Greetings and welcome to the TopBuild Fourth Quarter and Year-End 2023 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 fourth quarter presentation which can also be found on our website. I'd now turn the call over to Robert Buck.

Good morning. We are glad that you joined us today. I’d like to begin by thanking all of our TopBuild, Installation, and Specialty Distribution teams for their hard work and unrelenting focus on working safely, servicing our customers and continuing to push for operational excellence every day. We accomplished a lot this past year for our stakeholders, and I am proud to be part of this talented and results-driven team. Before reviewing our fourth quarter and year-end results, I want to update you on our SPI transaction. As a reminder, SPI is a specialty distributor and custom fabricator of mechanical insulation and a specialty distributor of building insulation to the three end markets we serve: mechanical, commercial building and residential. We are in the process of responding to a second request for information from the Antitrust Division of the Department of Justice. In today’s environment, these requests have become more common, resulting in a lengthier process. We are complying with their information requests and addressing their questions. Now, turning to our financial results. We finished 2023 with a strong fourth quarter, completing another outstanding year for TopBuild. For the full year, gross and adjusted EBITDA margins expanded 120 basis points and 140 basis points, respectively to 30.9% and 20.2%. Our diversified business model and focus on driving operational efficiencies led to the successful execution of our overall strategy. We once again delivered on our objectives of achieving profitable growth and outperforming in any operating environment. 2023 was markedly better than we had originally anticipated. When we first issued guidance 12 months ago, we were facing declining single-family starts, steady interest rate hikes, and the possibility of a slowing economy. Despite these headwinds, TopBuild showed positive growth from the outset, exceeding the high end of our initial sales and adjusted EBITDA guidance. There were many factors driving these outstanding results. I’m extremely proud of our Installation segment’s leadership who targeted multiple avenues for growth, successfully expanding our multi-family and commercial business to offset the decline in single-family construction. For the full year and on a same-branch basis, we grew our multi-family business by over 50% and our commercial business by over 11%. This strong growth more than offset the low single-digit decline of our single-family sales. At our Specialty Distribution segment, we saw commercial and industrial sales grow 6.3% in the fourth quarter and 4.6% for the year. This revenue includes maintenance and repair work on many commercial and industrial sites, driving ongoing stable revenue. Today, maintenance and repair work accounts for approximately 25% of Specialty Distribution’s revenue. In both business segments our proprietary Lead App tool is providing qualified leads to help our local businesses drive commercial and industrial organic growth. This is a great example of our innovative approach to enhancing the sales process. In 2023, we continued to spearhead initiatives to increase labor productivity. Even small improvements leveraged across our installer base of over 8,000 will deliver significant savings to our bottom line. Our common ERP system enables us to easily track productivity and identify future opportunities to drive operational efficiencies. This continuous focus on improved labor productivity is a distinct advantage for TopBuild as labor constraints persist across the construction industry. Another initiative contributing to our profitable growth last year was the expansion of our special operations team, comprised of seasoned leaders whose sole mission is to drive operational efficiencies and to share best practices throughout TopBuild. They are also tasked with focusing on the bottom quartile of our Installation and Specialty Distribution branches. Their goal is to understand why these branches are underperforming and to implement the necessary changes to improve their growth and profitability. This team helped drive some significant and sustainable improvements last year, positively impacting our top and bottom lines. Looking ahead, they have already identified multiple opportunities that will enhance our operating performance and organic growth in 2024 and beyond. We were also successful on the capital allocation front, completing four residential installation acquisitions that are expected to contribute approximately $173 million of annual revenue. This included SRI Holdings and Best Insulation, which, to date, are our third and fourth largest residential installation acquisitions. The other two acquisitions completed last year were Rocky Mountain Insulation and Panhandle Insulation, the latter of which closed in October. These four companies complement our growth strategy and bring experienced installers, great management teams, and strong customer relationships to TopBuild. As always, when we evaluate acquisition opportunities, we look for deals that are accretive to our existing footprint and current operations, meet our strategic growth initiatives, leverage our scale advantages in a meaningful way, and are a good cultural fit with our organization. Now let’s turn to 2024 and how we see the year unfolding. While Rob will provide more details and clarity on our outlook, you can see we expect another strong year of profitable growth for TopBuild, led by outstanding execution, a continuous focus on driving operational improvements, and an eye towards innovation throughout the company. As we have said on previous calls, we are bullish on the long-term fundamentals of residential new construction. There remains a shortage of housing inventory and strong pent-up demand. In the near-term, we are encouraged by the improvement over the past few months of single-family starts and the outlook for interest rates. As a result, we are optimistic single-family residential new construction could have more upside as the year progresses, and we believe this will be an important source of organic growth. There is also a strong backlog of multi-family work that should keep us busy throughout the year. On the commercial and industrial front, at both Installation and Specialty Distribution, we expect another year of growth based on our bidding activity and strong backlog. Our TruTeam branches have worked hard to build relationships with general contractors in their respective markets, and they are fostering these relationships to ensure we continue to win more than our fair share of light and heavy commercial work. We also expect solid performance this year for mechanical insulation, including new projects and maintenance and repair work. As I mentioned last quarter, we are in the second phase of our growth strategy and operational improvement initiatives relating to our specialty distribution model. We have identified many cross-selling opportunities and see this as another important driver of organic growth. Looking at material and assuming single-family starts maintain their current trajectory, fiberglass will be tight. We are seeing good price realization from the December/January material cost increase. With upcoming maintenance on a number of production lines, we don’t see any significant material capacity improvement this year, even with the addition of the Knauf plant, which is expected to be operational sometime mid-2024. Moving to capital allocation. Two months into the quarter, we’ve already inked three deals: Pest Control Insulation, a specialty distributor generating approximately $24 million of annual revenue; and two residential installers, Brabble Insulation and Morris Black & Sons, which combined are expected to generate approximately $9 million of annual revenue. Looking ahead, our prospect pipeline is robust, and we intend to stay active on the acquisition front. As always, we will remain focused on acquiring high-quality residential and commercial installation and specialty distribution companies. All three of our end markets are highly fragmented and present great opportunities to reinvest our strong free cash flow to drive shareholder value. Operationally, our team is focused on driving organic growth and exceeding customer expectations. We will also continue to implement initiatives and maintain an innovative approach to drive operational efficiencies and improve labor and sales productivity. Energy codes should continue to strengthen, serving as a tailwind for all areas of our business.

