you know get opportunities with a line where they needed to gain efficiencies with the line, which is something I mentioned in the comments here, we see them continue to work their operational efficiencies as well so deftly a strength of ours manufacturers love to partner with us on that and we loved to be partners with them on that new capacity.
Yeah, that's encouraging I'm once the plant gets to a sort of a steady state kind of situation do you feel like there are any residual benefits for having been involved in that initial start up.
Yes, I think so because obviously, we help them bid build the man regionally or geographically close to that new capacity. So I think it's good for for them and good for us as partners with them. So yeah. I think there is no residual benefit that goes down the road.
Great. Yeah, that's encouraging I know that you said that you're going to defer holding or defer providing official guidance on your volumes and expectations for next year until the Fourq you call.
But just generally speaking I was curious if you could talk about the outlook.
What what pieces you can see right now you talked about housing starts in particular, having a little bit of a slower ramp the constraint ramp which is a good thing into late for into Fourq and into early 2021, as we think about what that means in terms of specific numbers. Because you mean, the builders have been putting up some numbers and in some cases like Phil.
80% up in terms of orders and so there's just such a huge range of of numbers.
That people are trying to choose from what's curious if you could help us dimensionalize, what your outlook or just what youre seeing right now in terms of plans for single family housing starts growth over the very near term does that the foreseeable future called three to six months are we talking about like kind of a mid teens growth.
It's kind of a picture is that what you mean by a little bit of a slower ramp or are you talking about something that could flex a little bit you know.
More than that or just help us understand what kind of ramp in growth you're you're anticipating.
Stephen This is John so yeah, I think again the reason, we didnt give guidance was entirely tied to the fact that that across the entire industry, all construction basically labor and material or ramping up to support what we're seeing as it really nice push in order is converting into starts and we've seen that the last two or three months I think the starts data every.
Then over a million for so so to your point, we were extremely bullish about what's coming and and really you know when we think you know three to six months or even beyond that period of time, we're pretty bullish beyond that period to with all the.
All the demographics and everything supporting the growth long term lower interest rates, we expect to see that for an extended period of time, you know good pent up demand really really tight inventory both on on new and re sales. So so we think those things are in play for an extended period of time I think on the commercial side I think Robert talked about it in his prepared.
Paired remarks, we're also very bullish on that I think the challenge there right now is on the heavy commercial side. It's just a much slower cadence in terms of the of the work being done in performed because it primarily social distancing and that'll probably be with us tool.
Mid year next year sometime but but in terms of giving you numbers were not giving numbers out today, obviously I think we'll be in a position in the first quarter in February to give you a good look at 2021 from a sales and EBITDA, but.
But we're very very bullish about the prospects I think the only question right now is how quickly the industry in general can respond to the growth.
Yep, Okay, and so I guess that still that going to be an outlying question [laughter] I'm all right well. Thanks, very much guys good job and Jerry don't be a stranger.
Thanks, David.
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Our next question is from Ken Zener with Keybanc capital markets. Please proceed with your question.
Good morning, everybody and Gerry clearly congratulations.
[noise] so [noise].
Pretty amazing results Rob.
Robert John how gross margins are up about 200 basis points, you got leverage on EBIT across the business 'cause closer to 300.
And I.
I understand you're focused on labor, but how should we think and price and mix and all these items, but I have kind of two basic questions could we see a structural improvement in your business as it relates to.
Operating leverage in terms of how you're actually running the business.
Here are some of these costs could they come back next year or are you just doing it better than you thought you could.
Yeah. So Ken this is John what we saw really in the third quarter was really an extension of what we saw in the second quarter I think the biggest differences in the third quarter was that we had better volume. So obviously volume came into play much stronger and better than we saw in second quarter.
And we get great leverage as you know off of those volume increases we that so that was a benefit in and I mentioned in my prepared remarks that we also saw some improved material cost on around gutter and spray foam and that was at a higher you know a higher performance than we saw in the second quarter, but we also got the benefit in the third quarter of some line items being.
Impacted by code it favorably I'm traveling Entertainment group Health Shopifys are probably the three biggest on RTL and and that extended into the third quarter I think the second quarter, we talked about a 5 million dollar benefit it was roughly $4 million in the second and third quarter.
So that's like an SDMA item John is that correct.
