Q3 2024 TopBuild Corp Earnings Call
Greetings and welcome to Top Builds 3rd Quarter 2020 4 earnings conference call. At this time, all participants are in a listen-only mode. A brief questioning answer session will follow the formal presentation.
Hey, anyone to require operator assistance during the conference, please press star 0 on your telephone keypad.
As your minor, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, P.I. E.K.O. by President and Best of Relations. Thank you, you may begin.
P.I. E.K.O.: Good morning and thank you for joining us today. I'm joined by Robert Buck, our president and chief executive officer and Rob Kuhns, our chief financial officer.
P.I. E.K.O.: We posted our earnings release, senior management formal remark, and a presentation that summarizes our comments on our website at topbills.com.
Speaker Change: Many of our remarks today will include forward-looking statements, which are subject to known and unknown risks and uncertainties, including those set forth in this morning's Prat release and in the company's SEC Films.
Speaker Change: The company assumes no obligation to update any forward-looking statements because of new information, future events, or otherwise.
Please note that some of the financial measures to be discussed during this call will be on a non-GAAP basis.
These non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
We've provided a reconciliation of these financial measures to the most comparable gap measures in today's press release and in our presentation, both of which are available on our website.
Speaker Change: I'd like to now turn the call over to our President and CEO, Robert Buck.
Robert Buck: Good morning and thank you for joining us today. We're proud to share that in the third quarter we reach another historic high for top bills of sales and adjusted EBITDA performance.
Robert Buck: Our teams did a very good job across both our installation and special distribution segments, boasting top-line growth and bottom-line profit expansion.
Robert Buck: This quarter is a prime example of our ability to perform well in any environment.
Speaker Change: The landscape for building products in the third quarter was, in many ways, much like the second quarter. Although we've seen improvement in inflation metrics and the labor market is strong, housing demand in the second half of the year has been slower than anticipated.
Robert Buck: Single-family residential starts still vary widely across the country.
Robert Buck: Even as mortgage rates drifted lower ahead of the Fed rate cut in September, home buyer behavior suggests that consumers are holding out for a lower rate environment and election certainty.
Speaker Change: More recently, mortgage rates have been on the rise again.
Speaker Change: On the multifamily side, we're still working through our backlog. Multifamily demand has slowed, and we're not expecting it to improve in the fourth quarter and as we move into 2025.
Speaker Change: As a reminder, multifamily units typically require about 40% of the installation when compared to a single family unit, and our business is much more weighted towards single family, consistent with the industry.
Speaker Change: On the commercial industrial side, bidding is still very active and we have a strong backlog going into 2025.
Robert Buck: As we talked about last quarter, some project starts have been pushed out, primarily for financing reasons.
Speaker Change: We have not seen an uptick in cancellations, so we anticipate that when the finance and environment improves, these projects will move forward.
Speaker Change: Turning to our results, we performed very well in the third quarter given the macro environment. Sales increased 3.6% to $1.37 billion as volume grew
Speaker Change: benefiting from acquisitions and realizing pricing across both installation and specialty distribution.
Speaker Change: Our adjusted EBITDA total was $285.1 million and adjusted EBITDA margin was 20.8%.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Speaker Change: Moving on to our operations, with over 14,000 employees, we are a people business, and every day, excuse me, everyone plays a key role in what we achieve every day. We continue to be pleased with our ability to attract labor, align incentives, and develop and reward our employees accordingly.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: On the material side, fiberglass is still an allocation.
Speaker Change: Planned and unplanned maintenance remains persistent with the manufacturers and the new manufacturing facility in Texas has been slower than anticipated coming online.
Speaker Change: Our teams are doing a good job managing in the continued tight supply environment.
Speaker Change: Our special ops team continues to be an important part of our story and how we continue to improve productivity and drive profitability as you see in our results.
Speaker Change: As I've done on recent calls, I want to spend time highlighting a particular area of our business to provide a better understanding of our differentiated model.
Speaker Change: Today, I want to briefly touch on Crossroads, our Canadian specialty distribution business in mechanical and metal building installation.
Speaker Change: Crossroads Joint Top Build through the acquisition of Distribution International in 2021.
Speaker Change: With a long history in Canada, they're a leader in the commercial, marine, and industrial end markets.
Speaker Change: We operate out of 18 facilities located in key markets across Canada and our focus is to deliver the best service possible for our customers.
Speaker Change: Our value-added specialty fabrication capabilities differentiate us from competition and enable us to be the go-to supplier of innovative products and resources for our customers.
Speaker Change: Our focus includes both the ongoing maintenance of commercial and industrial facilities and a diverse and impressive list of new construction projects.
Speaker Change: One of our more notable projects for which we are currently the lead supplier is a liquefied natural gas project on the west coast of British Columbia. This is the largest infrastructure project in Canada's history.
Speaker Change: Thank you.
Speaker Change: We're also the lead supplier for a large shipbuilding program for the Canadian Coast Guard, as well as numerous nuclear power and oil sands projects.
