Greetings, and welcome to TopBuild's Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce P.I. Aquino, Vice President of Investor Relations.

Please go ahead. Good morning, and thanks for joining us. With me today are Robert Buck, our President and CEO; and Rob Kuhns, our CFO. Our earnings release, senior management's formal remarks and the deck summarizing our comments can be found 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 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. Let me now turn the call over to our President and CEO, Robert Buck.

Good morning. Thank you for joining us today for our third quarter earnings call. With more than 3 quarters of the year behind us, we are proud of what our teams have accomplished thus far in 2025. Let me start by giving you an update on where we are with our acquisitions. In the third quarter, we acquired Progressive Roofing. With roughly $440 million in annual sales, we've established an exciting new platform for growth in commercial roofing, which has a large and very fragmented $75 billion TAM. In the first 100 days following the acquisition, we continued to learn great things about the business and are refining a strategy to build on the platform. We've established great connection points across the Progressive Roofing organization, and our teams are doing a great job coming together and executing for the future. In October, we closed the SPI transaction. With this strategic deal, we're bringing together two leaders in the mechanical insulation and custom fabrication to better serve our commercial industrial customers across diverse vertical markets. The transaction extended our geographic footprint and expanded our capabilities. Our teams are already hard at work, as we leverage our M&A integration expertise to get SPI onto our technology platform and drive synergies. We expect to deliver $35 to $40 million in annual run-rate synergies over the next two years, and we're excited to have the SPI team onboard. We also announced yesterday several additional acquisitions. We closed Insulation Fabrics, Diamond Door Products and Performance Insulation Fabricators over the last few weeks and will soon close on a fourth acquisition, L&L Insulation. Together, these acquisitions add just over $50 million in annual revenue. Diamond Door Products is a very attractive complement to our specialty distribution business. Diamond Door fabricates and assembles insulated steel door systems which gives us the opportunity to provide metal building insulation customers with a value-added bundle of products that customers have requested. Insulation Fabrics and Performance Insulation Fabricators expand our distribution offerings of insulation accessories and mechanical insulation, while L&L Insulation grows our residential insulation installation business in Colorado. Our M&A Team is doing a great job. We continue to have a very attractive pipeline of acquisition candidates, and there's no shortage of opportunities to consider. Let me transition to discuss our results in the quarter. Results were in line with expectations and similar to the prior quarter. Our performance was solid even as the macro environment remains uncertain. We posted total sales growth in the quarter of 1.4% to $1.4 billion. Although the residential new construction market continues to be weak, it was partially offset by ongoing growth in heavy commercial and industrial. We're also benefiting from the contribution of our commercial roofing acquisition. Fundamentally, housing in the U.S. is still underbuilt and our long-term opportunity is intact. Near term, the downward movement of interest rates is encouraging, however mixed economic signals and affordability concerns linger, impacting consumer confidence and home buying decisions. Profitability in the third quarter was again solid and we reported adjusted EBITDA margin of 19.8% as we continue our focus on operational excellence across the business and supply chain. Turning to capital allocation, our priorities have not changed. We continue to believe we can drive the greatest shareholder returns through M&A. We're also evaluating opportunities and will remain disciplined around valuation. In the third quarter, we repurchased nearly 178,000 shares, returning $65.5 million in capital to shareholders. As you know, we plan to host an Investor Day in New York on December 9th. So, before I turn it over to Rob, let me give you a bit of a preview of the day so you have an idea what to expect. TopBuild has a differentiated business model and a clear profitable growth strategy, which drives compounded returns. Our strong track record of value creation would not be possible without our great team of leaders, many of whom you'll meet, including some folks from our recent acquisitions. You've heard us talk a lot about being a people business. One of our core strengths is our culture and our ability to attract and retain great talent, both of which we'll cover in more detail. This year we've expanded our total addressable market to approximately $90 billion, so we'll spend some time discussing our strategy for continued growth in this space, both organically and through M&A. We have the advantage of having a single technology platform that enables us to drive operational excellence and efficiencies. As we look ahead, we'll share more on our digital roadmap to support continued operational excellence and solutions that improve the customer experience. Finally, we'll share our thoughts on TopBuild's long-term financial outlook. We encourage you to join us in person. If you don't already have the details and would like to attend, please reach out to P.I. With that, let me close by thanking our teams as we continue our focus on safety, driving profitable growth and operational excellence. I also want to welcome our most recent acquisitions to our team. We look forward to working together and are delighted to have you join the TopBuild family.

