Greetings and welcome to the TopBuild Third Quarter 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tabitha Zane, Vice President, Investor Relations. Thank you, Tabitha. 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 third 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. With one quarter left in 2023, this year has exceeded our expectations with solid profitable growth. Our strong results are testament to our team's hard work, perseverance and strategic focus on growing our multifamily and commercial work as well as our continued emphasis on operational excellence and driving improvements throughout all areas of our business. Total sales for the nine months were up 4.4%, our gross margin has expanded 130 basis points to 31%, and our adjusted EBITDA margin has expanded 160 basis points to 20.4%. Reviewing our third quarter results, our Installation segment was able to drive efficiencies and grow revenue 4.9% despite volume contracting from the slowdown in single-family starts earlier in the year. To offset the single-family decline, our branches have actively and successfully targeted multifamily and light commercial work. On the commercial installation front, our dedicated heavy commercial branches are reporting strong bidding activity and are winning their fair share of projects, building up our already solid backlog. As a reminder, we are agnostic as to the types of projects we work on and are not over-indexed to office or any other type of heavy commercial job. Current projects we are working on include renovation of the SeaTac Airport in Washington State, the new Hard Rock Casino in Virginia and several large medical projects. In total, our commercial installation business grew 9.4% in the third quarter compared to the third quarter of 2022 and year-to-date, it is up 13%. Turning to our Specialty Distribution business. Overall sales in the second quarter declined 2.1% primarily as a result of a 1.9% decline in price. The greater availability of fiberglass and spray foam in the quarter put pressure on market pricing. As residential distribution volumes continue to normalize, our teams are doing a nice job of identifying and building attractive new areas of growth, as our overall results demonstrate. We are pleased to see a 1.7% increase in sales from our commercial and industrial channels. Our Specialty Distribution segment continues to support many major commercial and industrial projects, including the Salt Lake City International Airport and the new Intel chip factory in Arizona. We're also seeing quite a few major projects being planned across several diverse industries fueling the demand for mechanical insulation. Maintenance and repair work on many commercial and industrial sites is also being scheduled and this revenue stream should serve as a continued stabilizing revenue driver. We remain very optimistic about the opportunities for growth in both the commercial and industrial end markets in the US and Canada. We've also entered into the second phase of our growth strategy and operational improvement initiatives relating to our specialty distribution model. Over the past two years, we've identified many cross-selling opportunities, including areas of the country where either DI or Service Partners does not have a presence but where there is demand for their respective products and services. In 2024, we plan to co-locate some DI and Service Partners operations, effectively expanding our footprint where we already have existing operations and established customer bases without the investment generally associated with opening a greenfield location. More details to come next year as we continue this process to drive organic growth. Moving to material in the quarter, fiberglass is more readily available than it had been earlier in the year. As a result, some of the manufacturers have pushed the September price increase out until later in the year. Over the past month, however, material has started to tighten. Obviously, single-family starts will be an important bellwether for the industry as a whole as they move through 2024. Also, as a reminder, maintenance on production lines has an impact on product availability, and we work closely with our suppliers to effectively manage our inventory. On the capital allocation front, year-to-date, we've completed four acquisitions, which are expected to generate almost $173 million of revenue on a pro forma full year basis. One of these acquisitions was completed this month, Panhandle Insulation, a residential installer generating approximately $5.3 million of annual revenue. In July, we also announced our intention to acquire Specialty Products and Insulation, or SPI, a North American specialty distributor and custom fabricator of mechanical insulation and a special distributor of building insulation to the industrial, commercial and residential end markets, generating approximately $700 million in annual revenue. This transaction is currently going through regulatory review, and we expect to close in 2024. We are working closely with the SPI folks to ensure the integration process is smooth once the transaction closes. As we've gotten to know the SPI team even better, our confidence about the potential of this transaction has only increased. This well-run company has a strong operations team and a culture that aligns well with TopBuild. In the first 12 months, our focus will be integrating SPI onto our systems and supply chain and to further identify operational efficiencies and improvements across our entire organization. We are very confident we will achieve the $35 million to $40 million of run rate cost synergies we've targeted over the first 24 months. Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical insulation specialty distributors. We expect to remain very active on all three fronts going forward. Acquisitions remain our number one capital allocation priority, generating, by far, the greatest return for our shareholders, as evidenced by our return on invested capital, which increased from 8.6% in 2017 to 18.5% at year-end 2022. In summary, we had a great third quarter, and we are on track to report another solid year as evidenced by our increased 2023 guidance, which Rob will discuss. Our team continues to execute well, and our diversified model positions TopBuild to outperform in any environment.