Thanks, Robert, and good morning, everyone. We are pleased with our strong 2023 performance and I want to congratulate and thank the entire TopBuild team for a job well done. Your hard work to serve our customers and drive operational efficiencies led to another strong year of financial results. Since becoming a public company in 2015, we’ve grown sales and adjusted EBITDA for eight consecutive years at compounded annual rates of 16% and 33%, respectively. This consistent track record of growth is something we can all be proud of and build upon in 2024 and beyond. Looking at 2023 compared to 2022, we delivered $5.2 billion in revenue, representing growth of 3.7%. We improved gross margin by 120 basis points to 30.9%, and our adjusted EBITDA margin was 20.2%, a 140 basis point improvement. And for the first time in our history, we delivered more than $1 billion in adjusted EBITDA. Turning to the fourth quarter, net sales grew 1.7% to $1.3 billion. On a segment basis, Installation’s net sales grew 3.8% to $790.4 million, as lower single-family volume was more than offset by acquisitions, stronger multi-family and commercial volume, and slightly higher price. Specialty Distribution’s net sales totaled $564.5 million in the fourth quarter, up 0.2%. Lower residential volumes were more than offset by stronger commercial and industrial volumes and pricing. Gross margin for the fourth quarter was 30.4%, representing a 70 basis point improvement compared to the prior year. Fourth quarter adjusted EBITDA totaled $251.6 million, and adjusted EBITDA margin was 19.6%, an 80 basis point improvement versus the fourth quarter of 2022. Fourth quarter adjusted EBITDA margin for our Installation segment was 21.4%, an improvement of 60 basis points year-over-year. Specialty Distribution’s adjusted EBITDA margin in the fourth quarter was 17.5%, an improvement of 80 basis points versus last year. Other income and expense totaled $10.5 million in the fourth quarter, a decrease of $4.7 million versus the prior year. For the full year, other income and expense was $53.3 million, down from $55 million in 2022. Higher interest income on deposits more than offset higher interest expense on our variable rate term loan in both the fourth quarter and full year. In the fourth quarter, adjustments to net income totaled $7.4 million, and for the full year they were $21.6 million, which were largely acquisition related. Fourth quarter adjusted earnings per diluted share of $4.69 represents growth of 6.6% versus the prior year. For the full year, adjusted earnings per diluted share were $19.73 or growth of 15.3% versus 2022. Moving to our balance sheet and cash flows. We are pleased with our 2023 operating cash flow which increased 71% to $849.4 million compared to $495.8 million in 2022. Higher profitability and significant progress in working capital drove our cash flow improvement versus last year. Working capital was 13.2% of sales versus 15.7% last year. Our teams in the field did a great job reducing our inventory days on hand by eight days from last year. 2023 CapEx totaled $64 million or about 1.2% of revenue, slightly below our long-term guidance of 1.5% to 2%. Total outstanding debt at year-end was approximately $1.4 billion, and we finished the year with leverage of 0.56 times our trailing 12 months adjusted EBITDA, which compares to 1.31 times at the end of 2022. Total liquidity was $1.28 billion, including cash of $848.6 million and availability under our revolver of $436.2 million. Turning to our outlook for 2024, which does not include acquisitions that have not yet closed, revenue is expected to be between $5.36 billion to $5.56 billion, and we anticipate adjusted EBITDA of $1.04 billion to $1.13 billion. Breaking down our revenue outlook: total residential sales are expected to grow mid single digits. The midpoint of our outlook assumes that single-family starts remain near current levels for the year. Our multi-family backlog is strong, and we anticipate it will support our sales throughout 2024. On the commercial/industrial side, we continue to see healthy bidding activity, and we have a strong backlog. We also anticipate strong sales from recurring revenue on repair and replacement projects. As a result, we are projecting sales for commercial and industrial to grow mid single digits. Keep in mind that the project nature of this business can cause lumpiness from quarter to quarter. While we did start the year off a bit slow in January due to weather, we’ve seen a solid rebound in February. With that, I’ll close by expressing my optimism and confidence in our outlook. I'll now turn the call back over to Robert for closing remarks.