Thanks, Robert. Let me start by thanking our teams for continuing to drive solid results. Despite some challenging macro headwinds, our business continues to generate healthy margins and strong free cash flows, proving the strength and resiliency of our model. Turning to the third quarter results, our performance was in line with our expectations. Total sales grew 1.4% to $1.4 billion, driven by M&A of 7.9% and pricing of 0.3%, which were partially offset by a 6.7% decline in volume. Sales in our Installation Services segment totaled $858.3 million, up 0.2%, as M&A added 11% which was offset by a decline of 10.4% in volume and a 0.5% pricing decrease. As a reminder, our Installation Services segment includes Progressive Roofing, and they drove the majority of the $95 million of M&A revenue for the segment in the quarter. During the third quarter the demand for our legacy insulation installation services remained challenged in both residential and light commercial markets but was in line with our expectations. Specialty Distribution sales grew 1.4% to $608.9 million in the third quarter. Our sixth consecutive quarter of year-over-year growth in Specialty Distribution was driven by acquisitions of 2.3% and pricing of 1.2%, which were partially offset by a 2.1% volume decline. During the third quarter, Specialty Distribution's volumes and pricing remained challenged in residential products but continued to be strong for commercial products, especially mechanical insulation. Adjusted gross profit in the third quarter was 30.1%, which compares to 30.7% last year. Adjusted SG&A as a percentage of sales in the third quarter was 13.6% versus 12.8% last year. The increase in SG&A percentage was primarily driven by incremental amortization from acquisitions. On a same branch basis, excluding acquisitions, SG&A was 13.1% in the third quarter. Third quarter adjusted EBITDA for TopBuild totaled $275.6 million, and adjusted EBITDA margin was 19.8%, down 100 basis points versus the third quarter of last year. Our margins continue to be very resilient primarily due to actions we took earlier this year and supply chain improvements. These cost savings are helping to offset price pressure on residential insulation products. Installation Services adjusted EBITDA margin was 22.5%, an improvement of 20 basis points versus the third quarter of last year. Specialty Distribution adjusted EBITDA margin of 16.9% was down 150 basis points versus the third quarter of 2024. Other expense for the quarter was $24.5 million, compared to $16.1 million last year. The increase is due to higher interest expense resulting from the increased borrowing on our upsized credit facility that occurred in May of this year. Third quarter adjusted earnings per diluted share was $5.36 and compares to $5.68 last year. Turning to the balance sheet and cash flows, we ended the third quarter with total liquidity of $2.1 billion, of which $1.1 billion was cash and $933.4 million was available under our revolver. Total debt at the end of the quarter was $2.9 billion, $1.5 billion higher than last year due to the refinancing and expansion of our credit facility and $750 million in senior notes issued in September. Third quarter net debt was $1.7 billion, and our net debt leverage ratio was 1.6 times trailing 12 months pro forma adjusted EBITDA. Our TTM free cash flow as of Q3 was $791.2 million, up 13.4% versus last year primarily due to working capital. Working capital as a percentage of sales totaled 14.2%, which compares to 14.1% last year. We have been talking about our active M&A pipeline and we are very excited to announce some results on that front as we closed the SPI transaction in October and as you saw in our press release yesterday, we have signed and/or closed four additional deals across our businesses. M&A remains our top capital allocation priority. Assuming we owned SPI and the four most recent acquisitions for the last twelve months, our pro forma net debt leverage would have been 2.4 times. In the third quarter, we also repurchased shares totaling $65.5 million, which brings our year-to-date total to $417.1 million or more than 1.3 million shares. $770.9 million remains under the current authorization. As you saw in our release, we are updating our guidance today to incorporate the impact of our recent acquisitions. In the release and presentation, we've formatted our guidance table to make your modeling more straightforward. We expect full year sales to be between $5.35 to $5.45 billion, with the following assumptions at the midpoint. On a same branch basis, including price, we continue to expect residential sales will be down low double-digits for the year, driven by continued weakness in both single-family and multi-family. Commercial and industrial same branch sales are expected to be flattish. We expect heavy commercial projects to remain strong, while light commercial will continue to be challenged. The full year impact of M&A on sales is expected to be approximately $450 million. We are raising our adjusted EBITDA guidance for the year to be between $1.01 billion to $1.06 billion, which represents adjusted EBITDA margin of 19.2% at the midpoint. Depreciation and amortization are expected to be in the range of $166 to $171 million, and interest expense and other will be between $88 to $91 million for the year. We continue to expect our tax rate to be approximately 26%. In closing, I would like to welcome the employees from our recent acquisitions to the TopBuild family. These recent acquisitions have strengthened our legacy installation and distribution businesses, they have made our revenue streams less cyclical, and they have broadened our opportunities for growth. We are looking forward to sharing our excitement about the future at our Investor Day in New York next month.

