Ladies and gentlemen, greetings and welcome to the TopBuild Corp.'s Fourth Quarter and Year End 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, P.I. Aquino. Please go ahead.

Good morning, and thank you for joining us. With me today are Robert Buck, our President and Chief Executive Officer, and Robert Kuhns, our Chief Financial Officer. We posted our earnings release, senior management's formal remarks, and a presentation that summarizes our comments on our website at topbuild.com. 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 press release and in the company's SEC filings. 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 have provided a reconciliation of these financial measures to the most comparable GAAP measures in today's press release and in our presentation, both of which are available on the website. I'd now like to turn the call over to our President and CEO, Robert Buck.

Good morning, and thank you for joining us today. At TopBuild Corp., we are proud to share that 2024 represents our ninth consecutive year of growth and profit expansion as we celebrate our ten-year anniversary as a public company this year. Since our spin in 2015, we have demonstrated the strength of our business model and the long-term opportunity for TopBuild Corp. Our results have truly been a team effort. I want to start by thanking our employees for their dedication and commitment to our business. Congratulations to our installation and specialty distribution as well as branch support center teams for working diligently to service our customers, drive operational excellence, and work safely every day. The new residential construction landscape in the fourth quarter was much like the prior two quarters. Interest rates have remained elevated for longer than anticipated, and although some builders noted increased traffic, external forecasts for 2025 housing starts have been trimmed in the last few months. That being said, the underlying housing market fundamentals are strong, and we continue to be bullish about the mid- and long-term opportunity. Many uncertainties exist in today's environment. So before I move on to our results, let me cover a few topics. On tariffs, we do not anticipate a significant impact on our business. Products potentially impacted represent a relatively small portion of our material spend, and we are taking appropriate steps to mitigate this impact. Now regarding labor, we are aware of deportations happening in certain markets, which have not impacted TopBuild Corp. This has the potential to slow the construction cycle, putting labor at a premium. We are confident in the strength of our labor force and are being cautious and strategic as we manage our labor cost structure in this environment. We will continue to watch…

Thanks, Robert. Let me start by saying thank you to our employees for their hard work and efforts, which enabled us to deliver another record year for TopBuild Corp. Since our spin nine years ago, we have grown sales at a compounded annual growth rate of 14% and expanded adjusted EBITDA margins from 6.6% to 20.2%. These results have been driven by our teams that have a relentless focus on operational excellence and do a great job delivering exceptional value and service to our customers. Today on the call, I'll review our Q4 results, and then I'll walk through our guidance for 2025. In the fourth quarter, we increased sales by 2% to $1.3 billion. M&A contributed 2.4%, pricing added 0.9%, and volume declined 1.3%. Turning to our segments, installation sales were relatively flat year over year at $788.6 million. Volume declined 4.1% and was offset by M&A of 2.3% and pricing of 1.5%. The volume decline was driven by the slowdown in multifamily activity. Single-family activity remained choppy and was flat to the prior year on a same-branch basis. Within specialty distribution, sales grew 6.6% to $601.8 million in the fourth quarter. Volume rose by 4.4% as commercial industrial sales grew and spray foam sales rose ahead of industry cost increases. Acquisitions added 2.2% while pricing was flat in the quarter. Fourth quarter adjusted gross profit totaled $392 million or a margin of 29.9%, which was 50 basis points lower than last year. Gross margins were lower than the prior year in both specialty distribution and installation as the residential housing industry continues to tackle soft demand driven primarily by affordability and economic uncertainty. The decline was driven by strategic price and volume decisions primarily in our distribution business as well as conscious decisions around labor in certain installation…

Let me close our call today by saying that we continue to be bullish about our industry and TopBuild Corp.'s future. Not only do we operate in a great category with strong fundamentals, but we also have a unique and proven business model. The underlying fundamentals for new construction are strong, and our products and services play a critical role. We are confident that TopBuild Corp. will navigate fluctuations in near-term demand and outperform the market even as the broader environment changes. Our business is inherently well-positioned to capitalize on these opportunities for growth both organically and through acquisitions. Our acquisition pipeline is healthy. We remain committed to building on our track record of delivering increased shareholder value. With that, operator, let's open up the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to lift your handset before pressing the star keys. The first question comes from Philip Ng with Jefferies. Please go ahead.