I echo Rob’s confidence in 2024. We are excited about the year ahead and expect both segments, Installation and Specialty Distribution, to perform well. Our diversified model and multiple avenues for growth enable us to adapt to any operating environment and our team manages the business with a constant mindset of driving improvements and achieving operational excellence. Before opening it up for questions, I wanted to let you know this is Tabitha’s last call as she retires at the end of March. While Tabitha will be missed, we are very excited to introduce PI Aquino, our new Vice President of Investor Relations. PI has over 20 years of IR experience and she is looking forward to getting to know all of you. 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 Phil Ng with Jefferies. Please proceed with your question.

Thank you for taking my question and Tabitha, you will definitely be missed. I was looking at the press release this morning, and I was thinking I wish more management teams had structured it so cleanly and concisely. You'll definitely be missed. Well, team, congrats on another strong quarter, a strong finish to the year and you're obviously guiding for another strong 2024. But when I think about a more upbeat environment for single-family and continued growth in C&I, I'm a little surprised that your EBITDA guidance assumes EBITDA growth decelerates from around the 2023 level where you're dealing with an air pocket in a single family. So any nuance that you want to call out that a drag that maybe we may not be appreciating out of the gates?

Hey Phil. Yeah. This is Rob. The main thing to point out there, right, is just that 2023 was an exceptional year for our team despite the headwinds we faced, right? If you look at our same branch results for the year, sales were up $88 million. EBITDA was up $95 million. So we had a same branch flow through of 108%. So as we talked about back in Q2 and Q3, we definitely had some overperformance and margins around multi-family and commercial work we had done. We talked about around $10 million in Q2 that we called out as one-time overperformance. Similarly, in Q3 we talked about another $15 million. So I think if you look at our guide on EBITDA, you adjust 2023 for that $25 million, you'll see the midpoint of our guidance. We're at around a 23% flow-through. So right within the range we guide to 22 to 27%. At the high end, we're at 29% flow-through. So I think that's probably the key nuance to point out to folks.

Okay. That's helpful. Robert, you mentioned that fiberglass installation is still quite tight right now, and it might even be on allocation. Can you provide some perspective on how this situation compares to the COVID years when materials were extremely scarce? Do you believe this environment could support some growth in the second half? For a large company like yours with a distribution arm, do you see this as an opportunity to gain market share while smaller competitors may struggle to access materials?