Thanks, Rob. The underlying fundamentals for our business are solid, and we have a uniquely positioned, diversified business model across the residential, commercial, and industrial construction end markets. Our leadership has great control over our business, as demonstrated by our ability to navigate successfully in a challenging environment. And as always, we're focused on driving profitable growth and increased shareholder value. We look forward to seeing you at our Investor Day on Tuesday, December 9th. With that, operator, let's open the line up for questions.

Our first question is from Stephen Kim with Evercore ISI.

This is Aatish filling in for Steve. I wanted to ask about Progressive. Can you discuss the sales contribution from Progressive for the quarter? Are you still on track for the additional $215 million for the entire year? It would be helpful if you could address that.

Yes, this is Rob. So their total contribution in the quarter was about $92 million of sales. For the quarter, they're probably closer to about a $205 number now than the $215 we had previously. There's been a handful of projects pushed out a big data center in Iowa, some school funding in Arizona that was a little bit slower than originally anticipated. I'd say despite that, we're still looking at the back half of the year up low single digits for them. So nothing that we're concerned about at this point.

Great. Yes, it's Steve Kim. I appreciate that. You also announced four acquisitions yesterday, one of which was a manufacturer, which seemed like an interesting move. I'm also curious about the fabric distributor. Can you provide more details on those acquisitions and why they were particularly appealing? For instance, regarding the fabric distribution, why not just add bags, netting, and suits to your existing facilities? I assume there is some added value they bring, and it would be helpful to understand that. Additionally, with the insulated doors, are you intending to move deeper into the manufacturing of specialty products like that? Those are the questions I have regarding those acquisitions.

Steve, it's Robert. So let's start with Diamond Doors. Not a manufacturer, they just do assembly and some fabrication, i.e., assembling those doors, I would definitely not call it manufacturing. And it's really just a bundle that goes with the metal building industry and the metal building products and where our customers have been asking for it is doors would typically get delivered at the beginning of the project. You would have damage to doors, that type of stuff they were sitting on job sites. And so given our relationships now we're able to bundle it with the insulation that both get installed at the same time, these door systems. So it's a great adjacency that put our sales force on top of what we think is going to drive some great cross-selling opportunities. So we got it right down the fairway from that perspective. Insulation fabric, from that perspective is some of the products that we sold, some new products, but it's all really insulation accessories. They have a great reputation in the industry as well as some great customer relationships as well. So it was really a good add-on there given some of the talent, relationships and it just adds to the insulation accessories.

Okay. So were you already selling those nettings and suits in your existing priorities...

Some of those products like the suits and the netting, as we were already in some of those products as well. Yes, absolutely.

Our next question is Michael Rehaut with JPMorgan.

Great. Thanks, everyone. First question, wanted to 0 in, and apologies if I missed this in your prepared remarks, but quarter ago, you kind of baked in some price cost headwind into the back half of the year based on the potential for maybe pricing on the margin to weaken insulation pricing that is. I wanted to know in your current guidance, if that headwind is still baked in. I believe it was a $30 million headwind. And more broadly, how insulation pricing has trended during 3Q?

