Q3 2021 TopBuild Corp Earnings Call
Greetings and welcome to the top build third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Pat Please note this conference.
Is being recorded I will now turn the conference over to Tabitha Zane.
President of Investor Relations. Thank you you may begin.
Thank you and good morning on the call today are Robert Buck, President and Chief Executive Officer, John Petersen, Chief Financial Officer, and Rob Kuhns, Vice President and controller, we have posted senior management's formal remarks, and a powerpoint presentation that summarizes our comments on our website at <unk> Dot com.
Many of our remarks will include forward looking statements, which are subject to known and unknown risks and uncertainties, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward looking statements that become untrue because of subsequent events.
Please note that some of the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press.
And then our third quarter presentation, which can be found on our website I will now turn the call over to Robert.
And thank you for joining us today.
We were pleased to report another quarter of solid performance for Tocqueville.
Our team continues to successfully manage material cost increases with selling price adjustments and to navigate material and labor constraints.
Driving profitable growth remains a cornerstone of our operating model and the strong margin expansion. We've achieved throughout this year is a testament to the significance of our scale size and continuing focus on operational excellence.
Taking a step back and looking at our industry as a whole homebuilders general contractors and building product companies continue to be impacted by supply chain disruption and labor shortages.
These challenges are delaying the completion of projects and elongated and the build cycles of both residential and commercial construction projects.
While we had initially hope these industry wide supply chain bottlenecks would it be resolved by year end, we now believe that a more realistic scenarios falls well into 2022.
On a more positive note demand for residential housing remains strong interest rates are low and inventory remains tight.
In addition, with the longer build cycle, our backlog continues to grow it is reasonable to assume we should not experience the traditional seasonal slowdown in the fourth quarter of this year or the first quarter of next year barring any unusual harsh winter weather.
Looking at our third quarter results revenue grew 21, 3% and 10, 6% on a same branch basis, driven by strong pricing in the quarter at both <unk> and service partners.
Gross margin expanded 120 basis points adjusted operating profit grew 35, 2% and adjusted EBITDA increased 32, 8%.
In addition, adjusted operating margin expanded 170 basis points and adjusted EBITDA margin expanded 160 basis points to 18, 7% the highest in the company's six year history as an independent public company.
Turning to material fiberglass and spray foam remain on allocation.
Given the supply scenario three of the four fiberglass manufacturers have announced a 10% increase effective December or January.
On the capacity side, we were pleased with can also announcement that they plan to build a new facility in Texas that should be online later in 2023.
This new facility should add about 180 million pounds of installation or approximately 3% to 4% additional capacity.
In addition, can often J M Z blowing more lines should be up and running sometime later this quarter or early first quarter next year, adding an additional 3% to industry capacity.
Spray foam, which represents about 18% of our insulation sales.
Continues to face supply chain challenges and prices has significantly increased over the last 12 to 18 months.
That's why it was initially impacted by MDI shortages. The <unk> site chemical components, then the major freeze in the South Central States and significant bad weather along the Gulf coast caused additional production disruptions and delays.
Further compounding these issues or delays at U S ports affecting delivery of key chemical components.
Basically what we are seeing it here, we believe tot build is faring better than most on both the material and labor for us.
Over the past year, we partner with key suppliers to get our fair share of fiberglass and spray foam. In addition, our company wide ERP system gives us the ability to efficiently manage material and labor throughout our branch network to successfully support our customers.
Let me give you one recent example, a few weeks ago, a large production builder asks if we could leverage our resources to help them complete almost 600 homes in one of their key regions by the end of October.
Teamwork across our operations leadership, and our shared ERP system enabled us to quickly move material in crews from across our network and complete this work within the condensed timeframe I do.
Don't believe any other service provider in the U S could have accomplish this hats off to our 13 branches for making this happen and driving the miss value for our customer.
On the capital allocation front year to date, we've completed eight acquisitions, which are expected to generate almost $1 billion of revenue on a pro forma full year basis.
Since our last call in August we completed three of these acquisitions Valley Gutter supply, California building products and distribution internationally.
Valley got or acquired in mid August as a fabricator and distributor of gutter products and specialty metals to contractors and the Los Angeles area.
Approximately 70% of valleys gutters customers serve the residential market and the remainder focused on the light commercial <unk>.
Currently the distribution and installation of gutters comprises approximately 6% of top builds total revenue.
California building products, which we acquired in early October as a residential and light commercial installation company, serving northern California.
The company brings along a solid customer base and strengthens our operations in this high growth region.
