Greetings and welcome to TopBuild's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tabitha Zane, Vice President of Investor Relations. Thank you. You may begin.

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

Good morning, and thank you for joining us today. Before discussing our first quarter results, I would like to make a few comments regarding our view of the U.S. housing industry. We recognize that there are concerns that rising home prices, led by higher interest rates and an inflationary environment, could dampen consumer demand. And we agree there is a possibility that some consumers could be priced out of the market. Where we differ is with the sentiment that these factors will cause a material downturn in the U.S. housing industry. Looking at the macro environment, while interest rates have risen and will likely continue to increase over the year based on recent commentary from the Fed, they're still far below historical levels. It is also essential to consider long-term supply and demand fundamentals. Average housing starts over the past 10 years have been below historical levels, resulting in very low new home and resale inventory. At the same time, we have seen robust household formations, particularly among millennials, fueling the demand for entry-level homes. Builders are acutely aware of the shortage of entry-level housing and want to take advantage of this strong demand and are adjusting their product to mitigate the impact of higher housing costs, including offering homes with smaller footprints or scaled-back options. Plus, rising wages are helping more consumers manage higher home prices. From TopBuild's vantage point, our backlog is strong and growing, supported by the widening delta between starts and completions. Our builder customers tell us they still see robust demand, and accordingly, most continue to regulate sales. So even if there are some consumers priced out of the market, we believe the demand for housing, based on the macro environment just discussed, and what we are hearing and seeing in the field is strong enough to support steady growth over the next few years. We also expect to see good growth from the commercial and industrial end markets, which are tied to a wide range of construction projects and industries separate from housing. Our mechanical insulation business also benefits from recurring revenue tied to maintenance and repair operations. Combined, on a pro forma full year basis, these end markets contribute about 37% of our revenue with plenty of opportunities to expand our market share. Over the past seven years, we've demonstrated that our diversified business model, combined with our strong operational execution, overall scale, M&A expertise, proven ability to strike the optimal balance between price and volume and flexible cost structure should enable us to outperform the market in any environment. Turning to our first quarter results. We again demonstrated the strength of our operating model and our ability to manage material cost increases and selling price adjustments. Revenue increased 57.4%, and same-branch adjusted EBITDA margin expanded 310 basis points to 18.7%. The construction industry continues to experience material and labor constraints, elongating the build cycle and growing the backlog of work. At this time, we don't see any indications that the supply chain and labor constraints are beginning to ease, again supported by the recent starts and completions data. Fiberglass capacity and pricing remains a fluid situation. We've seen two cost increases this year and will likely see at least one more by year-end. Though additional loose fill capacity did come online late last year and in March of this year, manufacturers are performing line maintenance, reducing supply in the short term. While the industry remains on allocation, the quality and