Yes, Michael, this is Rob. So that is still baked into our guidance, about $30 million for the full year. We got impacted by roughly $12 million, I'd say, in the third quarter, more heavily on the distribution side of the business than on the installation side of the business. Now you do see pricing on installation. We did have negative price there. So we're kind of seeing the product mix play out between the 2 segments. So when you look at the Installation segment, where we're having price pressure is on residential products, fiberglass and spray foam. It's a much larger percentage of our revenue on the installation side of the business. Now we're doing a good job of maintaining margins there and working back with our supply chain partners and taking costs out where we can. On the distribution side, I'd say those pressures in residential products are even stronger and having more margin impact but it's a much smaller percentage of the product mix on that side of the business because of all the commercial products. And then the other thing you got going on that's driving pricing actually positive on the distribution side is that we've got gutters and mechanical insulation, which make up a larger percentage of the product mix on that side that have positive pricing going on this year, and that's helping to drive that number up to the 1.2% you saw in the quarter.

Great. That's very helpful, Rob. I appreciate all the detail there. Secondly, you reiterated your end market assumption for the year, expecting residential to be down low double digits, while commercial and industrial remain flattish. Considering the current trend, I am more interested in residential, but I would like your comments on commercial and industrial as well. I am trying to think about the first half of 2026, recognizing that guidance is a bit premature. Mathematically, if residential experiences softness throughout 2025, would this likely indicate some level of year-over-year decline in the first half of 2026? I’m trying to understand the trajectory of 2025 and its potential impact on at least the first half of 2026.

Yes, Michael, this is Rob. So I'd say what we're seeing out there right now is single family, was weak throughout most of the country, there are some pockets of strength in the Midwest and Northeast. But for the most part, weak across the country, it definitely got a little bit worse in Q3, I'd say, as we anticipated than it was the first half of the year. Our projections would say Q4 is probably a little softer as well. So to answer your question, if you roll that into next year, I think you're looking at probably flat to potentially slightly down first half of the year on single family. The other side of the equation, multifamily sales remain weak there. The little bit of bright side we see there is we are seeing some backlog starting to improve in certain markets. across this country. So there could be some potential upside on the multifamily next year.

Yes, Michael. I'll add to that. Rob is correct. The single-family market is a bit sluggish, and we will see how that develops at the start of the year. However, he is right that multifamily backlogs are consistently building across the regions. Looking at the quarter, the plan for commercial industrial shows that backlogs are increasing, even as we experience ongoing momentum in areas like mechanical and roofing. We believe this is a positive sign as we analyze our business mix.

Our next question is from Susan Maklari with Goldman Sachs.

My first question is on the margin. It's really nice to see how, especially in installation the operating margin is held up in there. Can you talk about your efforts to support that? And how we should be thinking about the path there for fourth quarter and anything looking out from that?

Yes, Susan, this is Rob. The profitability in our installation segment has been consistently strong this year, which we are quite pleased with. The primary factor contributing to this success is the cost-saving measures we implemented in the first quarter, which we've previously discussed. This includes consolidating facilities, reducing headcount in back office and support roles, as well as adjusting direct labor to better align our cost structure with the current market conditions. Although we are experiencing some pricing pressure, we have effectively managed to mitigate its overall impact on our margins. Overall, this year has been a great example of the resilience of the installation segment's margins.

Yes. Okay. And then turning to Progressive. Given the weakness that we've seen on the new construction side, especially in some of the end markets there. Can you talk about what you're seeing on the reroofing side of that business? Is there any change in the competition and your ability to come up against that and continue to see the level of growth that you expect?

Yes. It's Robert. So I think we feel very confident and comfortable with what's going on roofing as we look at their mix of reroofs and new construction as we look at their backlog, what's being bid, what's being won, even Q4 and definitely very strong for 2026. And margins are doing a nice job there given the mix of business as well. So highly confident. I'd say, some people ask us questions about, hey, you've owned the business here for, call it, 100 days or more. What have you learned or what have you seen? And that is just that team and the backlog that they're building especially across Southwest into Texas where they're strong and stuff. It's been a bright spot, and we think a bright spot for the future. So highly confident in what's going on there and what we see in the fundamentals of the business.

Our next question is from Ken Zener with Seaport Research.