And finally, we announced in October that distribution International has successfully gone through HSR regulatory review enjoying the tocqueville team.
We are now the leading north American specialty distributor in the $5 billion mechanical insulation market as the leading supplier of energy saving installation solutions in three critical and expanding end markets.
Residential commercial and industrial.
We added 101 branches to our specialty distribution network, including 17 in Canada.
Increase our customer base by close to 13000 and welcome 1300 EIA associates.
Our teams are working closely to ensure a smooth transition as we integrate <unk> into our systems and supply chain over the next 12 months.
As noted previously we anticipate $35 million to $40 million of run rate cost synergies over the next 24 months.
Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical insulation specialty distributors and we expect to remain very active on all three fronts going forward.
We also use our capital in the third quarter to repurchase 60000 shares and year to date, we've repurchased just over 183000 shares at an average price of $194 15 per share.
Before turning the call over to John and Rob to discuss our financial results in further detail I want to emphasize once again that our strong operating performance quarter. After quarter is a direct result of our uniquely diversified model and the ability of our experienced and cycle tested leadership team to manage our business well.
In any environment.
John.
Good morning, everyone and as Robert noted, we had a solid quarter. Despite the industry wide supply chain shortages and labor constraints temporary top line growth.
Our team once again demonstrated their ability to successfully manage and optimize input cost and pricing and drive operational efficiencies throughout the business.
Moving to our results in the third quarter net sales increased 21, 3% to $845 8 million.
Primarily driven by a 10, 8% increase in price of $74 $5 million of revenue from seven acquisitions Garland LCR.
As Ark ABS creative conservation.
RJ insulation and belly greater supply.
For the first nine months of 2021 net sales also increased 21, 3%, primarily driven by increased selling prices sales volume and a $172 $2 million of revenue from acquisitions.
Gross margin improved 120 basis points in the third quarter and 100 basis points in the first nine months of 2021 to 29, 6% and 28, 5%, respectively, driven by higher selling prices and lower insurance costs, partially offset by material inflation.
Adjusted operating profit in the third quarter grew 35, 2% to $137 4 million.
With a corresponding margin improvement of 170 basis points to 16, 3% driven by the same positive factors that I just mentioned that led to gross margin improvement.
Partially offset by increased travel and entertainment activity and the initial absorption of fixed cost of new acquisitions.
For the first nine months adjusted operating profit increased 42, 7% to $364 $5 million.
With a corresponding margin improvement of 220 basis points to 15%.
Adjusted EBITDA for the third quarter was $158 2 million compared.
Compared to $119 2 million in the third quarter of 2020, or 32, 8% increase and adjusted EBITDA margin expanded 160 basis points to 18, 7%.
For the first nine months of 2021, adjusted EBITDA grew 34, 4% to $423 9 million and adjusted EBITDA margin was 17, 5% a 170 basis point improvement over the first nine months of 2020.
Third quarter SG&A as a percent of sales was 13, 8%.
Compared to 13, 9% in the third quarter of 2020.
The year over year decrease as a percentage of sales was primarily the result of higher sales, partially offset by increased travel and entertainment and the initial absorption of fixed cost of acquisitions.
Adjusted income for the third quarter was $97 7 million.
Or $2 95 per diluted share compared to $69 6 million or $2 10 per diluted share.
For the first nine months of 2021 adjusted income was $256 4 million.
Or $7 73 per diluted share compared to $171 2 million or $5 14 per diluted share.
Third quarter adjustments to net income were $3 6 million all related to acquisition expenses.
Adjustments to net income in the first nine months of 2021 or $24 million primarily.
Really tied to $13 $9 million of debt refinancing costs and the remainder related to acquisition expenses and the COVID-19 leave plan initiated in March of 2020.
As of July one 2021 that plan is no longer active.
Our effective tax rate for the quarter was 25, 7% and 24, 7% for the first nine months of the year.
Interest expense in the third quarter of 2021 was $5 5 million.
Compared to $7 $7 million in the prior year, primarily driven by lower interest rates on our senior notes issued in March 2021.
And borrowings under the amended credit agreement.
During the fourth quarter, we successfully closed on a $500 million senior notes offering priced at four and one 8% maturing in 2032.
In early October we amended our credit agreement, increasing the revolving credit facility from $450 million to $500 million and adding a new $300 million delayed draw term loan.
This was used along with the proceeds from our senior notes offering and cash on hand to fund the purchase of distribution International which officially joined the <unk> team two weeks ago.
Capex through September 30 was $42 $3 million or one 7% of sales slightly below our long term guidance of 2% of sales.
