Greetings, and welcome to TopBuild's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, P.I. Aquino, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us today. I'm joined by Robert Buck, our President and Chief Executive Officer; and Rob Kuhns, our Chief Financial Officer. We've posted our earnings release, senior management's formal remarks and a presentation that summarizes our comments on our website at topbuild.com. Many of our remarks today will include forward-looking statements, which are subject to known and unknown risks and uncertainties, including those set forth in this morning's press release, and in the company's SEC filings. The company assumes no obligation to update any forward-looking statements because of new information, future events or otherwise. Please note that some of the financial measures to be discussed during this call will be on a non-GAAP basis. These non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We've provided a reconciliation of these financial measures to the most comparable GAAP measures in today's press release and in our presentation, both of which are available on our website. I'd like to now turn the call over to our President and CEO, Robert Buck.

Good morning, and thank you for joining us today. We're proud to share that in the third quarter, we reached another historic high for TopBuild sales and adjusted EBITDA performance. Our teams did a very good job across both our Installation and Specialty Distribution segments, posting top-line growth and bottom-line profit expansion. This quarter is a prime example of our ability to perform well in any environment. The landscape for Building Products in the third quarter was, in many ways, much like the second quarter. Although we've seen improvement in inflation metrics and the labor market is strong, housing demand in the second half of the year has been slower than anticipated. Single-family residential starts still vary widely across the country. Even as mortgage rates drifted lower ahead of the Fed rate cut in September, homebuyer behavior suggests that consumers are holding out for a lower rate environment and election certainty. More recently, mortgage rates have been on the rise. On the multifamily side, we are still working through our backlog. Multifamily demand has slowed, and we're not expecting it to improve in the fourth quarter and as we move into 2025. As a reminder, multifamily units typically require about 40% of the installation when compared to a single-family unit, and our business is much more weighted towards single-family consistent with the industry. On the commercial industrial side, bidding is still very active, and we have a strong backlog going into 2025. As we talked about last quarter, some project starts have been pushed out, primarily for financing reasons. We have not seen an uptick in cancellations, so we anticipate that when the financing environment improves, these projects will move forward. Turning to our results. We performed very well in the third quarter, given the macro environment. Sales increased 3.6% to $1.37 billion as volumes grew, benefiting from acquisitions and realizing pricing across both installation and specialty distribution. Our adjusted EBITDA totaled $285.1 million, and adjusted EBITDA margin was 20.8%. Moving on to our operations, with over 14,000 employees, we are a people business, and every day, everyone plays a key role in what we achieve. We continue to be pleased with our ability to attract labor, align incentives, and develop and reward our employees accordingly. On the material side, fiberglass is still on allocation. Planned and unplanned maintenance remains persistent with the manufacturers, and the new manufacturing facility in Texas has been slower than anticipated coming online. Our teams are doing a good job managing in the continued tight supply environment. Our Special Ops team continues to be an important part of our story and how we continue to improve productivity and drive profitability, as you see in our results. As I've done on recent calls, I want to spend time highlighting a particular area of our business to provide a better understanding of our differentiated model. Today, I want to briefly touch on Crossroads, our Canadian specialty distribution business in mechanical and metal building installation. Crossroads joined TopBuild through the acquisition of Distribution International in 2021. With this long history in Canada, they're a leader in the commercial, marine, and industrial end markets. We operate out of 18 facilities located in key markets across Canada, and our focus is to deliver the best service possible for our customers. Our value-added specialty fabrication capabilities differentiate us from the competition and enable us to be the go-to supplier of innovative products and resources for our customers. Our focus includes both the ongoing maintenance of commercial and industrial facilities and a diverse and impressive list of new construction projects. One of our more notable projects for which we are currently the lead supplier is a liquefied natural gas project on the West Coast of British Columbia. This is the largest infrastructure project in Canada's history. We're also the lead supplier for a large shipbuilding program for the Canadian Coast Guard, as well as numerous nuclear power and oil sands projects. Our Crossroads management team is highly accomplished, and we're very proud of their hard work. They've been driving the business forward and have consistently achieved growth above the market. Turning to capital allocation. M&A is a core competency of TopBuild, and acquisitions continue to be our number one capital allocation priority. We have a solid track record of generating strong returns for shareholders. We are pleased to have recently announced the agreement to acquire Shannon Global Energy Solutions, a mechanical installation company servicing multinational commercial and industrial customers. Shannon's based in upstate New York and generates approximately $11 million in annual revenue. This brings our 2024 year-to-date acquisition count to 7 for a total of approximately $118 million in annual revenue. Given our robust pipeline and very active M&A environment, we're allocating more resources to support our M&A efforts as we evaluate several opportunities across our end markets. We continue to concentrate on our core of insulation, and we're also learning about opportunities that have the potential to expand our total addressable market. Importantly, we will stay disciplined as we focus on those opportunities that best leverage our core competencies. Also, in the third quarter, we continued our share buyback program, repurchasing 1.07 million shares for a total of $413.9 million. As you saw in our press release this morning and considering today's macro environment, we are tightening our outlook on 2024, which Rob will cover in more detail. Before I turn it over to Rob, let me reiterate that we are performing very well in a macro environment that has been choppier than anyone anticipated at the beginning of the year. Despite this, 2024 will be another strong year of profitable growth for TopBuild. We are very well positioned to capitalize on improving demand that we believe will materialize as 2025 progresses. We participate in a great category and industry. And as we differentiate, we have a diversified business model; the underlying fundamentals are strong, with an underbilled housing market in the U.S., right in household formations and the prospect for lower interest rates. These factors, coupled with the critical role that insulation plays in driving energy efficiency and meeting strengthening building codes, demonstrate why we're bullish about the long-term growth opportunity for TopBuild.

