Greetings, and welcome to TopBuild's Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Tabitha Zane, Vice 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; and John Peterson, Chief Financial Officer. We have posted senior management formal remarks and a PowerPoint presentation that summarizes our comments on the Investor Relations section of our website at topbuild.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 for 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 release and in the presentation accompanying this call. I will now turn the call over to Robert Buck.

Good morning, and thank you for joining us today. I want to start by thanking our entire TopBuild team for their continued hard work and dedication. Our strong second quarter performance is a direct result of their commitment to excellence in all that they do. This continues to be a great operating environment for TopBuild and one that we believe could last for the foreseeable future. Unlike the housing boom of 2 decades ago, which featured excess supply, rampant speculation and lead credit controls, this current housing growth is being driven by strong pent-up demand, extremely limited housing inventory and improving economy and low interest rates. Governing this growth and elongating the cycle are material and labor constraints for all trades in our industry. Evidence of this is clearly indicated by completions, which have remained flat -- relatively flat over the past year. While we are optimistic some of these supply chain constraints will begin to ease by year-end, the extension of the build cycle has created a healthy backlog. Turning to our second quarter results. We again demonstrated the strength of our operating model and our ability to pass material cost increases through with selling price adjustments. Revenue increased 29.1%, 18.3% on a same branch basis. Adjusted operating profit grew 55.5% and adjusted EBITDA increased 39.1%. Adjusted operating margin expanded 270 basis points. Adjusted EBITDA margin expanded 130 basis points and adjusted net income per diluted share increased 64.3% to $2.76. As expected, TruTeam saw a strong sequential increase in customer pricing from the first to the second quarter. With material and allocation and labor constrained, every branch is focused on striking the optimal balance between price and volume, understanding that at the end of the day, our goal is driving profitable growth. Service Partners continue to do an…

Good morning, everyone. As Robert noted, this is a great operating environment for TopBuild, and our strong second quarter results provide solid evidence of the strength of our business model and our ability to successfully manage and optimize our input cost and pricing as well as our overall cost structure. Moving to our results in the second quarter. Net sales increased 29.1% to $834.3 million, primarily due to an 11.8% increase in sales volume, a 6.5% increase in price and $70.2 million of revenue from 6 acquisitions: Garland, LCR, Ozark, ABS, Creative Conservation and RJ Insulation. For the first 6 months of 2021, net sales increased 21.4%, primarily driven by increased selling prices, sales volume and $97.6 million of revenue from acquisitions. Adjusted gross margin increased 140 basis points in the second quarter and 90 basis points in the first half of 2021 to 29.2% and 28%, respectively, driven by higher selling prices, lower depreciation expense and insurance costs primarily offset by material inflation. On a same branch basis, adjusted gross margin expanded 190 basis points in the second quarter. Adjusted operating profit in the second quarter grew 55.5% to $129.9 million with a corresponding margin improvement of 270 basis points to 15.6%. For the first 6 months, adjusted operating profit increased 47.7% to $227.1 with the corresponding margin improvement of 260 basis points. Adjusted EBITDA for the second quarter was $149.8 million compared to $107.8 million in the second quarter of 2020, a 39.1% increase. And adjusted EBITDA margin expanded 130 basis points to 18%. As a reminder, in the second quarter of last year, our depreciation expense was approximately $5 million higher due to a reduction in the carrying value of older assets that the company was no longer utilizing. For the first 6 months of 2021, adjusted…

Thank you, John. Our entire company remains focused on achieving profitable growth through operational excellence and thoughtful and balanced capital allocation. As we look to the rest of the year, we expect solid full year performance of both TruTeam and Service Partners. The housing market is strong, fueled by low interest rates, pent-up demand and very little inventory. This is a good operating environment for TopBuild and should remain so for the foreseeable future. As always, I thank the entire top of team for their focus on working safely to deliver value, quality and service to our customers. Operator, we are ready for questions.

[Operator Instructions]. Our first question comes from Stephen Kim with Evercore ISI.