reliability of our supply chain is a clear competitive advantage for TopBuild. Relative to spray foam, we have not yet seen any easing of supply constraints and costs continue to escalate. Unlike fiberglass, spray foam is dependent on imported components, many from Asia. Spray foam manufacturers are also experiencing limited availability of the new closed-cell blowing agents required by some states, further constraining supply. Where possible, we continue to invest in extra inventory to service our customers, grow our share and smooth out some of the supply chain disruptions. While Rob will discuss our business segment results in more detail, I want to recognize our Installation and Specialty Distribution teams for outstanding execution in a difficult and demanding environment. Great job by our field and support teams in driving shareholder value. Installation revenue on a same-branch basis grew 17%, and the team continues to do an excellent job managing price, labor needs and meeting customer expectations. Our backlog continues to expand as supply and labor constraints remain obstacles to strong industry volume growth. Specialty Distribution on a same-branch basis continues to see volume impacted by supply constraints in many of the products we distribute. On the flip side, these constraints enabled the segment to see 22.9% in price realization compared to the first quarter of 2021. While we're not breaking out financial results for DI, I will say the DI revenue is growing at a solid pace given fewer supply chain disruptions and great supply planning and margins are expanding. The benefits of this strategic acquisition focused on our core business of insulation are exceeding our expectations. Turning to the integration of DI. With about seven months under our belt, it is proceeding very well, thanks in large part to the dedication of our multifunctional team driving this effort. To give you some specifics, supply chain integration is on schedule, many functions are now operating under one umbrella, including finance, human resources, legal, safety and strategic sourcing, and we're beginning to move DI's branches onto our common ERP system. We are extremely confident we will achieve the $35 million to $40 million of synergies by the end of our second year of ownership as projected back in October when we closed this transaction. This has been a tremendous acquisition for our company, diversifying our revenue stream, providing a strong entry into the Canadian market, expanding both our core product offerings and customer base as well as enhancing our M&A pipeline. On the capital allocation front, we've completed four residential insulation acquisitions this year, which are expected to contribute close to $16 million of annual revenue. Acquisitions continue to be a great use of our capital, generating strong returns for our shareholders. While we have a solid prospect pipeline and hope to see additional transactions close as we move through the year, the successful integration of DI remains our top priority. We're also pleased to announce the $100 million accelerated share repurchase, which we anticipate executing within the next several days. This program reflects management's and our Board's confidence in the long-term potential of TopBuild and our strong future cash flow position. In summary, we had a great first quarter to start what we believe will be a solid 2022. Our team continues to execute well and generate strong results, managing rising material costs and achieving selling price increases while maintaining our unwavering focus on profitable growth. Looking forward, we believe there are several years left in the residential market to facilitate steady growth. Our commercial and industrial markets continue to show strength as well. Our diversified model positions TopBuild to outperform in any environment.