Yeah. Phil, this is Robert. So I would say maybe compared to the COVID years, maybe not quite as tight as that because there was a lot of erratic, if you will, demand and supply back then. And this is really maintenance driving a lot of this as well as the trajectory here of what we're seeing in single-family starts. So as always, gaining back through the years, we'll definitely do our job making sure we get more than our part of that material, and we obviously have constant discussions with our supplier partners around that. As we think about what's happening with the single-family starts, especially what's happened in the past few months with that trajectory, I think Rob and I would both say, look, there's price upside here. You even see some new price announcements even on the spray foam side of the business that's come out recently as well. So we do expect it to be tight given all that maintenance, given the single-family trajectory, which we think has upside even on the single-family side and some good organic growth there. So I think it will stack up well for TopBuild, and to your point about our teams gaining new customers like we did last year around multi-family and commercial especially. If you think about mineral wool and some of the other products that you mentioned there, we think it's going to be a really good environment for TopBuild here in 2024.

Okay. And just a follow-on to that, Rob, is that pricing that Robert just mentioned, that could be a source of upside, is that in the guide, or is that something that we could potentially think about if pricing momentum builds?

Yeah. I mean, we've got an assumption for pricing in there. As you know, we don't break it out, but we would say we think with what we see today, like Robert was seeing, there's potentially upside to the assumption we have in there.

Okay. Thank you. Really appreciate the color, guys.

Thank you.

Thank you. Our next question comes from the line of Mike Rehaut with JP Morgan. Please proceed with your question.

Hi. Thanks. Good morning, everyone, and congrats on the results so far.

Thanks, Mike.

Just wanted to circle back to the EBITDA guidance, and Rob, appreciate your highlighting the $25 million of unusual profit. We kind of backed that out and got to a growth rate, plus or minus, similar to the underlying sales growth, and you kind of pointed out the incremental margins in that 23% to 29% range. Obviously, you've been able to consistently exceed your incremental margin guidance or long-term targets over the last several years. Is there any reason or is there any difference in the market backdrop as you look out into 2024 that might make you, let's say, a little more conservative relative to prior years where you've been able to exceed that incremental margin guidance? Certainly, we talked about the fact that it's going to be a positive year of housing starts, supply remaining pretty tight in various respects. So just trying to parse out whether the guidance here, that incremental margin guidance, kind of in line with your long-term, is it simply a function of conservatism, or is there anything that you see on top of that that might push the incremental margins not to exceed those targets like you've done in the past?

Right. Mike, yeah, I'd say the 22 to 27, folks have asked that question a lot, right? You guys tend to beat that number, and that's always our goal, right? We're always shooting to do that. When we look at the cost structure of our business and what happens with volume, that's about what we expect to get. But every year, we're working hard with our teams to drive for better than that, right? And we've been very successful in that. We'd rather have that as upside in our guidance, have upside for the things we're going to do to outperform rather than put it in there. So we're going to be shooting to do better than that here in 2024, just like we did in 2023. But like I was saying earlier, I think last year, we really did a great job with it, right, with the 108% same branch EBITDA pull-throughs. And I think we've got to be a little realistic about those numbers moving forward.

Yeah. Mike, this is Robert. I think, as Rob mentioned, on the high end, we're at that 29%. And I think the hallmark of our company has been known for the execution piece. To Rob's point, how we continually performed in changing environments. And I think we're pretty well known for that and pretty well known for pushing the achievement level of the company and our teams.

Okay. No, no, I appreciate that. So basically, though, no real difference in the backdrop that is causing it other than, again, you shoot for better, but these are still your long-term targets. Is that fair?

Correct. I'd say, I mean, actually, going into this year, there's probably more upside than in most years, right? I mean, I think there's certainly a lot more optimism around where things are going with starts. We've talked a little bit about the material being tight and the pricing environment. So I'd say compared to most years when we were sitting here at this time, there's probably more upside than usual.

Thank you for the update on SPI. You mentioned that you were asked for some additional information. While much of this is beyond your control, could you share any further insights on that request? Specifically, does it appear unusual in any way or alter your expectations regarding the timing of a potential close? Additionally, does it change your outlook on whether this deal will eventually close, even if it is just taking longer due to information or process-related factors?