Speaker Change: Our Crossroads management team has highly accomplished, and we're very proud of their hard work.
Speaker Change: They've been driving the business forward and have consistently achieved growth above the market.
Speaker Change: Turning to capital allocation, M&A is a core competency of TopBuild and acquisitions continue to be our number one capital allocation priority.
Speaker Change: We have a solid track record of generating strong returns for shareholders.
Speaker Change: We are pleased to have recently announced the agreement to acquire Shannon Global Energy Solutions, a mechanical installation company servicing multinational commercial and industrial customers.
Speaker Change: Shannon is based in upstate New York and generates approximately $11 million in annual revenue. This brings our 2024 year-to-date acquisition count to seven for a total of approximately $118 million in annual revenue.
Speaker Change: Given our robust pipeline and very active M&A environment, we're allocating more resources to support our M&A efforts as we evaluate several opportunities across our end markets.
Speaker Change: We continue to concentrate on our core of insulation, but we're also learning about opportunities that have the potential to expand our total addressable market.
Speaker Change: Importantly, we will stay disciplined as we focus on those opportunities that best leverage our core competencies.
Speaker Change: Thank you very much.
Speaker Change: Also in the third quarter, we continued our share buyback program, repurchasing 1.07 million shares for a total of $413.9 million.
Speaker Change: As you saw in our press release this morning and considering today's macro environment, we are tightening our outlook on 2024, which Rob will cover in more detail.
Speaker Change: Before I turn it over to Rob, let me reiterate that we are performing very well in a macro environment.
Speaker Change: Despite this, 2024 will be another strong year of profitable growth for Topbill.
Speaker Change: We are very well positioned to capitalize on improving demand that we believe will materialize as 2025 progresses.
Speaker Change: We participate in a great category in industry, and we have a differentiated business model. The underlying fundamentals are strong, an underbuilt housing market in the U.S., rising household formations, and the prospect for lower interest rates.
Speaker Change: These factors, coupled with the critical role that insulation plays in driving energy efficiency and meeting strengthening building codes, demonstrate why we're bullish about the long-term growth opportunity for top-build.
Speaker Change: Rob?
Rob Kuhns: Thanks, Robert. I'd like to extend my thanks to our teams for their hard work in delivering another excellent quarter.
Rob Kuhns: As Robert noted, record high sales of $1.37 billion grew 3.6% versus prior year, with both segments showing growth year-over-year and sequentially.
Rob Kuhns: M&A, net of a disposition, contributed 2.3% while price was up 1% and volume improved 0.4%.
Rob Kuhns: Third quarter pricing of 1% reflects the continued realization of higher fiberglass pricing net of new price reductions on spray foam driven by increased supply.
Speaker Change: Turning to our segments, installation sales grew 4.2% to $856.4 million.
Speaker Change: Net M&A added 2.7%, pricing contributed 1.1%, and volume was up 0.5%.
Speaker Change: Residential sales improved slightly from the second quarter and grew 3.7% versus prior year due to M&A and single family growth, partially offset by slowing multifamily sales.
Speaker Change: Commercial sales improved slightly from the second quarter and grew 6.8% versus prior year due to M&A and timing of projects.
Speaker Change: Specialty distribution sales rose 5.1% to 600.4 million in the third quarter.
Speaker Change: Volume improved 3%, acquisitions added 1.4%, and pricing contributed 0.8%.
Speaker Change: Sales to the residential end market improved slightly from the second quarter and grew by 8.5% versus prior year.
Speaker Change: Sales to the commercial and industrial end markets slowed slightly from the second quarter and grew by 2.9% versus prior year.
Speaker Change: Third quarter adjusted gross profit of $421.8 million, or a 30.7% margin, was 100 basis points lower than last year.
Speaker Change: As we've discussed in the past, our 2023 third quarter results included a one-time benefit of approximately $15 million from higher than normal margins on multifamily and commercial projects in the installation segment.
Speaker Change: Excluding this, adjusted gross margin improved by 10 basis points versus last year as we continue to focus on driving productivity and profitability across our operations.
Speaker Change: Third quarter adjusted SG&A as a percent of sales was 12.8%, an improvement of 40 basis points versus last year.
Speaker Change: Top bill at Adjusted EBITDA in the second quarter totaled $285.1 million or a margin of 20.8%. Excluding the $15 million margin benefit from last year, we expanded Adjusted EBITDA margin by 50 basis points.
Speaker Change: Installation segment adjusted EBITDA margin was 22.3%, a 40 basis point improvement after excluding last year's $15 million benefit.
Speaker Change: adjusted EBITDA margin for the specialty distribution segment expanded by 20 basis points versus 2023 to 18.4 percent
Speaker Change: Other income and expense of $16.1 million in the third quarter was $3.3 million higher than prior year due to lower interest income which was driven by lower cash balances.
Speaker Change: Third quarter adjusted earnings per diluted share of $5.68 improved 4.6% compared to last year.