Good morning, everyone. As Robert noted, our teams continue to execute at a high level in a challenging business environment. The benefits of these efforts were reflected in our strong first quarter results, which included revenue growth and expanded adjusted EBITDA margins in both our Installation and Specialty Distribution segments. In the first quarter, net sales increased 57.4% to $1.2 billion driven by revenue from acquisitions, which increased sales 38.6%. Same-branch sales growth, which excludes the impact of acquisitions completed in the last 12 months, was 18.7% due to higher selling prices and higher sales volume. First quarter adjusted gross margin expanded 160 basis points to 28.3% driven by higher selling prices, higher sales volume, synergies from the DI acquisition and operational efficiencies, partially offset by material inflation. Adjusted operating profit in the quarter grew 72.4% to $167.5 million with a corresponding margin improvement of 120 basis points to 14.3%. Keep in mind that our adjusted operating margin includes $9.6 million of incremental purchase price amortization from the DI acquisition. On a same-branch basis, operating income margin was 16.4%, an improvement of 330 basis points. First quarter adjusted EBITDA increased 74.2% to $201.7 million, and our adjusted EBITDA margin was 17.3%, a 170 basis point improvement. On a same-branch basis, our adjusted EBITDA margin was 18.7%, an improvement of 310 basis points. Both adjusted operating income and the EBITDA margin improvements were driven by the previously mentioned factors impacting gross margin as well as our continued controls and discipline around SG&A costs, enabling us to leverage our fixed cost base. Evidence of this leverage was seen in our same-branch incremental EBITDA margin, which was 35.2% in the first quarter, well ahead of our guided range of 22% to 27%. Our overall incremental adjusted EBITDA margin was 20.2%, which consisted of the 35.2% same-branch incremental EBITDA margin and our M&A EBITDA margin of 12.9%. First quarter interest expense increased from $6.6 million to $12 million, primarily as a result of additional interest expense related to our $500 million senior notes offering last October. Our effective tax rate was 24.9% in the first quarter compared to 20.7% for the comparable period in 2021. The higher rate was primarily due to a decrease in the benefit related to share-based compensation and state tax adjustments. Adjusted net income for the first quarter was $115.6 million or $3.50 per diluted share, an increase of 73.3% compared to $2.02 per diluted share in the first quarter of last year. First quarter adjustments to net income were $3.5 million, primarily tied to acquisition-related costs. Moving to our balance sheet and cash flows. First quarter CapEx was $18.4 million, approximately 1.6% of revenue. Working capital as a percent of trailing 12-month sales was 14.8%, 460 basis points higher than a year ago, primarily as a result of the DI acquisition. As I mentioned on our February call, DI has a higher working capital profile than our legacy business. In addition, another factor impacting working capital this quarter was our taking advantage of the opportunity to build some inventory at both business segments to help mitigate the ongoing supply chain constraints and meet our customers' strong demand. Over the long term, our working capital target remains 11% to 13%. First quarter operating cash flow was $89.5 million. We ended the quarter with net leverage of 1.84x trailing 12 months adjusted EBITDA, an improvement from last quarter when our net leverage was 2.0x. Total liquidity was $556.6 million, inclusive of the available balance on our $500 million revolver of $430.1 million, and cash of $126.6 million. Now let's turn to our segment results. In the first quarter, our Installation segment's net sales increased 27% to $676.7 million. Revenue from acquisitions increased sales by 10%, and same-branch sales grew 17% due to higher selling prices and sales volume. First quarter adjusted EBITDA margin for the Installation segment was 19.1%, a 270 basis point improvement compared to the first quarter of last year. Specialty Distribution's first quarter sales were up 116.2% to $543.9 million. Revenue from acquisitions increased sales 93.3%, and same-branch sales increased 22.9% due to an increase in selling prices. First quarter adjusted EBITDA margin was 15.6%, a 60 basis point improvement. As Robert mentioned, DI is performing well and the integration is proceeding as planned. We're already enjoying some synergy benefits and are even more confident today that we will successfully deliver the $35 million to $40 million of synergies announced at the time of the transaction. Moving to our annual guidance. We expect 2022 to be a solid year for TopBuild. However, as noted in February, our guidance assumes continued industry-wide material and labor constraints, limiting volume growth in our end markets to the low to mid-single digits. Based on our first quarter results, current backlog and conversations with our customers, we are now projecting total sales to be between $4.65 billion and $4.8 billion, a $150 million increase on both the high and low end of the range. We are also increasing our guidance for adjusted EBITDA to be between $810 million and $860 million, a $40 million increase on both the high and low end of the range. At the midpoint of our guidance, our adjusted EBITDA margin has increased 30 basis points, and we expect to be at the high end of our 22% to 27% incremental organic EBITDA range for the full year. Our long-range modeling targets and assumptions are unchanged from those we published on February 22. I will now turn the call back to Robert for closing remarks.

