Greetings, and welcome to TopBuild Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now turn the conference over to your host, Ms. Tabitha Zane, Vice President, Investor Relations.

Thank you, and good morning. On the call today are Robert Buck, President and Chief Executive Officer; John Peterson, 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 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 our fourth quarter presentation, which can also be found on our website. I will now turn the call over to Robert Buck.

Good morning, everyone, and thanks for joining us today. We were pleased to end the year with a strong fourth quarter, reporting solid topline growth, and a 17.1% adjusted EBITDA margin. For full-year 2021, we again demonstrated the strength of our diversified business model and our seasoned management team, and delivered on our objective to achieve profitable growth. Revenue increased 28.3%, and adjusted operating and EBITDA margins expanded 160 and 130 basis points, respectively. Full year 2021 was also very productive. Highlights include, reporting our best year ever with regards to our safety and personal injury rate, managing both material and labor constraints while moving resources across our network to meet the needs of our customers, successfully managing material cost increases with appropriate selling price adjustments, putting over $1 billion of capital to work through the acquisition of 11 companies, including Distribution International, or DI, establishing TopBuild as the leading distributor of mechanical insulation, entering the industrial insulation end-market and broadening our insulation capabilities and services, more than doubling our specialty distribution network, including expansion into Canada, and maintaining our focus on driving operational efficiencies throughout the organization. We’ve also evolved as a company compared to where we were when we went public in 2015. To give you some context, six years ago, approximately 84% of our revenue was derived from residential housing. Today, on a pro forma basis, it’s about 63%, with commercial now representing 29%, and industrial 8%. We’ve also expanded our Specialty Distribution business, which, again on a pro forma basis, accounts for 42% of our revenue versus 35% in 2015. Perhaps most important, we’ve successfully demonstrated our ability to outperform in any environment, as evidenced by our exceptionally strong adjusted operating and EBITDA margin expansion every single year. While we’ve seen important changes as a company,…

Thanks, Robert, and thank you to the entire TopBuild team for making these past almost seven years successful, memorable, and fun. I’ll miss all of you. Robert, special thanks to you for your leadership, partnership, and friendship over the past 12 years. I’ve enjoyed every moment of it. As most of Rob Kuhns, who has served as our Vice President and Controller for almost four years, will be assuming the CFO role at the end of next month. Rob has made significant contributions to our strategy, growth, and success, and has built a very strong team. His in-depth experience, understanding of our operations, and leadership skills, make for this to be a very smooth passing of the baton. I look forward to watching all the success he and the rest of the TopBuild team will have in the future. I also want to thank all of you on the call, most of whom I’ve met. Your support of TopBuild over these years has been greatly appreciated. Rob will now discuss the company’s fourth quarter results.

Thank you, John, and good morning, everyone. As Robert noted, we finished 2021 with a strong fourth quarter, and entered 2022 well-positioned to capitalize on the anticipated growth in the three end-markets we serve. We’ll begin with a review of our 2021 results, then provide our outlook for 2022. First, a couple of housekeeping items. As Robert mentioned, DI’s results are being reported, along with Service Partners, as part of our Specialty Distribution segment. In addition, due to the significant amortization from the purchase accounting associated with DI, we are now providing adjusted EBITDA results for both of our reporting segments. Starting with our fourth quarter results, net sales increased 47.4% to $1.1 billion. The 11 acquisitions we completed in 2021, increased sales by 34.9%, with DI contributing $188.3 million, ahead of our expectations. On a same-branch basis, sales increased 12.5%, driven by higher selling prices, partially offset by slightly lower volume due to the continued industrywide supply chain shortages and labor constraints, along with a more difficult year-over-year comp for Service Partners. Sales for the full year 2021, increased 28.3% to $3.5 billion. On a same-branch basis, sales increased 12.7%, driven by higher selling prices and higher sales volume. Adjusted gross margin improved 60 basis points in the fourth quarter to 28.1%, and improved 90 basis points for the full year to 28.4%. On a same-branch basis, adjusted gross margin improved 190 basis points, and 150 basis points for the fourth quarter and full year, respectively. Adjusted gross margin improvement for both the fourth quarter and the full year was driven primarily by higher selling prices, strong cost controls, and productivity initiatives, partially offset by material inflation. Adjusted operating profit in the quarter grew 45% to $150.7 million, while adjusted operating margin declined 20 basis points to 14.2%. As…