Thanks Robert and good morning everyone. We are pleased to report another strong quarter of profitable growth, a reflection of the continued success of our focused strategy and the hard work of our teams. Our third quarter net sales increased 1.9% to $1.33 billion. Breaking that down, our Installation segment's third quarter net sales were $821.7 million, an increase of 4.9%, driven by M&A of 4.8% and price of 3.6%, partially offset by a 3.5% decline in volume. While multi-family sales remained strong throughout the quarter, we did not see the traditional second quarter to third quarter increase in single-family activity due to the slower single-family starts earlier this year. As the third quarter unfolded, single-family sales began improving each month in line with the growth in single-family starts that occurred beginning in May. I also want to highlight that the strength of our diversified end market strategy was evident as our commercial sales for the Installation segment grew 9.4%, driven by strong activity from both light and heavy commercial projects. Specialty Distribution net sales were $571 million, a 2.1% decline from prior year, primarily due to lower prices. Specialty Distribution residential sales were down 7.5% as a larger percentage of construction activity continues to be focused on multi-family, a channel with lower participation from the smaller installation contractors we service. Specialty Distribution's commercial and industrial sales were up 1.7% in the quarter. Third quarter gross margin expanded 130 basis points to 31.7%, driven by operational efficiencies and strong margins on Installations multi-family and commercial projects. Normally, the margins on these larger commercial and multifamily projects are similar to what we see on the single-family side. However, on many of our recent projects, our teams have done a tremendous job delivering higher margins through outstanding execution. Third quarter adjusted EBITDA increased 9.4% to $283.7 million, and our adjusted EBITDA margin was 21.4%, a 150-basis point improvement compared to last year. Adjusted EBITDA margin for our Installation segment was 23.7%, up 210 basis points and driven by the gross margins discussed earlier. Despite lower sales, Specialty Distribution segment delivered an EBITDA margin of 18.2%, a 20-basis point improvement from productivity and continued realization of synergies from our acquisition of Distribution International. Other income and expense was $2.1 million lower than prior year as higher interest expense on our variable term loan was more than offset by higher interest income from our cash on hand. Adjustments to net income were $8.4 million and primarily related to acquisition-related costs and the opportunistic disposition of a small non-core business. For the quarter, adjusted earnings per diluted share were $5.43, a 13.1% increase from prior year. Moving to our balance sheet and cash flows, our working capital as a percent of trailing 12-month sales was 14.6%, 90 basis points lower than a year ago. We have worked hard over this past year to get working capital in line with our long-term guidance of 12% to 14%, and this has helped drive our 75% increase in year-to-date operating cash flow from prior year to $588.5 million. September year-to-date CapEx was $48.1 million, approximately 1.2% of revenue. In addition, year-to-date, we have allocated $147.6 million to acquisitions. We ended the third quarter with trailing 12 months EBITDA to net debt leverage of 0.79 times. Total liquidity at September 30th, 2023, was $1.1 billion, including cash of $615.6 million and an accessible revolver of $436.2 million. Moving to annual guidance, we expect to close out 2023 with a strong fourth quarter and have adjusted guidance accordingly. We are projecting total 2023 sales to be between $5.13 billion and $5.21 billion, a $105 million increase on the low end of the range and a $35 million increase on the high end. Breaking that down, same-branch residential revenue is expected to be relatively flat for the year, and same-branch commercial and industrial revenue will be up mid-single-digits. We have also raised our 2023 guidance for adjusted EBITDA to be between $1.025 billion and $1.055 billion, a $75 million increase on the low end of the range and a $55 million increase on the high end. Our long-range modeling targets are unchanged. I will now turn the call back to Robert for closing remarks.