Hey, Mike, this is Robert. I think you said it well there at the end. It's just taking longer. If you take the environment today with the DoJ, I mean, this is part of the normal process today, one, the process taking longer, one asking for more information. And if you take the SPI business, there's kind of three distinct businesses there, the mechanical business, the spray foam business, and the metal building business. So they're trying to do their part to understand that and just given the environment, it's just a longer process. We've responded very timely to what they've asked for. The process is progressing down the path here. So probably, best we can say is things are still under review, but you can kind of get a flavor given the environment.

Great. Thanks so much.

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.

Morning, Ken.

More upside than usual. I think that says a lot. So here's my question for you guys. October rates were high mortgage rates. They fell into December. They've rallied a bit since. Can you discuss the bidding cadence that you're seeing from your customers in terms of aspects like the labor, such as material that's limited labor, how they were thinking about cycle times as you guys were having those communications with each other. And then any commentary around the larger builders versus the smaller builders giving perhaps financing constraints? That was my first question.

Yeah. Ken, this is Robert. So I'd say the builders are, especially if you think about the big builders, the production builders, definitely optimistic. Matter of fact, it's kind of a good week, the builder show's going on in Vegas, so we've had a lot of meetings with builders. I'd say they're definitely optimistic. And I think, given a little bit of the fluctuation of rates, they still are, given what's happening. I think you've got some of the smaller custom builders that are kind of waiting for those rates to drop some. I think that happens. You hear that optimism in their voice as well. So relative to bidding, good bidding activity to start off the spring selling season, which, as you know, starts at the end of January. And I'd say very productive conversations with the big builders and what they're planning for this year and what it means from a TopBuild perspective.

Okay. The second question is about your future structure and any potential changes. You mentioned that maintenance repairs currently account for about 25% at SDI, and it seems likely that this will increase. Can you discuss how MRO is impacting your business stability, margins, and incremental gains? Also, could you remind us how this aspect of your business compares to having a more cyclical residential segment, especially in light of the upcoming acquisition? Thank you.

Sure. So this is Robert again. So, yeah, the 25% is our current distribution business. And so I'll give you a few examples. If you think about the MRO side from the commercial/industrial, those are kind of like annuities, if you will. There are certain regulations, there are certain environmental type of things that happen given the extreme conditions of some of those environments and insulation where that there's constant repair and replacement of those parts, whether it be insulation or even some of that kind of jacketing of materials that go on those very extreme conditions or extreme temperature type of environments and stuff, or you can also think about food and beverage, if you will. There can be some codes and regulations that require that to change. So it is a regular cycle. There is some kind of repair type of things that happen on the spur of the moment. And there's also some contracts that are kind of longer-term that go for that repair and maintenance work that happens there. And then if you just think about our standard distribution business, think about all the insulation-related products that we supply, safety products that we supply, gloves, glasses, those types of things that are constantly reoccurring as well. So it's a real stabilizing environment for that 25% of our business as long as we keep up the great service, which we're known for, and we're able to service on the spur of the moment, which our teams do a great job in the field. So that's why we focus on that recurring piece of the business. We think it's important. We continue to be able to grow that and it's something that we always talk about.

Thank you.

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

Morning. This is Noah Merkousko on for Trey. Thanks for taking my question.

Morning.

You mentioned in your prepared remarks that the weather in January was challenging, which was expected. You also indicated that February appears to be improving. Can you provide additional insights on how the first quarter is progressing? With March still ahead, do you anticipate a normal weather pattern for that month? Do you believe volumes will still be lower in the first quarter, or what is your outlook on that?

Yes, this is Rob. Looking at the seasonality of our guidance, I would say the strongest quarters are typically Q3, Q2, Q4, and then Q1 in that order, with Q1 being the lightest. Year-over-year, we entered 2023 with a strong backlog in single-family, which has softened as the year progressed. Last year, we had a particularly strong commercial quarter in the first quarter, making our first quarter this year likely the toughest comparison. It was also our largest quarter of growth in 2023. Therefore, I anticipate we'll see flat to low single-digit growth for Q1. While January pushed us back a bit, February has shown improvement, and if things continue positively through March, we should recover to our expected position.