Speaker Change: Moving to our balance sheet and cash flow, total liquidity was $693.6 million at the end of the quarter.
Speaker Change: Cash was $257.3 million and we have $436.2 million of availability under our revolver.
Speaker Change: We ended the quarter with net debt of 1.14 billion and our net debt leverage ratio was 1.06 times trailing 12 months adjusted EBITDA.
Speaker Change: Working capital as a percentage of sales was 14.1%, an improvement of 50 basis points compared to prior year.
Speaker Change: Free cash flow for the trailing 12 months totaled $698 million, representing a 2.6% improvement over the same period prior year.
Speaker Change: Thank you for tuning in.
Speaker Change: We continue to strategically allocate these strong free cash flows, and our capital allocation priorities remain unchanged, with acquisitions our top priority.
Speaker Change: This year we have announced seven transactions and we continue to have a very healthy pipeline.
Speaker Change: Our second priority remains returning capital to shareholders, and in the third quarter we bought back 413.9 million, or 1.07 million shares.
Speaker Change: That brings our year-to-date share buybacks to 919.2 million, or 2.3 million shares.
Speaker Change: Finally, turning to our outlook, we are narrowing our full year guidance.
Speaker Change: We expect to finish the year with sales between 5.3 and 5.35 billion, which represents year-over-year growth of 2.5 percent at the midpoint.
Speaker Change: We have also tightened our adjusted EBITDA expectations to $1.055 to $1.085 billion.
Speaker Change: While the macro environment has not played out the way we originally thought this year, 2024 is shaping up to be our ninth consecutive year of sales and profit growth, something we are very proud of.
Speaker Change: While the choppiness of our end markets is likely to continue into the first half of 2025, we think the underlying fundamentals for demand in our industry remain strong and we are confident that we will continue to drive profitable growth and increase shareholder value.
Speaker Change: Robert?
Speaker Change: Before I open up the call to questions, let me reiterate some of my opening remarks.
Speaker Change: We have a proven, differentiated business model, a disciplined capital allocation approach, and an ongoing focus on strong execution and driving improvements throughout the business.
Speaker Change: As we look ahead, the macro fundamentals of our business are supportive of construction demand growth. We are inherently well positioned to capitalize on the opportunities for increased energy efficiency and strengthening building codes.
Speaker Change: We continue to have a significant opportunity to drive growth through M&A. Our pipeline is healthy and we are very active. We have a great track record of evaluating, acquiring, and integrating businesses, generating solid returns.
Speaker Change: We remain committed to building on our track record of delivering increased shareholder value and we expect 2024 to be another strong year of profitable growth.
Speaker Change: I'll conclude by thanking our teams for their continued dedication, focus on our customers, and commitment to safety.
Speaker Change: We want to thank you for your efforts to consistently execute and drive improvements across our business.
Speaker Change: With that operator, we're ready to open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Philip Eng with Jeffries. Please proceed with your question.
Speaker Change: Bye.
Speaker Change: Hey, good morning, everyone. This is Maggie on for Phil.
Maggie: Robert, you called out some of the current choppiness continuing into the first half of next year. Can you give us a framework for how to think about 2025 and do you have enough levers to continue driving organic?
Speaker Change: Topline and EBIDTA growth, even if we don't see a meaningful acceleration in single-family starts next year.
Speaker Change: Yeah, Maggie. This is Rob. So, you know, obviously we haven't put out our guidance for 2025, but as we look ahead, you know, we're optimistic about 2025, that that could be our 10th consecutive year of sales and profit growth.
Speaker Change: You know obviously we're dealing with some some choppiness in the end markets right now
Speaker Change: But, you know, overall, like we've talked about, the fundamentals we know are strong. We're optimistic that rates will come down next year. And, you know, for resi and commercial...
Speaker Change: That should be good for end market demand. So while we know...
Speaker Change: You know, the headwinds on multifamily, we started to see, you know, that hit us in Q3.
Speaker Change: that we're going to continue to see that into Q4 and into early next year. It's important to remember that's 10% of our business, total business.
Speaker Change: Right now, our bidding activity there has actually picked up some. So we're optimistic that things may have bottomed out there and that could be getting better. And then, you know, in the rest of our business...
Speaker Change: You know, the rest of our business would need to be up, you know, if that's down 30% next year in line with what starts are down year to date.
Speaker Change: We need to be up a little over 3% in the rest of our core business, which we think is definitely doable. So, you know, long answer to your question, yes, we still see paths for sales and profit organic growth next year.
Speaker Change: Thank you.
Speaker Change: Okay, that's really helpful. And then I wanted to dig into pricing. You have the the mid-year fiberglass increase. Can you talk about realization for that? We've been getting some feedback that builders are getting some pricing fatigue, so just wanted to...
Speaker Change: if you could go through how some of those conversations are going. And then on the spray foam side, you mentioned price reductions. Are you starting to see prices stabilize or are there going to be continued headwinds in that category?