Good results as always. First question I had for you relates to the effect of cycle times on pricing, particularly in TruTeam. Obviously, TruTeam had -- probably has more impact from that. Last quarter, I think it was somewhere in the range of about 100 basis points headwind to pricing these extended cycle times at the builders. Curious what that -- what you think that was in 2Q? And also noninsulation products, I think you also mentioned might be a bit of a headwind to pricing and just wanted to see if you could quantify that as well?

Yes, Stephen, so this is John. Yes, you're right, going back to first quarter results, we talked about it on the call last time that TruTeam because of the extended build cycle, the ability to drive pricing and get pricing into our P&L basically was delayed a little bit. So as we said on that call, we expected the second quarter to be significantly better and really almost current. And I think you've seen the result of that in what we reported today. So much, much better in terms of the timing on the TruTeam side, some very small delay tied to the build cycle, but very de minimis in terms of versus what we had. And you're right. Last quarter, it was about 100 basis points delay. Service Partners, obviously, first quarter and second quarter much more timely in terms of the ability to drive pricing and get into the market. And again, second quarter, great performance there on SP. There are other products, as you mentioned, where we are seeing a matter of fact, most products have almost, I'll say, all products have some level of inflation tied to it. And I think we've been successful pretty much across the board in terms of adjusting our selling prices accordingly and getting full value of what we need.

So what I'm hearing is really not much of a meaningful headwind to call out from either the extended cycle times or the non-insulation products, right?

That's exactly what you're hearing, Stephen. Thank you.

All right. Second question I had relates to, more broadly, the -- again, the cycle time impact. But this time, I'm curious about its potential impact on volume and your overall overhead leverage. What we're hearing is that the time it's taking the builders to build homes is lengthening. I think a lot of builders said it lengthened by a couple of weeks for the large public builders in the last quarter. I think private builders probably have had more of an impact than that. But I'm curious as to whether you think that this extended cycle time that's happening here in the middle of the year is going to lead to unusual seasonality in the business as it relates to when your products get installed if you think that, that could lead to unusual seasonality and/or could there be a consequent bulge in or surge in your activity as you head into, let's say, the winter months of next -- of this upcoming year. And then kind of part of that, in general, is consolidation in the homebuilding business a headwind or a tailwind to your market share?

Stephen, this is Robert. So I'll try to answer that from 3 or 4 different perspectives. So start with seasonality. I mean, I'd say given the strong backlogs that probably the industry has built, not just us, I see that seasonality being smooth as we go through the winter, unless there's a harsh winter coming at us, we would expect third quarter is always busy as the public builders are trying to get through all their closings. I'll come back to that in a minute, but fourth quarter and going into the first quarter next year, given the backlog, we'd expect a smoother curve versus some seasonality we previously see. I think if you think about the public builders with their closings coming up here in, I'll say, October, early November time frame. I think as the industry, it will be interesting to see how much of that gets to the funnel here as the entire industry is facing some constraints here. We would say material is getting slightly better as we're going into the back half of the year. But I think what we see and what we hear from other trade is labor continues to pop up as a continued constraint here. So it will be good to see. I think it is a healthy backlog for the industry. I think we expect to see less seasonality because of that. But to your point about, is our spike coming, I think it'll just be to know how much the industry as a whole can get through that funnel as we work through the next, I will say, 2 quarters here, especially given the public builder closings and going towards the end of the year. And your last point on the builder -- any questions on that before I get into builder consolidation, Stephen? Okay. Builder consolidation. I would say, relative to us -- I mean, obviously, we do -- we service builders of all sizes, great relationships with large public builders, overseeing some of that consolidation coming I'd say there's nothing less than a positive for us given our relationships and the footprint of what we cover across the country with the public builders, some of the regional builders are doing some consolidation as well. So I'd say for us overall, a positive. And as we look at our kind of mix shift among builders, we haven't seen a huge change there from that perspective.

Our next question comes from Phil Ng with Jefferies.