Got it. That's really helpful detail. Shifting gears to maybe a more longer-term question. You'd mentioned the multi-family continues to hold in strong. I think you noted it will hold up through the balance of the year. But I guess with the starts that have kind of come in and the sentiment deteriorating there at some point, if you think about maybe later this year or 2025, when you do see less multi-family construction. Do you think that could free up capacity in the industry so that single-family completions could go north of that 1.1 million? That was the prior peak?

Yeah. Good morning. This is Robert. So, yeah, I think, obviously, we think about labor to your assumptions there. Obviously, folks will shift towards the single-family side. And as you think about even from a revenue perspective, the take per unit on a single-family is more than a multi-family. So that's a positive for the business as well. So, yeah, I think you'll see the industry respond accordingly and that shift will be a positive, obviously.

To reach that 1.1 on the single-family side, there are many variables involved, including various products and labor. What excites us, from a long-term viewpoint, is that demand exists, and we are aware of the limited supply. Given the tight labor market, we should anticipate growth for many years ahead.

Got it. That's all really helpful detail. Thanks for taking my questions and good luck with the rest of the year.

Thank you.

Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone.

Morning, Susan.

Good morning. My first question is focusing perhaps a bit more on the gross margin specifically. You continue to see some nice expansion there. As you think about the coming year and your comments around pricing on materials and those kinds of elements, can you talk a bit about how you think about the sustainability of the gross margin, the path there and anything on price cost for the year?

Yeah, Susan, this is Rob. So from a gross margin perspective, as you said, it was a great year for us in 2023. Now, the $25 million I've talked about kind of one time, Q2, Q3 benefits that we saw that obviously hit in the gross margin line. And if you look at the year, you can see Q2, Q3, our gross margins jumped up to $32 million. So as we think about 2024, I think we'll be more in that $30 million to $31 million type range. But like we've said, we're always doing what we can on the productivity side to drive improvements there. And on the price cost side, we're always managing that as aggressively as we can to maximize the benefit on that side too.

Okay. That's helpful. And then perhaps shifting to the commercial and industrial side of the business. I think you commented that you expect mid single-digit growth there this year. How much of that is coming from the market versus your own ability to continue to gain share there and outperform on a relative basis?

Good morning, Susan. It's Robert. If you look at some of the industry numbers, you'll see that we're performing above average in the commercial and industrial sectors. Our field teams are doing a great job growing that business and making gains with customers in both areas. The efforts of our special ops team have also contributed significantly. We previously mentioned our focus on growing the business in terms of both revenue and profit. Our teams have done excellent work in the commercial and industrial sectors, which is reflected in our results. That's why we remain very optimistic about our performance in these areas for 2024 and beyond.

Okay. All right. Thanks for the color and good luck with everything.

Thank you.

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

Thanks very much, guys. And Tabitha, good luck with everything. It's been a real pleasure.

Thank you.

I wanted to start my questions regarding productivity and its possible effect on the updated guidance. You mentioned overall efforts in labor productivity and also referenced the work from your special ops team. I have a couple of questions about that. How much did the special ops team contribute in 2023? You've had this team for some time now; could you explain the expansion you're referring to and why it is necessary or beneficial at this moment compared to the past? Lastly, to clarify, my understanding is that you usually don’t factor in the performance expectations from this special ops team in your guidance. I would like to know if that is changing.

Sure. This is Rob. I'll address the numbers part, and then Robert will provide more details about the team's activities. This is a key strategy for our business and has been vital to our success for many years. As you mentioned, we are not factoring in any potential upside from this in our guidance. We see it as potential upside since it is an ongoing process for us. Last year was a strong year, and while we don’t breakdown specifically what contributed to that, our same-branch performance, even excluding the one-time $25 million, showed an 80% flow-through for the year, which indicates strong performance. A significant portion of that upside is attributed to the efforts of the special ops team. Robert can provide further insights into what the team is working on.