Rob, regarding the question about public builder inventory units, they are down 15% to 20%, and we can consider it in the mid-teens range. This decline seems related to demand concerns, particularly around having too many speculative homes and faster cycle times. It's worth noting that this suggests they might have fewer inventory units. What gives you confidence that this mid-teens level, which we are seeing broadly, can remain stable in the first half, especially since better data could clarify this situation? It somewhat reminds me of the concerns we had around multifamily last year. Could you elaborate on this based on the data you have regarding bids, even without government data? Thank you.

Yes, I would say we're not providing guidance for 2026 at this time.

Bit of logic.

Yes. Yes. I mean I think just given what we're seeing, we're not anticipating the market to dramatically improve from here, right? But we will be comping pretty tough first and second quarter from last year. So that's really the thinking there around the comment to flattish to slightly down. But obviously, there's a long way to go, most of what we'll be working on in the first and second quarter of next year hasn't even been started yet by the builders. So we obviously got to see what activity happens there, and that will really ultimately end up driving our sales.

Yes, Ken, this is Robert. So yes, look, in some certain markets, you've definitely seen it slow and they're trying to work through that inventory to exactly what you just said. And Naples would be a nice example of that. And Austin, Texas would be a nice example of that. So that's definitely happened in some markets. But there's somewhere, I'd call it steady. We talked about the Midwest. So even if you look at some of those above, user term, the smile states there, there are some pockets of some positiveness there relative to, I call it, steady demand. Even the Pacific Northwest isn't a bad area to look at and we look at what we're seeing in book sales and stuff also. So definitely some where they've slowed given the inventory and some where we're seeing, I'd call it, given the current environment steadiness, if you will.

Our next question is from Phil Ng with Jefferies.

Congratulations on another strong quarter despite a challenging environment. Robert, could you provide more details regarding backlogs and the pace of orders, especially in your Commercial and Industrial business? Are there differences between your legacy business and the acquisitions of Progressive and SPI? Is there an acceleration in activity? I'm asking because the recent headlines about data centers have been quite positive. Is the situation more stable than rapidly changing? Are you noticing any signs of recovery in the light commercial sector? I would appreciate more insight into what you are observing in the Commercial and Industrial side.

Yes, I believe we've covered a lot of ground. In terms of Commercial and Industrial, it's steady, and we see the backlogs continuing to grow. There have been some project delays, but no cancellations, and government projects have slowed down slightly, though this has minimal impact on us. When we analyze backlogs in mechanical, DI, and SPI, they are definitely increasing. Specifically for SPI, there is a renewed focus on the business since its integration into top bills, which we consider a significant positive. Regarding our acquisition of Progressive, the commercial roofing sector has shown notable strength. We are now over 100 days into owning Progressive, and their backlogs are also growing, including both reroof maintenance and larger projects like the data centers you've mentioned. Overall, this segment remains steady and is a bright spot in our commercial and industrial operations. As for light commercial, we are hoping it has hit the bottom; it has been a weaker area due to its correlation with residential trends. Our teams are actively pursuing suitable projects across the region, and we are beginning to see some successes in the light commercial sector.

Okay. I mean everything you're saying suggest, probably some level of growth next year for '26 on C&I. Is that a fair characterization?

I think we feel positive about C&I as we go into '26, yes.

Okay. And then from a pricing standpoint, appreciating resi is a little choppier and your customers are dealing with affordability, but your commercial industrial business is 50% of the business at this point, post all the acquisitions you've announced this year. How should we think about pricing in those categories just because like mechanical insulation, everything we're reading, it's on allocation, I think prices are going higher, certainly don't have as great as a feel for commercial roofing. But internal perspective on pricing momentum and, I guess, at this point, half of your business?

Yes, Phil, this is Rob. You are correct; the pricing has remained much more stable on the commercial industrial side this year. We experienced some cost increases in the first quarter on the mechanical side, but our teams have successfully managed to pass those costs along and have recognized price increases. From what we observe in commercial roofing, pricing is also holding steady. The demand in the commercial industrial sector is certainly contributing to a stronger pricing environment.

Our next question is from Jeffrey Stevenson with Loop Capital Markets.