This is Maggie on for Phil. I guess kind of following up on Stephen's question just now, we've been hearing pretty broadly from the homebuilders, this dynamic of slow order growth to catch up on backlogs and such. I guess, how are you seeing this play out in your business? And are there any differences to call out between national versus more regional builders? And what type of impact do you expect this to have on your demand over the next few quarters?

Yes. So -- definitely, do we hear that from the builders? The answer is yes. We're hearing where some of them are tapping the brakes, if you will. But there is a good healthy backlog in the industry as well. So I think all of us are going to be working through that backlog. We'll see how the whole industry, again, works that backlog through the funnel here. But there's a healthy backlog even as some publics as you've heard, as we've heard, are tapping the brakes in some markets from that perspective. Relative to the large publics and the regionals or the custom builders. Some of that lag time or cycle time could be extended for some of the regionals and the smaller builders, a little further out than the public builders. Typically, we've said in the past that we're on the job sites in -- about 60 days or something like that. But I would say we've seen that, Maggie, go out as much as 30 to 60 days in additional time to that, just given the cycle time, what's happened to trade in front of us. I think if you look at some of the builders reporting where the biggest delays are, if you think about framing some of those trades that come before our trade, I think we see that in some of those cycle times getting elongated really across all builders, maybe more on those regional and custom builders, but the publics are obviously seeing it as well.

Okay. Great. Super helpful. And then my second question is the guidance revision implies full year margin expansion well ahead of what you were initially forecasting. So can you just walk us through some of the pieces in there? And what's driving your confidence in the more favorable outlook on margins?

Sure, Maggie. This is John. So first of all, obviously, we're 3 months further along. So more certainty, obviously, as we're now halfway through the year. I think a little more confidence around our ability to manage input costs. Obviously, you've seen some great results in the second quarter of our ability to manage the inflationary pressure, primarily on material vis-a-vis selling prices, and another 3 months of our productivity initiatives kicking in. So I think what you saw was just a -- the next step as we do guidance, obviously, we always attempt to refine that each quarter. And so you're just seeing a little more confidence around top line, around our ability to deliver price vis-a-vis an inflationary environment. And again, great confidence in what the operations teams are doing from a productivity standpoint, so...

Our next question comes from Adam Baumgarten with Zelman & Associates.

I guess starting out, given some of the pretty robust pricing trends you guys are seeing that assuming you're accelerating, how should we think about the formula that you guys have laid out in the past for every 50,000 increase in starts, you guys generate $90 million in revenue, should that be higher at this point? Or is it too preliminary to kind of move that up?

Yes. Adam, I think -- this is John. We do that typically every year when we do our initial guidance, we'll give the long-range modeling that you're referring to. And you're right. What we've said is for a 50,000 start, it's $90 million of revenue on the residential side of the business on top. I would say we're not going to update that number probably until next time we do the 2022 guidance, which would be our fourth quarter call. But I would say generally, if your suspicion is the number's higher than $90 million, then you're correct, between specialty pricing, additional acquisitions, et cetera, the number would get north of that. But again, we'll get more specific on that as we enter 2022 and give guidance.

Got it. Okay. And then just on some of the capacity shifts that are out there, primarily by OC, any impact you expect from their kind of capacity movements around the western part of the U.S.?

No. I think they talked about in their earnings and net neutral. So I think as they sell Santa Clara and as they open up some more capacity in Utah and Arizona, I think they expect a net neutral in that type of move. So -- and I think generally, with all materials out there, be it fiberglass, be it foam, be it cellulose, we would say that, that capacity of plus or minus 1.5 million housing start capacity out there that seems about an appropriate number that you probably heard us say before.

Our next question comes from Michael Rehaut with JPMorgan.

Wanted to focus for a moment just on the bigger picture from an acquisition standpoint. Obviously, this year, it's been pretty active. And I believe you said in your opening remarks that the pipeline still looks pretty robust. At the same time, you have a pretty broad footprint and the industry is consolidating at a decent rate. I was hoping if you could give us a kind of a bigger picture view of the amount -- if you have any type of studies in terms of the amount of opportunity that remains, particularly for a mid- to larger size standpoint that's out there? And in particular, I'm focused on the residential side. Obviously, the commercial part of the business is wide open. But how do you think about the remaining piece of the pie that's out there from the residential side over the next 2 or 3 years?