Thanks, Robert. I'd like to extend my thanks to our teams for their hard work in delivering another excellent quarter. As Robert noted, record high sales of $1.37 billion grew 3.6% versus last year, with both segments showing growth year-over-year and sequentially. M&A, net of a disposition contributed 2.3%, while price was up 1% and volume improved 0.4%. Third quarter pricing of 1% reflects the continued realization of higher fiberglass pricing, net of new price reductions on spray foam driven by increased supply. Turning to our segments. Installation sales grew 4.2% to $856.4 million. Net M&A added 2.7%. Pricing contributed 1.1%, and volume was up 0.5%. Residential sales improved slightly from the second quarter and grew 3.7% versus last year due to M&A and single-family growth, partially offset by slowing multifamily sales. Commercial sales improved slightly from the second quarter and grew 6.8% versus last year due to M&A and timing of projects. Specialty Distribution sales rose 5.1% to $600.4 million in the third quarter. Volume improved 3%, acquisitions added 1.4%, and pricing contributed 0.8%. Sales to the residential end market improved slightly from the second quarter and grew by 8.5% versus last year. Sales to the commercial and industrial end markets slowed slightly from the second quarter and grew by 2.9% versus last year. Third quarter adjusted gross profit of $421.8 million, or a 30.7% margin was 100 basis points lower than last year. As we've discussed in the past, our 2023 third quarter results included a one-time benefit of approximately $15 million from higher-than-normal margins on multifamily and commercial projects in the installation segment. Excluding this, adjusted gross margin improved by 10 basis points versus last year as we continue to focus on driving productivity and profitability across our operations. Third quarter adjusted SG&A as a percent of sales was 12.8%, an improvement of 40 basis points versus last year. TopBuild adjusted EBITDA in the second quarter totaled $285.1 million or a margin of 20.8%. Excluding the $15 million margin benefit from last year, we expanded adjusted EBITDA margin by 50 basis points. Installation segment adjusted EBITDA margin was 22.3%, a 40 basis point improvement after excluding last year's $15 million benefit. Adjusted EBITDA margin for the Specialty Distribution segment expanded by 20 basis points versus 2023 to 18.4%. Other income and expense of $16.1 million in the third quarter was $3.3 million higher than last year due to lower interest income, which was driven by lower cash balances. Third quarter adjusted earnings per diluted share of $5.68 improved 4.6% compared to last year. Moving to our balance sheet and cash flow. Total liquidity was $693.6 million at the end of the quarter. Cash was $257.3 million, and we have $436.2 million of availability under our revolver. We ended the quarter with net debt of $1.14 billion, and our net debt leverage ratio was 1.06 times trailing 12 months adjusted EBITDA. Working capital as a percentage of sales was 14.1%, an improvement of 50 basis points compared to last year. Free cash flow for the trailing 12 months totaled $698 million, representing a 2.6% improvement over the same period last year. We continue to strategically allocate these strong free cash flows, and our capital allocation priorities remain unchanged with acquisitions our top priority. This year, we have announced 7 transactions, and we continue to have a very healthy pipeline. Our second priority remains returning capital to shareholders. And in the third quarter, we bought back $413.9 million or 1.07 million shares. That brings our year-to-date share buyback to $919.2 million or 2.3 million shares. As of September 30, $235.2 million remains under our current share repurchase authorization. Finally, turning to our outlook. We are narrowing our full year guidance. We expect to finish the year with sales between $5.3 billion and $5.35 billion, which represents year-over-year growth of 2.5% at the midpoint. We have also tightened our adjusted EBITDA expectations to $1.055 billion to $1.085 billion. While the macro environment has not played out the way we originally thought this year, 2024 is shaping up to be our ninth consecutive year of sales and profit growth, something we are very proud of. While the choppiness of our end markets is likely to continue into the first half of 2025, we think the underlying fundamentals for demand in our industry remain strong, and we are confident that we will continue to drive profitable growth and increase shareholder value.