It's a combination it's a combination of the two the travel and entertainment touches on on primarily SGN, a but then the group health shops of five would be more on the gross profit side. So you know roughly 50 50 split if you had to split it so.
So I think you know you're just seeing a continuation of our teams executing extremely well in the field managing price material labor, which are obviously the three most important elements for us to manage.
And then you know the U.S.G. in a bucket in certain overhead buckets, you know impacted by the coated and also we took a restructuring in the second quarter. I think you may recall, we picked up about another million in a quarter worth of benefit year over year from the restructuring so.
You know continuation to Twoq, you with some minor adjustments and changes the biggest being volume and improved material cost.
So just following up on that I mean, it's such a juicy quarter, Dan has questions, but the volume I mean, I know you called out commercial which if you could comment on your real ability to take further M&A in commercial.
Given the environment, we're seeing but the volume you're seeing I mean, it went up a little bit obviously 50 million a quarter to quarter, but you did have down commercial is 6.8%. If we assume that as the same sales mix as you stated annually at about 23% that.
Did you were still down on new construction. So the volume gains that you're referring to could you maybe be a little more explicit why did commercial grow so much on that volume did was there a channel shift I know that was more than one question, but.
I apologize thank you very much gentlemen.
Yes, so in terms of our commercial volume I think sequentially, we saw an improvement versus the second quarter in the third quarter.
As we did in all of our lines of business basically but that improved in the third quarter versus second the biggest change for US volume wise was in service partners, where we had a significant gain year over year.
Versus where second quarter was a good quarter third quarter with a much better quarter in terms of those volume gains year over year and Robert touched on those in his prepared remarks, you know great execution in terms of share gains there in that industry and also getting more of our current customers pocket basically so.
They are the major drivers I think Ken if that answers your question.
Hey, guys I'll I'll talk to you guys yet thank you.
Thank you.
Our next question is what Phil Ng with Jefferies. Please proceed with your question.
Hey, guys, a really impressive quarter and Jerry Congrats really enjoyed working with you and best of luck.
Thanks, Phil.
When do you guys expect to see some of these bottlenecks easing and just kind of being able to play catch up on demand I know you know how you called out labor and supply chain, which is a bigger issue at this juncture and do you expect volumes to inflect positively in the fourth quarter on your installation business.
I feel its Robert so the thinking about the third quarter and even a little more recently, we so continue to see a gradual ramp every month.
In the third quarter. So we thought that was positive and you know just a little bit for looking here. We were really pleased with what we've seen in October.
So you know we would obviously you got it you know the winter months coming up here, we do expect to be see smoother seasonality than we see in years past. So I think we're pretty positive looking forward as John said earlier, and we like what Weve seen a continued gradual ramp so I'm going to answer your question I think we're already seeing some of it now.
Robert.
Was your volumes in October out pre installation business.
We saw some nice improvements in October for sure.
Got it and then some of the strength that you've seen in your distribution business. That's really exciting in terms of the share gains is that level of growth sustainable overtime and did you see any pre buys perhaps ahead of the price increase during the quarter.
Yeah, I think so I think we're pretty positive about it you know growth in service partners AMAG again, as we mentioned we've seen this as a share growth better execution by the team. Both the sales side service side piece of the business you know mix of customers products that we're offering new products that we're offering that type of thing so so.
We're definitely optimistic about future relative to your question around Prebuy I would say it could have been some of that but I wouldn't I wouldn't put a significant amount on that and that if you go back to that time period materials were already getting tight in supply. So there wasn't a lot of what I'd say excess material available for pre buy scenario.
Okay, Great and then one last one for me it sounds like you from M&A pipeline standpoint things are looking quite robust any way to help size up or somebody to these deals that you have in the pipeline that could be joining you soon relative maybe carlin and some of the deals you've done in the past.
Yeah Bill this is John I, I think we're not going to give out specific numbers, except to say that it's a pretty broad spectrum. In terms you know historically some of the deals youve seen have been that five to 10, something like Garland at 60, and then quite frankly, there are others out there that are bigger than that that are right now in our pipeline that we're evaluating and so I think it's a pretty broad.
Slide range in terms of the opportunities for us and.
And as we said on the prepared remarks, and we'll say right now we're very optimistic in terms of our pipeline and what we think it will deliver.
Howard about multiples are shaking out in some of these recent deals you've closed off.