Thanks, Rob. In closing, while we recognize we can't control the macro environment, what we can control is how we operate within it, and our focus remains on growing our market presence, improving operational efficiency, driving profitable growth and successfully integrating DI. Our unique business model, which includes Installation and Specialty Distribution in the residential, commercial and industrial end markets offers multiple avenues for growth and gives us the ability to outperform in any environment. As a reminder, we are hosting our Investor Day on May 26 in New York City. The key team leaders from Installation and Specialty Distribution will be there as well as our senior leadership team. If you're interested in attending, please contact Tabitha, and she'll give you the details. Thanks again to our entire TopBuild team for their hard work, energy and unyielding focus on delivering continued great customer service and strong results while operating safely every day. Operator, we are now ready for questions.

Our first question comes from the line of Stephen Kim with Evercore.

Impressive results as usual. I would like to hear your thoughts on the delays in the industry and if you could provide some details on that. I recall that last quarter you mentioned they had worsened. I'm curious if you could quantify how much they have worsened. You discussed spray foam, but I would like you to go through your three segments and explain how the delays are affecting each of them. That would be really helpful.

It's Robert. I'll address this from a few perspectives. In terms of the delays or cycle time this quarter, it has worsened again in Q1 across the industry. We estimate an additional delay of two to three weeks, which aligns with what we've heard from our customers and larger builders. The numbers indicate a more than 10 percent increase in starts for the quarter, while completions fell by about 5 percent, reflecting these trends. Looking at different segments, fiberglass supply is constrained due to allocation issues and some supply chain disruptions with manufacturers, along with necessary maintenance at their facilities. Spray foam remains tight, and while there is some relief in open-cell foam, closed-cell foams are still particularly constrained, especially with new blowing agent regulations in certain states. On the industrial side, there are fewer disruptions, even though material remains tight, which contributed to some positive volume growth in that segment. This overview captures the situation across segments, products, and overall cycle times.

Yes, that's helpful. Just to clarify, when do you expect the fiberglass maintenance to stop being a challenge?

Yes. I think based on what we understand for the manufacturers, there's probably some more maintenance that will happen here into the summer months. But we would expect when we get in the back half of summer, i.e., August type of time frame into the fall, some of that maintenance definitely starts to slow down.

Okay, great. And the last question is about building inventory or safety stock, which Rob mentioned. I'm just curious how much more is needed there. How long do you expect to maintain these elevated levels of working capital?

Yes. Yes. So definitely, in this current environment, Stephen, we'll take whatever inventory we can get with material as tight as it is and price is rising. So where we could, strategically, we have invested. The working capital percentage does get a little bit distorted because of pricing right now. So if you just look at the overall percent increase from Q4, our inventory was up 10% and our sales were up 10%. So a lot of it is just the growth and the inflation and the inventory as well.

Our next question comes from the line of Ken Zener with KeyBanc.

Your results and the incremental margins you're achieving, if you just take a little bigger picture and obviously at your Investor Day, I think some of these broader pictures or scope will turn up. You guys had a fixed cost platform that you said you would grow starts into for some of your peers, the incrementals that you've achieved through, that rise in volume. Now the volume's slowing, you're obviously getting a lot of price. It appears your distribution arm has certainly helped you, I think, gather that material. Could you kind of just frame up the fact that you're running so far above your incrementals? How much of that you think is your platform? How much is perhaps like FIFO/LIFO stuff running through given pricing that we're seeing? And maybe just give a little context because you have this perspective. When you see price so contributing so much to the growth, which is obviously flowing through your margins, how that kind of normalizes given the cycle times we're seeing in the industry. It's just such an interesting dynamic, in my view.

Yes, Ken, this is Rob. There are several factors contributing to that. Our field operators are effectively navigating a challenging environment with tight supply and rising prices. Price is certainly a significant element on both the distribution and installation sides. We ensure that we receive fair compensation for the top-notch service we provide to our customers, and our field team excels at this. Additionally, managing our fixed costs is a daily focus for us. As prices increase, we continue to leverage that just as we do in a volume environment. Finally, our productivity initiatives significantly contribute to our superior margins. We are implementing various strategies in the field, such as investing in technology for time tracking and job quoting, as well as concentrating on improving our bottom 25% performing branches. There are numerous initiatives in place driving those results. Our forward-looking guidance will remain at 22% to 27%, and we will always strive to exceed this as we did this quarter.

Thank you. Regarding the on-site tour, it was very informative before the recent events in Ukraine. Can you share your observations about the energy industry? Is there significant change in terms of maintenance? New construction takes a long time, but does the situation in that sector really affect maintenance, or is it limited by labor constraints in the market?

Yes, Ken, this is Robert. So in that segment and especially in some of the areas that you're talking about, there's kind of two sets of projects there. There's what you call turnaround projects, which are where you shut down a certain part of a refinery and you do that kind of MRO work, and then you got kind of capital projects. So that turnaround work is scheduled well out in advance. So we don't see a lot of changes there. Capital projects, there can be some more funding of that per se, but I wouldn't call it dramatic. I would say, though, as we look at backlogs, bidding and overall projects in the industrial space, some really nice things on the horizon there. I think partly, it contributes to how we said that industrial piece kind of started recovering later after the initial COVID piece. And I think some of those projects are coming right along with it. So really happy with what we see there and nice representation around all those verticals, if you will, from the DI business.

Our next question comes from the line of Adam Baumgarten with Zelman.