Working capital as a percent of trailing 12 month sales was 10, 3% versus 10, 1% a year ago.
This slight increase was due to higher inventory on hand, which is being driven by inflation M&A and the timing of inventory receipts.
We ended the third quarter with a net leverage of <unk> seven times using trailing 12 months adjusted EBITDA of $545 3 million.
Total liquidity at September 32021 was $709 8 million, including cash of $327 $9 million in accessible revolver of $381 9 million.
Operating cash flow was $309 5 million for the nine months ended September 30.
Assuming the inclusion of <unk> and associated debt acquired to finance the transaction September 30, net debt would have been two two times on a pro forma basis pre synergies.
I'm now going to turn the call over to Rob Kuhns, Our vice President and controller to discuss our segment results as announced last month I will be retiring from my position as CFO at the end of March and Rob will be assuming this role.
Robyn I have worked closely together for over three years and this succession plan has been in place since he joined the company.
He has built a great team and is involved with all aspects of the company's operations and we Couldnt have selected a better replacement Rob. Thanks, John starting with <unk> sales increased 24, 5% in the third quarter to $612 9 million on.
On a same branch basis revenue grew 10, 3% driven by an eight 4% increase in price and a one 9% increase in volume.
Residential and commercial markets saw healthy demand in the quarter, but the industry wide material shortages in labor constraints tempered growth.
We are pleased with <unk> third quarter adjusted operating margin of 17, 2%, a 20 basis point improvement from the first quarter 2020, even given the significant contribution from M&A.
Our teams did a great job managing both price and cost in this environment and our backlog remains strong.
Looking at service partners third quarter sales grew 13, 2% to $276 4 million driven by a 16, 5% increase in price, partially offset by a five 2% decline in volume.
It was partners top line was challenged by material constraints in both fiberglass and spray foam.
In addition, last year's service Partners' third quarter volume increased a robust 12, 2%. So this quarter was a difficult comp.
A high note with service partners third quarter adjusted operating margin of 17, 1% to 370 basis point improvement from the third quarter of 2012.
Our service partners team continues to do an outstanding job managing cost increases customer pricing and operating cost John.
Thanks, Rob moving into 2021 annual guidance a number of factors were taken into consideration as we put together our outlook for the remainder of the year the.
The most relevant being the industry wide supply chain shortages and labor constraints, which are impacting everyone's ability to meet the continued strong demand for new residential housing and commercial projects.
As a result, looking at legacy Southfield, which excludes financial results from Dr. We're.
We are reducing the midpoint of our 2021 sales forecast by $55 million to a range of $3 255, and $3 billion and $295 million.
So the adjusted EBITDA as a result of improved operational efficiencies and strong input cost management, we are maintaining the midpoint of our previous guidance of $577 million, but are narrowing the range and now expect adjusted EBITDA to be between $570 million to $585 million.
We expect <unk> to contribute revenue between 170, and $180 million and adjusted EBITDA between 15% and $20 million. As a reminder, this acquisition closed on October 15th So the guidance provided us for approximately two five months.
In total we are projecting sales to be between $3 billion $425 $3.475 billion and adjusted EBITDA to be between 585 and $605 million.
We are not providing a projection of housing starts for the remainder of the year as there was a weak correlation between starts and our performance due to the continuing extension to the build cycle tied to the constraints previously mentioned that said, we remain very bullish on the demand profile of all three end markets we serve.
Looking ahead, we will provide our 2022 outlook when we report our fourth quarter and year end results in mid February.
Let me turn the call back over to Robert.
Before opening up the call for questions I wanted to mention that in September we hosted our annual strategy session with our board and key members of our leadership and operating teams.
During the two day meeting we took a deep dive into all aspects of our strategic plan, including our ongoing ESG efforts. This is a great planning session with the goal to continue to create great value for all our stakeholders.
Also let you know that we plan to host a top build Investor day in New York City on Tuesday March 15th.
This will be a great opportunity to meet the leaders of our business.
Looking ahead, we anticipate the industry will continue to be impacted by supply chain disruptions and labor constraints into next year.
From <unk> perspective, we believe we are faring better than most in terms of both material and labor due to our size and.
Scale strong relationships with our suppliers and are engaging recruiting methods and productivity improvement initiatives.
Our company wide ERP system also facilitate the sharing of these limited resources, enabling us to best serve our customers.
Our teams throughout top they'll continue to do a great job successfully navigating the current environment as demonstrated by our solid third quarter results.