Robert Buck: Hey Maggie, it's Robert. So on the fiberglass, I think as Rob pointed out in his remarks, you know, we definitely saw
Speaker Change: improvement quarter over quarter Q2 to Q3 on fiberglass. But look, there's been a lot of definitely conversations, thousands of conversations with the builders.
Speaker Change: and Situation, but overall he's done a nice job. Yes, spray foam, definitely. I think there was a lot of...
Speaker Change: [inaudible]
Speaker Change: And that's created a competitive situation. We would think that's not sustainable, what's happened relative to the decline, so we would see that stabilizing here coming out of 24 going into 25.
Speaker Change: All right, thanks so much guys
Speaker Change: Thank you.
Speaker Change: Our next question comes through line of Steve and Kim with Evercore. Please proceed with your question.
Speaker Change: Hi, this is Atisha for Steve. Thanks for taking the question. Sticking with pricing there,
Speaker Change: Outside of fiberglass and spray foam, how should we think about the pricing dynamics of the other products in the quarter and kind of going forward? Was there deflation there? So if you could touch on that, that would be helpful.
Speaker Change: Yeah, Ateesh, this is Rob. So I'd say overall, the other product categories...
Speaker Change: No meaningful change, the two movements from quarter to quarter was, as Robert said, we saw improvement in price realization on the fiberglass side from Q2 to Q3.
Speaker Change: And then, you know, in Q3, the new news there was the, you know, spray foam price decreases that we saw. You know, we got decreases on the supply side as well as...
Speaker Change: talked about, things got a little more competitive in certain markets with new supply coming online. So, you know, that had the opposite impact, you know, ending up with kind of the muted 1%. But the other product categories didn't have a meaningful impact.
Speaker Change: Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: I guess my question, just a housekeeping item first, that to confirm that you actually had an extra day this quarter, which you included in your volume, and I assume that also you have an extra day in the fourth quarter.
Speaker Change: So just if you could confirm that and then
Speaker Change: A larger question about the commercial projects of CNI.
Speaker Change: delays. I think last time we met, Robert, you thought that most of those projects were likely only going to be delayed by like a couple of months or something, because if they were going to be delayed longer than that, I think you would indicate that the customers would probably like come back to you asking you to extend your quoted pricing, and they weren't doing that. So you said probably, you know, they're only delayed a couple of months. I'm curious, has that changed? Are we looking at longer delays now? And if maybe you could describe, if so, what does that make you think about for fiscal 25? Are you going to have more of a bunching of projects in 25? So are we actually going to see more CNI activity in 25 than you previously thought? Or help me think through the dynamics there.
Robert Buck: Morning, Steve. It's Robert. I'll take the first part of that, the commercial industrial side.
Speaker Change: and then Rob Kinnett talk about the days in the quarter. So yeah, I think a great question that you have there. So there have been more delays. I think the positive is no cancellations.
Speaker Change: that have happened. So, you know, I think last time, whenever I saw you, we were talking about some big data center projects that we were working on that had been delayed, you know, three or four months at that point. Now we're seeing some projects delayed, you know, three or four months or even a couple quarters into 2025. So, you know, as Rob talked about, I think, in his remarks when we talked about special distribution and the volume there, we were pretty happy. So what was driving that has been some good maintenance and repair work.
Speaker Change: that is hit from the CNI side of the business. So that would say that we expect assuming a stable finance environment and things improve there, bigger pickup in the capital projects and the bigger projects on the commercial industrial side in 2025. So bidding remains active, no cancellation uptick. So I'd say we're positive from that perspective, but definitely continued delays in projects. Some's a little bit longer. If you take like, you may say, give me a mega project or give me some, some verticals that you may talk about, EV and battery plants, that'd be a great example of, has some demand to slow their projects are getting delayed, pushed out, not canceled. So that would be an example of that, that we see that are a little more extended.
Speaker Change: Yeah, and then just hit on your housekeeping items there. You're correct. It's plus one day in Q3 and Q4 on a year-over-year basis.
Speaker Change: Thank you.
Speaker Change: Perfect. Thanks so much, guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Michael Reholt with J.P. Morgan. Please proceed with your question.
Michael Reholt: Hi. Thanks. Good morning, everyone. Thanks for taking my questions.
Michael Reholt: First, maybe a little bit also of a housekeeping question, just to kind of better appreciate the degree of magnitude here, given the variety of your end markets and products that you offer. If you could just remind us roughly what percent of sales?
Speaker Change: you know uh... does commercial represent
Speaker Change: as well as on the residential side, spray foam.
Speaker Change: as a percent of your overall sales, or if it's more relevant, installation, your installation segment, just to kind of better appreciate, you know, again, the impact of some of the mixed trends in these areas.
Speaker Change: Sure, Mike, this is Rob. So pretty straightforward answers there, you know commercial industrial for for our business on the install side where It's about 15% of our of our total sales, especially distribution It's about 60% and you know that puts it at top build kind of around 35%
Speaker Change: Spray foam between the segments. On the install side, you're talking 15 to 20% of total sales. Distribution around 10%, and that puts the overall top bill at the 10 to 15% type number.