Yeah. This is John again, so I don't think we've seen a significant change at this point from what we saw historically.
So you know I think we've typically talked about that five to six range on a pre synergy basis. So that's kind of what we'd expect to see for some of the transactions how some of the larger ones that have been in play for US as you know U.S. <unk> et cetera.
There might be different economics involved, but I think for the majority of the transactions that five to six on a pre synergy is probably the the range.
Got it Super helpful. Good luck in the quarter guys.
Thank you.
Now.
Our next question is what the Justin here with the Zelman and Associates. Please proceed with your question.
Hi, Good morning, guys. Thank you and Jerry I just wanted to extend my congratulations to you and your retirement and it's just been an incredible thing to watch your team and you orchestrate just incredible returns for shareholders. It's been an amazing story.
Thank you John I, just want to make sure all you're welcome.
Great job I wanted to just really unpack the yesterday for a bit and and look into the margins. Because you guys have done such a great job for not just this quarter, but for for many many quarters on the margin side, but recognizing that there may be some like several things going on here with yesterday side.
I guess from from yesterday piece of the equation that is controllable I guess, how much of a tailwind from that travel and entertainment piece that may or may not be sustainable I guess, how much maybe quantify for us or maybe how long you think that could sustain into next year.
Yes, so looking at SGN Aone, the overall company a big piece of it was traveling entertainment and I, we put that number in the third quarter, probably roughly couple of million dollars I'm just and.
I mean, there is other things too obviously that again, we took restructuring I'm in the second quarter. So we've been managing our.
Our salary wages benefits mine very well too, but on the t. any it's really difficult to say when that's going to come back and how quickly we saw a little bit of an increase in third quarter over second quarter levels.
Yeah, you know I think we will continue to see that over time, whether it will ever truly normalize it what we had historically I think you know the onus is on the company right now to evaluate you know how much of that gain or benefit can live through it after things kind of get back to normal, but but yeah, we'd expect to see that number starts to ramp continue to ramp up.
As you know is coded hopefully gets behind us overtime here.
For sure I guess, maybe another way of thinking about it as you know.
It's been a it's you've managed it very tightly should should we consider that maybe that will grow.
More in line with underlying demand as you as you consider all the moving pieces is that a is that a reasonable way to think about it or or do you think you can maybe gaining some scale. There as you look to what could be decent growth next year, notwithstanding the supply chain headwinds.
Yeah, I think we can certainly leverage you know the cost that we have in that bucket and again you know, we're not going to see that as demand recovers, we will see some additional TNT and other line items that had been disproportionately lower.
Come back, but you know I'd say travel entertainment, specifically until it's safer out here I think you're going to continue to see that lower than Weve had historically and again as we get into 2021 up.
We will be evaluating what we can do to keep as much of that benefit as possible in that the on a long term basis.
That makes sense and then separately you know we're back and kind of the the mode of suppliers manufacturers, particularly fiberglass manufacturers other suppliers.
But these price increase announcements I know historically inflation not not a bad thing for a distribution like model, but maybe remind us how you're kind of thinking about not only the big announcements, but maybe the magnitude of the announcements and your ability to absorb them and and and then also as a follow up to that.
What what's the right mid mid terms EBITDA margin potential for this model because you guys have done such a good job pulled forward. Some of the I think ambitions that that were maybe articulated in years past.
And very successful the U.S. <unk> U.S.I. integration.
How should we think about normalized margins for this model under a scenario, where we eventually do achieve one and a half million starts.
Hi, Justin this Robert I'll take the first part of that question around the material and the supplier. So yeah I think a few parts to that question I think it's I think it'll be supply and demand any material is tight right now and labor is tight so if I think about it from a distribution perspective labor and the level of service, we're able to provide as it's key for us.
Customer base and so you know we feel comfortable as weve demonstrated in the past, but with appropriately passing along those increases.
The installs side of it obviously is a labor and material.
The combination of the two which are both extremely and high demand right. Now. So you know we feel comfortable and confident both businesses I think you know back to the supply and demand I think as if this ramp in housing continues to happen that I think you know we can expect to see definitely multiple increases and 2021 a free.
In the manufacturers I think you'll see some that capacity come back, but again, if we continue to see that ramp I think the materials stay in that tight supply and labor will as well and and overall, we feel comfortable with our ability to pass that along and I think we've demonstrated that on a pretty consistent basis in the past.
