Greetings. Welcome to TopBuild's Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to 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; 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 third quarter presentation which can be found on our website. I will now turn the call over to Robert Buck.

Good morning, and thank you for joining us today. We are pleased to report another quarter of solid performance for TopBuild. Our team continues to successfully manage material cost increases with selling price adjustments and to navigate material and labor constraints. Driving profitable growth remains a cornerstone of our operating model, and the strong margin expansion we’ve achieved throughout this year is a testament to the significance of our scale, size and continuing focus on operational excellence. Taking a step back and looking at our industry as a whole, homebuilders, general contractors and building product companies continue to be impacted by supply chain disruptions and labor shortages. These challenges are delaying the completion of projects and elongating the build cycles of both residential and commercial construction projects. While we had initially hoped these industry-wide supply chain bottlenecks would be resolved by year-end, we now believe that a more realistic scenario falls well into 2022. On a more positive note, demand for residential housing remains strong, interest rates are low and inventory remains tight. In addition, with a longer build cycle, our backlog continues to grow and it is reasonable to assume we should not experience the traditional seasonal slowdown in the fourth quarter of this year or the first quarter of next year, barring any unusually harsh winter weather. Looking at our third quarter results, revenue grew 21.3% and 10.6% on a same branch basis, driven by strong pricing in the quarter at both TruTeam and Service Partners. Gross margin expanded 120 basis points, adjusted operating profit grew 35.2% and adjusted EBITDA increased 32.8%. In addition, adjusted operating margin expanded 170 basis points and adjusted EBITDA margin expanded 160 basis points to 18.7%, the highest in the company’s six-year history as an independent public company. Turning to material, fiberglass and spray foam remain on allocation. Given the supply scenario, three of the four fiberglass manufacturers have announced a 10% increase effective December or January. On the capacity side, we were pleased with Knauf’s announcement that they plan to build a new facility in Texas that should be online later in 2023. This new facility should add about 180 million pounds of insulation, or approximately 3% to 4% additional capacity. In addition, Knauf and Johns Manville’s new blowing wool lines should be up and running sometime later this quarter or early first quarter next year, adding an additional 3% to industry capacity. Spray foam, which represents about 18% of our insulation sales, continues to face supply chain challenges and prices have significantly increased over the last 12 to 18 months. Supply was initially impacted by MDI shortages, the A-side chemical component. Then, the major freeze in the South-Central states and significant bad weather along the Gulf Coast caused additional production disruptions and delays. Further compounding these issues are delays at U.S. ports affecting delivery of key chemical components. Based on what we are seeing and hearing, we believe TopBuild is faring better than most on both the material and labor fronts. Over the past year, we have partnered with key suppliers to get our fair share of fiberglass and spray foam. In addition, our company-wide ERP system gives us the ability to efficiently manage material and labor throughout our branch network to successfully support our customers. Let me give you one recent example. A few weeks ago, a large production builder asked if we could leverage our resources to help them complete almost 600 homes in one of their key regions by the end of October. Teamwork across our operations leadership and our shared ERP system enabled us to quickly move material and crews from across our network and complete this work within the condensed timeframe. I don’t believe any other service provider in the U.S. could have accomplished this. Hats off to our TruTeam branches for making this happen and driving immense value for our customer. On the capital allocation front, year-to-date, we’ve completed eight acquisitions which are expected to generate almost $1 billion of revenue on a pro forma full-year basis. Since our last call in August, we completed three of these acquisitions: Valley Gutter Supply, California Building Products and Distribution International. Valley Gutter, acquired in mid-August, is a fabricator and distributor of gutter products and specialty metals to contractors in the Los Angeles area. Approximately 70% of Valley Gutter’s customers serve the residential market and the remainder focus on light commercial. Currently, the distribution and installation of gutters comprises approximately 6% of TopBuild’s total revenue. California Building Products, which we acquired in early October, is a residential and light commercial installation company serving Northern California. The company brings along a solid customer base and strengthens our operations in this high growth region. And finally, we announced in October that Distribution International had successfully gone through HSR regulatory review and joined the TopBuild team. We are now the leading North American specialty distributor in the $5 billion mechanical insulation market and the leading supplier of energy saving insulation solutions in three critical and expanding end markets: residential, commercial and industrial. We added 101 branches to our specialty distribution network, including 17 in Canada, increased our customer base by close to 13,000 and welcomed 1,300 DI associates to TopBuild. Our teams are working closely to ensure a smooth transition as we integrate DI into our systems and supply chain over the next 12 months. As noted previously, we anticipate $35 million to $40 million of run rate cost synergies over the next 24 months. Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical insulation specialty distributors, and we expect to remain very active on all three fronts going forward. We also used our capital in the third quarter to repurchase 60,000 shares and year-to-date we’ve repurchased just over 183,000 shares at an average price of $194.15 per share. Before turning the call over to John and Rob to discuss our financial results in further detail, I want to emphasize once again that our strong operating performance quarter-after-quarter is the direct result of our uniquely diversified model and the ability of our experienced and cycle-tested leadership team to manage our businesses well in any environment. John?