Thank you, Rob. Before opening the call up for questions, I wanted to note that we have moved our Investor Day from March 15 to May 26, with the same New York City location. Most of you should have received a new save-the-date email a few weeks ago. This change was due solely to the wide spread of Omicron and our concern for the health and safety of our team and our Investor Day attendees. 2022 should be another year of profitable growth for TopBuild. Our backlog is strong and demand is healthy. Our entire team is focused on the successful execution of our plan, providing energy efficient solutions for our customers, driving operational efficiencies throughout our company, integrating DI on our operating platform, successfully managing input costs and pricing, and identifying accretive acquisitions that support our core business, insulation. In closing, I want to thank our entire TopBuild team, TruTeam, Service Partners, DI, Branch Support, and Field Support Center teams, for their dedication and hard work. We had a great year in 2021, and our success is due to your outstanding efforts and constant drive to improve. Operator, we are now ready for questions.

Thank you. [Operator Instructions] Our first question is from Trey Grooms with Stephens. Please go ahead.

Hey, good morning. First off, congrats on a strong finish to the year. And, John, congrats and wish you the best on your next chapter.

Great. Trey, I appreciate that. Thank you.

Okay. So, I guess, first question is, looking at the guide for this year and understanding that there is a growing backlog due to the constraints you talked about, you mentioned that you have the expectation for supply to remain tight, but that there's - with this assumption of low to mid-single digit volume, it sounds like you're expecting maybe some easing here with some of these constraints in the back half. I guess, number one, thoughts around what's going to kind of help create this easing kind of situation, number one. Number two, I guess trying to get at the cadence there as well, and could it be more kind of back-half loaded with the volume, given the comment around the easing and these constraints,

Hey Trey, this is Rob. Yes, so looking at next year, we see strong demand across all three end markets. To your point, we're expecting low to mid-single digit volume growth. And that's really being driven by the continuing constraints. Certainly, without the constraints, our volume growth would be significantly higher than that. So, we are optimistic that it'll sort itself out a little bit more towards the backend, but we're not expecting a step function change in availability in the back half.

Oh, okay. All right, that's helpful. So, nothing monumental, just the slight improvement, hopefully in the back half. One last one here for the longer-term guide, the residential revenue for every 50,000 starts, $107 million, up from, I think the last update, and I may have missed something in between, but I thought at the end of 2020, it was $90 million per 50,000. So, if you can help us unpack that a little bit, how much has pricing put in place since then versus market share gains?

Yes, Trey, really the - this is Rob again. There's really two main drivers to that. It's M&A we've done over the past year. And then as well as price over the past year. So, those are the two big drivers of that.

Yes, okay. And I guess lastly, the $1 billion of capital you put to work, big year for M&A obviously. And you noted the prepared remarks that the DI integration is kind of at top of mind, but did still mention M&A as possibility. Just given how heavy the M&A was in ’21, should we be kind of thinking about maybe little bit of a dial-back on the M&A appetite just as you get that integration kind of work-through? Was that the messaging? Or just help us kind of think about your appetite there as we look through this year, given what we saw in the past.

Right. Trey, good mornings. It’s Robert. So, yes, DI integration absolutely our priority, but you've seen since we acquired DI, we've completed four additional acquisitions, three in the residential space, another one in the specialty distribution space. So, the pipeline is still really healthy. We're definitely focused on the quality of targets. So, I think you'll see activity from us this year really looking across all three end markets, but you’re also going to see us do a great job of this integration with DI, which I think you heard me say in my prepared remarks, we're off to a great start. That's a great acquisition for us, and we feel so confident with what we're doing there. So, it's going to be a good balance. It's going to be a great integration of DI, and we’ve got a really nice pipeline across all three end markets as well.

Right. Thank you, Robert and Rob, and I'll pass it on. Thanks again.

Thank you. Our next question is from Adam Baumgarten with Zelman & Associates. Please go ahead.

Hey, good morning. I guess maybe sticking with the volume guidance, just the low to mid-single digits. Any way you can break down further how you're thinking about residential versus commercial and industrial, or if they're all kind of in a similar boat?