Hey, guys. Strong quarter and Rob, appreciate all the color on some of the margin side of things. I guess, on the pricing side of things, are you seeing things dial up from there just given the builders are under some pressure or it's kind of more of the same? And how are you kind of balancing that? Certainly, pricing for certain pockets, I think there's a little inflation in spray foam you kind of mentioned, maybe a mechanical insulation. But it's kind of help us think through what you're seeing on the pricing environment. And if we do see input cost inflation, your ability to kind of pass that through and not getting squeezed on that point.

Hey. Good morning, Phil. It's Robert. So I'll start with that. Yeah. From a builder's perspective, I mean, obviously, affordability is top of mind right now. Right? So you do see in some of the slower markets, you know, more pressure from the builders. I mean, we're definitely not chasing share, but we're definitely working with the builders in those slower markets. And if you kind of look at that, it's the drop set kind of heavier on the distribution side relative to some of the pressures. You know, commercial industrials is doing very well from that perspective. And if you get into byproducts, you know, we would say there's been definitely pressures on the spray foam side of the business. And in some of the markets, you definitely see on the fiberglass side. But our teams are doing a great job. I mean, we're, you know, we're being cautious in our outlook here. Appropriately given, you know, if you look at 2024 and how that developed. So we've not baked any of our optimism in because we want to make sure we have a realistic focus of what we see today.

And, Robert, I'm a little surprised on the spray foam comments. Because they think there's some dumping duty to and you kind of mentioned Nissan off taking that distribution business with customers buying ahead of it. Are you starting to see that move higher or are you getting squeezed on that backdrop on the spray foam side of things?

Yeah. So there's definitely a lot of, miss material out there available, and so there's been some pressure around in the first in, you know, the ending the year as that was announced right around Thanksgiving. Been passing some of that along, but, you know, there's definitely that continues to get worked here in the first quarter. And so we expect as that comes around here, you know, you're obviously seeing it relative to some of the demand, not as much demand there. As some of the housing market has slowed, so that could be fueling some of it as well.

Okay. And then from an M&A standpoint, I think you hinted that pipeline's pretty robust. Certainly, new administration here. Give us a little more color on what you're seeing out there. Some especially on the F&I side. And then, Robert, this isn't the first time we kind of hinted at looking at adjacent markets. Is this gonna be a bigger bite like the C&I opportunity you've seen in recent years or kind of more bolt-on? Do you give us a little more perspective on what you kind of envision interest is in adjacent markets?

Yeah. So as we think about, you know, current pipeline, I'd say it's, you know, we've got some great prospects in distribution, and then, you know, commercial, industrial as well. As we think about, you know, C&I specifically, which I think you mentioned, Phil, and if you look at some of our big acquisitions that we did in 2024, it was definitely in that space with Metro Supply and Shannon Global, which we closed the back half. So there's a lot of activity in that space. And as we think about adjacencies, I think the point that we're communicating here is, you know, C&I right down the fairway we've done a great job with that. There's more opportunity in our core insulation areas residential, just, you know, residential, commercial, industrial, C&I being part of that. But we're also saying, look. We have a set of core competencies, the strengths of the company. That we think as we look at, you know, how we can expand, check those boxes, and gives us a high level of confidence as to the, you know, value for shareholders we can drive some of those adjacent spaces. I'd say, you know, more to come on that. I think you can probably hear in our tone here, we see some good opportunity for TopBuild Corp. Given, you know, the cash that we generate and, you know, good use of capital allocation that we've had as a company. I think, you know, we're thinking about that and thinking about growth for the company here going forward.

And, Robert, would those adjacent opportunities be larger or they're gonna be potentially more on the tuck-in?

I think there's some potential larger opportunity out there for TopBuild Corp.