Before opening up the call to questions, let me reiterate some of my opening remarks. We have a proven, differentiated business model, a disciplined capital allocation approach, and an ongoing focus on strong execution and driving improvements throughout the business. As we look ahead, the macro fundamentals of our business are supportive of construction demand growth. We are inherently well positioned to capitalize on the opportunities for increased energy efficiency and strengthening building codes. We continue to have a significant opportunity to drive growth through M&A. Our pipeline is healthy, and we are very active. We have a great track record of evaluating, acquiring, and integrating businesses, generating solid returns. We remain committed to building on our track record of delivering increased shareholder value, and we expect 2024 to be another strong year of profitable growth. I'll conclude by thanking our teams for their continued dedication, focus on our customers and commitment to safety. We want to thank you for your efforts to consistently execute and drive improvements across our business. With that, operator, we're ready to open the line for questions.

Our first question comes from Philip Ng with Jefferies. Please proceed with your question.

This is Maggie on for Phil. Rob, you called out some of the current choppiness continuing into the first half of next year. Can you give us a framework for how to think about 2025? And do you have enough levers to continue driving organic top line and EBITDA growth, even if we don't see a meaningful acceleration in single-family starts next year?

Yes, Maggie, this is Rob. Although we haven't released our guidance for 2025, we're optimistic that it could mark our tenth straight year of sales and profit growth. Currently, we are facing some turbulence in the end markets, but the fundamentals remain strong. We believe that interest rates will decrease next year, which should positively impact demand in both residential and commercial sectors. While we acknowledge the challenges in the multifamily sector that have affected us in Q3 and will likely continue into Q4 and early next year, it’s important to note that bidding activity in 10% of our business has increased. This gives us hope that conditions may have reached their lowest point and could improve. Even if our overall business were to decline by 30% for the year—something we don’t anticipate—we expect to perform better than the market due to our market share and increased bidding activity. For our core business to remain stable, we would need to see an increase of just over 3%, which we believe is very achievable. To summarize, we continue to see opportunities for organic sales and profit growth next year.