Yes, Adam, this is Rob. So, over - across the three markets we serve, we say it's not going to be drastically different, a point or two difference between the three. But we're expecting similar environments of strong demand, tight supply, which is obviously going to also lead to an inflationary environment next year as well.

Adam, this is Robert. Maybe just to add on to that, to what Rob said. I mean, the backlogs are really healthy. As we look across residential, the backlog there, given that extension that's happened in the cycle time, as well as our backlogs in commercial and industrial. So, really healthy backlogs really across. And we would say also a really great start to the year here in 2022, also. So, really happy with what we've seen thus far early in the new calendar year.

Okay, got it. And then just a couple on distribution, the pricing Delta between the Distribution business and TruTeam continues to widen. Maybe if you could kind of walk through some of the driving factors there, as well as if you expect that gap to narrow at some point. And then just on volume, should we expect negative volumes through the first half in that business, given the still tough comps you face?

Hey Adam, this is Rob again. So, as far as the pricing differential between Installation and Distribution, it's really driven primarily by the material content. So, on the install side, within the cost of sales, you have labor and material, and on distribution, it's purely material. So, you always are going to have a higher pricing dynamic on the distribution side of things. And then I'm sorry, repeat the second part of your question.

Yes, just on the volumes for the first half in industry, should we expect those to remain negative given the pretty similar tough comps that you have?

Yes. first quarter is going to be another tough comp for Service Partners for sure year-over-year. So, that's probably a likely trend.

Got it. Thanks, guys.

Thank you. Our next question is from Philip Ng with Jefferies. Please go ahead.

Hey, guys. congrats on another strong quarter. John, appreciate working with you all these years. It's been super helpful. And Rob, looking forward to working more with you going forward.

Thank you, Phil. Much appreciated.

I guess, Rob, for you to kick things off, heading into 1Q, a lot of companies we cover, they're still playing catch-up on price costs. You guys have obviously done a really good job on that front. Just want to get some color on how price - have you taken all the pricing actions you need to kind of maintain the type of incrementals you've been putting up for some time now starting the year?

Thanks, Phil. Yes, this is Rob. So, going into Q1, we've got some more price increases coming. So, we had some cost increases from suppliers that hit December and the beginning of Q1. So, we're trying to get out in front of those, but based on our results last year, I think you see our team in the field just does an excellent job of managing that, and we anticipate doing that throughout 2022 as well.

Got it. Super. And then a question for you, bigger picture, Robert. Can you give us a sense how much backlog you have in your business today? And is there a good way to compare that to call it mid-2018 levels? The reason I'm asking, there's no denying that underlying demand for housing is actually very strong right now. But if we do go through an air pocket like 2018 with rates going up, which you frankly manage quite well and saw very limited slippage, but just curious, how are you set up this time now versus 2018?

Yes. Morning, Phil. So, if I think about, let me talk about commercial and industrial first. I mean, obviously there's good visibility to that business, given our contracts, given what we see in our bidding activities. So, those backlogs have actually - on the commercial side, have actually grown. As we sell projects get slow down some, given the spike in COVID and some of the supply chain constraints. So, we've seen backlogs grow there. Residential, a little harder to quantify. I mean, I think there's a few things to point to. Number one would be looking at that Delta between starts and completions, right? I mean, major delta there that builders have continued to sell homes and stuff. So, if you see like starts of plus 16% and a completions rate that's more like that 3%, that's obviously continued to add to the backlog. we've seen more multifamily coming along as we look at our contracts and work we've secured on the multifamily side. So, yes, I think - and I think that's also why, even there was weather in January, you heard us talk about on our third quarter call, we didn't really expect to see seasonality as we left 2021 and went into 2022. And you heard us say, hey, great start to the year here in ‘22. So, I think all that points to a solid backlog, and we definitely see that contract-wise and stuff on the commercial industrial side of the business as well.

Okay, that's helpful. And Robert, I'm obviously less familiar with DI, but I understand - from what I understand, material availability there might not be as tight. Any color on how to think about your ability to kind of grow in that business? I suspect it's probably a little less constrained than resi, but any color would be helpful.