Speaker Change: Okay, great, great. And then, um...
Speaker Change: Thank you. Bye.
Speaker Change: and I assume when you kind of talk about you know the commercial projects being delayed that is kind of broadly speaking referring to the overall you know commercial industrial numbers that you just quoted
Speaker Change: Yeah, that's correct. So no particular geography to point out or anything like that. It's pretty neutral across the country, and even thinking about the verticals that I spoke about earlier.
Speaker Change: Okay all right because I think also a part of that is you know there is a portion of the commercial industrial business it's kind of more recurring so I don't know if that would be kind of outside of those percentages so to speak.
Speaker Change: I mean inside of the 35% is the recurring revenue.
Speaker Change: So and like Robert said the recurring was strong in the quarter and our overall C&I for the quarter was up 4% across the company so
Speaker Change: You know, more in line with our, you know, actually a little better than the reduced assumption we had coming into the back half of the year here. We were thinking more kind of low single-digit growth, and that was a little better than we thought in the quarter.
Speaker Change: Great, great. Second question relates more to the M&A backdrop and, you know, we see the continued activity this year. I think, you know, going back to the beginning of the year, you know, with the SPI deal that fell through for, you know, reasons that obviously we're all familiar with.
Speaker Change: That was a relatively larger deal and you know I think there is some maybe concern out there that similar larger deals may be harder to come by.
Speaker Change: Hmm.
Speaker Change: So, you know, I'm just kind of curious your thoughts around, you kind of continue to talk about the M&A.
Speaker Change: Backdrop remaining robust.
Speaker Change: a lot of activity, a lot of opportunity. You know, kind of on the medium to larger side, I was wondering if you could kind of review...
Speaker Change: your prospects across your three different verticals.
Speaker Change: I guess it's more, you know, relevant to the medium to larger opportunities are more on the commercial-industrial side.
Speaker Change: But kind of where you stand, you know, with those types of acquisitions and how should we think about the next, you know, two or three years as it relates to the potential for, you know, additional medium to larger deals.
Speaker Change: Yeah, Mike's Robert, so I'll take that from a few different angles. So, you know, if I look at the current pipeline, what we have under NDAs and deals that we're closer to there, it's really across all three.
Speaker Change: of the end markets there.
Speaker Change: that we service. And there's some nice, chunkier deals in there, 40, 50, 60 million dollar type of deals, and then there's the smaller 15, 20 million dollar type of deals as well. So very active right now, not just active, but I'd say a lot of things that we're working from an M&A perspective. And I think your question is a good question, as you think longer term here. I mean, obviously...
Speaker Change: point that we talk about, and that is really we're focused on, you know, the core competencies that Top Note has.
Speaker Change: And our core competency is we're very comfortable and have a competency of running this dispersed branch network type of model with central support. Obviously, from a culture perspective, what we've built relative to this local ownership, local empowerment piece.
Speaker Change: So that would be, again, the first we're pretty optimistic.
Speaker Change: and good line of sight for the next two to three years, how we think about it.
Speaker Change: Great. Thanks so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Susan McLaury with Goldman Sachs. Please receive your question.
Susan McLaury: Thank you. Good morning, everyone. Good morning. My first question is around the energy efficiency initiatives that you had mentioned. As the builders are struggling with the affordability headwinds and rates are continuing to move higher versus lower, can you talk about how some of that is perhaps slowing through and how it may come through over the course of the next year or so?
Speaker Change: Yeah, I'll start with that, Susan Roberts. So, yes, as I mentioned earlier, whenever we're talking about spray foam, there's been some excitement, but at the end of the day, the builder's just getting that to pencil out.
Susan McLaury: hasn't really come to fruition. So there are other insulation, i.e. fiberglass alternatives there.
Susan McLaury: that definitely, if you think about, you know, like a blown-in blanket.
Speaker Change: Kuhns, Tabitha Zane, Robert Buck
Speaker Change: or other solutions. And you know, there'll be some place, I'm sure some folks will use spray foam to meet those codes, maybe in the custom or even in the regional sector there. But I don't think it'll hold back the implementation of some of the code, more stringent codes, if you will.
Speaker Change: Okay, that's helpful. And then maybe thinking about the cost environment a bit, can you just talk about labor, the availability that you're seeing there? Has that changed at all? Has it gotten any better for you? How you're thinking about wage inflation? And then I guess, you know, as it relates to that also, just some of the company-specific efforts that you're pursuing as it relates to being more productive and efficient, especially on some of the distribution efforts there?
Speaker Change: Yes, so from a labor perspective, as you know, it's always been a strength for us. And I'd say as there's been choppiness in certain markets and stuff, labor's become more readily available, but as we look out further into 2025 and stuff, as things pick back up, we definitely think labor for the industry, not for top-bill, will be a constraint. Relative to the inflation piece, we really haven't seen it. Just a reminder, the majority of our workforce there is on a piece rate, so whenever we talk about our special ops teams and really working productivity, that's what we're constantly doing. So you never really heard us talk much about the wage inflation side, because we really worked on improving productivity, and things specifically that we're working on there is some better tools that we're putting in place.