We're also extremely excited about our entry into the mechanical insulation specialty distribution space through our acquisition of distribution international and their leadership position distributing and fabricating products for the industrial and commercial end markets.
This acquisition also solidifies <unk> as the leader in supply and energy saving insulation solutions to a broad range of businesses and industries across North America.
To conclude our team manages the business with constant mindset of driving improvements and achieving operational excellence.
We're proud of our track record of producing strong financial results and we recognize our success is the result of having the best and most talented operators in the field.
And a dedicated and experienced group at our branch support center in Daytona Beach, our goal is to create sustainable shareholder value in every operating environment.
Operator, we're now ready for questions.
Thank you as he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star teams.
Our first question is from Stephen Kim with Evercore ISI. Please proceed.
Okay. Thanks, very much guys. Thanks for all the info and I guess my first question relates to D. I.
I know that youre going to be giving more specific guidance for the business overall in the <unk> call, but as we think about trying to model out D. I can you give us a sense for how we might be thinking about the sales growth opportunities for that small portion of your business.
Because it's a bit discrete and then in addition, what kind of incremental margins excluding synergies should we be thinking that business can carry.
Yes, Stephen this is John so we will be giving guidance in the fourth quarter call with some time mid February we're going to be putting.
Be lumping together, though die with the rest of the business that will provide one sales number one adjusted EBITDA number in our range, obviously I would say looking forward, though in terms of the market, we're pretty bullish on the industrial market in terms of both the current status of where it's at and I think our breakout this quarter of <unk> reflects that in terms of the revenue we've been.
<unk> been in there.
Going forward.
Along with residential commercial we're extremely bullish in terms of that market in terms of your last question around the range Sim.
Similar to service partners as we think about our spread the 22 to 27 on an incremental basis.
We always talk about service partners being at the lower end of that range and <unk> is probably die is the same type of position so around that 22% on an incremental basis is the way to think about it on a long range basis.
Okay. That's helpful. Thanks for that.
And then I guess second question relates to this unusual environment of homebuilder constraints.
Obviously, we all see what's going on and it makes sense that you've called that out.
I'm curious as to whether or not this unusual period of time, though provides any market share implications or opportunities for top built in other words is there anything about the current dysfunction dysfunctional environment, where you have seen an opportunity to lean in and invest maybe change some things.
In an effort to grow your market share opportunities.
We come out of it.
Good morning, Steven Robert So, yes, I think absolutely the case and they have talked about.
Example, in lockdown of where as you know the production homebuilders, they're heading towards this time of the season heading towards their year ends and stuff that would be created some opportunity. If you think about what's happening in the supply chain and upstream from us downstream from us, but like whenever we would get those homes coming at us they would come in slugs.
30% or 40 homes at a time because the previous trades are backed up in the previous trades or just there's no smooth even flow of production coming in that's a strength for us because even though they're bringing those 30 40 homes owned in a day or two what we're doing is we're able to move crews around move our resources around and we can make to insulate those homes for them in the same day or the next.
Say, if you will so we've seen that we absolutely think given what we've done relative to <unk>.
Labor materials, there's definitely been some some gain sharing I think as we look at our results in Q3, and we look at our residential buy and compare that to what the builders are reporting as well we feel really good about our residential volume what's happening there and the results that we produce so I'd say good good environment for topical good environment for us to leverage our strengths.
I think we're seeing that on a day to day basis across the country.
Yeah, that's very clear thanks for that and just to clarify is that an opportunity on sales or margins or I should say sales or pricing or both.
I think the volume pricing, yeah, I would say, both Stephen and I think as we think about share, but I think also.
As builders are pushing for this and stuff.
Labour constraints concern about supply chain, where FC pricing appropriately to drive value for us and for them.
Got it thanks very much guys.
Welcome. Our next question is from Ken <unk> with Keybanc. Please proceed.
Okay.
Good morning, everybody.
Good morning, Ken Good morning.
So.
Very interesting times here.
Pricing is up 8% on the install.
Distribution 16, both of those numbers are about <unk>.
Half of that on the two year stack basis.
With the December increase of 10% on price.
And volumes.
Flat.
Maybe up a little bit.
It really over the next six months based upon what the builders are saying.
Can you maybe give a little context for.
This type of pricing situation to mid flat volumes.
And I am asking is specifically as it relates to.
The conviction you have.
The 22% to 27% operating leverage historically, which.
Usually when you talked about more efficient drive times et cetera, et cetera. So maybe if you could just kind of lay out how.
Your business model fits into.
Hi, pricing, but not such high volume environment related to your operating leverage.