Okay. Excellent. Appreciate the color, guys. Thank you.

Thank you. The next question comes from Stephen Kim with Evercore ISI. Please go ahead.

Yeah. Thanks very much, guys. Appreciate all the color and the guidance here. I wanted to see if I could delve into a little bit of something you said in your opening remarks. I think you talked about strategic price and volume decisions in residential products, primarily in distribution and conscious decisions around labor in certain install markets. Wondering if you could elaborate a little bit on what you meant by that and what we should be expecting as you're looking into 2025 on those points.

Yeah, Steve. So this is Rob. So just, you know, walking you through that a little bit. In terms of what we're seeing there. You know, as Robert talked, on the pricing side and we talked a little bit about this in Q3. You know, we're seeing a little bit of extra supply on the spray foam side of things. That's created some price pressure. So, you know, where we need to, we're making the decisions we need to continue to drive some volume with that product. So that created some pressure in the quarter for sure. And then on the distribution side, you know, I'd say we're still, you know, price cost or on the installation side. We're still definitely price cost positive there. We're seeing some pressure in certain markets for sure, but we're working through that and obviously working with our supplier partners on those things. Right. You know, as volumes have slowed on the install side, like we saw in the quarter, the pressure we get there is more from the labor side of things. Right? And that's where, you know, we're being strategic in our thinking, you know, being that we're optimistic about the long term or the midterm even. Know, that residential markets will bounce back here at some point. You know, we're being careful not to cut, you know, good labor that we have out there being that we want to continue to be active on the M&A front. You know, we're being careful with our back-office labor as well. So that's really the driver of the deleveraging we're seeing there, on the volume side.

I understand. Yeah. That's helpful. Okay. Great. And then similarly, I think I just want to make sure that I heard you correctly. Robert, when you talked about fiberglass price increases, I think what you indicated was that you thought that it would depend upon builder market conditions improving. I just, you know, if things stay the way they are, I'm sort of paraphrasing here, but if things stay as they are and they don't improve, they don't get worse either. They just sort of stay where they are. Would it be your expectation that we would not see pricing increase in fiberglass this year?

Yeah. I would say, Steven, so there's definitely material available right now, given the slower demand environment. And I'd say there's, you know, as you know, there were increases announced for earlier in January. You know, those didn't see traction really, and so I think it is gonna have to be driven by an increased demand environment to strike cost price there in 2025.

Okay. And then lastly, you had mentioned something in your prepared remarks about technology and using technology more significantly than you had in the past. To aid, I think, with your pricing and, I think, volume decisions as well. Can you just elaborate a little bit on that? Like, what does that mean? You know, from a practical perspective? What are you actually doing in your operations? And is it one side of your business more than the other?

Yes. I'll start with that, Steven. I'm sure Rob will chime in as well. So, you know, I wouldn't say any more than usual other than I'd say, you know, our ERP tool is extremely valuable in these times where we're able to see fluctuations of demand by market, by business, install versus distribution, so it allows us to make appropriate decisions. One, you know, from a pricing perspective, you know, we're able to put guardrails around that. So it's our method. We're able to give locally. And then even from, you know, as we think about, you know, labor perspective, productivity perspective, sales productivity perspective, it gives us insight to that, which really gives, you know, great control to our build teams, to drive decisions and management of resources.

Yeah. And, Steven, the only thing I'd add to that is just, you know, we talked about volume pressure on the other side. You know, likewise, the common ERP gives us great visibility into where things are slowing from an orders perspective. Allows us to get out ahead, start planning some of those labor reductions. So we're using that our common ERP that way as well.

Okay. Appreciate it. Very much, guys.

Thank you. Next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Good morning.

I wanted to talk a bit about the commercial side. You mentioned in your remarks that you are still seeing healthy levels of bidding activity despite the macro that is out there. Can you talk a bit more about where that bidding activity is coming from and how you're thinking about that relative to perhaps some of that actual work starting to flow through and what we need to see to get that activity a bit higher?