Speaker Change: take him away.
Speaker Change: as well. So we continue to work those, and that includes on the distribution side with our drivers. If you think about, you know, from a distribution model, drivers being a very important part of the team there. So, you know, working activities there to make that group more productive, both in warehouses, but the drivers specifically as well.
Speaker Change: Okay, thank you for the color and good luck with everything. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question comes from the line of Jeffrey Stevenson with Loop Capital. Please proceed with your question.
Speaker Change: Hi, thanks. It's Gary Schmoyce on for Jeff. Thanks for taking my question. I was wondering if supply constraints on the fiberglass side had any impact to volumes similar to what you saw in prior quarters and, you know, maybe just speak broadly how you're positioned from inventories going into the fourth quarter, just given the supply constraints you talked about.
Speaker Change: Yeah, good morning, Mr. Roberts. So, you know, third quarter saw some fluctuations relative to supply. I would say
Speaker Change: was tighter to start the quarter, eased up in some of the choppier markets, somewhat during the third quarter, maybe in the August timeframe, early September. But as the maintenance started hitting and some unplanned maintenance started hitting, definitely material tightened up again here as we came through October. So a little fluctuation in that.
Speaker Change: some impact in the in Q3 from you know tight environment. I'd say sitting here you know going into Q4 we think we're positioned
Speaker Change: Well, from that perspective, as we see as we got through October and we know there, you know, the Knopf plan in Texas, which you mentioned this lower coming online, we expect it to be, you know, up and going here towards the end of the year, heading into 2025. So I think we feel pretty comfortable from that perspective. Obviously, everything will be supply-demand driven there, so we'll see what happens with the starts here coming up in the next, you know, 30, 60 days as well.
Speaker Change: Okay, thanks for that and just wondering if you could provide maybe some more color just geographically what you're seeing by region.
Speaker Change: Sure, so if I think about, um, let me just kind of think about this a little bit, maybe going through the, through the country, so.
Speaker Change: If I think about...
Speaker Change: You know, the Northeast, maybe Mid-Atlantic, maybe the...
Speaker Change: The Northwest Northern California, I think we've seen some improvements there. If I look at bid activity and sales, so let's say...
Speaker Change: I'm seeing some improvement in those areas. If I think about steady, I'd say steady regions are Utah, Idaho, the Carolinas, Colorado. Dallas has continued to pull through well, as well as San Antonio, Denver.
Speaker Change: And then if I said some areas that, you know, use my term choppy, I'd say maybe like, you know, Southern California, certain Arizona markets, you know, Austin would be a good, a good, you know,
Speaker Change: You know, example of that, Houston a little bit as well, but think about Texas.
Speaker Change: and then Florida some but it's just kind of a market by market there I think maybe on a previous call or previous conference I mentioned like the Naples area.
Speaker Change: That would be a slower one, but we continue to see Orlando be strong, and Florida's got a little bit of impact if you think about the hurricanes and stuff as well.
Speaker Change: I think that one, you know, will continue to be steady and improved, but hopefully that gives you a little flavor if you're around the country.
Speaker Change: No, it does. Thanks for that, and I'll pass it on.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Our next question comes from Keith Hughes with Truist. Please proceed with your question.
Keith Hughes: In the fourth quarter, what are you expecting in your multifamily business?
Speaker Change: in terms of dollars and units, however you want to do it, to be down.
Speaker Change: Yeah, Keith, this is Rob. So we don't split it out between single-family and multi-family. I mean, we're still expecting, you know, our total RESI sales for the full year, I'd say.
Speaker Change: When you put it all together, we're looking at the full year kind of flat on total resi sales.
Speaker Change: So you can kind of back into a fourth quarter assumption that has a slightly negative from a resi side, and obviously multi-family would be driving the bigger chunk of that.
Speaker Change: And do you think, whatever that number is, it seems like that's probably going to get worse at the beginning of the year. Is that directionally where you see the market going?
Speaker Change: Yeah, I think multifamily will be a challenge as we move into Q1 and Q2, but like we were talking about, we've actually seen some of our bidding activity pick up there, so we think we're going to do better than the market on that side of things. And then, like I pointed out earlier, the fact that it's 10 percent of our total business
Speaker Change: We don't need to see too big of an uptick on the single family and commercial side to offset it. So we're, obviously 2025's a lot of variables still to be seen, but we're cautiously optimistic, like I said earlier, that it'll be another year of growth.
Speaker Change: But probably definitely tougher first half versus second half, I would say, next year.
Speaker Change: It's just not been up much this year. What do you think it would take to get back to some higher inflation in terms of, you know, what you're getting from your suppliers as well as what you can put to your customers?