Michael, this is John. So I'll give it right now, starting with a little bit of history here in terms of the past 10 months. I think we've done roughly revenue tied around $280 million worth of acquisitions, most of that in our core space of residential insulation around commercial insulation. So we think there's plenty of white space going forward in terms of opportunities. I do think that the -- you can never predict exactly when something gets across the finish line from a mergers and acquisition. But I think -- we have a very, very active pipeline. So we remain very confident that we're going to consume most of our, call it, excess liquidity or capital in the world of M&A. So -- and that can be -- your focus on residential installation certainly is probably where a large portion of our acquisition targets are, but also commercial. And then we constantly look at other options available to us, other ancillary products, other areas of insulation, et cetera, as opportunities for us. But we remain pretty confident that we're going to continue to see the majority of our capital deployed in those areas. And again, for all the right reasons, we love it, right, it delivers good strong top and bottom line results, and we drive, as you know, significant synergies as we do M&A and a good history of delivering that, obviously, so...

Yes. And Michael, this is Robert. Just to add on to John's comments. I mean, we put more -- I think we said earlier, we put more resources in this area. And we really think that we absolutely have a core competency in the integration of what we do with these acquisitions after they've acquired to drive that value that John talked about. So really confident in our M&A strategy, confident in our approach, confident in our targets. As you know, we're selective with who we go after and how we execute post acquisitions. So are really confident in our strategy.

Okay. I appreciate that. I guess, secondly, perhaps just on the margin front and also kind of a bigger picture question over the next 2 or 3 years, I believe for both TruTeam and Service Partners, perhaps more so for TruTeam, but you've talked about incremental margins, I believe, and I apologize, it's either 20%, 25% or 22%, 27% but kind of in that low to mid-20s range. So there's still further runway for both businesses. As you look at the margin expansion this year, I was hoping to get a sense from you of what percent is driven by volume versus positive price cost and how we should think that there's -- how we should think about the opportunity over the next 2 or 3 years in terms of the primary drivers of further expansion?

Yes, Michael, this is John. If I think what's gotten us to this point, right, it's great, great leverage on our fixed overhead, and we think there's plenty of that left in our future, certainly. Good acquisitions, integration of acquisitions and the synergies they bring, again, plenty of that left in our future for sure. And great productivity at all -- at both segments between TruTeam and Service Partners. And again, we're constantly working at both in the back office and at our branch locations from an execution standpoint. So I do think this year, I think to date, we're something north of that 27% or just about that 27% in terms of our pull-throughs on a same branch basis. But we feel pretty confident about the ability to continue to deliver that on a go-forward basis. If you take our guidance, the back half of the year, and you take the midpoint, I think we're at the upper end of that range in terms of the same branch pull-through once you back out the M&A that we've done. So I think there's plenty of room left for us to continue to expand margins with good tailwinds in the industry, again, good fixed cost leverage, good productivity and good management of our input cost of labor and material, which, again, good evidence of that, and I think there's plenty left in our future.

Our next question comes from Reuben Garner of The Benchmark Company.

Maybe Just looking at TruTeam versus Service Partners. Service Partners volume in the last 4 quarters has been very strong. As we move into the back half of the year, should we expect maybe those trends to reverse. I think the comps are a little easier for TruTeam. And anyway, any color that you have on that dynamic?

Yes, this is John. So we don't break out the guidance in terms of segment information or top line. I think both businesses, if you look at our second half growth based on our guidance, both businesses are going to do great in terms of pricing. And I think from a volume standpoint, both are going to be around the total that we provided. You're right, the comps on Service Partners get a little bit more difficult in the second half of the year. So generally, I don't think you're going to see a major swing between what we've had and what we expect to have.