Yes, sure. So, a few things. If you think about the industrial side of the business, that impact of the material in the supply chain was a little bit delayed. And so, there are some materials that are tight there, but not as tight as we'd say on the resi side and on some of the building insulation side of the business. DI, like TopBuild, great relationships with the supplier base. They did a really nice job of building some inventory last year in their supply chain, and their facilities as well. Great relationships. So, I think we've got some great growth paths there. You've heard us talk about it, some greenfield opportunities. DI dd a really nice job how they manage their inventory, how they manage their service levels, which drove to some share gain in 2021. So, no, I think that we're really confident in that supply chain, several mutual relationships, mutual suppliers. So, I think we - good level of confidence being able to service and grow those customers in 2022 here.

Great color. Thanks a lot, Robert. Appreciate it.

Thank you. Our next question is from Michael Rehaut with JPMorgan. Please go ahead.

Great. Thanks. Good morning, everyone, and congrats to both John and Rob. First question, and I apologize if this is something you kind of addressed earlier, but I might have missed it. In terms of the sales guidance for ’22, I know you kind of said that it incorporates an end market upload a mid-single digit from a volume growth perspective, but I was trying to get a sense, the other two major components, how you're thinking about price and acquisitions also in terms of contributing to that number.

Yes. Michael, so this is Rob. So, obviously, if you break down our sales growth year-over-year it's about - our guide is about $1.1 billion above year-over-year. Obviously, M&A is going to be a significant portion of that year-over-year, with the DI acquisition happening in the fourth quarter. And then with the volume guide we've given, if you factor those two things in, we don't disclose what our price assumption is. We've obviously got price baked in there, assuming an inflationary environment, but doing that math, you could get in the ballpark to wherever we are.

And in the guidance here - in the guidance, there'd be no additional M&A that would be in that as well, Michael. But to Rob’s point, additional pricing that we think could be coming here in 2022 is included.

Okay. Well, maybe we could talk a little more offline then on that. I think secondly, just the margin path for DI, I think you said it's performing better than expected. Any sense on, I think over time, what - where you want that business to be from a comparable margin rate standpoint. And obviously you can talk about it through EBITDA or EBIT. I know, obviously amortization near term is going to make things a little less comparable, but any way to think about the DI margins over time.

Yes. Michael, this is Robert. So, as we think about it, just that's a great acquisition. And the more we've got closer to the business and stuff, the more confident we are. So, to your - directing your question about margins, you've heard us talk about our $35 million to $40 million run rate synergies by the end of year two. highly confident in that. And if I take that, plus the good momentum that DI had in the business, things - continued operational improvements we expect, we absolutely expect that business to get in that mid-teens type of margin projection here within the next couple of years. And we think we have line of sight to that as well. So, they've got a really nice proven track record in that business. We've got a nice proven track record of integrations. So, I think really confident in DI becoming accretive and really adding to that specialty distribution platform that we've built there.

Okay. All right. Thanks. Just one last quick one on DI, again, just trying to triangulate a little bit on the sales contribution for ’22. I mean, it came in at about $750 million annualized sales. I mean, is that - but at the same time, you're looking at another year with some growth and price perhaps on top of that. So, again, any way to just try and dimensionalize the contribution of DI in ‘22 sales, again, would be helpful if possible.

Yep. Michael, this is Rob. So, I think your number for DI is probably coming in a little low there. I think you might be the annualizing the two and a half months. And so - but we would also say that that two and a half months was very strong. And I think - their number is going to be somewhere probably north of $800 million for next year net-net, but a strong fourth quarter and we’re expecting that momentum to continue into next year.

Okay. Thanks a lot.

Thank you. Our next question is from Keith Hughes with Truist Securities. Please go ahead.

Thank you. As you look at the year, and you've given us your guidance for organic contribution margin, would that be - one of these years was lower at the beginning and then improves as the year goes longer, is it going to be more straight line?

Hey Keith, this is Rob. So, I mean, I think the way to think about it is, we we'll show consistent improvement on the core business throughout the year. If you were to break that EBITDA down, right, so on the M&A piece, we should be right in the middle of our guided range of 11% to 16%, probably just to the slightly lower than the midpoint of that. And then from a same-branch perspective, we expect our incremental EBITDA to be more towards the high end of our guided range next year.