Thanks Rob. As 2023 draws to a close, we are very pleased with how this year has progressed and our results once again demonstrate the strength of our operating model and the hard work of our TopBuild team. In addition to successfully managing inflation, we continue to make operational improvements throughout our organization as we drive both growth and profitability. I'm also pleased to report that our MSCI ESG rating improved from A to AA, a direct result of the hard work of our dedicated sustainability team. We made great strides over the past few years, and our ratings improvement reflects this progress. In closing, I thank the entire TopBuild team for their focus on working safely to deliver value, quality, and service to our customers. Operator, we are now ready for questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Mike Rehaut with JPMorgan. Please proceed with your question.

Thanks and good morning everyone. Congrats on the results.

Thank you.

I wanted to focus first on the improvement you mentioned during the quarter related to single-family new residential, particularly in light of the improving trends from the second quarter. Given how that's progressed year-to-date, I was curious if you have any early thoughts about at least the first half of 2024. As the market is evolving, and considering the current volatility, do you have any insights on how single-family, as well as multifamily and non-residential sectors, are influencing your perspectives for the first half of 2024?

Hey, good morning Mike, it's Robert. So, as we mentioned, the quarter started out slower on the single-family side as we progressed through the quarter, we saw single-family activity pick up as we think about ending the year going into first quarter next year. The public builders continue to be optimistic. You've heard it on their call. The majority of them are looking for growth next year. That's what we hear from them and see as well. Some of the smaller builders, a little more, I'd say, talking more flat next year. But right now, heading out of Q4 heading into Q1, we expect single-family and given some of that pickup in starts that you saw coming in May and June to carry forward. From a multifamily perspective, definitely, backlogs are down slightly, but we say still very healthy. We think that demand carries into 2024 as well. So, I think overall, we remain positive. We'll see what happens here with the single-family starts as we finish up Q4. And that will be the bellwether as we get into Q1, Q2 of 2024.

Great. Great. No, I appreciate that. I guess, secondly, when you think about insulation capacity currently and perhaps what the industry has planned for the next six or 12 months, do you anticipate any significant change in either availability of product, or for that matter, pricing to the extent that capacity might change and, let's say, in a more stable or just moderately improving backdrop, how that might impact industry pricing or the ability to push through price increases over the next six or 12 months?

Yes. So, as we mentioned in the remarks, materials had tightened as we finished Q3 and now in Q4, with definitely at least one manufacturer documenting allocation in the market. And I think that's supply driven, given the maintenance that's going on really across the industry. So, I think gets into two dynamics. You've got maintenance, which a lot of manufacturers have maintenance planned and announced. And then, again, the single-family starts will be that kind of bellwether point. So, as maintenance and single-family keeps up, from a curve perspective are growing, I think you see material stay tight as we head into 2024 into Q1 here and possibly definitely into Q2, again, given that maintenance schedule and if we see the single-family starts continue to grow.

Great. Thanks so much.

Thank you.

Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Yes. Thanks a lot guys. Appreciate it. Just to clean up a couple of those that Mike just asked. So, first of all, regarding the rebuilds, our sense is that we're going to have an unusually high level of rebuilds across the fiberglass industry in 2024, which we're expecting to at least offset the capacity additions that are planned. Curious as to whether or not you would agree with the magnitude of the rebuild in 2024 being higher than normal? If you could just sort of comment on that, relative to what a normal year is? And then regarding the drag from single-family being offset by the multifamily and light commercial, just to get a sense. I'm wondering whether the drag from single-family was about equal to the 7.5% decline you saw in your Specialty Distribution business that you referenced? And if so, does that mean that multifamily and light commercial sort of recovered back about 400 basis points, just strictly talking volume?