Hey, Ken Good morning, it's Robert So I'll take the first part of that John will take the second part so I think given that material is still constrained.
And thinking about even even what's coming online here, which is loose fill material. The bad side is still constrained as well spray foam is still constrained and growing backlog. So theres a lot of work stacked up here.
The supply chain continues to improve even though we think that's well into 2022. It is still creates an environment of supply and demand dynamics that will allow for the appropriate pricing. So as we as we think about this December January increase coming and stuff I think we're pretty comfortable from a pricing perspective.
Appropriate conversations and again, given that supply demand dynamic and what's in the backlog coming as well.
Ken This is John So I think in terms of any environment, we've shown pretty good evidence of operating well whether it's.
Low growth low price or high growth high price or but right now we're seeing some challenges certainly in terms of the volume coming through the pipeline, but a very inflationary environment. So I think I think our businesses have shown great capability in terms of performing well under any of those scenarios and I think what we're seeing right now in the third quarter is just one of those cases, where.
And we've said this many times and I think you've heard this on many other calls from from builders and distributors and building product companies that demand is extremely strong, but unfortunately, the pipeline continues to be the issue.
When we get to our guidance as an example, we're back in August we were counting on some slight incremental improvements throughout the third and fourth quarter and we're just not seeing that right now, but I think in response to that our teams have done extremely well in terms of obviously dealing with an inflationary environment.
Taking advantage of that volume in and begin.
The margin expansion you saw great evidence of that so so again I think we're comfortable under any scenario you kind of point to us and I think we've got pretty good evidence of performing that way.
Good and just my second question is specifically on distribution the operating model the margins seem to be moving up along with sequential pricing.
As you know.
First quarter second quarter third quarter is there any reason to assume that dynamic would change I'm just thinking about how the business looks sequentially and specifically into next year with that statement.
Pricing structure.
Seemingly in place thank you.
Hey, Ken this is John so so again I think really we don't anticipate.
A change I think.
As we look forward if in fact, we were to see some type of correction in terms of the industry or a slowdown.
There's two things that will happen pretty much simultaneously certainly from a from an external standpoint, there'll be some pressure on top line pricing.
But again I think that will also be some probably excess material and of course, we're going to put pressure on suppliers in terms of material pricing. So I think.
We will balance those as well as possible. So I think again, we'll manage that well I think going into the future and.
And I think it plays out well for topical.
Thank you.
Youre welcome.
Our next question is from Phil <unk> with Jefferies. Please proceed.
Hey, guys John Thanks for all the help through the years, it's been a pleasure and Rob looking forward to working with you a little more intimately going forward.
I guess to kick things off the constraints you called out obviously weighed on <unk> volumes in your guide implies still some hangover effect in the fourth quarter, but any color. If some of these constraints are beginning to ease a little bit and when you kind of expect volumes to kind of reflect some of the underlying demand.
Strength Youre seeing at this point.
Good morning pills, Robert so.
Still tight.
And the industry.
Talk about the pipeline the pipeline and the congestion if you will both labor and material, we would say, we're definitely faring better than most but materials still tight.
So, let's talk maybe fiberglass and spray foam, so fiberglass batts and below we get a little more below capacity coming on end of this year beginning of next year that will help but at the same time and as you've heard me say before.
These plants are going to have to have maintenance and so that some of that additional capacity will be eaten up with maintenance activities that have to happen in 2022 on the spray foam side, it's really been a roller coaster.
As broken.
Paired remarks about.
Or even pre Covid there was some tightness relative to input chemicals, we had the freeze and we've had some things relative to the ports and materials coming in from overseas. So there's continued to be issues.
The spray foam side of the business as well so we see this going into 2022 as we mentioned.
But im sure all trades are working on that on the pipeline piece of it and we would hope as we get.
Into 2020 to maybe mid year earn back half of next year, we start to see some of that ease, but given those backlogs and stuff. We would think materials are going to continue to be going to continue to be tight.
Specifically about spray foam and.
Insulation fiberglass, but it's really across all products create before as trades after us and even some other products, we do like garage doors as an example.
You're constrained there given all the component items and you can think about some of those components come from overseas as well.
Got it Robert that's helpful. I mean, I think some of the builders have talked about maybe some of the supply chain easing to more normalized levels by spring. So could you see that pick up and certainly some of that capacity that's coming on the loose fill.
Or are you trying to signal that your volumes going to be really compress until the back half of next year, which seems a bit you're counting but any color on that front would be helpful. And then I guess bigger picture with some of this capacity coming on in the next few months and then longer term with the canal expansion have you guys looked like secure some of that supply and a more.