And then I wanted to dig into pricing. You have the midyear fiberglass increase. Can you talk about realization for that? We've been getting some feedback that builders are experiencing some pricing fatigue. If you could go through how some of those conversations are going? And then on the Spray Foam side, you mentioned price reductions. Are you starting to see prices stabilize? Or are there going to be continued headwinds in that category?

Maggie, it's Robert. Regarding fiberglass, as Rob mentioned, we observed improvement from Q2 to Q3. There have been numerous conversations with builders due to market fluctuations. Overall, our team has performed well, though experiences vary by region and local circumstances. As for Spray Foam, there has been positive talk, especially with the changes in energy codes, which have made it appealing for builders. This has led to an influx of supply in major markets like Texas, resulting in increased competition. However, we believe this competitive situation is not sustainable given the decline, and we expect stabilization as we move from 2024 to 2025.

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

This is Atish on for Steve. Just sticking with pricing there outside of fiberglass and Spray Foam, how should we think about the pricing dynamics of the other products in the quarter and kind of going forward? Was there deflation there? So if you could touch on that, that would be helpful.

Yes, Atish, this is Rob. So I'd say overall, the other product categories, no meaningful change. The two movements from quarter-to-quarter was, as Robert said, we saw improvement in price realization on the fiberglass side from Q2 to Q3. And then in Q3, the new news there was the Spray Foam price decreases that we saw. We got decreases on the supply side as well as Robert talked about. Things got a little more competitive in certain markets with new supply coming online. So that had the opposite impact, ending up with kind of the muted 1%. But the other product categories didn't have a meaningful impact.

It's Steve. Just jumping in. I guess my question, I had kind of just a housekeeping item first. Money to confirm that you actually had an extra day this quarter which you included in your volume. And I assume that also you have an extra day in the fourth quarter. So just if you could confirm that. And then a larger question about the commercial projects, the C&I delays. I think last time we met, Robert, you thought that most of those projects were likely only going to be delayed by a couple of months, or something because if they were going to be delayed longer than that, I think you had indicated that the customers would probably come back to you asking you to extend your quoted pricing, and they weren't doing that. So you said probably they're only delayed a couple of months. I'm curious, has that changed? Are we looking at longer delays now? And if maybe you could describe, if so, what does that make you think about for fiscal '25? Are you going to have more of a bunching of projects in '25? So are we actually going to see more C&I activity in '25 than you previously thought? Or help me think through the dynamics there?

So Steven, it's Robert. I'll take the first part of that, the commercial industrial side. And then Rob can talk about the days in the quarter. So yes, a great question that you have there. So there have been more delays. I think the positive is no cancellations that have happened. I think last time when I saw you, we were talking about some big data center projects that we were working on that had been delayed 3 or 4 months at that point. Now we're seeing the projects delayed 3 or 4 months or even a couple of quarters into 2025. So as Rob talked about in his remarks when we talk about special distribution and the volume there, we're pretty happy. So what was driving that has been some good maintenance and repair work that has hit from the C&I side of the business. So that would say that we expect, assuming a stable finance environment and improvements, a bigger pickup in the capital projects and the bigger projects on the commercial industrial side in 2025. So bidding remains active; no cancellation uptick. So I'd say we're positive from that perspective. But definitely, continued delays in projects, some a little bit longer. If you take like you may say, a mango project or give you some verticals that you may talk about, EV and battery plants would be a great example of demand that slowed there; projects are getting delayed, pushed out, not canceled. So that would be an example of that; we see that there are a little more extended delays.

Yes. And then just hit on your housekeeping items there. You're correct. It's plus 1 day in Q3 and Q4 on a year-over-year basis.

Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

First, maybe a little bit also of a housekeeping question. Just to kind of better appreciate the degree of magnitude here, given the variety of your end markets and products that you offer. If you could just remind us roughly what percent of sales does commercial represent, as well as on the residential side, Spray Foam as a percent of your overall sales, or if it's more relevant installation, your installation segment, just to kind of better appreciate the impact of some of the mix trends in these areas.