Speaker Change: I think a couple of things, one is we definitely see the demands, I think more of an even or steady increase on the single family starts.
Speaker Change: As Rob said, we're going to perform better than the market on multifamily, whatever that looks like. But a lot more fiberglass, as you very well know, goes into a single-family unit, so I think the demand side.
Speaker Change: on the single family and I think you're going to see the codes continue to kick in here in 2025 as well and we're seeing the builders prepare for that. I think that's going to, we think material will be tight in 2025 but I think we're set up well for that.
Speaker Change: Okay, thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Rhys Chadrasek with Bank of America. Please proceed with your question.
Speaker Change: Hi guys, this is actually Sean Calman, I'm for Rafe.
Sean Calman: On the spray foam price changes, can you talk about the cadence of price changes there? Are they consistent or is this more of a dynamic pricing model versus fiberglass? And then how is the spread between fiberglass and spray foam changed over time?
Sean Calman: As you know, if you go back there, you come with some of the material constraints.
Speaker Change: 2020 and 2021, you know, dramatic inflation from a spray foam perspective.
Speaker Change: That's definitely gotten more realistic or pulled back here, I'm going to say, in the last 18 months.
Speaker Change: But it's still, I'm going to say, two and a half times.
Speaker Change: a call-slash-price environment.
Speaker Change: It's pretty dynamic. There was a lot of optimism fueled the early part of the year about the builders and energy codes and using fiberglass, especially in some really big markets like Texas, Southern California.
Speaker Change: Florida
Speaker Change: Again, some of that's been harder for the builders to pencil out. So you've seen, you know, you saw more supply come on, more blenders come on, and that created some dynamics around the pricing cost side. We don't think that's sustainable, and so that's why we've said earlier we think that stabilizes heading out of 24, early 25. So that's kind of the dynamics of what's happened, a little bit of the history as well.
Speaker Change: Thank you.
Speaker Change: Okay, got it. And then you mentioned that you guys are looking at opportunities to expand the addressable market. Can you just kind of expand on what those opportunities are that you're evaluating? Are these new products or markets and then is it more on the installation or distribution side?
Speaker Change: Yes, I think, you know, relative to growth in M&A, I mean, we're always looking at
Speaker Change: you know, any opportunities in our core business. I mean, we, you know, whenever we think about our core business, there's so much runway still left in our core business. Whenever we think about, you know, residential, commercial, industrial, around building insulation and, you know, commercial, mechanical, industrial insulation solutions. So a lot of runway there. So as we look at acquisitions, we're always looking at, you know, geographies where would be good opportunities for us or MSAs.
Speaker Change: plenty of runway there that drives into our thoughts and as we look longer term the two to three years
Speaker Change: You know, it's really about these core competencies. I think, you know, given our history of going back pre-top, that we really learned a lot about M&A, and I think you've seen a very successful track record since 17 in this business.
Speaker Change: And it's because you've got to build M&A off of core competencies, and so, you know, I've talked about our core competencies, which, you know, goes from the culture to, you know, our confidence, comfort level and competency we have around M&A and running this dispersed model with central support in the background.
Speaker Change: We're very, very good at labor. We're very good at driving productivity in the model and supply chain leverage. We're not going to do anything outside those core competencies. That's how we think about it, and it's given us a really good line of sight as to what that looks like here in the coming timeframe.
Speaker Change: Does that complete your question?
Speaker Change: Yes, thank you.
Speaker Change: Our next question comes from the line of Ken Zener with Seaport Research. Please proceed with your question.
Ken Zener: Good morning, everybody.
Speaker Change: Good morning.
Speaker Change: Um
Speaker Change: Appreciate your comments.
Speaker Change: regionally. I liked your positive steady and choppy market definition given that you and competitor have probably the best data on housing, new housing.
Speaker Change: activity in terms of bids. Within that context, could you maybe just comment on how your...
Speaker Change: Your, you know, your sales people are conveying positive steady choppy to you in terms of like the bidding. Is there a price pressure? If there's obviously volume pressure given the rising
Speaker Change: number of finished homes that builders have, right? It seems like they're pulling back on starts a little bit and obviously rates have gone up in the last six weeks, but could you maybe give us some
Speaker Change: context for this, if it's a supply issue, it's a demand issue, if you know your team's just saying pricing's an issue or they're pushing back on us, but also
Speaker Change: Given your perspective, does this make sense what's happening, just kind of, you know, micro cycles where it takes a little bit to get adjusted to interest rates?
Speaker Change: It's very interesting and I think your view matters. Thank you.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: Hey, Candace, Robert, I'll start, but I'm sure Rob will have some color to add as well. So, yeah, it is, you know, one good thing, one of the many good things about Central IVRP that we have is we're able to see those bid rates.
Speaker Change: looking out across the country by geography, by MSA. And so that drives our commentary, as well as our cadence with the field of understanding what they're seeing. But I think you're right. I think there's this calibration time period of addressing some of the political uncertainty, those types of things.