Slide solidified for.
Approach or it's still kind of the ongoing negotiation. Thanks, a lot guys.
Yeah, Phil So I think that first question with the builders I think there probably is taken exactly what we spoke to earlier there shouldnt be the seasonal slowdown here in Q4, and Q Q1, given seasonality assuming no harsh winter weather as we mentioned so given that seasonality factor should be smooth.
They would expect some catch up that would happen as part of that and so we that's why we said we don't expect the seasonality. So I think the builders are thinking through that as well, which going into March and April whenever things start picking up coming out of that spring selling season, I think we will see demand ramp up again, so I think thats, probably what they are thinking from a seasonality perspective.
To your second question about <unk> I would say, we worked very closely with management and off.
And the planning of that capacity and so we've absolutely secured a majority of that capacity for <unk> and we have a great relationship with <unk> management team and so glad to work with them on that.
Thanks, a lot really appreciate it.
Our next question is from Mike Rehaut with Jpmorgan. Please proceed.
Yes.
Good morning, everyone.
First question I, just wanted to kind of review a little bit if possible just the mechanics of it.
How the manufacturer price increases flow through because you know take for example.
Yes.
The upcoming 10%.
Price increase.
You have a portion of of.
In true team sales that are.
Not residential oriented obviously, you'll have a.
A smaller portion of service partners that is not.
Residential insulation.
Yeah.
Good rule of thumb to use when you think of like a 10%.
Insulation price increase.
Through the industry, assuming that all of it goes through.
How much proportionally you'd see that come through in each of your segments.
Yes, Mike This is John so.
We're not going to provide a number or a rule of thumb I think you know that all the manufacturers of course, we have relationships with in and each time, there are price increases announced by them, we obviously sit down and negotiate both the timing and the magnitude.
So.
And that is a little bit of the secret sauce of top build certainly in terms of the scale and the leverage and.
The value we bring them in the BCD the value they bring us so yeah, we're not going to give those type of percentages because quite frankly, they vary by time period and by.
By segment I think if you look at by segment.
You're typically always going to see a higher number on the service partners side on a time, where theres material inflation because of course material mix up a much larger piece of the P&L. So as our numbers reflect in the third quarter second quarter and first service partners' price percentages are higher but that's that's really require because material obviously as much.
The bigger piece of what flows through but yes, we really can't provide any type of guidance in terms of by segment and our timing because again it varies but.
But we do think we've done a great job certainly in terms of getting that into our bids in both areas.
And I think it's reflected in the performance. We've had this year so and Mike. This is Robert I'll add on so the manufacturers do a nice job of getting the announcements out 60 90 days in advance to John's point, we started the discussion with the suppliers, but at the same time, we start forming and start the discussion with our customers as well and as you can imagine on the crew team sizes.
The builders, we started conversations with but we also start communicating with our contractors and our customers on the on the on the.
Specialty distribution side of the business as well.
Okay.
Appreciate it I guess secondly, just shifting to <unk> for a moment.
Can you just remind us.
Again, the amount of synergies that you expect out of that acquisition and.
Yeah.
<unk> spent more time over the last month or two.
What perhaps is not included in those synergy numbers and.
As you become more and more comfortable with the acquisition.
How to think about that from essentially.
Essentially an upside scenario.
Yes, so what we've provided this is John by the way what we provided on the call was a $35 million to $40 million total synergy on the business with.
With first year by the end of the first year the run rate 2017 to 20 by the end of the second year of the full 35% to 40 run rate achieved.
And that breakdown by the way it was about 40% supply chain about 35% back office and another 25% operational improvement. So in terms of where we sit today, Mike. We obviously had done a lot of work in advance of the transaction closing mid October but.
In between that September signed period, and the close period and up to right now we've been very active in terms of working the integration strategy and digging more into the synergies I can tell you.
We feel extremely good about the guidance we provided.
We're not going to sit here and tell you there is upside to that at this point in time, we're certainly going to be pushing for that and I think you know.
As we drill and we're going to look for those opportunities, but I will tell you we feel extremely good today.
That projection we provided you back in mid October we closed the transaction.
Fair enough. Thanks, guys I appreciate it.
Yeah.
Our next question is from Adam Baumgartner with Zelman and Associates. Please proceed.
Hey, good morning, everyone. Thanks for taking my questions. I guess, you haven't really touched much on the commercial business can you maybe give us some color on what Youre seeing there are you seeing some project push outs due to labor and material constraints.