Sure, Mike. This is Rob. So pretty straightforward answer there. Commercial and industrial for our business on the install side, it's about 15% of our total sales; specialty distribution, it's about 60%, and that puts it at TopBuild kind of around 35%. Spray Foam between the segments, on the install side, you're talking 15% to 20% of total sales. Distribution around 10%, and that puts the overall TopBuild at the 10% to 15% type number.

And I assume when you talk about the commercial projects being delayed, that is, broadly speaking, referring to the overall commercial industrial numbers that you just quoted.

Yes, that's correct. So no particular geography to point out or anything like that. It's pretty neutral across the country and even thinking about the verticals that I spoke about earlier.

Because I think also, part of that is there is a portion of the commercial and industrial business that's kind of more recurring. So I don't know if that would be outside of those percentages, so to speak.

Yes, the recurring revenue is included in the 35%. As Robert mentioned, the recurring revenue was strong this quarter, and our overall commercial and industrial growth for the quarter increased by 4% across the company. This is more in line with, and actually a bit better than, the lower growth assumption we had when entering the second half of the year. We were anticipating low single-digit growth, and the results exceeded our expectations for the quarter.

The second question pertains to the M&A landscape, and we are witnessing ongoing activity this year. Reflecting on earlier this year, the SPI deal did not proceed for reasons we are all aware of, and it was a relatively significant deal. There may be some concerns that similar larger deals could be more challenging to secure. I would like to know your thoughts on the M&A environment, which you continue to describe as strong with ample activity and opportunities. Specifically, regarding medium to larger opportunities, particularly in the commercial and industrial sectors, could you provide an update on your outlook for acquisitions in those areas? Additionally, how should we anticipate the potential for more medium to larger deals over the next two to three years?

Yes, Mike, it's Robert. I will address that from several perspectives. When I examine our current pipeline, which includes non-disclosure agreements and deals nearing finalization, we have opportunities across all three of our end markets. There are significant deals in the $40 million to $60 million range, as well as smaller ones around $15 million to $20 million. Activity is quite high at the moment, and we are also engaged in various M&A efforts. Your question is pertinent when considering the longer term. As SPI has pointed out, it represents a small aspect of our business, primarily focused on the MDI side. However, we see substantial opportunities in the mechanical and industrial sectors. Although our work on SPI caused us to slow down certain activities in that area, we are now witnessing a resurgence in that activity, which is encouraging. Looking ahead 2 to 3 years, it's crucial to emphasize our focus on TopBuild's core competencies. We excel in managing a dispersed branch network with centralized support. Our culture promotes local ownership and empowerment, all anchored in safety and technology. We have also been successful in attracting and retaining labor. This model, combined with our supply chain management and our ability to grow both organically and through M&A, positions us well. These core competencies create great opportunities that align with what we do. Thus, we are optimistic and have a clear outlook for the next 2 to 3 years regarding how we believe things will unfold.

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

My first question is around the energy efficiency initiatives that you had mentioned. As the builders are struggling with the affordability headwinds and rates are continuing to move higher versus lower, can you talk about how some of that is perhaps flowing through? And how it may come through over the course of the next year or so?

Yes, I'll start with that, Susan, it's Robert. So yes, as I mentioned earlier, whenever we're talking about Spray Foam, there have been some excitement. But at the end of the day, the builder is just getting that to tens out hasn't really come to fruition. And so there are other installation methods, i.e., fiberglass alternatives, that definitely, if you think about like a blown-in blanket, which you may have heard the term bids in the industry before, can definitely accomplish and meet the codes as well. So as you know, given our model, we're pretty agnostic; we can go with a lot of different solutions for the builders, and that's what we're giving them today. So we definitely see it playing out where these codes are going to be a tailwind, and we're going to be able to satisfy those with fiberglass solutions or other solutions. There will be some cases where I’m sure some folks will use Spray Foam to meet those, maybe in the custom or even the regional sector there. But I don't think it will hold back the implementation of some of the more stringent codes, if you will.