Good morning, everyone. As Robert noted, we had a solid quarter despite the industry-wide supply chain shortages and labor constraints tempering topline growth. Our team once again demonstrated their ability to successfully manage and optimize input costs and pricing and drive operational efficiencies throughout the business. Moving to our results, in the third quarter, net sales increased 21.3% to $845.8 million primarily driven by a 10.8% increase in price and $74.5 million of revenue from seven acquisitions: Garland, LCR, Ozark, ABS, Creative Conservation, RJ Insulation and Valley Gutter Supply. For the first nine months of 2021, net sales also increased 21.3%, primarily driven by increased selling prices, sales volume and $172.2 million of revenue from acquisitions. Gross margin improved 120 basis points in the third quarter and 100 basis points in the first nine months of 2021 to 29.6% and 28.5%, respectively, driven by higher selling prices and lower insurance costs, partially offset by material inflation. Adjusted operating profit in the third quarter grew 35.2% to $137.4 million, with a corresponding margin improvement of 170 basis points to 16.3%, driven by the same positive factors that I just mentioned that led to gross margin improvement, but partially offset by increased travel and entertainment activity and the initial absorption of fixed costs of new acquisitions. For the first nine months, adjusted operating profit increased 42.7% to $364.5 million with a corresponding margin improvement of 220 basis points to 15%. Adjusted EBITDA for the third quarter was $158.2 million compared to $119.2 million in the third quarter of 2020, a 32.8% increase, and adjusted EBITDA margin expanded 160 basis points to 18.7%. For the first nine months of 2021, adjusted EBITDA grew 34.4% to $423.9 million, and adjusted EBITDA margin was 17.5%, a 170 basis point improvement over the first nine months of 2020. Third quarter SG&A as a percent of sales was 13.8% compared to 13.9% in the third quarter of 2020. The year-over-year decrease as a percentage of sales was primarily the result of higher sales partially offset by increased travel and entertainment and the initial absorption of fixed costs of acquisitions. Adjusted income for the third quarter was $97.7 million, or $2.95 per diluted share, compared to $69.6 million, or $2.10 per diluted share. For the first nine months of 2021, adjusted income was $256.4 million, or $7.73 per diluted share, compared to $171.2 million, or $5.14 per diluted share. Third quarter adjustments to net income were $3.6 million, all related to acquisition expenses. Adjustments to net income in the first nine months of 2021 were $20.4 million, primarily tied to $13.9 million of debt refinancing costs and the remainder related to acquisition expenses and the COVID-19 Leave Plan initiated March of 2020. As of July 1, 2021, that plan is no longer active. Our effective tax rate for the quarter was 25.7% and 24.7% for the first nine months of the year. Interest expense in the third quarter of 2021 was $5.5 million compared to $7.7 million in the prior year, primarily driven by lower interest rates on our senior notes issued in March 2021, and borrowings under the Amended Credit Agreement. During the fourth quarter, we successfully closed on a $500 million senior notes offering priced at 4.125% and maturing in 2032. In early October, we amended our credit agreement, increasing the revolving credit facility from $450 million to $500 million and adding a new $300 million delayed draw term loan. This was used along with the proceeds from our senior notes offering and cash on hand to fund the purchase of Distribution International, which officially joined the TopBuild team two weeks ago. CapEx through September 30 was $42.3 million, or 1.7% of sales, slightly below our long-term guidance of 2% of sales. Working capital as a percent of trailing 12-month sales was 10.3% versus 10.1% a year ago. This slight increase was due to higher inventory on hand which is being driven by inflation, M&A and the timing of inventory receipts. We ended the third quarter with a net leverage of 0.7x, using trailing 12 months adjusted EBITDA of $545.3 million. Total liquidity at September 30, 2021, was $709.8 million, including cash of $327.9 million and accessible revolver of $381.9 million. Operating cash flow was $309.5 million for the nine months ended September 30. Assuming the inclusion of DI and associated debt acquired to finance the transaction, September 30 net debt would have been 2.2x on a pro forma basis, pre-synergies. I’m now going to turn the call over to Rob Kuhns, our Vice President and Controller, to discuss our segment results. As announced last month, I will be retiring from my position as CFO at the end of March and Rob will be assuming this role. Rob and I have worked closely together for over three years and this succession plan has been in place since he joined the company. He’s built a great team and is involved with all aspects of the company’s operations and we couldn’t have selected a better replacement. Rob?