Yeah. Good morning, Adam This is Robert So I'll look on the commercial side of the business.
Yes, definitely project has been delayed relative to the delta there yet ramped up.
Saw some nice year over year performance from the commercial side definitely was slower than we anticipated, especially to have more heavy commercial projects. If you will and then I think as on the residential side yourself in the material constraints earlier, we've seen some of those that's a drift in more on the commercial side of the business like in Q.
Three.
As well so that being said.
Really bullish on the health of the industry and like the Prime indicator Prime indicator for US is the backlog and the bidding activity of what's going on so our backlog continues to grow bidding projects.
Not just in 2023, but actually some bigger projects in 2024 right now.
Our contract flow coming in is still very healthy so.
So, yes, a little slower than we would've anticipated on the commercial side given some of the supply chain constraints and I'd say, probably more specifically COVID-19 hitting on the commercial side of it but.
We like what we see longer term there and again the mix of projects. There is driving the health of that if you think about the warehouse projects to health care projects, even education, if you will.
It's very healthy and that's what we see the type of projects that we're bidding as well.
Got it thanks, and then just on the strength and incremental margins and service partners.
Should we think about what's driving that is part of that perhaps accretive pricing given the tight supply environment. How much of that is maybe related to fixed cost leverage as most of the growth being driven by price versus volume. So if you could maybe walk us through the moving pieces there.
Hey, Adam this is Rob.
Our two team operations team has just done an excellent job.
Continuing to execute at a very high level and providing customer service.
For sure what's driving their their bottom line performance is a combination of strong price management.
Demand is so strong and supply is tight.
Done an excellent job managing that piece of it.
They are extremely focused on their cost controls so they've done a great job around cost controls and then we did get a little bit of benefit on our insurance costs in the quarter. Some of Thats driven by our focus on safety, but we also had a benefit on our medical costs as well.
Got it thanks.
Right.
Our next question is from Keith <unk> with <unk> Securities. Please proceed.
My question is on service partners, Great margins this quarter I assume that's quite sort of cost can you just talk about moving forward. It will not lessen over time as this historic catches up.
With increases before the meeting.
The announcement of its next year.
Yes. So Keith this is John and I think that was an earlier question too and we're confident we've obviously been seeing margin expansion there over the past six plus years that we've been a public company.
Certainly our team has been doing a great job of managing an inflationary environment right now both segments, obviously, but service partners also and again, we've been leveraging that fixed overhead base, we have albeit smaller than schuh team. So I think on a go forward basis as I said.
If there is some type of correction in the industry or when there will be some type of we're confident that we can manage both the top line in terms of selling prices and.
The material cost side of it because I think again, we're going to have to balance those out and manage that throughout any type of downturn, but we're confident we'll be able to work that into the future and maintain the margin base that we have today.
And moving forward.
It will be included with the distribution segment combined together for recording purposes.
So youll start to see that on our fourth quarter call. We'll report on two segments.
Installation and specialty distribution, so service partners and <unk> will be consolidated under one segment.
Okay. Thank you youre.
Youre welcome.
Our next question is from Noah.
Koski with Stephens. Please proceed.
Good morning, and thanks for taking my question.
So first you know I understand youre not giving guidance.
<unk> for next year, yet, but just how are you thinking about the pricing frequency and magnitude that you're expecting from manufacturers next year at least maybe can you compare it to what we've seen this year I know it sounds like capacity effectively isn't really changing much and you've got very elevated demand and backlog. So just curious.
Just on your thoughts there.
Yes. Good morning, it's Robert So I mean, I think if you looked at this year you had Q4 already announced increases basically one per quarter.
Probably two in the second quarter. There. So I think it is it is supply demand as we mentioned earlier we.
We expect supply to stay tight.
Into next year again with the backlog that we have and stuff. So I'm sure. The manufacturing, we'll look at that I mean, I see three of the four of announced here for call. It December January Mike.
My guess would be as though we'll be evaluating as we come out of spring selling season, given the demand and the starts and stuff and there'll be evaluating but we definitely expect to see additional increases additional inflation into 2022 frequency and how many little hard to say, but I think we all are pretty bullish on the <unk>.
Residential environment in commercial environment into next year, and whilst that's going to drive so what exactly expect to see more inflation and multiple increases next year and hopefully.
We see the spray foam side of the industry stabilized next year some of that supply chain gets under control both the input materials from overseas as well as some of the domestic blending.
Blending and manufacturing as well.
Thanks, that's helpful.