So Justin this is John I'll take the second part of that in terms of your questions around what what's the what does margin look like in the future from an EBITDA standpoint, so I'm not going to give you a specific number but starting with third quarter to take the I think the 17.1%. We achieved I mentioned that about 4 million, but dollars are that was tied to what I'll call coded related.
Fences, which were which were you know is lower than we historically would have seen due to covance. If you back that out you're probably close to 16.5% and I'd say.
On a go forward basis.
We feel great about the prospects on a go forward I think we've already got great evidence of the fact that we can leverage that footprint and you know we think there's plenty of room to leverage you know as we said many many times in our history up to a million and a half starts and beyond so I think that's that's in our favor I think theres always continuous opportunities on the on the on the labor.
Productivity side and again, we got pretty good evidence of delivering that from an M&A standpoint, certainly you know very accretive margins and we think there's many accretive acquisitions out there for us to continue to want to play in that you know way out into the future. So so we're pretty bullish about the prospects I think next year, we probably have some challenges from a comp standpoint due to the.
The fact that we've had some of this kobe benefit.
That will be comping up against but beyond that we've always talked about a 22% to 27% type of pull through number for the business and.
No we're still as bullish about that number on a go forward basis as we have been in the past.
Excellent. Thanks, I really appreciate it guys and again Jerry congratulations.
Thanks, Doug.
Our next question is with Adam Baumgarten with Credit Suisse. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions I, just you know service partners volume growth has been outpacing truteam now for the last four quarters, maybe if you could walk through some of the drivers. There is there less commercial exposure maybe there is there more residential remodel just kind of curious about the divergence there.
Yeah. Good morning, Adam This is Robert So I'd say I think there's multiple fronts to that to that answer number one is a very conscious effort by the team and our direction. There. If he if we went back a year or two ago, you talked about some of the conscious decisions. We made there relative to stepping away from some volume and stepping away from some.
From customers, we've obviously got the team they're focused on the right mix of customers right mix of products.
And complemented by great service across the country as well so I think that's absolutely driven the share gains that we've seen and the service partners business you never probably if you look backwards, probably some weaker comps compared to last year, but the team is after they've done a great job there really energized in the field and really run.
Great Yeah from an operational.
No improvements perspective, as well so yeah, just really really good job there from a service partner side and again as I mentioned before I think I think we're excited about what that business can do in the future as well.
Okay got it and then just you guys called out gutter coil and spray foam costs as deflationary can you give us a sense, where your fiber glass installation costs also down year over year.
Well this is John so no we basically the driver behind material was entirely gutter and spray foam. So really the rest of the product lines, including fiberglass, we're pretty much tread water compared to prior year.
Great. Thank you welcome.
You're welcome thank you.
Okay.
Our next question is what Seldon Clarke with <unk> Bank. Please proceed with your question.
Hey, good morning, Thank you.
When you think about the relationship between you know insulation volumes and starts and no. The typical sort of a three month lag.
And I know you talked about a number of supply constraints, but you're you're sitting there over the last three months single family starts are up sort of 16%. So could you give us a sense of.
You know if you could possibly quantify like how much you think supply will be a constraint.
In the fourth quarter, and just help us think about the relationship now versus starts you know compared to how it trended historically yeah.
Yeah. That's a difficult. This is John that's a difficult question to answer only because when we talk about material constraints, we're talking about many different product lines versus installation one of them certainly, but you know across the broad spectrum of all the materials and parts that go into building a house I'd say you know.
Most are challenged right now and in the mode of coming back and they will I think the question is how quickly will those individual pieces come into play and how quickly will they ramp to support the growth, it's not only coming but it's here. So it's just difficult for us to peg that which is exactly why we didnt give guidance on this call, but we are confident that you know.
We're all going to figure it out we talked about insulation, specifically on this call and I think all the other trades in product lines will do the same but just very difficult to put a number on that at this point.
Is there any way you can just give us some context around you know maybe where October is trending I know you said no inflation was was up or better in October but I need.
Maybe just like gauge us on the distribution side as well.
Yeah, we're not going to give specifics I think what Robert said is we saw a nice continuation of growth. So we may call. It average daily sales as an example was improving throughout October as it had been in the third quarter and I think that's just a an indication to us that and by the way, we think from a a labor constraint or material can stream.