Hey, good morning Stephen, it's Robert. I'll take the first part of that on the material and rebuild side. So, yes, I think it is a little above average, what we're seeing scheduled for the rebuilds in the industry and enough Q4 and heading into 2024. Some of the manufacturers haven't exactly nailed down when those rebuilds start. So, it's kind of hard to say what that does with the capacity coming on. But given those rebuilds and if that single-family start number continues to improve, yes, I think you could see material stay tight in 2024, at least to start the year until some of those rebuilds get finished. And that new capacity comes on, just a reminder that new capacity comes on sometime around end of Q2 and early Q3. And as always, we're staying close to the manufacturers, we have good insight into that.

Yes, Stephen, and then this is Rob. On the second part of your question there around the single-family decline we saw on the install side. I'd say you're in the ballpark there. The decline we saw was definitely in that mid-single-digits that we saw in the Specialty Distribution side, right? And that really just goes to show you what we've been talking about here in terms of multiple avenues for growth. What we were able to do on the installed side of the business this quarter by completely offsetting that with growth for multifamily and commercial.

Okay, that's encouraging. And then you talked about the fact that margins in commercial and multifamily were stronger than single-family, and that's rather unusual. I was wondering if you could comment a little bit on maybe what drove those higher margins in commercial and multifamily. And you talked about multifamily demand carrying into, I think, the middle of next year. But given the starts we're seeing in multi, is it also reasonable to think that maybe that might crest in midyear and become a little bit of a headwind in the back half of 2024?

Yes. To address your question on margins, we previously mentioned that in the commercial and multifamily sector, the margins for larger, more complex projects are typically comparable to those of single-family homes. In Q3, we noted about an 80 basis point advantage, roughly $10 million, from strong operational performance and having bid on many of these projects early, anticipating some inflation. We also experienced an additional benefit in Q3 of about 110 basis points, or around $15 million, from this performance. However, we are not incorporating this benefit into our guidance going forward. It remains part of our commitment to continuous improvement, but it's not something factored into our future projections.

All right. Thanks very much guys.

Thank you. Our next question comes from the line of Joe Ahlersmeyer with Deutsche Bank. Please proceed with your question.

Hey everybody. Congrats on the strong results and thanks for taking the questions.

Thanks Joe.

If we could just talk about the commercial business and the outlook going forward, I think there's some leading indicators showing some potential weakness and commentary from others in the industry about certain end markets within commercial, but you held the commercial and industrial revenue guide flat. And I'm just curious if that is purely a reflection of the backlog you have now and just how you might be thinking about the sales opportunity there year-over-year into next year?

Good morning, Joe. It’s Robert. This really highlights what we've developed and what our teams are accomplishing in the field. As we've stated, we are open to various project types. When we plan our work, we consider our business mix and the projects we are bidding on, which gives us considerable flexibility. Our light commercial work is significant; while all of our residential branches engage in this area, we also have dedicated branches for heavy commercial projects. We're capturing more market share from this angle, and it's an area where we're making investments. For instance, we are adding sales personnel across all sectors—commercial, industrial, light, and heavy. Additionally, we've discussed our Lead App tool, which effectively consolidates leads within the business and is set to be deployed in our industrial sector soon. We remain optimistic about growth in this area and are confident in our ability to excel in any market conditions due to the framework we've established for commercial and industrial operations.

That's great. You mentioned in your prepared remarks something that caught my attention about co-locating the branches. It seems like this is more focused on expanding sales rather than reducing costs or consolidating the footprint. I didn't see this mentioned in relation to the DI acquisition. Am I right to understand that this is an additional strategy beyond what you've already discussed? I realize it might be hard to quantify this ahead of time, but could you provide an idea of how aggressively you plan to pursue this strategy?