Can you maybe walk us through the drivers of the increased '22 guidance? It looks like the end market growth outlook is unchanged and the incremental acquisitions are pretty small. So is it primarily the strong first quarter and maybe some additional price? Maybe just some more color there.

Yes, Adam, this is Rob. You pretty much hit the nail on the head. I mean we outperformed our first quarter expectations, both, I'd say, a little bit on the price side and also on the volume side a little bit, so that was a pleasant surprise. So we've got that flowing through for the full year. And then just with the visibility we have on the price that we've gotten, putting that through for the rest of the year, that's really driving the increase in our outlook.

Got it. And then just on the inventory build you mentioned, were you able to increase inventory across all categories? Or was it primarily in fiberglass installation?

It wasn't across all categories. It was a mixed bag in different areas of the country. But it's primarily in spray foam, but a little bit in fiberglass as well.

Yes, probably heavier on the DI side of the business, Adam, relative to some of the industrial products and a little bit on the foam, to Rob's point, on the residential side.

Okay. Got you. And then just last one for me. I mean you mentioned that there's been a couple fiberglass installation increases from the manufacturers and expect at least one more. It looks like that one more has already been announced for June from what I can tell. Do you expect another increase at this point sometime in the fall then given the three in the first half?

Yes, I would say considering the current environment and material constraints, there is a strong possibility of another increase in the fall timeframe. Nothing has been announced yet or discussed, but I believe there is a good chance of that.

Our next question comes from the line of Keith Hughes with Truist.

Just to go back, dig in a little more on DI. Do you have a feel in the quarter for what organic growth was? I know you didn't own it in the prior year, but is there any sort of indication you can give on that? And is pricing in that market, is it going up as aggressively as what we see in some of your residential installation markets?

Yes, Keith, this is Robert. While I can't break it out specifically, we did see substantial volume growth in the DI segment. As I mentioned earlier, there have been likely some share gains as well, and the team in that area is doing an excellent job. There is certainly inflation present, but I wouldn't characterize it as severe compared to what we've seen in some residential segments or our legacy business. However, there is an inflationary trend in that part of the business, and we've announced another price increase coming in June. So inflation is notable, but it's not as intense as it has been in the residential side.

Our next question comes from the line of Trey Grooms with Stephens.

Congrats on the quarter. So you guys have been very acquisitive. It sounds like DI is outperforming your expectations. So as you look out at your pipeline there, are there any other chunky-type deals like DI that complement the commercial and industrial side of the business? Or when you look specifically on that side of the business, would it be more kind of tuck-in type deals that would be kind of out in the pipeline today?

It's Robert. It's a great question. Yes, definitely, I think when we announced the transaction, we talked about there's some nice chunkier acquisitions available out that we're building relationships with in that industrial commercial space, and DI bought on a healthy pipeline of that as well. So yes, definitely some, what I call, chunkier acquisitions, very fragmented, those are nice tuck-ins as well, but there are some chunkier ones out there. And we're appropriately building relationships there. Again, DI integration is our top priority here in 2022, and that's moving along extremely well. But definitely, the pipeline looks very healthy for the future also.

Great. And then last one for me. Labor, obviously, an issue for most. But for your business, are you seeing any improvement in labor availability or any change in turnover rates there? I know a lot of the labor issues are upstream from you guys, but just interested to hear what you're seeing there since somewhat skilled labor is a big part of what you have to do.

Yes. I will address this from two perspectives, Trey. First, I believe our business is performing quite well. We have implemented several programs and, as Rob mentioned earlier, we are continually focusing on productivity initiatives. However, labor across the industry remains very tight. This is reflected in the numbers we see regarding starts versus completions. When we examine other trades, both upstream and even downstream, we definitely notice the labor tightness on the direct labor side. Additionally, some professional positions are also hard to fill, reflecting the broader trends in the labor force across the country.

All right. Congrats again, and look forward to seeing you in a few weeks.

Our next question comes from the line of Phil Ng with Jefferies.