Yeah. Stephen, so it has been something that we've had. We continue to invest in it. So if you think about our footprint, if you think about opportunities relative to anything from labor productivity, sales productivity, logistics, yields on material, those types of things, we just continue to see the ability. And to Rob's point about the pull-through of the same branch, I mean, that comes from all that work we're always doing. I mean, you hear us talk about maybe we keep using these terms operational efficiency, driving operational improvement. Whenever we say that, that's the action that's happening behind the scenes to continue to drive that. And we see more opportunity. That's the one thing about sitting in our business is that we continue to see more opportunity there. And it doesn't matter what you're looking at in a business. As you know, you've got a bottom quartile. And so our mindset is you're always uplifting that bottom quartile, whether it be products, branches, customers, that type of thing. So it's just a constant cadence of how we run the business.

That's encouraging, thank you for that insight. My second question is about the SPI acquisition. I've heard that the metal building installation segment may be causing some delays. I'm curious if you would consider separating that business from the other three that come with SPI, and if that would significantly affect your expected synergies.

Yeah. So as you think about the business, you're right. There's three parts to it: the mechanical, spray foam, and the MBI. The DoJ has been trying to understand all three. I mean, they're good businesses in the SPI model. So all the information and what we're working with them on has been really across the business here of SPI. We really haven't had to consider that part about the splitting off and stuff. And you've known us from the big acquisitions in the past. We're good at driving synergies in the different models and stuff. So it wouldn't be the synergy piece here with the whole business. It's really not a concern of ours. So it's too early to speculate anything, but something we've really not considered given how the process is going forward.

Okay. So that's great. So that's encouraging. Appreciate all the information and best of luck, guys.

Thanks.

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

Thank you. Two questions. I guess, first on the discussion you had on residential and commercial growth in the press release for '24. Is that a unit comment, or is that a unit in pricing in this business?

Yeah, Keith, this is Rob. That would include price. So it's volume and price in terms of the mid single-digit growth.

Okay. And second on the SPI deal, this might be kind of hard to answer in one number because I have a couple different businesses, but what would this take your market share from and to if you're able to successfully complete it in that market?

Yeah, I think as we think about the core business of SPI, in the mechanical space, which is the core business of it, it still keeps us in the double digits and the low teens, if you will, like the double digits relative to that.

Okay. Great. Thank you very much.

Thank you.

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

Hey, everybody. Good morning and congrats on the strong finish to the year.

Thanks, Joe.

And Tabitha, also congratulations to you, and you will be missed.

Thank you.

Could you provide more insight on the implications of not finalizing SPI? While it may not currently appear as cash on the balance sheet, it still represents allocable capital. Additionally, you're expected to generate significant cash in the upcoming year and beyond. Could you share your thoughts on potentially increasing buybacks over time, especially considering that your pool of acquisition targets may likely decrease? How might this impact the allocation of capital towards buybacks instead of acquisitions?

Yeah. Joe, this is Rob. So from a capital allocation standpoint, I'd say nothing's changed with our strategy there. M&A is priority one in terms of where we see the best returns. So we're going to continue to deploy capital there. But just like we've said in the past, that's going to be lumpy and we're going to stay disciplined in our process there. So we always do look at buyback opportunities, trying to be opportunistic there and weighing it with the pipeline and the deals we have coming. So I think you'll see us doing buybacks again at some point as well. But we're also going to stay aggressive on the M&A front.

Understood.

I would say that we definitely have a strong pipeline. As you can see from our activities in 2023, we have already secured three deals for 2024 early on. There is a lot of positive activity, and the market remains very fragmented with many players involved.

Okay. I think oftentimes investors think about this business in terms of the large production builders. But maybe if you could talk to the smaller portion of your business that goes into R&R or even teardown construction with some of the more custom builders. Just anything you're seeing on that front as we think about that being part of the solution to solving the underbuilt construct that we've got.

Yes. So relative to the R&R, the rebuild, I mean, I definitely there are a lot of teardowns in the U.S., which constitutes a new start. But relative to the repair model, that's something our service partners business does a great job of getting after that. That's probably the smaller contractor that's doing that work. So that's really the targeted customer. And we do see upside in that, whether it be relative to what you're talking about, but then also just relative to some normal repair and maintenance that happens that we see with our smaller contractor customers on service partner side. So we do see that and that team does a great job of servicing those customers.

Alright. Thanks for the time.

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

Hi. Good morning. Thanks for taking my questions. And Tabitha, congratulations. You'll definitely be missed.

Thank you.