But ratably through the year on to get to that high end number, is that kind of how you're looking out?

Yes. We’re not breaking out the seasonality of it right now, but I would expect that those incrementals to be consistent throughout the year. M&A is obviously going to be heavier the first three quarters than the back half with - over the fourth quarter with DI

Right. Okay. Thank you.

Thank you. our next question is from Stephen Kim with Evercore ISI. Please go ahead.

Thanks very much, guys. Congratulations. And yes, we'll miss you, John. But I - we really do appreciate all the help over the years.

Thanks, Stephen.

Question for - sure. And question for you, I guess, most of my questions have been asked already, but I wanted to delve into this question of the shortages and the limited availability. You said it was both across spray foam and fiberglass. So, I guess, first of all, from a numbers perspective, is there a way that we can think of quantifying what that headwind from just strictly availability, what that was. and then sort of looking to sort of qualitatively understand the situation, are your customers willing to wait longer to get product or are you seeing that you're just sort of losing those sales altogether? Is there a practical limit to which these delays can extend on your customers part? Just give us a little bit of insight into what's going on actually at the branch.

Yes. Hi Stephen, this is Robert. So, I guess let's - first off, I'll kind of hit the entire industry, right? I mean, so there's these delays and shortages that have elongated the cycle really in trades quite honestly before us. And I think you've heard us probably talk about, if we were getting on the job site in 90 days, that elongated to probably out to 30 to 60 days more in 2021. And we even saw that in Q4 actually get a little bit worse than that. So, it's really, I'd say, other trades that are stalling relative to when we're getting on the job site. From our perspective - so fiberglass has remained tight. We know that we're getting our fair share of the allocation. I think you heard us talk about even with the new lines coming back, we got more than our fair share relative to that new capacity. So, I'd say it's more been of an industry type of constraint than it's necessarily been, definitely not labor for us necessarily. And on the material side, spray foam has probably been the bigger issue from that perspective. And the reason being, I think you're probably familiar with it, right, if you go back to end of ’20, constraints of input materials coming overseas, to what happened in the deep freeze this time last year, to just input materials overall. So, between the two, I'd say spray foam has probably been the more the limiting factor. But no doubt, fiberglass remains tight. I'd say relative to losing sales, definitely as we look at the residential side of the business, we're really confident in what's happened there as we look at our growth from a residential perspective, both businesses. So, there could be some trade-off on the distribution side between some customers, but I'd say overall, keeping our share for sure. And we do a great job between our install branches separately and our distribution branches separately, moving material around and servicing those customers. So, that advantage we have of the visibility, as well as how we allocate the material completely separately between the two, I think we've got ourselves in a great shape, and I think we've maintained and probably picked up a little bit of share in some areas.

Yes. No, that would make sense. Thinking a little bit longer term, which obviously the rise in interest rates and subsequently mortgage rates has gotten everybody doing, I'm wondering whether or not you're anticipating that you might see more of a move to affordably priced homes, and if that's having any longer-term ramifications on people's interest in spray foam, or rather, I should say, more interest in going with a fiberglass product, just to kind of keep the overall price tag down relative to spray foam. Are you hearing anything like that from the residential side of the business?

So, I think to your first point, yes. I mean, you’re going to see, I think we are seeing for sure, and you're hearing about it, more entry level homes that are - from the production home builders, as they're thinking about interest rates, as they're thinking about affordability and stuff as well, they're doing a great job of modifying the product they're going to market with. And then relative to that, no doubt, there's been significant increases in the spray foam prices over the past 12 to 18 months. And so, given that, we see custom builders and others are still absolutely on the spray foam wagon field, given its benefits. But you do see some smaller builders that are moving back towards fiberglass as well. So, overall, dollars are healthy on this spray foam side, given the inflation, and no meaningful move on the units. But we've seen some builders that have made a choice there to go back to fiberglass versus foam in some instances, as an example.

Yes. Makes sense. Okay, great. Thanks very much, guys.

Thank you. ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Robert Buck for closing remarks.

Yes. Thank you everyone for joining us today. we look forward to talking with you in May, when we report our Q1 results.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.