Congrats on another very strong quarter. I guess to kick things off, Robert, the DI acquisition has been a nice addition. Where energy prices are at right now, just curious to get your take on the outlook. And I've heard some of these LNG projects that were put on hold during the pandemic have come back. Do you view that as a pretty meaningful opportunity for you guys down the road?

Thanks for the question. There are a couple of things to address regarding oil and gas. As I mentioned earlier, there are two types of projects: turnarounds and capital projects. These are generally well-scheduled in advance, though there may be additional capital projects emerging. However, the turnarounds are planned well into the future. Overall, I would say there are some promising projects coming online in the industrial sector, and we are pursuing several bids, not just in 2022 but definitely looking into 2023. You raised an excellent point about LNG. This is one aspect we appreciate about the DI acquisition, as it has enabled us to establish a leading position in Canada. The largest LNG project in history is now starting, with the previous largest being valued at $16 billion, and now we have a $40 billion project that's launching in Canada. We are aligned with some of our key customers concerning that project. The outlook for the industrial and commercial aspects of our business is very positive, both in the U.S. and Canada.

And that opportunity, in particular, Robert, is that a 2023 event where you would see the uptick or further out?

I think 2022 will be solid, and I think we should see that carrying into 2023, not just in some of the verticals that we talked about, but I think you know DI plays in some of the other areas like food and beverage and some of the other verticals as well.

Our next question comes from the line of Mike Rehaut with JPMorgan.

Doug Wardlaw on for Mike. Just a question on the seasonality margin installation. I think you touched on it a little bit earlier. Usually, we see a pretty big step from 1Q to the rest of the year, and guidance just seems to imply that. So was there something unusual about 1Q? Or is there some other reason to expect the cadence to be different than usual?

Yes. I mean I think from a seasonality perspective, what we've seen, typically, in our residential business, typically, you saw Q4 and Q1 lower than the rest, right? But with as much demand as there is out there and all the starts that are underway, we're seeing less seasonality on the residential side for sure. So I think from a seasonality perspective, Q3 and Q2 will still typically be our best, right? And I think that's true across residential, commercial and industrial, with Q4 and Q1 slightly below that.

Our next question comes from the line of Ryan Gilbert with BTIG.

I wanted to revisit your comments on the guidance, particularly regarding how it is based on the visibility of the pricing you have achieved so far. Is it accurate to say that the manufacturer price increases we have observed this year have been completely passed on to customers at this stage?

Yes. I think it's definitely fair to say and it's definitely reflected in our margins here in the first quarter.

Okay. Great. And then if we see another price increase in the year, is that potential upside to the guide? Or does the guide incorporate a view that there's going to be more price increases throughout the year?

We are assuming a continuing inflationary environment and have factored our pricing assumptions into our expectations. However, the actual outcomes may differ from what we anticipate.

Okay. The second question is about insulation supply. We've been running at 1.7 million to 1.8 million starts on a seasonally adjusted annualized basis. In the past, we've mentioned that actual industry capacity is closer to 1.5 million to 1.6 million. Are you seeing evidence of a capacity build to support the higher starts we've observed in the last couple of months, or do you think cycle times will continue to extend, allowing the gap between starts and completions to widen?

I think this is Robert, Ryan. Cycle time reflects the overall building materials, not only fiberglass. We still believe that capacity is just above 1.5 million, around 1.55 million. This will play a role moving forward. Additionally, there are considerations for some alternatives. Some industry players have mentioned plans for capacity expansion in late 2023, which is about 18 months away. So, we expect more capacity to come online in late 2023. Currently, this is where we stand on capacity, and I believe that other capacity constraints in the broader building products sector are likely a more pressing issue upstream.

Certainly, certainly. And just to remind us, how much do you think the capacity in 2023 that's been added improves the supply situation?

Yes, I think the numbers, if you look at what was publicly announced, is probably in that ballpark of 3%, 3.5%, something like that, additional capacity coming on.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you for joining us today and look forward to seeing many of you at our Investor Day in the month of May.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.