Yes, we see a significant opportunity here. You're correct that it's incremental. When we completed the DI acquisition, we anticipated cross-selling opportunities, and we're now focused on those after achieving the initial improvements and synergies. We believe this is a great opportunity, combining the strengths of DI and our Service Partners. So far, we've identified approximately eight to ten locations where we plan to move forward. While it’s challenging to quantify at this stage, we believe this approach will enhance our service to existing customer bases and lead to growth in those areas where we have a strong presence.

Good stuff. All right. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Ken Zener with Seaport Research Partners. Please proceed with your question.

Good morning everybody.

Good morning.

Focusing on distribution and kind of the commercial side, can you talk to how the recurring maintenance repair piece of that business, if you could talk about like what percent that is today? As well as with the SPI acquisition, if that's something that has been helping you guys relative to the market, whatever that end market demand is?

Yes. So, as we think about it today, Ken, that's probably about 25% of that Specialty Distribution revenue today. And then with the future of SPI, that gets up to about a third of the revenue. So, yes, we think it is a stabilizing piece of the business, and it really goes across Service Partners, DI and SPI, whether you think about recurring items such as PPE around safety or whether you think about some of the extreme conditions that some of the mechanical insulation is exposed to in refineries, food and beverage, those types of things that really requires some regular repair and maintenance on those products. We think it's a great part of the business, and it's something that we'll continue to build upon.

And just one thing to point out there, Ken, on those numbers for the quarter on the commercial side for Specialty Distribution. I mean, it was 1.7% growth, but we also had one less day than prior year. As well as we were comping a pretty tough quarter. So really, the average daily sales for us in the commercial industrial side, for Specialty Distribution was a record this quarter. So, a really strong quarter there.

Yes. Rob, just to clarify, it seems like there was a 6% increase in comparable sales last year, and now it's down 5%, down 3%, and down 3%. Does that suggest that you might be facing easier comparisons next year? How should we approach this for the upcoming year?

Yes, I think I'm not sure the numbers you quoted there because I think on the Specialty Distribution side, we would be up each quarter this year for sure on the commercial, industrial side. But going into the fourth quarter here, I can tell you, it's a pretty tough comp there. We grew on a same-branch basis, around 7% last year on the Specialty Distribution side. So, a pretty tough quarter. And typically, the fourth quarter on the mechanical insulation side, things do slow down a bit. So, the activity is a little bit slower, especially in December.

All right. And then I guess, just relative to the operating leverage you got, price is kind of flattening out. We don't know what's happening. But obviously, your labor pool, your piecemeal contracting. Can you talk about the different pressures that margin faced, relative to your material price, the labor, gas? Obviously, with the auto strikes, that's not an issue for you guys. But you're still indicating labor is tight, therefore, it would seem to be inflationary on that side of the business.

Yes, Ken. So, you're right. I mean, on the material front, definitely seeing inflation slow down on that side. The price increase that was announced in Q4 has been pushed out. And on the labor side, we do all we can to get after that with productivity. It's really been one of the secret sauces of our success, particularly on the install side, where the majority of our workforce sits. The fact that we pay them on a piece rate allows us to align their incentives with ours, right? And the more productive we can make them, the more money they can make at the end of the week, which is what they care about. So, we've done a really good job of offsetting labor inflation on that side with productivity as well as price. And nobody has done a better job of that, I think, and we'll continue to do that moving forward as well.

Thank you.

Thank you. Our next question comes from the line of Adam Baumgarten with Zelman. Please proceed with your question.

Hey good morning everyone. You mentioned that the insulation price increase was pushed out. Do you expect that to still be kind of having realized, just given the uptick in demand? Or is that potentially at risk of not being realized at least from the manufacturers?