Thanks, John. Starting with TruTeam, sales increased 24.5% in the third quarter to $612.9 million. On a same branch basis, revenue grew 10.3% driven by an 8.4% increase in price and a 1.9% increase in volume. Residential and commercial markets saw healthy demand in the quarter, but the industry-wide material shortages and labor constraints tempered growth. We are pleased with TruTeam’s third quarter adjusted operating margin of 17.2%, a 20 basis point improvement from the third quarter 2020 even given the significant contribution from M&A. Our teams did a great job managing both price and cost in this environment and our backlog remains strong. Looking at Service Partners’ third quarter, sales grew 13.2% to $276.4 million, driven by a 16.5% increase in price, partially offset by a 5.2% decline in volume. Service Partners’ topline was challenged by material constraints in both fiberglass and spray foam. In addition, last year Service Partners’ third quarter volume increased a robust 12.2%, so this quarter was a difficult comp. A high note was Service Partners’ third quarter adjusted operating margin of 17.1%, a 370 basis point improvement from third quarter 2020. Our Service Partners team continues to do an outstanding job managing cost increases, customer pricing and operating costs. John?

Thanks, Rob. Moving to 2021 annual guidance. A number of factors were taken into consideration as we put together our outlook for the remainder of the year. The most relevant being the industry-wide supply chain shortages and labor constraints which are impacting everyone’s ability to meet the continued strong demand for new residential housing and commercial projects. As a result, looking at legacy TopBuild, which excludes financial results from DI, we are reducing the midpoint of our 2021 sales forecast by $55 million to a range of $3,255 million and $3,295 million. For the adjusted EBITDA, as a result of improved operational efficiencies and strong input cost management, we are maintaining the midpoint of our previous guidance of $577 million, but are narrowing the range and now expect adjusted EBITDA to be between $570 million to $585 million. We expect DI to contribute revenue between $170 million and $180 million and adjusted EBITDA between $15 million and $20 million. As a reminder, this acquisition closed on October 15, so the guidance provided is for approximately 2.5 months. In total, we are projecting sales to be between $3,425 million and $3,475 million, and adjusted EBITDA to be between $585 million and $605 million. We are not providing a projection of housing starts for the remainder of the year as there is a weak correlation between starts and our performance, due to the continuing extension of the build cycle tied to the constraints previously mentioned. That said, we remain very bullish on the demand profile of all three end markets we serve. Looking ahead, we will provide our 2022 outlook when we report our fourth quarter and year end results in mid-February. Now let me turn the call back over to Robert.

Before opening up the call for questions, I wanted to mention that in September, we hosted our annual strategy session with our Board and key members of our leadership and operating teams. During this two-day meeting, we took a deep dive into all aspects of our Strategic Plan, including our ongoing ESG efforts. This was a great planning session with the goal to continue to create great value for all of our stakeholders. I also let you know that we plan to host a TopBuild Investor Day in New York City on Tuesday, March 15. This will be a great opportunity to meet the leaders of our business. Looking ahead, we anticipate the industry will continue to be impacted by supply chain disruptions and labor constraints into next year. From TopBuild’s perspective, we believe we are faring better than most in terms of both material and labor, due to our size, scale, strong relationships with our suppliers and our engaging recruiting methods and productivity improvement initiatives. Our company-wide ERP system also facilitates the sharing of these limited resources, enabling us to best serve our customers. Our teams throughout TopBuild continue to do a great job successfully navigating the current environment as demonstrated by our solid third quarter results. We are also extremely excited about our entry into the mechanical insulation specialty distribution space through our acquisition of Distribution International and their leadership position distributing and fabricating products for the industrial and commercial end markets. This acquisition also solidifies TopBuild as the leader in supplying energy saving insulation solutions to a broad range of businesses and industries across North America. To conclude, our team manages the business with a constant mindset of driving improvements and achieving operational excellence. We are proud of our track record of producing strong financial results and we recognize our success is the result of having the best and most talented operators in the field and a dedicated and experienced group at our branch support center in Daytona Beach. Our goal is to create sustainable shareholder value in every operating environment. Operator, we are now ready for questions.