And then maybe thinking about the cost environment a bit, can you just talk about labor, the availability that you're seeing there? Has that changed at all? Has it gotten any better for you? How are you thinking about wage inflation? And then I guess, as it relates to that also, just some of the company-specific efforts that you're pursuing relative to being more productive and efficient, especially on some of the distribution efforts there?

Yes. So from a labor perspective, you know that's always been a strength for us. And I'd say there's been choppiness in certain markets, labor has become more readily available. But as we look out further into 2025, we believe that labor for the industry, not for TopBuild, would be a constraint. Relative to the inflation piece, we really haven't seen it. Just a reminder, the majority of our workforce is on a piece rate. So whenever we talk about our special ops teams and really working productivity, that's what we're constantly doing. So you’ve never really heard us talk much about wage inflation because we've been improving productivity, and things specifically that we're working on relate to some better tools that we're putting in place for our teams in the field to enhance their efficiency getting on job sites, the installation perspective as well. So we continue to work on those and that includes on the distribution side with our drivers. If you think about from a distribution model, drivers being a very important part of the team there. So working activities to make that group more productive both in warehouses and the drivers specifically as well.

Our next question comes from the line of Jeffrey Stevenson with Loop Capital. Please proceed with your question.

It's Garik Shmois on for Jeff. I was wondering if supply constraints on the fiberglass side had any impact on volumes similar to what you saw in prior quarters, and maybe just speak broadly to how you're positioned from inventories going into the fourth quarter, just given the supply constraints you talked about.

Yes. It's Robert. So third quarter saw some fluctuations relative to supply. I would say it was tighter to start the quarter, eased up in some of the choppier markets somewhat during the third quarter, maybe in the August timeframe, early September. But as some maintenance started hitting and some unplanned maintenance started hitting definitively, material tightened up again here as we came through October. So a little fluctuation in that. There was some impact in Q3 from a tight environment. I'd say, sitting here going into Q4, we think we're positioned well from that perspective as we see, as we got through October, and we know the Knauf plant in Texas, which you mentioned. This is lower, coming online; we expect it to be up and going here towards the end of the year, heading into 2025. So I think we feel pretty comfortable from that perspective. Obviously, everything will be supply-demand driven there. So we'll see what happens with the starts here coming up in the next 30, 60 days as well.

And just wondering if you could provide maybe some more color just geographically what you're seeing by region.

Sure. Thinking about the Northeast, Mid-Atlantic, Northwest, and Northern California, I see some improvements in those areas. Bid activity and sales have shown positive trends. Regions like Utah, Idaho, the Carolinas, Colorado, Dallas, San Antonio, and Denver have been steady performers. However, areas such as Southern California, Arizona, and Austin have been a bit unpredictable, with Houston and parts of Texas showing similar patterns. Florida is mixed; while Naples remains slow, Orlando continues to perform strongly. The state has faced some impact from hurricanes, but I expect it to stabilize and improve over time. I hope this provides a clear picture of what's happening across the country.

Our next question comes from Keith Hughes with Truist. Please proceed with your question.

In the fourth quarter guide, what are you expecting your multifamily business in terms of dollars or units, however you want to do it to be down?

Yes, Keith, this is Rob. So we don't split it out between single-family and multifamily. I mean we're still expecting our total residential sales for the full year, I'd say, when you put it all together, we're looking at the full year kind of flat on total residential sales. So you can kind of back into a fourth quarter assumption there has a slightly negative from a residential side; and obviously, multifamily would be driving the bigger chunk of that.

And do you think whatever that number is, it seems like that's probably going to get worse at the beginning of the year. Is that directionally where you see the market going?