Yeah. Good morning, Susan. It's Robert. So, commercial industrial side was definitely nice job by our teams in the field and we saw that for full year results. We saw it in the quarter as well, and bidding activity is very active there. So, you know, as you've heard Rob talk about in his guidance, you know, we're definitely looking for growth in that commercial industrial side of the business here in 2025. If you look at the I think the main thing is you look across the verticals of that business, commercial industrial business, I'd say we're pretty optimistic across most verticals. If you think about manufacturing, obviously, data centers, oil and gas, food and beverage, pharmaceutical, those types of areas. You know, we like what we see there. The bidding verified that. We like the diversification there. And sometimes people ask where do you see any weakness? You know, battery plants, EV facilities, there's been, you know, some in those areas, but we're pretty diversified across those verticals. And so we like what we see and, you know, looking back, but then, most importantly looking forward bidding. And we mentioned we're seeing projects get launched here that were delayed some of 2024 as well.

Okay. That's helpful color. And then maybe turning to the margins, appreciating the commentary around the labor and some of those actions there. But as you think about some of the other efforts that you have coming through, you know, perhaps on the distribution side and consolidating some of those locations and some of those other company-specific actions in there, can you talk a bit about how you can leverage those and anything that you're looking for, they year to come through given the environment that we're in and how that could help the margin as we go through the next several quarters?

Yep. Susan, so that's this is Rob. So, you know, that's obviously something that's out there, definitely an opportunity for us. So as we look across our footprint, and as we're, you know, looking at some of the challenges ahead, we're definitely looking at some consolidation opportunities. Like I talked about, we're looking at labor opportunities. And like I mentioned on the call, we've got, you know, a productivity number baked into the midpoint of that guidance. You know, that's offsetting some of the investments we're making on the digital side of things with some e-commerce initiatives and some things around data analytics, as well as you have the, you know, the decremental impact of carryover M&A on your EBITDA margins as well. But we do have that productivity baked in. And, you know, it's something that, you know, we're on top of in terms of, you know, the environment we're in right now.

Okay. Thank you for the color. Good luck with everything.

Thank you.

Thank you. The next question comes from the line of Keith Hughes with Truist Securities. Please go ahead.

Thank you. Your outlook on commercial industrial is flattish. Would that mean that within this guidance framework, we would see the distribution business feel less pressure than what would be coming in insulation?

Yeah, Keith. This is Rob. So actually, we're guiding to low single-digit growth on the commercial side. So we do expect to be up on that side of things. Obviously, to your point, that makes up a much bigger piece of our distribution business. Yeah. More like 60% of the business on that side versus 15% on the installation side. So you're correct as we look at the year, from a segment perspective, the sales growth, you know, year over year will be tougher for install than it will be for distribution.

And you've talked about some, I guess, lack of price increases. We've all heard about some of the spray foam deflation that's going on. What's kind of your view near term for pricing and jobs with fiber primarily fiberglass?

Yeah. So from a fiberglass perspective, as we mentioned earlier, there wasn't a lot of traction given the excess material right now. So obviously, we're able to give our teams new guidance right now. There's no, you know, there's no new increases announced out there. And we're just making sure our team's doing a good job of maintaining. We're not chasing any share from that perspective, so we're getting guided here to make sure, you know, they're bidding consistently for the next, you know, call it, ninety days on the residential side.

Do you think there'll be compression in job prices in this environment? Is that bad enough for that?

In certain markets that are, you know, we do see that. Right? And, like, Robert mentioned on the spray foam side of things, there's certainly some more pressure there than on the fiberglass side of things. But in the slower markets, there's pressure, but that's, you know, why we talked about being choppy. We still have markets that are performing well. A lot of them kind of, you know, kind of average. So it's certainly not a widespread thing at this point.

And I think what you've seen for most, Keith, you've watched us for a while is our teams do a good, I would say, a great job of optimizing, you know, that margin volume perspective. And, you know, some of these markets are out just spoke to that are choppier or uncertain, you know, they're making some of those decisions. And so we do a good job of that, and I think you see overall the margins are holding up very nicely if you look at the guide that we're giving for the full year.