Thank you. Our first question is from Stephen Kim with Evercore ISI. Please proceed.

Yes. Thanks very much guys. Thanks for all the info. And I guess my first question relates to DI. I know that you're going to be giving more specific guidance for the business overall on the fourth quarter call. But as we think about trying to model out DI, can you give us a sense for how we might be thinking about the sales growth opportunities for that small portion of your business because it's a bit discrete? And then in addition, what kind of incremental margins, excluding synergies, should we be thinking that business can carry?

Yes. Stephen, this is John. So we will be giving guidance in the fourth quarter call sometime in mid-February. We're going to be lumping together DI with the rest of the business. So we'll provide one sales number, one adjusted EBITDA number in a range. I would say, looking forward, though, in terms of the market, we're pretty bullish on the industrial market in terms of both the current status of where it's at. And I think our breakout this quarter of DI reflects that in terms of the revenue we've baked in. And then going forward, along with residential and commercial, we're extremely bullish in terms of that market. In terms of your last question around the range, similar to Service Partners, as we think about our spread the 22% to 27% on an incremental basis, we always talk about Service Partners being at the lower end of that range, and DI is the same type of position. So around that 22% on an incremental basis is the way to think about it on a long-range basis.

Okay. That's helpful. Thanks for that. And then I guess second question relates to this unusual environment of homebuilder constraints. Obviously, we all see what's going on and it makes sense that you've called that out. I'm curious as to whether or not this unusual period of time though provides any market share implications or opportunities for TopBuild? In other words, is there anything about the current dysfunctional environment where you have seen an opportunity to lean in and invest, maybe change some things in an effort to grow your market share opportunities as we come out of it?

Yes. Good morning, Stephen. It's Robert. So yes, I think absolutely it's the case. I mean, I talked about a good example on the phone of where, as you know, the production homebuilders, they're heading toward this time of the season, heading toward the year-end and that definitely created some opportunity. If you think about what's happening in the supply chain and upstream from us, downstream from us, whenever we would get those homes coming at us, they would come in slots of like 30 to 40 homes at a time because the previous trades are backed up and there is no smooth even flow of production coming in. That's a strength for us because even though they're bringing those 30 or 40 homes on in one day or two, what we're doing is we're able to move crews around, move our resources around and we can basically insulate those homes for them in the same day or the next day. So we've seen that, we absolutely think given what we've done relative to labor and material there's definitely been some share gain. I think as we look at our results in Q3 and we look at our residential buy and compare that to what the builders are reporting as well, we feel really good about our residential volume, what's happening there and the results that we produce. So I think it's a good environment for TopBuild, good environment for us to leverage our strengths, and I think we're seeing that on a day-to-day basis across the country.

Yes. That's very clear. Thanks for that. And just to clarify, is that an opportunity on sales or margins or I should say, sales or pricing or both? Volume or pricing?

Yes. I would say both, Stephen. I think as we think about share, but I think also as builders are pushing for this and given labor constraints and concerns about supply chain, we're obviously pricing appropriately to drive value for us and for them.

Got it. Thanks very much guys.

Our next question is from Ken Zener with KeyBanc. Please proceed.

Good morning, everybody.

Good morning, Ken.

Good morning.

So very interesting times here. Pricing is up 8% on the install, distribution 16%. Both of those numbers are about half of that on a two-year stack basis. With the December increase of 10% on price and volumes flat, maybe up a little bit really over the next six months based upon what the builders are saying, can you maybe give a little context for this type of pricing situation amid flat volumes? And I'm asking this specifically as it relates to the conviction you have to hit the 22% to 27% operating leverage historically, which usually we talk about more efficient drive times, et cetera. So maybe if you could just kind of lay out how your business model fits into high pricing, but not such high volume environment related to your operating leverage?