I believe multifamily will face challenges as we enter Q1 and Q2, but we've seen a pickup in our bidding activity in that sector. Therefore, we expect to perform better than the market in this area. Additionally, as I mentioned earlier, multifamily represents only 10% of our total business, so we don't require a significant increase in single-family and commercial sales to compensate for it. Looking ahead to 2025, there are still many variables to consider, but I remain cautiously optimistic, as I stated earlier, that we will experience another year of growth. However, the first half of the year will likely be tougher compared to the second half.

And I guess on the pricing side, you've not been up much this year. What do you think it would take to get back to some higher inflation in terms of what you're getting from your suppliers as well as what you can put to your customers?

Yes, Keith, it's Robert. I believe there are a few important points to consider. First, we definitely see demand. We anticipate a steady increase in single-family starts. As Rob mentioned, we expect to perform better than the market in multifamily sectors, whatever that may entail. As you know, significantly more fiberglass is used in single-family units. Therefore, I am optimistic about the demand for single-family homes, and I expect building codes to start taking effect in 2025, with builders already preparing for this. While we believe that materials will be in short supply in 2025, we feel well-equipped to handle that situation.

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

This is actually Shaun Calnan on for Rafe. First, on the Spray Foam price changes, can you talk about the cadence of price changes there? Are they consistent? Or is this more of a dynamic pricing model versus fiberglass? And then how has the spread between fiberglass and foam changed over time?

Yes. Shaun, it's Robert. Regarding your question, if we look at how the situation has evolved over time, coming from the material constraints we faced in 2020 and 2021, there was significant inflation in the Spray Foam sector. Over the last 18 months, pricing has become more realistic, but it remains about 2.5 times or possibly more than fiberglass. The pricing environment is quite dynamic, with a lot of optimism earlier this year regarding builders and energy codes, particularly with fiberglass in major markets like Texas, Southern California, and Florida. However, some of those opportunities have been challenging for builders to realize. We've seen an increase in supply and more competitors entering the market, leading to changes in pricing dynamics that we believe are not sustainable. That's why we anticipate stabilization as we move out of 2024 into early 2025. This provides a bit of context on the developments and historical trends. Yes. I think relative to growth in M&A. We're always looking at any opportunities in our core business. When we think about our core business, there's so much runway still left in our core business. If we think about residential, commercial, industrial, around building insulation and commercial mechanical and industrial insulation solutions, there’s a lot of runway there. So as we look at acquisitions, we're already looking at geographies where there would be good opportunities for us or MSA. So let a runway there that drives into our thoughts. As we look longer term, the 2 to 3 years, it's really about these core competencies. I think given our history of going back pre-op, we've really learned a lot about M&A, and I think you've seen a very successful track record since '17 in this business, it's because you got to build M&A off of core competencies. I've talked about our core competencies, which go from a culture to our confidence, comfort level, and competency we have around M&A, and running this dispersed model with central support in the background. We're very, very good at labor, and we've been very good at driving productivity in the model and supply chain leverage. We're not going to do anything outside those core competencies. And that's how we think about it. It's given us really good line of sight as to what that looks like here in the coming time frame.

Does that complete your question?

Yes.

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

I appreciate your regional insights. I find your description of the market as positive, steady, and choppy quite insightful. Considering that you and your competitors have access to some of the best data on housing, particularly in terms of new housing activity and bids, could you provide some insights on how your sales team is interpreting these market conditions in relation to bidding? Is there price pressure? Given the increased number of completed homes that builders have, is there also a volume pressure? It appears that builders are slightly reducing new starts, and we have seen interest rates increase over the past six weeks. Can you share your thoughts on whether this situation stems from supply issues, demand issues, or if your teams are indicating that pricing is a concern? Furthermore, based on your perspective, do you think the current scenario makes sense, considering there may be underlying micro cycles where adjustments to interest rates take some time? Your insight would be valuable.