Yes, I was hoping to dive deeper into the variance between residential installation and distribution pricing. And I wondered if the better relative installation pricing is driven by builders reliance on TopBuild's national scale and high-quality service levels compared with independent competitors. And then in distribution, our channel inventories currently at elevated levels, leading to increased competitive dynamics?

Yes, it's Robert. I'll address the first part of that question, and Rob may add further details. On the installation side of the business, there is certainly pressure on the fiberglass segment. However, to Rob's earlier point, the team has managed the price-volume discussions effectively on a market-by-market basis, taking into account the unique circumstances in each market. It's a bundled solution involving labor and materials, and our teams are recognized for their excellent service and strong relationships with local builders. This has certainly been beneficial in maintaining margins despite some challenges. On the distribution side, material availability is currently good, impacting the supply and demand environment. We've observed increased pressure there, particularly regarding fiberglass and spray foam. The dynamics of supply and demand have led to more competition, but overall margins remain stable. The team continues to perform well, balancing these pressures, particularly in the residential distribution sector. So great question. So we're very active from an M&A perspective in the roofing space. I'll hit it from two different angles. I think we mentioned on the last call, some investment we're making on the M&A side and the team on roofing. So some of that's coming together for sure. That Progressive team has a lot of relationships in the industry. So they're working those relationship sides of, of some of the smaller to chunky acquisitions. Then obviously, we've got our relationships broader in the industry. And so we're definitely working some from, I'd say, the bigger side or, again, chunkier side of the of some roofing acquisitions. So definitely very active. We feel good about activity going on from both ends in commercial roofing, and we definitely would look to that to lead to some good execution in 2026.

Our next question is from Keith Hughes with Truist Securities.

Kind of building on the last question on more commercial roofing deals. Is there a specific region that you're looking specifically going after to acquire? And does it make a difference in terms of deals who the major suppliers of membrane are to the installers.

Keith, it's Robert. We have a lot of opportunity in a highly fragmented market. While Progressive has a strong presence, especially in the Southwest, there isn’t a particular area we are focused on. Our approach remains consistent with TopBuild's past discipline, which involves seeking great companies and talent in these broad areas of opportunity. As for our supply relationships, the major suppliers in this space are already important partners for TopBuild, and we maintain strong connections with them. Thus, the choice of supplier isn't a significant concern due to the strength of our partnerships. Instead, we're concentrating on identifying high-quality companies that meet the necessary standards in terms of competency, talent, and performance.

Our next question is from Collin Verron with Deutsche Bank.

I just wanted to go back to the installation margins and the strength there. You called out the primary driver being the cost saving actions that you guys have taken. Can you just help us think about how much was realized in the third quarter and maybe to date in 2025. And what you expect the annualized benefit of those cost actions to be as you go forward into 2026?

Yes, Collin, this is Rob. So yes, the cost actions we took in the first quarter annualized is about $35 million of savings, I'd say our productivity in the third quarter definitely had it 0.25 share of that as well as I'd say some additional savings we had there that helped really drive the margins up in the quarter.

Our next question is from Kurt Yinger with D.A. Davidson.

Just wanted to go back to competitive dynamics on the residential install side. It sounds to me like that's primarily some savings on the material side. Is that the case? Or are you seeing increased bidding pressures depending on geography. And then maybe stepping back, can you just talk about kind of the tone of customer conversations as builders kind of battle the affordability challenges and maybe work to share some of that with suppliers like yourself?

Kurt, it's Robert. So relative to the competitiveness, I mean, obviously, we worked in productivity side of it. If you think about margins, we've obviously worked with our supplier partners as well. But they're definitely in the slower markets, there definitely increased competitiveness in some of that bidding. And I think that's where we look at our team and the job they've done and why we complement them on the work that they've done there because I think they try to find that right balance of volume and price. And obviously, we were able to put some controls around that from a bidding perspective as well. So that's some of the dynamics that have happened from that standpoint. And if you look at the commentary around the country, the builders are obviously smart themselves. So between not just coming to us relative to some of the pressures, I mean, obviously, they're, they're reengineering some of the products they're going to market with. You can look at whether it be some of the footprints, whether some of the things that they're doing. Obviously, we've done some of that value engineering with them as well to help them as they face the pressures and they come to us as well. But it definitely has to be the partnership because as we said in our prepared remarks, look, the fundamentals are intact here, but we've got a time period here to the inflection point. So we're working with the customers on it. I think our teams in the field are doing a nice balance of that.