Hey, Ken. Good morning. It’s Robert. So I'll take the first part of that, and John will take the second part. So I think given that material is still constrained and thinking about even what's coming online here, which is loosefill material, the batt side is still constrained as well as spray foam and growing backlog, there's a lot of work stacked up here. As the supply chain continues to improve, even though we think that's well into 2022, it still creates an environment of supply and demand dynamics that will allow for appropriate pricing. So as we think about this December, January increase, I think we're pretty comfortable from our pricing perspective and in having appropriate conversations with customers given that supply-demand dynamic and what's in the backlog.

Yes. Ken, this is John. So I think in terms of any environment, we've shown pretty good evidence of operating well, whether it's low growth, low price or high growth, high price. Right now, we're seeing some challenges certainly in terms of the volume coming through the pipeline, but a very inflationary environment. So I think our businesses have shown great capability in terms of performing well under any of those scenarios. And I think what we're seeing right now in the third quarter is just one of those cases where — and we've said this many times — and I think you've heard this on many other calls from builders and distributors and building product companies that demand is extremely strong, but unfortunately, the pipeline continues to be the issue. And when we got to our guidance in August we were counting on some slight incremental improvements throughout the third and fourth quarter, and we're just not seeing that right now. But I think in response to that, our teams have done extremely well in terms of dealing with an inflationary environment, taking advantage of pricing and again, the margin expansion you saw is great evidence of that. So again, I think we're comfortable under any scenario you point to us, and I think we've got pretty good evidence of performing that way.

Good. And just my second question is specifically on distribution, the operating model, the margins seemed to be moving up along with sequential pricing, first quarter, second quarter and third quarter. Is there any reason to assume that dynamic would change? I'm just thinking about how the business looks sequentially and specifically in the next year with that same net pricing structure seemingly in place? Thank you.

Hey, Ken. This is John. So again, I think we don't anticipate a change. If, in fact, we were to see some type of correction in terms of the industry or a slowdown, I think there's two things that will happen pretty much simultaneously. Certainly, from an external standpoint, there will be some pressure on topline pricing. But again, I think there will also be some probably excess material. And of course, we're going to put pressure on suppliers in terms of material pricing. So I think we'll balance those as well as possible. So again, we'll manage that well, and I think it plays out well for TopBuild.

Thank you.

You're welcome.

Our next question is from Philip Ng with Jefferies. Please proceed.

Hey guys. John, thanks for all the help through the years. It's been a pleasure, and Rob, looking forward to working with you a little more intimately going forward. I guess to kick things off, the constraints you called out obviously weighed on 3Q volumes and your guide implies still some hangover effect in the fourth quarter. But any color if some of these constraints are beginning to ease a little bit? And when do you kind of expect volumes to reflect some of the underlying demand that you're seeing at this point?

Yes. Good morning, Phil. It's Robert. So still tight in the industry, and we talk about the pipeline and the congestion, both labor and material. We would say we're definitely faring better than most, but material is still tight. And let's talk maybe fiberglass batt and blown. So on the fiberglass batt and blown side, we've got a little more blown capacity coming on end of this year, beginning of next year, that will help. But at the same time, these plants are going to have maintenance. Some of that additional capacity will be eaten up with maintenance activities that have to happen in 2022. On the spray foam side, it's really been a rollercoaster. I spoke in the prepared remarks about issues even pre-COVID where there was some tightness relative to input chemicals. We've had freezes and issues relative to ports and materials coming in from overseas. So there continue to be issues on the spray foam side of the business as well. We see these constraints going into 2022, but we're hopeful that midyear or in the back half of next year we start to see some of that ease. Given the backlogs, we think materials are going to continue to be tight. I spoke specifically about spray foam and insulation fiberglass, but it's really across many products and trades. Even garage doors, for example, have major constraints given component supply from overseas.

Got it, Robert. That's helpful. I mean, I think some of the builders have talked about maybe some of the supply chain easing to more normalized levels by spring. So could you see that pick up and certainly some of that capacity that's coming on, on the loosefill or are you trying to signal that your volume is going to be really compressed until the back half of next year, which seems a bit draconian but any color on that front would be helpful. And then I guess bigger picture with some of this capacity coming on in the next few months and then longer term with the Knauf expansion, have you guys looked to secure some of that supply in a more solidified approach or it's still kind of an ongoing negotiation? Thanks a lot guys.