Ken, it's Robert. I'll start. I'm sure Rob will have some color to add as well. So yes, it is. One of the many good things about the central ERP that we have is we're able to see those rates looking out across the country, by geography, by MSA. That drives our commentary, as well as our cadence with the field understanding what they're seeing. But I think you're right. I think there's this calibration time period of addressing some of the political uncertainty, those types of things that's going to happen as well. So it's probably an adjustment period that happens. But I would say, obviously talking to our builders, which we do about what their outlook is for '25, whether it be first half, back half, that type of thing, that's where we get our information from. It's pretty fact-based, coming from a combination of our conversations, our field people, as well as what we can see from a big perspective in our ERP system.

Yes. I'll just add to that, Ken. I think as Robert stressed earlier, it's really a market-by-market situation out there. Even within states like Florida and Texas, we're seeing differences. So that's the choppiness we refer to. Ultimately, from a broader view, rate certainty, we definitely saw, as rates went up, that rate certainty played a big role there as rates were going up, people hit pause. Once rates stabilized and people realized that the 3% mortgages weren't coming back anytime soon, demand came back. Obviously, the buydowns from the builders have helped that a lot, too. But now, with rates heading in the other direction, we hope you can kind of see that same pause button, I think, from some buyers out there where they're saying, okay, well, if I can get this cheaper in a few months, I'll sit here on the sideline. That's a driving factor behind what we're seeing there in the choppiness.

As we said, the long-term fundamentals are solid. And so I think to break loose here where people get comfortable in the environment, rates do stabilize, get some of the uncertainty out of the way, we definitely will be ready from a top perspective. As you know, Ken, labor is a strength for us. We feel good about the material situation, how we're situated there as well. So I think as things do improve, we're going to be ready.

Really appreciate that. Maybe if I could come at it from another angle. You have a broad perspective on the national housing, and I think people like myself get sometimes overly biased by what the public builders are saying. Many of the public builders are calling for like 10% growth. Is that kind of consistent with the public versus the private delta as they think about their business next year? Because starts probably aren't growing 10% overall, but many builders are looking for 10% growth. Does that mean the publics are still gaining a lot of share? Or is that really just that we're focused on Orlando, Dallas and not enough on Michigan or the smaller markets?

Yes. As we think about our custom builders, with whom we do major work, custom builders and regional builders feel positive too. As you get to that more stable environment and the outlook for those moderated rates, they expect nice improvement in their business; they haven't been able to do the buy-downs and stuff that large publics have.

Our next question comes from Adam Baumgarten with Zelman & Associates. Please go ahead with your question.

Just on the pricing side, can you put a finer point on the magnitude of the headwind to overall pricing from the spray foam declines just because I know you kind of talked about the fiberglass side improving on a year-over-year basis from 2Q to 3Q, but I think it was offset by spray foam. So any color on the magnitude just so we can get a better apples-to-apples comparison on the fiberglass side.

Yes, this is Rob. So I'd say the Spray Foam impact, it was about 130 basis points on the price. And then the other thing to keep in mind when you look at our price number is that it's a price mix, right? So as you see shifts in customer or regions or products, we also have some impacts there. But by far, the biggest headwind to the improvement in fiberglass was the spray foam price decreases, and that was about 130 basis points.

And then just to clarify on the tightening of the guidance range and the midpoint coming down, was that solely due to lower single-family or just overall residential growth in general, not any change at this point in your C&I outlook?

Yes, I'd say it was definitely residential focused, not C&I. The drop last quarter was more driven by the choppiness in C&I; this quarter I'd say it's residential, and primarily multifamily, right? Some of the backlog we thought would come through in the third quarter. We saw some delays with some of that backlog. Keep in mind the hurricanes, too; the midpoint and higher end of our range didn't contemplate the hurricanes that we've seen in the third and fourth quarters. I'd say it was about a $10 million impact in Q3 and roughly about $8 million here in Q4.

We have reached the end of the question-and-answer session. Mr. Buck, I would like to turn the floor back over to you for closing comments.

We appreciate you joining us today and your interest in TopBuild. We look forward to seeing many of you in person at conferences later this month and in December. Thank you.

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