Okay. I appreciate that. And maybe just following up on kind of the balance of price and volume. Does it feel like as the year has progressed and we've kind of seen that additional step down in residential that more often, you're maybe having to walk away from some of these projects or bids? Or has that been pretty consistent with what you felt over the last couple of quarters?

Yes, this is Rob. I would say the situation hasn’t worsened significantly in terms of us needing to reduce our volume. As we anticipated, we have noticed an increase in price pressure, prompting us to adopt a more aggressive pricing strategy. Therefore, I would assert that we are not pulling back from seeking additional work. We are maintaining our market share. You can observe some of the effects on pricing, particularly in installations, where there was a negative impact this quarter. However, as we've noted, we have effectively managed our costs and have been able to mitigate most of the effects through productivity improvements.

Our next question is from Rafe Jadrosich.

On the distribution side, the pricing improved, but you say the price cost getting sort of worse there. And I think that's just on the residential piece of that. Can you just help me understand and like what's going on there? And just if the market stays soft, is there an opportunity from a cost perspective sort of said differently, like if the market like kind of stays like this, could you get to a point where you're able to lower your costs where you can get to price cost neutral even if pricing stays negative?

Yes, Rafe, this is Rob. So we're working with our suppliers today in terms of that price cost equation, and we are seeing some relief there. But like we've talked about, we're definitely seeing the price pressure on the sales side. We've talked about how on install, we've done a great job offsetting. On the distribution side, a little tougher, a little more pressure there because you don't have the labor component. So the price pressure we're seeing is having a negative impact on margins. Now this is what I was trying to explain a little bit earlier. When you look at our overall pricing on distribution were up and it's really a product mix impact there because of gutters, we're seeing inflationary pressures on those products, mechanical insulation, we talked about how commercial products, we're seeing good, strong price. So we're driving price. Costs are up and prices are up on those products, and we're maintaining margins. And then you got the residential products where you got cost down, price down. And when you put the two of those together, you're kind of netting out to a positive price, negative cost and a net slightly negative price cost number for distribution.

I think regarding productivity, we're always monitoring what's happening across our operations and in different markets. If adjustments are necessary, we've demonstrated in the past that we can anticipate changes effectively. So...

Yes, Rafe, this is Rob. So yes, we're not uncomfortable with where our leverage is today. It's pro forma with the SPI deal, we're at 2.4x, we've been that high or slightly higher before after large deals. We certainly will be more comfortable in that long-term target range of 1% to 2%. We don't feel the need to try to get there overnight. Obviously, there's, there's multiple paths to get there, ones to drive growth in EBITDA, which is definitely plan one and how we'd like to get there. We can also pay down debt or hold on to cash, and it would take about $500 million of cash to get us back down to the 2x, which would be a portion of next year's free cash flow. So we can continue to do M&A and continue to have, like we've talked about in the past, we balance buybacks with M&A and typically put a grid in place. So we think we can continue that strategy at these levels with longer-term goal of getting that leverage back down to closer to 2x.

Our next question is from Adam Baumgarten with Vertical Research Partners.

Just on the kind of implied 4Q guidance, it kind of points to worsening year-over-year margin pressure. Maybe if you could sort of run through the drivers there, whether it's some of the acquisitions, pricing, price cost, just kind of the outlook there in the near term.

Yes, Adam, this is Rob. Looking at the fourth quarter numbers based on our guidance, I mentioned the impact of price cost, which we expect to remain a headwind and be slightly worse in the fourth quarter compared to the third quarter. We hope this is a conservative estimate, and we're doing our best to manage it. Regarding mergers and acquisitions, in the first year before realizing synergies with SPI, there will be a negative effect on overall EBITDA, as they are projected to operate at a 10% to 11% EBITDA margin. However, as we achieve synergies, we anticipate bringing that up to the mid-teens. Additionally, we expect continued volume headwinds, which may be more pronounced in the fourth quarter due to seasonality.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Thank you for joining us today. We look forward to seeing you next month at our Investor Day on December 9. Thank you.

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