Speaker Change: that's going to happen as well. So it's probably an adjustment period that happens. But I would say, you know, obviously talking to our builders, which we do about, you know, what their outlook is for 25, whether it be first half, back half.
Speaker Change: That's where we get our information from and that's pretty fact-based coming from a combination of our conversations with our field people as well as what we can see from a bid weight perspective in our ERP system.
Speaker Change: Yeah, and I'll just add to that, Ken, I think, as Robert stressed earlier, it's really...
Speaker Change: even within states like Florida and Texas, we're seeing differences.
Speaker Change: That's the choppiness we refer to, and I think, ultimately, from a broader view, rate certainty.
Speaker Change: We definitely saw as rates went up that rate certainty played a big player there. As rates were going up, people hit pause.
Speaker Change: And then once rates stabilized and people realized, you know, the 3% mortgages weren't coming back anytime soon, demand came back.
Speaker Change: Obviously, the buy-downs from the builders have helped that a lot, too. But now, with rates heading the other direction...
Speaker Change: At some point, we hope, right? You know, you're kind of seeing that same pause button, I think, from some buyers out there where they're saying, okay, well, if I can get this cheaper in a few months.
Speaker Change: I'll sit here on the sidelines, so I think that's a big driving factor behind what we're seeing there in the choppiness.
Speaker Change: As we said, the long-term fundamentals are solid, and so things do break loose here where people get comfortable in the environment, rates do stabilize, you get some of the uncertainty.
Speaker Change: you know, out of the way and maybe even filter through some of the promises that have been made.
Speaker Change: We feel good about the material situation, how we're situated there as well. So I think as things do improve, we're going to be ready.
Speaker Change: really appreciate that. Maybe if I could
Speaker Change: a broad perspective on the national housing and I think people like myself get
Speaker Change: sometimes.
Speaker Change: Overly.
Speaker Change: Biased by what the public builders are saying so many of the public builders are calling for like 10% growth Is that is that kind of consistent with?
Speaker Change: the public versus the private delta as they think about their business next year? Starts probably aren't growing 10% overall, but many builders are looking for 10% growth. Does that mean the publics are still gaining a lot of share? Is that really just that we're focused on Orlando, Dallas, and not enough on Michigan or, you know, these smaller markets? Thank you.
Speaker Change: As we think about our custom builders, which we do major work with custom builders and the regional builders.
Speaker Change: Their, I think, feedback is a stabilized rate environment.
Speaker Change: And what they're expecting from that, they expect nice improvement in their business as well. Because they haven't been able to do the buy-downs and stuff that large publics have. So as you get to that more stable environment and, you know, the outlook for those moderating rates, I'd say the regionals and the small custom builders feel positive as well.
Speaker Change: Thank you.
Speaker Change: Thank you very much.
Speaker Change: As a reminder, if you would like to ask a question, press star 1 on your telephone keypad.
Speaker Change: Our next question comes from Adam Baumgarten with Zellman & Associates. Please proceed with your question.
Adam Baumgarten: Hey, good morning everyone. Just on the pricing side, can you put a finer point on the magnitude of the headwind to overall pricing from the spray foam declines? Just because I know you kind of talked about the fiberglass side improving on a year-over-year basis from 2Q to 3Q, but I think it was offset by spray foam. So any color on the magnitude just so we can get a better apples-to-apples comparison on the fiberglass side?
Speaker Change: Yeah, and this is Rob. So I'd say that the spray foam impact was about 130 basis points on the price.
Speaker Change: And then the other thing to keep in mind when you look at our price number two is it's a price mix, right? So as you see...
Speaker Change: Shifts in customer or regions or products, we also have some impacts there. But by far the biggest headwind to the improvement in fiberglass was the spray foam price decreases, and that was about 130 basis points.
Speaker Change: Okay, got it. That's helpful. And then just to clarify on the kind of tightening of the guidance range and the midpoint coming down, was that solely due to lower single-family or just overall residential growth in general, not any change at this point in your C&I outlook?
Speaker Change: given by the choppiness in C&I this quarter. I'd say it's residential and primarily multifamily, right? Some of the backlog.
Speaker Change: We saw it would come through in the third quarter. We saw some delays with some of that backlog, so definitely seeing some slowing on the multifamily side.
Speaker Change: And then it's important to keep in mind the hurricanes too, right? Certainly...
Speaker Change: You know, the midpoint and higher end of our range didn't contemplate the hurricanes that we've seen in the third and fourth quarter now. I'd say it was about a 10 million impact in Q3 and roughly about 8 million here in Q4.
Speaker Change: They got it. Thanks. Best of luck.
Speaker Change: Thanks.
Speaker Change: Thank you. We have reached the end of the question and answer session. Mr. Buck, I would like to turn the floor back over to you for closing comments.
Speaker Change: We appreciate you joining us today and your interest in top builds. We look forward to seeing many of you in person at conferences later this month and in December. Thank you.
Speaker Change: For more information visit www.FEMA.gov