Yes, good morning Adam, it's Robert. I think it's a bit difficult to say since it was delayed and the traction wasn't as strong in September. However, with the situation improving in October and considering the maintenance we discussed earlier, I believe there may be better traction ahead. As we've mentioned before, we stay close to the manufacturers and maintain ongoing discussions regarding this matter.

Okay, got it. That's helpful. And then just on SPI, I mean it's been a few months now since you guys announced the deal. Just any incremental benefits that you're starting to see in the business as you kind of get under the hood here?

What we would say there is as we've gotten closer with the team there and just really, obviously, what we can do is planning, integration and how that would look on the other side, our confidence level just continues to rise and strengthen. I mean, it's a great team there. Great operations team as well as throughout the business, including the leadership team there. So, I think our confidence continues to grow as we talk about integration, what that looks like, things about systems leverage, tools, those types of things. So I think you heard it in our prepared remarks, our confidence continues to strengthen there with that acquisition.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Please proceed with your question.

Hey everyone. I have a quick question about how we should view the volume trends throughout this year and into the beginning of next year. Robert, you mentioned that the increase in single-family starts began to show results later in the quarter. So, have volumes likely reached a low point, and can we expect a turnaround by early next year? On the multifamily side, we all recognize that starts are at an all-time high right now. However, like single-family this year, there is a delay in completions. What kind of effect should we anticipate on demand for multifamily next year, considering there are clear concerns in that sector at the moment?

Yes. So, this is Rob. So on the volume side of things, as you look at the guidance we've put out there, I'd say if you back into it from a same-branch perspective, we're looking at kind of flattish fourth quarter there. And that's probably with flattish volume, flattish price on a year-over-year basis. So some improvement on the single-family side, but also the seasonality that usually comes in the fourth quarter. We're not anticipating a significant jump up there. And then to your point, as we move into next year, we're definitely cautiously optimistic that single-family will continue to improve as it has. Obviously, we've got to see how things play out with interest rates and the impacts of that. But we're cautiously optimistic there. And the backlog we have on multifamily, we definitely feel it's going to last us into next year. How far that's going to last into next year, we'll make that part of our guide when we talk to you in February.

Okay. Regarding pricing on the distribution side, it decreased slightly. Do you foresee any risk of further decline? While it hasn't significantly affected your margins, how do you view its overall impact? Additionally, can you provide insights on where you're experiencing more pressure, possibly comparing spray to fiberglass?

Yes, Phil, this is Rob. So, I'd say the pressure we saw there in the quarter was primarily driven by spray foam and gutters. And so as we move into Q4, I think I don't anticipate it getting significantly worse from where we are. But it's something certainly we'll keep our eye on. And as you mentioned, we're going to do our best to maintain our margins and recover on the material side, anything we give up on the price side.

Okay. Thank you. Appreciate it.

Thank you. Our next question comes from the line of Noah Merkousko with Stephens. Please proceed with your question.

Good morning and thank you for addressing my questions. First, there has been considerable discussion about pricing, but it appears that pricing is moving in two different directions between installation and distribution segments. Looking ahead, should we anticipate that the Installation segment will maintain stronger pricing power, even if material availability improves, leading installation pricing to perform better than distribution?

Yes, good morning Noah. It's Robert. As you noted, we experienced some pressure on the distribution side with spray foam gutters and fiberglass this quarter. Regarding installation, I believe the changes were primarily related to productivity rather than pricing. The team is focused on improving labor efficiency and sales productivity. We have implemented various tools to support this area of the business. I expect to see ongoing operational improvements and efficiencies, but I've noticed that the focus has shifted more towards pricing. We'll have to observe how the demand curve evolves. As Rob mentioned, we are seeing tighter material availability this quarter, and we'll assess how this develops for the remainder of the year and into 2024.

Noah, and this is Rob. I'd just add to that. I mean, just historically speaking, price tends to be a little stickier on the install side than it is on the distribution side of things.