Okay. Great. Thank you.

Thank you. The next question comes from the line of Rafe Jadrosich with Bank of America. Please go ahead.

Hi. Good morning. Thanks for taking my questions. But first and appreciate that it's a choppy environment. It's a pretty wide range that you have on the guidance. Just can you help us understand some of the assumptions that get you to the high end versus the low end of the guidance range, particularly on the single-family starts outlook?

Yeah, Rafe. This is Rob. So I'd say, you know, we focus on our midpoint as we do this, and then, you know, given the a little wider range than normal as you point out on it. I mean, from a single-family perspective, when we think about the low end, that's probably closer to minus 2% on a year-over-year basis and on the high end more of a plus 2. Right? And our midpoint's kind of flattish there. So that's kind of the range there. And then, you know, similarly, we've got a similar range on multifamily around the 30% down we're talking about. And then on commercial industrial, you know, similarly, we've got the, you know, low single digits at the midpoint, a little better than that on the high and a little below that at the low.

And then on the first quarter, I know it's, like, relatively balanced through the year, but sounds like you expect the first quarter to be weaker. Can you just talk about what's impacting the first quarter? Are you assuming the macro gets better after the first quarter, or are there specific headwinds that you're facing there that are gonna subside?

Yeah. No. I'd say, I mean, the first quarter, we do have the benefit of, you know, we've got a month and a half in the books here that we've seen. So we know what we're seeing right now. You know, and so we've obviously got that baked in. And as we think about the balance of the year, like we've said, we're optimistic that, you know, demand for residential is gonna come back stronger, but we haven't baked an upturn in that into our guidance. So when you think about what we're seeing right now, we basically baked in kind of normal seasonality through the rest of the year. And when you do that, right, if you do that from where we are today and you look at the year-over-year comps, you'll see, you know, that we're gonna be, you know, kind of low single digits down most of the year with Q1 down the most. We did have some weather in January. That's definitely a factor as well. But, you know, we have weather every year as well. So we tend to not call that out.

That's a consistent macro view, but the comp is just different. Different on a year-over-year basis.

Yeah. And it's important to point out too, we do have one less day in Q1. So for the year, one last day and it's in Q1. The rest of the year, the date would be the same.

Yeah. Hey, Rafe. This is Robert. Just to add on there, I mean, I think, you know, we think back to 2024. I think everybody was sitting here at the beginning of the year with a, you know, outlook for what was gonna happen in the back half of the year. And so to Rob's point, we have optimism, but, you know, we're being cautious as to the outlook based on what we see today. And, you know, not wanting to get the situation that it wasn't 2024 where the back half didn't develop as everybody thought early in 2024.

Great. Thank you.

Thank you. The next question comes from the line of Ken Zener with Seaport Research Partners. Please go ahead.

Good morning, everybody. Robert, I'd like to ask you a high-level question and ask Rob just more, like, you know, an operating leverage question. But, Robert, you know, the narrative is that housing's been underbuilt. And builders' new home inventory census data is quite high today. You know, and the idea is that they're leaning into more presale units in order to leverage mortgage buy downs. How long do you think, I mean, because you and I probably have some of the best data out there, this slowdown? You mentioned the word affordability, but how long do you think it takes to actually work off this high level of under construction complete units that the inventory that the industry is in? I mean, is that kind of a headwind you see or is it in your assumptions they're building down inventory, or they're just gonna keep it up? Trying to understand the demand versus this excess.

Yeah. Morning, Ken. So I think that's where, to your point about the inventory, that I think is where some folks are leaning into the back half of the year. So we'll see, you know, how that develops. I think, you know, if things pick up, that could definitely be realistic. We'll see what happens. I think the builders, you know, it kind of depends on the builder population you're talking about. Right? So the big builders continue to buy downs, and they're in a situation for that. I think the longer that goes on, the more we probably said this in 2024, the more it can impact from the smaller regional smaller builders here. So you're right. Where you got the extra inventory sitting on the ground, bigger guys are able to continue to build. But, you know, they're also builders are smart business people, so they're obviously adjusting the product they're going to market with. Based on those affordability issues and maybe where they see more of the inventory as well. So they're adjusting their approach as well.