Got it. And then my second question is more of a clarification and a reminder. I think you've talked about this in the past, but the starts outlook that you have, I think, around 1.5 million at the midpoint, that would imply, I guess, the first half was closer to $1.6 million, that would imply a slower second half. Is that actually a true starts outlook? Or is that more -- I know completions have been closer to 1.4 million? Is it more of a combination of starts and completions. How do you guys think about that? Are you really expecting the housing start number to go back to 1.4 million in the second half? Or are you kind of incorporating the labor challenges and your addressable market, so to speak, for this year?

Yes, it's the latter. Certainly, as we said in our prepared remarks last quarter and this quarter, the data we're providing and projecting is based on a very constrained environment, both material and labor, more so material than labor, but -- so yes, it's more like the starts that we get to work on at the phase and the stage that we work on the project. So I would expect probably when starts are done at the end of the year, probably going to be slightly higher than what we projected, but ours is more of a what can we get to from a work standpoint and deliver.

Next question comes from Keith Hughes with Suntrust Robinson Humphrey.

I have a question on pricing. Pricing up in both segments. I think a bit more in Service Partners. Can you talk about what's allowing to get more price, given that the input inflation that would be pretty similar, I would guess, between the two?

Yes, Keith, it's really a function of the P&L. If you look at the Service Partners P&L versus the TruTeam, the material content is obviously much, much greater on Service Partners. So as you're trying to recover the impact of inflationary input cost, Service Partners is going to have to drive a higher selling price as a percentage in order to maintain or expand margins. So it's really a function of the fact that just the percentage of cost that material makes up is just much, much greater at Service Partners. A very small piece that would be that timing thing we talked about, where Service Partners is able to deliver pricing a little bit quicker to the market than TruTeam, but by far the bigger piece is the material content as a percent of the total.

Okay. And second question, in the breakout of residential commercial same-brand sales growth, commercial was actually a little bit faster growing on the same breadth of sales. It is a little surprising. You talk about pacing the business there, is that onetime projects? Or is this something that commercial finally got the slides under it right now?

Keith, this is John. You're referring to the year-over-year performance?

I am, yes.

Yes. So I think really a function more probably than a year ago, commercial was disproportionately hit versus the residential business. We talked about -- last year, we talked about some states actually locking down. We talked about the extended build cycle had a much, much more -- social distancing a year ago had a much more dramatic impact on our commercial business, especially heavy commercial, where you can only let so many trades on the job site at a certain time. So that's really the function you're seeing is that we're back on the job sites now at normal social distance -- or I should say, normal cadence. And so you're just seeing a better comp year-over-year that's disproportionately benefiting commercial.

Our next question comes from Ryan Gilbert with BTIG.

First question is on pricing in TruTeam. It seems like there are some indications that homebuyers are becoming maybe a little more price sensitive than they were in prior quarters. And I don't think that's necessarily filtered back to the builders yet, in the sense that their primary focus is just getting homes closed. But I'm wondering if you've noticed any changes in your negotiations with homebuilders as it relates to increasing prices in the team.

Ryan, this is Robert. So I think you've seen that there's been additional material cost increase announcements come out. I think in fiberglass, there was -- definitely the one in June, one supplier pushed back to September, Santa Clara [ph] here, early third quarter type of increase from that perspective. And then I'd say others -- as John mentioned it earlier, but other materials, if I think about raw tours, other products as well, all those have come out with increases and continued increases, including spray foam, which has been some dramatic increases given the MDI component that was limited in the fall of last year then say the Texas freeze situation what happened in the industry from a petrochemical standpoint back in February. So inflation has continued. Obviously, we're still working with our builder customers. I think the team obviously did a great, great job here in the second quarter, continues to work with our builder customers on pricing here for the back half of the year. But I think if you think about a builder today, and you think about those elongated cycle times, service and being there whenever you say you're going to be there and having the material to do the work for them is extremely, extremely critical to the builders right now. So we're doing a great job of delivering that service, delivering on the time that we're supposed to be there, having the material for them sticking to commitments, so we don't hold up any other trade. I think that's something we're seeing for, and that's a big value add of TopBuild because remember, we can move labor around, we can move material around. We can move equipment around. Our systems allow us to do that, which gives what I call, 5-star service to the builders in this type of environment.