Topbuild isn't as good a position as.
Is anybody in insulation and probably anybody in any other product line or trade group at this point in time. The issue is obviously, there's a lot of pieces are going to go in house to determine how quickly. It's built so so I think we're bullish about the fact that is going to come back I think October we saw the industry continue to ramp and grow.
And as Robert said I think you know our expectation is in November December were going to see improved seasonality versus what we typically would then historically would in a fourth quarter timeframe.
Okay. That's helpful and you know if if miss along in construction cycle or recovery sort of plays out for the next 12 months or so.
How does that change your ability to efficiently manage your fixed cost base to leverage those opportunities does that increase.
Increased visibility or sort of more steady you know ramp in demand help your incremental margins or you know is there not much of a difference to how you can manage the business.
Yeah, I think as we look forward, we obviously expect volume to continue to grow and improve but our expectation is that we're going to manage our fixed cost very very tight in fact, you know we're constantly looking for ways to reduce cost and become more efficient whether that's in the branches.
Specifically with their fixed overhead or whether it's you or the branch support center.
And again, you know we've got four to four or five years now a very very good evidence that we can leverage not only the fix cost we haven't obviously improved the productivity reduce cost appropriately, which we did in the second quarter. So so I think you know we expect volume to continue to ramp and grow but we don't expect there to be a significant amount of pressure on increasing north.
Fixed overhead.
And that's just been the way we run the business since day, one and that's going to be the way, we're going to go into the future. So.
Okay I appreciate the question. Thanks.
Thank you.
Our next question is from Keith Hughes with Suntrust Robinson Humphrey. Please proceed with your question.
Thank you.
Just a question on commercial broken that out in the press release, but in general how much of the commercial business is house Truteam versus service partners.
I'd say, it's about 50 50 in terms of the split.
In terms of total dollars hang on for just a second.
[noise] you have that type of thing.
[noise] percentage right, yeah that at my Fingertips, Keith So we can get back to you on that in terms of the exact numbers.
Okay and.
As we think about the demand patterns between those two business will be fairly similar or because of the install aspect.
True team could it could there be mismatches business moves up and down between the two segments in commercial.
Yeah. They keep this is Robert so I think as you know we see the starts come out of the ground. I think you may see you know more portion of ramp on the end south side of the business and I think what we seen which we're really excited about the service partner side has been a share gain that we've been able to accomplish on that side of business I think you'll see you know.
And then order amount of ramp at starts come out of the ground on the Truteam side, if you think about it that way.
Okay that could be bad but back to your question real quick on commercial of roughly about 150 plus million dollars almost 160.
Commercial revenue roughly two thirds of that isn't true team and about a third and service partners.
Okay. Thank you.
Our next question is with Ryan Gilbert with BTI cheap. Please proceed with your question.
Hi, Thanks. Good morning, everybody first question is just on on material costs, I guess looking to the fourth quarter or do you think on the magnitude of the lower Gudrun spray foam costs that you saw in the third quarter is enough to offset the 4% price increases we've seen announced for fiberglass.
Well I'm talking specifically the third quarter, we talked about the fact that the material gains were in gutter and spray foam and those numbers, we expect we'd probably the most positive game, we ever give me the third quarter from a comp standpoint.
Those both those commodities are normalizing.
As we entered the fourth quarter and beyond.
You know in terms of the the impact from a fiberglass standpoint, obviously, we don't share specifically, what our negotiations are what our pricing is so I really can't give you any guidance on that but again, we're confident we'll be able to manage that as we have in the past.
Okay. Thanks for that second question is just a point of clarification on.
Commentary around commercial it sounded like when you said that you know commercial projects have been delayed.
My interpretation is is it's not that they the commercial projects have it's not that that starts themselves have been delayed but rather it's just slower for these construction projects to get to the installation stage and I I'm, just hoping you can either confirm or just a little more clarity. There have have the starts themselves been delayed or is it just slower to get to it.
Relation.
Ryan This is Robert so no number one of the projects we are already working on on the job site. Those are those are slower due to some of the no social listening stuff. That's on the job site as far as new projects. We've seen very few projects cancelled some have been slower to get started so they've been a delay in some startup some projects, but very few have been canceled.
But we're seeing a new project start up you know on a weekly basis, but you know some of them are slower to start than if you ask eight months ago as an example.