Yes, Phil. I think relative to that first question with the builders, they probably expect there shouldn't be the seasonal slowdown in Q4 and Q1, assuming no harsh winter weather. So given that seasonality factor should be smooth, they expect some catch-up that would happen as part of that and so would we. As we get into spring selling season, I think we'll see demand ramp up again. Regarding Knauf, we worked very closely with Knauf’s management in the planning of that capacity, and we've secured a majority of that capacity for TopBuild. We have a great relationship with their management team and are glad to work with them on that.

Thanks a lot. Really appreciate it.

Our next question is from Mike Rehaut with JPMorgan. Please proceed.

Thanks. Good morning, everyone. First question, I just wanted to kind of review a little bit if possible, this is the mechanics of how the manufacturer price increases flow through because, take for example, the upcoming 10% price increase. You have a portion of TruTeam sales that are not residential oriented. Obviously you have a smaller portion of Service Partners that is not residential installation. Is there kind of a good rule of thumb to use when you think of like a 10% installation price increase through the industry, assuming that all of it goes through, how much proportionally you'd see that come through in each of your segments?

Yes. Mike, this is John. So we're not going to provide a rule of thumb. Each time manufacturers announce pricing increases, we sit down and negotiate both timing and magnitude. That varies by time period and by segment. Typically, you'll see a higher percentage on the Service Partners side in periods of material inflation because material makes up a larger piece of the P&L. As reflected in the third quarter results, Service Partners price percentages are higher, but that's required because material is a larger piece of what flows through. We can't provide a precise guide by segment or timing because it varies, but we have done a great job getting these increases into our bids in both areas, and it's reflected in our performance this year.

And Mike, I’ll add on. The manufacturers usually announce increases 60 to 90 days in advance. To John's point, we start discussions with suppliers and we also start discussions with our customers. On the TruTeam side, there are thousands of builders we start the conversations with, and we also communicate with contractors and our specialty distribution customers as well.

Okay. Appreciate it. I guess, secondly, just shifting to DI for a moment. Can you just remind us, again, the amount of synergies that you expect out of that acquisition? And as you've spent more time over the last month or two, what perhaps is not included in those synergy numbers? And as you become more and more comfortable with the acquisition, how to think about that from potentially an upside scenario?

Yes. What we've provided is $35 million to $40 million of total synergies. By the end of the first year, the run rate is expected to be $17 million to $20 million; by the end of the second year, the full $35 million to $40 million run rate should be achieved. The breakdown is about 40% supply chain, about 35% back office and another 25% operational improvement. We've done a lot of work in advance of the transaction closing in mid-October and have been very active in integration planning since then. We feel extremely good about the guidance we provided and will be pushing for additional opportunities, but at this point we are not projecting upside beyond that guidance.

Fair enough. Thanks guys. Appreciate it.

Thank you.

Our next question is from Adam Baumgarten with Zelman & Associates. Please proceed.

Hey. Good morning, everyone. Thanks for taking my questions. I guess, you haven't really touched much on the commercial business. Maybe give us some color on what you're seeing there? Are you seeing some project push outs due to labor and material constraints?

Yes. Good morning, Adam. On the commercial side of the business, projects have been delayed relative to the Delta variant ramp-up. Even though we saw some nice year-over-year performance from the commercial side, it was slower than anticipated, especially for larger heavy commercial projects. Similar to residential, we've seen material constraints impact commercial activity in Q3. That said, we're bullish on the health of the industry. The prime indicators for us are backlog and bidding activity. Our backlog continues to grow and bidding projects include work into 2023 and some larger projects in 2024. Contract flow remains healthy, so although commercial was a bit slower than expected in Q3 due to supply chain constraints and COVID, the longer-term outlook is strong. The mix of projects — warehouses, healthcare, education — is healthy and reflects the types of projects we're bidding.

Got it. Thanks. And then just on the strength in incremental margins in Service Partners. How should we think about what's driving that? Is part of that accretive pricing given the tight supply environment, and how much of that's related to fixed cost leverage as most of the growth being driven by price versus volume? If you could walk us through the moving pieces there?

Hey, Adam. Our TruTeam operations team has done an excellent job and continues to execute at a very high level, providing strong customer service. The bottom line performance is driven by a combination of strong price management in a supply-constrained, high-demand environment, disciplined cost controls, and some benefit from lower insurance costs in the quarter. Some of that insurance benefit is driven by our focus on safety, and we also had a benefit on medical costs as well.

Got it. Thanks.