Got it. That's helpful. And then on my follow-up, leverage here, really low, below one turn. How are you thinking about balancing capital allocation towards M&A versus share repurchases?

Yes, Noah, this is Rob. So I mean our strategy there really is unchanged, I'd say. You layer in SPI, our net debt this quarter on a pro forma basis would have been about 1.59 times, which is right in that targeted range of 1 to 2 that we're comfortable in. So, while we're a little bit lower where we landed for the quarter, I think with SPI sitting just down the road from us here, we see that definitely going higher. And we're going to continue to focus on capital allocation. Our strategy there is to prioritize M&A and then to continue to evaluate stock buybacks, right? And obviously, at our evaluation today, we think that's an attractive opportunity as well. So we'll continue to evaluate both, just like we have in the past.

That all makes sense. I’ll leave it there. Thanks for taking the questions.

Thank you, Noah.

Thank you. Our next question comes from the line of Jeff Stevenson with Loop Capital Markets. Please proceed with your question.

Hi, thanks for taking my questions and congrats on the nice quarter. So, you reported another quarter of healthy high-single-digit commercial installation volume growth. And I just wondered if you could talk more about the success you've had growing your commercial installation business? And whether you've seen any change in bidding activity as we move through the back half of the year as some of the leading indicators have started to slow?

Yes, Jeff, this is Robert. I'll cover several points regarding our presence in the light commercial, heavy commercial, and industrial markets, which means we reach all end markets. Our residential branches are successfully handling light commercial work and are effectively bidding for projects. In heavy commercial, we have not only achieved growth but have also made operational improvements, as Rob mentioned. We are continuing to invest and add sales talent, as well as explore cross-selling opportunities. Notably, we've made a significant investment in our proprietary Lead App tool, which is unique to our business. These are the key areas our team is focusing on, and we believe this multifaceted approach to growth is reflected in our results. We remain confident in this segment of our business moving forward and in what we have built.

Okay. Understood. That makes sense. And then given your capital-light business model, I'm wondering if you had to make any adjustments to your workforce with demand continuing to hold in better than prior expectations?

No. No change in the workforce. I mean we're always driving efficiencies there. So again, back to some of the margin performance you see that was driven by a lot of efficiencies and continued things that we work in the business. But no adjustments, given the nice growth that we're seeing and our outlook.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Reuben Garner with The Benchmark Company. Please proceed with your question.

Thank you. Good morning everyone. Most of my questions have already been addressed, but I have one quick one. There's been a lot of discussion regarding fiberglass availability. Can you provide insights on the availability and pricing trends in some of the commercial and mechanical sectors? Are there specific areas you anticipate will remain tight into 2024, and are there any areas that might be at risk of loosening up?

No, I mean there hasn't been a considerable inflation in some of those products. I mean, there are some products that are still kind of tight, I think, about mineral wool, some of those products are definitely still tight in the industry. And then from a pricing perspective, the only thing I'd mention is on the mechanical side or what the industry calls, C&I, commercial & industrial, there is an industry-announced price increase out there in that piece of the business, and we'll call that in January of 2024. Not unusual for that piece of the industry to announce increases at the beginning of the year. So, we'll see how that plays out. But that's out there in the future, and has been announced by the manufacturers.

I have one question, but I want to add a quick follow-up regarding mineral wool. I've noticed an increase in its usage in the residential market, particularly in townhomes. Is that an area where your company is active, and do you hold a larger market share compared to some of your competitors?

Yes, I think we're probably the largest player in mineral wool both in Canada and the US. Obviously, a lot in the commercial space, some in some high-rise, multiunit-type of development, but definitely a big user on the commercial side. So, very familiar with the product, and we release it across the footprint.

Great. Thanks. Congrats on strong results guys.

Thank you.

Thank you. Our next question comes from the line of Keith Hughes with Truist Securities. Please proceed with your question.

Thank you. Question on TruTeam, you called out for strong commercial multi-family. As a percentage, what are those two representative TruTeam sales? What's the run rate?