I would like to ask about the current tightness in insulation materials and the upcoming addition of Knauf later this year. Given this context and the new capacity coming online, how has this historically affected your business and your positioning against competitors? Is there a chance to gain market share with this new capacity?

Yeah. Good morning, Rafe. It’s Robert. So a couple of things there. So yeah, you're right. New capacity coming on mid-year. Now it will take some time to get the lines up and going there. So although that starts up mid-year, you're probably thinking more about later in the third quarter, running capacity there. And then as we mentioned, there's a lot of maintenance happening in the industry this year. So it doesn't really have a capacity impact here in 2024. And to your point about, from a TopBuild perspective, if you think about when that plant was announced, which I'm going to say was probably back in 2022, we stated there that we worked with the management team with Knauf about how they were planning capacity and planning that operation and stuff. So they're definitely a good partner with us, and we're definitely partnering with them relative to bringing up their new plant there in McGregor, Texas.

Got it. Just to follow up on that, do you have either commitments or contracts or anything specific around that when there's new capacity coming on that the manufacturer will arrange with you ahead of time?

We'll definitely do some advanced planning with them. That's probably the best way to say it.

Got it. Okay. And then the second question is just about your multi-family exposure compared to single family. I know your backlog extends through the end of this year. What does that imply for your guidance regarding multi-family? Is it expected to remain flat for the year, or is it projected to decline slightly? What's the quantification?

Yes, this is Rob. From a multi-family perspective, we are going to be aligned with the trends in both single-family and multi-family markets. Our assumptions for guidance remain neutral regarding either sector. Multi-family units are essentially flat for us. While we acknowledge that starts are decreasing, our backlog allows us to maintain a relatively stable outlook for the multi-family side this year.

Okay. Thank you.

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

Hi, this is Mario for Adam.

Good morning.

A quick question on antitrust. Given the attention on the FBI deal, do you have any thoughts on what this could mean for your ability to do other large deals in this space?

Yeah. So as we mentioned, the process is pretty normal today as to what's happening with the DoJ. So it's too early to speculate anything there, as we mentioned on a previous question that came up. But at the same time, we operate in a very, very fragmented environment here across all three, really residential, commercial, and industrial. So we still see it as a healthy M&A environment, healthy pipeline out there for the future. And M&A is always our first choice, as Rob mentioned earlier, we think about buybacks and the best use of capital here. So we're not speculating on anything here. We're just going with the normal process with the DoJ right now, and the process is progressing.

That's helpful. Thank you. And just another one. Can you provide any further details or thoughts on the split between industrial, heavy commercial, and light commercial? Do you expect all of them to be in that mid single-digit growth, or do you expect some variation between the industry? Thank you.

Yeah. Mario, this is Rob. So I'd say not too different between the end markets. So as you know, on the install side, about 15% of our business is commercial. It's roughly 50/50 light and heavy commercial. And I'd say we're expecting both sides of that to grow in that mid-single-digit type range this year. And then on the distribution side of the business, the commercial/industrial piece is 60% of our business over there. You've got service partners servicing the commercial building side of things. And then you've got with DI, we're doing the mechanical installation side of things. And I'd say across both of those end markets, we're expecting kind of that mid-single-digit growth as well.

Thank you.

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

Thank you so much, guys. Rob, I just wanted you to clarify and expand upon the mid-single-digit, both the unit and price, and how that is consistent with the trends we are seeing today. With price up, price still tight, seems like you're looking for actually even more conservative volume gains in residential. Is that correct assumption? Thank you very much.

We are projecting both price and volume in our residential and commercial/industrial segments. For residential, we expect single-family starts to remain around the current level of about a million starts. Any increase beyond that would boost our guidance. We anticipate multi-family starts to remain stable due to our existing backlog, which will contribute to some volume growth, likely in the low single-digit range compared to last year. Additionally, we anticipate some price increase on top of that. On the commercial/industrial side, some products may experience less inflation. Our assumptions for price and volume are aligned with the mid-single-digit expectations. Given the current market conditions, it seems more probable that we could see additional price increases and inflation beyond our expectations, which would also positively impact our guidance.

Thank you for your clarification.

No problem.

Thank you. There are no further questions at this time.

Thank you for joining us today. We look forward to talking with you in early May when we'll share our Q1 results. Thank you.

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