Got it. Second question on Service Partners. I guess it seems like insulation material shortages have helped maybe expand or deepen your customer market share and customer base. And I'm wondering if you had any comments on how we should think about the stickiness of your market share gains or the distribution customer base as the supply situation slowly normalizes over the course of the next few quarters?

Yes, Ryan, it's Robert again. So I think as supply comes back, which, by the way, we see that maybe it's easing a little bit, but not much from that perspective. We think it's going to continue to be tight for the remainder of the year, heading into 2022. But I think Service Partners have done a great job of 3 or 4 things. I think one is expanding with current customers, so offering more products or broader product rate with current customers. Number two is just at new -- existing customers are also new customers, new contractors. I think I mentioned that, expanding services to new contractors. But then, three, just back to that focus on service. I mean in this time, the last thing a contractor can really handle is not having material or not having delivery on time, so they're not holding up the job site or holding up the next trade. And I think -- and our Service Partners team -- business, the team has done a really great job of focusing on the right service metrics, communicating with the customer. I think that's like one of our things is you communicate, communicate, communicate with your customers as to what's going on, and the team has done a nice job of doing that. I think those things are going to allow us to continue to see some healthy margin performance in our distribution business.

Our next question comes from Ken Zener with KeyBanc Capital.

Good morning, everybody. So price is pretty strong. Your operational leverage is pretty strong. Let me start on, I guess, what I consider more of the spot market, which is the distribution part of the business. The margins you've gotten, are those -- I apologize, are those record margin -- I mean, it's been -- it just seems like 16% margin, if I got that correct, is pretty high. Is that really a function of just the net pricing you're getting, basically your cheaper cost of inventory versus what the spot market is. Is that the main driver there, when I think about 16% versus the 10%, 11% range?

Yes. So it is a record margin in the quarter, Ken, to start with -- this is John, obviously. So I think it's really a lot of things, the culmination of an awful lot of things and we've talked about it. Back in 2018, when we had the other, call it, significant constraint shortage, we intentionally walked away from some business for folks that weren't necessarily are willing to pay what we felt was the appropriate selling price. So I think we've also had a new management team put in place over the last couple of years that I think has been putting their strategy that Robert talked about, and putting the capabilities the customer metrics, et cetera. So what you're seeing, I think, is a culmination of a lot of those things come into play along with, obviously, a very, very tight material-constrained environment. So it's really tough to kind of pick out 1 or 2 things because I think this is a culmination of a lot of changes, bringing good people onto the team and delivering to customers what they need, which is the products when and where they need it. I think the other thing that I think we've always shown you the ability to deliver is productivity and managing our expense buckets, right? So if you look at the Service Partners organization, they have -- they're executing what they have with very minimal additional fixed overhead. So delivering a lot more leverage in the business. So I think you're seeing all that and quite frankly, to the obvious point, with material as tight as it is right now, certainly from a distribution standpoint, the environments are relatively good one to operate in it.

So just sticking with that distribution, I know you provide market share data for your combined company in terms of the installation combined with distribution. It just is occurring to me, can you talk to what you think your, I guess, share is of the distribution market, given that it seems even on that side of the business, right, the supply-demand dynamics have turned very favorable for you as opposed to -- well, yes. Is there -- have you ever talked about what your share of distribution is separate from the insulation side?

Ken, this is John. No, we have not. We talked about, as you know, the fact on the residential new construction that we believe we deliver something a little bit around 10%, maybe a little north of 10% of all material from an installation standpoint. But no, we have not talked about the specifics around the overall distribution market.

At this time, I would like to turn the call back over to Mr. Robert Buck closing comments.

Thank you for joining us today. We look forward to talking with you on our third quarter call in early November.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.