And then I guess kind of a similar question, but on <unk>.
Sort of what you've got going on in the M&A pipeline.
Outside of Big deals like D. I, obviously this year's been there's been a lot of activity. So just kind of what youre seeing now and maybe your expectations into 'twenty two one on sort of smaller to medium size deals.
Yes. So pipeline is is really active right now really across multiple areas residential commercial and specialty distribution, which is both <unk> and service partners for sure. So we definitely have many things working across all three of those areas I think we've done a good job of.
Really focusing on integration doing integrations right at the same time balancing that with new deals coming along and I think while we were working on the Iqos announcing.
Announced in the VIP she saw us do the.
The Valley Cutter acquisition is off to a California building products that are really nice companies and nice growth areas out west. So I think you can expect us to continue to be active across all three of those and areas and markets. If you will and I think you can expect us to.
To see activity from us and again the pipeline I think Jon I, probably said this for the past year year and a half but the pipeline continues to remain really really strong.
M&A side.
Thanks, that's helpful I'll leave it there.
Okay.
Our next question is from Ryan Gilbert with <unk>. Please proceed.
Alright, thanks, everyone.
First question is on your backlog.
The commentary around the strength of it I'm just wondering if you could give us some details such as.
How much the backlog is up on a year over year basis, or if you could rank order the strength between single family multifamily and commercial.
That would be really helpful. Thank you.
Yes.
As John Ryan So, we don't give out and we're not going to give you absolute numbers in terms of the backlog growth I'd say, especially with the third quarter activity. Our commercial backlog is certainly strong at this point in time as Robert said the bidding activity has been really strong.
And we saw a disproportionate impact on the volume side the commercial.
On the <unk> side, especially this quarter, so that backlog grew in the quarter significantly and then in terms of the overall single family multifamily single family backlog has absolutely gone we're at probably about 30 to 60 days on average in most of our locations in terms of our normal time between the bid and when we do the work.
You've got at least a month to potentially two months worth of backlog activity growing in our branches.
Throughout the pandemic so.
I think one thing we've expressed as real strong confidence around the fact that we're comfortable we're not losing any share in this environment either I think the volume struggles. We had this quarter were all tied basically to the material and labor impact we talked about in a little bit.
Fortunate to commercial if you look at our residential volumes.
Our residential volume for instance on true team X place is up over 6% around 6% on a year to date basis up over 7% and I think that tracks pretty well with what we've seen in completions and quite frankly, what we've seen builders coming out with so.
I appreciate the question.
But yeah from a.
But overall backlog very very healthy backlogs, both in residential and commercial.
On the true team side, especially.
Okay. Thank you.
Second question is on distribution volume it sounded like most.
Most of that drop was the tough comp and as you said material shortages is it fair to say that the the <unk>.
Customer base at service partners is largely intact from <unk> 21, or <unk> 21, or have any customers fallen out or have you pruned. Some lower margin business have you as you've done in prior years.
Yeah. Bryan this is Robert I'll take the first part of that John and Rob can jump in if they'd like so.
Definitely from from that perspective tough comp if you think about coming out of Q2 last year, we had an abundance of material with things were little slow in Q2 as Covid hit and so we came out really all guns blazing in Q3 with really executing well on our strategy that we laid out with service partners. As you remember last years to your question is a really good question.
New customers that we were going after smaller contractors and stuff. So the team did a great job.
With that if I think about now youre right tough comp some material constraints, but know that that team has done a really good job on material has been constrained I would say that team at service partners has done a great job of really up in the service levels for the customers.
About kind of some just in time things that are happening from a material perspective with service partners has done a great job of communicating with the customer balancing those loans with different customers based on their immediate needs that they have as well across fiberglass, but you can think about spray foam and how big of a battle. That's been have done a really nice job of it even on the spray foam.
Side as well so.
So no I'd say no customer fallout I'd say, if anything service partners is gaining some longer term customers just given the absolute great service as they have been able to provide.
And Ryan this is Rob I would just add to that just to give you a number with it just on that comp last year, our volume was up 12% and service partners last year.
The last piece I think on SP, that's worth mentioning too I think if you think about the service partners business for us.
One of the between the two segments that gets disproportionately more R&R to the subcontractor base.
If you look at our third quarter with Covid spiking, we probably saw what we definitely saw less consumer acceptance to have people come into their houses and so so we were down on the R&R side.
In the third quarter and that also had an impact certainly on the volume itself.
Okay got it thanks very much welcome.
This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you for joining us today, we look forward to talking with you on our fourth quarter call in February.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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