Commercial accounts for about 15% of total TruTeam sales. For multifamily, we expect to be aligned with industry trends. Therefore, our residential sales distribution will mirror what is seen in the industry.

So, you mean versus what we see on starts? Or what's the benchmark you're referring to?

Yes. The multi-family sector is a bit more challenging due to the variability in starts and completions data, but completions would likely be the most relevant metric to focus on.

Okay. And then just a big picture question with the move up in rates in the last month or so. Are you getting any reports from your builder customers, how that's affected orders inflecting down notably? And any kind of intelligence would be helpful.

Yes, Keith, this is Robert. So production builders are pretty positive. They talk about the buy down and the rates and that kind of less than six being the magical number, so they're still very active in those buy-downs. And they're pretty, I'd say, optimistic for growth in 2024. You've seen some of their public announcements. Some of them are doing a nice job with new community counts, those types of things. So, production builders, I'd say optimistic. I'd say, the smaller private builders, you're kind of talking more of a flat environment and some of the impact for them. So I think you can probably expect to see production builders continue to grow. And maybe some of the other smaller builders, more of a flat outlook for the future.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question.

Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask on the fourth quarter guidance. If I look at the midpoint, sales are sort of being guided to flat year-over-year, which implies a slight decline organically, which is the slowest growth of the year or the worse of any growth of the year despite what would be kind of the easiest comp. Are there incremental headwinds are parts of the business that are softening as you're starting to see the single-family business improve? Can you just help us understand the fourth quarter guidance, kind of relative to your industry expectations?

Yes, this is Rob. I believe that if we consider the midpoint of our guidance and analyze both residential and commercial sectors, we can expect them to remain relatively flat in the fourth quarter. Commercial has definitely faced tougher comparisons in the second half of the year compared to the first half, but there are no major concerns on that front. We are experiencing the usual seasonal slowdown in the fourth quarter, nothing beyond that. Regarding the residential side, last year's fourth quarter saw benefits from existing work, and if we compare last year's Q4 completions to the recent Q3 starts that will wrap up this quarter, they are about 5% higher than what we anticipated. This highlights the projected volume slowdown year over year.

Got you. Got it. That's very helpful. And then in the quarter, in a softer single-family environment, you've still been able to maintain pricing. And obviously, the margin performance was really strong when completions are down. Can you just talk about your ability to hold prices as builders are trying to solve the affordability issue? Are you seeing pushback at all from the builders in terms of pricing? I know there's another price hike which manufacturers are trying to push through here. Like how do you think about maintaining margins, pushing price in an environment where builders are trying to keep the cost of construction down?

Yes, Rafe, this is Robert. It's a constant discussion with the builders around those points. But I think as you've seen some spikes and stuff, they value the service that we bring. They value the labor that we have on a consistent basis for them where we can handle those spikes. And if you take the time of year where big builders are going through their closures, their year-end closings, and they can have 60, 70 units become available at one time. That plays to our strength, has been able to move labor around and materials and assets and stuff. So, it's a constant discussion, but we do believe they value what we bring forward. And so I think from that perspective, our team has done a nice job with pricing and continuing to show that value to the builders.

And one more quick question on SPI, if I can fit it in. Can you discuss the timing? I thought you were expecting it in the fourth quarter previously. I could be mistaken, but I think you mentioned it would be in 2024. Where do you currently stand in that process? And what is your best estimate on when it will close?

Yes, we are targeting 2024. Progress is being made as we navigate the regulatory process. It's a new regulatory framework, which takes a bit more time, but we have experience with this and are following the usual procedures. Therefore, we are confident in our 2024 timeline, especially with the holidays approaching.

Great. Thank you.

Thank you.

Thank you. There are no further questions at this time. I would like to pass the floor back over to management for closing remarks.

Thank you for joining us today. We look forward to talking with you in February to share our Q4 and full year results. Thank you.

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