Our next question is from Keith Hughes with Truist Securities. Please proceed.

My question is on Service Partners, great margins this quarter. I assume that's price and cost. Can you just talk about moving forward, will that lessen over time as the industry catches up with increases before the new announcement hits next year?

Yes. Keith, we've seen margin expansion in Service Partners over the past several years and the team has been effective in managing the inflationary environment. On a go-forward basis, if there is some type of correction in the industry there may be pressure on topline pricing, but there may also be excess material which would pressure material costs. We'll manage those dynamics and balance topline pricing and material cost management. We're confident we can manage through those scenarios and maintain a solid margin base.

And moving forward, will DI be included with the Distribution segment combined together for reporting purposes?

Yes. You'll start to see that on our fourth quarter call. We'll report on two segments, installation and specialty distribution. So Service Partners and DI will be consolidated under one segment.

Okay. Thank you.

You're welcome.

Our next question is from Noah Merkousko with Stephens. Please proceed.

Good morning, and thanks for taking my question.

Good morning.

So first, I understand you're not giving guidance for next year yet, but just how are you thinking about the pricing frequency and magnitude that you're expecting from manufacturers next year? At least maybe can you compare it to what we had this year? I know it sounds like capacity effectively isn't really changing much, and you've got very elevated demand in backlog. So just curious on your thoughts there.

Yes. Noah, if you look at this year, there have been multiple announced increases, effectively one per quarter, with a couple in the second quarter. It is a supply-demand dynamic. We expect supply to stay tight into next year with the backlog that we have. Three of the four manufacturers have announced increases for December or January, and they will evaluate the market as we come out of the spring selling season. We definitely expect to see additional increases and continued inflation into 2022, and multiple increases are possible. We hope to see the spray foam side stabilize next year as some of the supply chain issues, both input materials from overseas and domestic manufacturing, get under control.

Thanks. That's helpful. And then I guess kind of a similar question, but on sort of what you've got going on in the M&A pipeline outside of big deals like DI. Obviously this year has been active, so just kind of what you're seeing now and maybe your expectations into 2022 on sort of smaller to medium-sized deals?

The pipeline is very active across residential, commercial and specialty distribution. We've focused on doing integrations right while continuing to pursue new deals. While working on DI we completed Valley Gutter and California Building Products, which expand our presence in the West. Expect us to remain active across all three areas and continue to see strong M&A pipeline activity into 2022.

Thanks. That's helpful. I'll leave it there.

Our next question is from Ryan Gilbert with BTIG. Please proceed.

Hi. Thanks everyone. First question is on your backlog. I appreciate the commentary around the strength of it. I'm just wondering if you could give us some details such as how much the backlog is up on a year-over-year basis or if you could rank order the strength between single-family, multifamily and commercial? That would be really helpful. Thank you.

Ryan, we don't provide absolute backlog numbers. Our commercial backlog is certainly strong right now; bidding activity has been strong. We saw a disproportionate impact on volume on the commercial side of TruTeam this quarter. Single-family backlog has also grown — in many of our locations we're at about 30 to 60 days on average between bid and when we perform the work, so at least a month to two months worth of backlog activity has grown throughout the pandemic. We are confident we're not losing share in this environment. The volume struggles in Q3 tied to material and labor impacts were slightly more pronounced in commercial, but overall backlogs are very healthy across residential and commercial on the TruTeam side.

Okay. Thank you. Second question is on distribution volume. It sounded like most of that drop was the tough comp and material shortages. Is it fair to say that the customer base at Service Partners is largely intact from 2Q 2021 or 1Q 2021? Or have customers fallen out? Or have you pruned some lower margin business as you've done in prior years?

Ryan, good question. It was a tough comp; coming out of Q2 last year we had an abundance of material and then strong Q3 activity as the business ramped. The Service Partners team has done a great job serving customers while material has been constrained. They have not seen customer fallout; if anything, they are gaining longer-term customers because of strong service. The team has done a great job balancing limited material across customers and communicating effectively. One point worth mentioning: R&R (repair and replacement) activity was down in Q3 as consumer acceptance was lower with COVID spiking, which also impacted volume.

Ryan, just to add a number on the comp: Service Partners' volume was up 12% last year, so the comp was particularly difficult.

Okay. Got it. Thanks very much.

You're welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you for joining us today. We look forward to talking with you on our fourth quarter call in February.

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