Okay, great. Thanks very much.
[noise] as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is what Ken Zener with Keybanc capital markets. Please proceed with your question.
Good morning, again I.
Want to clarify what seems to be the tone of this conversation, which is growth is slower because the seven.
Yeah channel issues and costs are inflating and you have lots of one time benefits first growth can you talk about delays given that you have you know 30 to.
Including distribution, 40% share of the U.S. you have the best insight into U.S. housing activity of anybody in my view what is the traditional delay from start to installation and where are you now if you could give us some perspective to quantify this quote delayed not a number.
But that time delay.
Okay and your your question is around the time to start occurs to when we do our work on it.
Yeah. So if it's usually a quarter lag what what are you seeing and how much is that the lakes I think thats part of the concern that people are thinking about on the top line. That's my first line of question.
Yeah, I mean, I I think you know we're seeing that improve by the way is obviously, we walk through the third quarter and into the fourth quarter through October.
I mean third quarter is a good example, where I think lags starts were down 14% and yet you know our our volume was up proportionally on a positive mode. So it's a very very strange relationship now between lags starts and when we get on the job and as you know you know orders turn into permits permits turned in starts starts turning to work.
For us over time, it's just that the traditional lag is off but it's improving we're see it and improve across all of our local.
Locations.
It did historically maybe was two to three months historically on average it might be you know I'd say, two and a half to three and a half months or something like that if maybe a month extension right now, but that's starting to compress over time here and it really depends on the location you're talking about between the labor and material constraints, but you know we expect that.
Obviously to continue to play catch up but I think it's in the it's in the mode of doing that right now so all right. So the time delay the second derivative is improving the worst is half. That's in terms of that is what I heard you say, yeah, I think you're pretty confident that dip in both labor and material across all construction trades in industries, we're going to continue to see that improve.
Right and now here the other thing about the margin leverage and I apologize about that just kind of surprised how I think the tone has been on this conversation.
In 2018, and there was rather robust price increases due to loose fill plants being shut down allocation bats kind of followed so while you talked about is it 8% increase from Owens Corning.
Traditionally as I look at 2018 for example, you guys were able to get price.
And margin expansion did you.
You've always talked about industry dynamics and pricing are you calling out the inflation because you think there's a different relationship than you saw in 2018 in terms of price and your ability to recover it or within the context of gutter and some of these other input costs that deflated do you think that's going to be.
Got you know an unrecoverable headwind can seems people are questioning your ability to really.
You know price.
Your input cost like you did in 2018, when they were much higher it just can you expand on that.
To clarify what people seem to be hearing in the conference call. Thank you sure.
Sure Ken This is John so yeah, we certainly didn't mean to send any message it like that at all we remain as confident today as we did back in 2018 in our ability to obviously negotiate and manage our material input cost and then appropriately priced it and again, we've got a good five year history.
Of doing that and so we don't see any change on a go forward basis I think the only difference between 18 and now 18, certainly was a surprise you know with that came upon the industry and topbuild as a major surprise overnight. So there as you recall, we took a little while we took about a quarter and a half to get you know.
At our pricing immaterial in balance, but we did and certainly the back half of 18, we had great evidence of that I think we feel great about the ability to manage what we see right now which is you know we have advanced notice obviously of the January increase we'll be talking to all four suppliers and we're in the process of doing that right now.
We appropriately expect to be able to manage that into our bids you know prior to that first quarter timeframe. So so we feel great about the ability to continue to manage both labor and material input cost in our selling prices and continuing to drive margin expansion. If you have in the past that Ken. This is Robert so that that had.
On to that if you think about 18 right, 20% of the capacity while they industry overnight from from one issue at a manufacturing plant. So there wasn't really any planning there wasn't really any you know looking for type of thing that was 20% capacity and one night here you know one.
Housing starts ramping up number two laborers, even at a more of a premium today number three as you see you know these announcements are coming out in advance. So it's not an overnight type of phenomena annex building materials across the industry its labor across the industry. So I'd say, it's very different than 18, and I'd say, we're even more confident given this is a really a.
A demand driver for really a positive thing going on in the industry and going on with housing.
Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back to Jerry Lewis for closing remarks.
Thank you again for joining our call and.
And Robert and his team look forward to reporting capital's fourth quarter and year end results at the end of February.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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