Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- TopBuild Corp (BLD, Financial) delivered a solid second quarter with both segments growing top line sales and bottom line profits.
- Sales grew 3.7% to $1.37 billion, with both segments realizing pricing, increased volumes, and benefiting from acquisitions.
- Reported adjusted EBITDA of $277.7 million and an adjusted EBITDA margin of 20.3%, the highest in the company's history.
- Residential business grew 5.4% in the quarter, with single-family environment continuing to improve.
- Strong M&A activity with acquisitions totaling approximately $280 million in annual revenue over the last 18 months.
Negative Points
- Volumes across both segments were softer than anticipated in the quarter.
- Material supply constraints, particularly in fiberglass and certain commercial products, impacted growth.
- Commercial and industrial end markets are feeling the impact of higher interest rates, causing project delays.
- Gross profit margin was 100 basis points lower than last year, partly due to a one-time benefit in the previous year.
- Revised full-year sales guidance to $5.3 billion to $5.5 billion, reflecting choppiness in demand, primarily in commercial markets.
Q & A Highlights
Q: When we look at your results this quarter, we were a little bit surprised by the overall price realization in the quarter, we thought they might be a bit stronger. I was curious, whether any mix issues at all to call out? And then also, if you look at your guidance, I think you said that really, the reason for the reduction in the guidance is this commercial industrial segment. Does that envision a positive year-over-year trend in commercial and industrial in the back half? Or does that trend towards something more like flat to down?
A: Stephen, this is Rob. On the first question around price, we are overlapping some price decreases from the second quarter of last year on both gutters and spray foam, which accounted for about a 1% headwind on our overall price. We feel good about the realization of the price increase that happened in the first quarter. Regarding guidance, the biggest change is around some choppiness in project volume on both the install and distribution sides. We see the second half improving year-over-year in both residential and commercial, but not as much as originally anticipated.
Q: You mentioned that there's been some regional shifts in terms of the single family. Can you talk about where you're seeing more strength or more weakness and how that could perhaps come through as you think about the back half?
A: It's Robert. Strength is definitely still in the Southeast, Carolinas, Florida, Texas, and California. Weaker spots include the Pacific Northwest and the Northeast. In Arizona, it's city by city. We think it will continue to improve as long as we see those starts come out of the ground in some of those slower regions here in the back half.
Q: Can you talk about your appetite to continue to use up the $649 million or so that's remaining on the authorization? And any comments with that on the M&A pipeline and how you're thinking about that also as a use of cash?
A: Susan, this is Rob. Our priorities are unchanged. M&A remains our number one capital allocation priority. Our pipeline is very healthy, and we feel good about it moving forward. As for buybacks, we will continue to prioritize that with our M&A pipeline and be opportunistic.
Q: What appears not normal is the lack of material. How unique is that in your perspective? And why aren't we seeing that in greater pricing if the supply is so tight?
A: Ken, it's Robert. Fiberglass is still in tight supply, and Q2 was tighter due to maintenance and unscheduled downtime from suppliers. We expect this to improve in the back half of the year. We feel good about the price covering the additional expense from third-party buys.
A: This is Rob. We feel pretty good about the pricing environment, and we are working through the second fiberglass price increase right now.
Q: Can you talk about the variance between large reduction and independent builder growth in your second quarter installation volumes and whether you expect that trend to widen as we move throughout the back half?
A: Jeff, similar to industry data, we see growth with big builders as they continue to take share, particularly with their ability to do rate buy-downs.
Q: Can you give any color on how demand trended in the second quarter for light commercial and whether you've experienced any slowdown in bidding activity during the quarter?
A: Jeff, it's Robert. We saw some project delays in both light and heavy commercial. Light commercial did a little better and follows residential trends. Bidding activity is strong, and we see no cancellations, which is critical. This is more of a timing issue.
Q: We've seen such a strong improvement in single-family starts year-to-date. Where is the disconnect between that and your volumes? And when do you anticipate that improvement starting to flow through?
A: Maggie, this is Rob. Starts are up, particularly single-family, but completions are only up 1%. We expect the improvement in starts to make its way into the third and fourth quarters. We have volumes improving in the second half of the year, but we have tempered that down based on recent trends.
Q: Potential rate cuts coming later this year. How are your residential and commercial customers anticipating the impact of that potentially flowing through later this year or in 2025?
A: Definitely conversations are happening. If rate cuts occur, it would likely create great momentum for 2025, positively impacting consumer sentiment and starting the year off strong.
Q: What productivity and other initiatives contributed to your profitability year-to-date versus last year? And how can we think about these going forward?
A: This is Rob. Productivity is a huge part of our story, driven by our special ops teams working with our bottom-performing branches. We typically outshoot our targeted incremental of $22 million to $27 million due to this work.
A: This is Robert. Our special ops team has focused on optimizing logistics and productivity, particularly in our mechanical businesses, showing benefits in our distribution margins.
Q: How do you view the opportunity on margins over the next one to two years, especially if the market were to slow?
A: This is Rob. We are a high variable cost model, so in a slowdown, we would reduce material purchases and labor costs. If the slowdown is short-lived, we would hold on to labor. For a long-term downturn, we would make more reductions. We target a similar $22 million to $27 million range for decrementals, but it will be bumpy due to fixed costs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