Right. And I guess, Rob, the, you know, mid-thirty percent incremental decline that you talked about, not widespread market weakness, but, you know, in some markets, you did highlight there's price concessions and, you know, some other factors. Do those markets that are weaker, not widespread, pretty much overlap with what we're seeing, hearing, meaning pressure in Southwest Florida, you know, these particular areas where inventory and margins are going down broadly? Are there is that to be interpreted the same where your margin pressure is? If you have margin pressure?

I'd say in general, yes. Right? I think there's definitely some correlation there. But, you know, what we're seeing is definitely, you know, it's very different market by market even within states, so it's hard to even, you know, generalize the state of Florida or the state of Texas. But certainly where there's more inventory, you know, that creates more pressure for the builders. And, you know, that can have a trickle-down effect on us as well.

Thank you very much.

Thank you. The next question comes from the line of Kurt Yinger with DA Davidson. Please go ahead.

Great. Thanks, and good morning, everyone.

Good morning.

Just one question on the commentary around deportation activity and not putting a premium on labor. I mean, it's pretty intuitive in terms of, you know, the benefit that could serve to, you know, the service kind of oriented offering that you guys have. I'm curious if there's, you know, maybe a little bit more nuance as you guys see it in regards to, you know, competitive advantages or how that might impact the competitive landscape kind of specifically for TopBuild Corp. as we look out over 2025.

Yeah. As we think about that, morning, Kurt, it's Robert. I'd say a few things. Number one is, it's probably, you know, more impactful of, you know, things up in the construction cycle earlier and maybe some things, you know, right after us in the cycle. So talked about there could be a cycle time impact. I think we think about it from that perspective. I think, obviously, you know, we're very confident in our workforce. We think that puts a value in our workforce, obviously. As we think about what we can offer the builders, the service levels that we can offer whether builders, the contractors, commercial, side of our install business as well. So we think it's an advantage for us, for sure. We can't control the cycle time, but we'd have to be able to control the service and how we'll be able to, you know, make sure that we're there for the builders from a labor perspective. So definitely an advantage for TopBuild Corp.

Okay. That makes sense. And just one follow-up. I mean, it's kind of an impossible question to answer without knowing all the variables. But as you think about kind of holding on to the labor and, you know, with the view that perhaps some of these demand pressures are more temporary, what would what are a couple of things you might need to see change, that might impact your decision to maybe be a little bit more aggressive looking at the cost side and kind of readjusting the size?

Yeah. So this is Rob. So like we talked about, I mean, we're monitoring with our systems, our bidding activity across the footprint. Right? We're obviously, you know, talking with the field who's talking directly with the customer. So as we understand what's going on in each market, kind of get a feel for where we think it's going. You know, we'll get more aggressive with cost actions we're taking. I mean, we've been through this before. Our team's been through it before. We went through it, you know, during COVID when, you know, we saw our sales drop off, you know, 20% immediately after COVID. And, you know, for us, given our cost structure, right, it's about labor. Right? And it's about knowing your a players, your b players, and your c players. And, you know, we do our best to hold on to those a's and b players as long as we can. And, you know, this is a similar situation in those slower markets right now.

Yeah. Just to add on that, Kurt, Rob I think Rob said it well. We'd have to see prolonged, you know, weakness, but, you know, our productive labor, we want to keep. And, you know, the COVID's a good example, but if you look back also even back to wherever there was choppiness in residential, 2017 and 2018, and we took appropriate action that came out stronger, and we see the same here.

Right. Makes sense. Okay. Appreciate the color. Thank you.

Thank you. As there are no further questions, I would now like to hand the conference over to Robert Buck for closing comments.

Thank you for joining us today. We look forward to talking with you in early May whenever we report our Q1 earnings.

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