Earnings Call Transcript - BLD Q4 2025

Operator, Operator

Greetings, and welcome to TopBuild's Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note, this conference is being recorded. I will now turn the conference over to P.I. Aquino, Vice President of Investor Relations. Thank you. You may begin.

P.I. Aquino, Vice President of Investor Relations

Good morning and thanks for joining us. With me today are Robert Buck, our President and CEO; John Achille, our COO; and Rob Kuhns, our CFO. Our earnings release, senior management's formal remarks and a 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 have 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.

Robert Buck, President and CEO

Thanks, and good morning, everyone. We appreciate you being with us. As P.I. mentioned, Rob and I are joined by John Achille, our COO. I've asked John to start joining us so he can share his business insights, including our ongoing efforts to drive operational excellence across the organization. Many of you will remember meeting John at our Investor Day a few months ago. We were really pleased to see many of you at our Investor Day in December, and if you weren't able to attend in person, I hope you've taken the opportunity to watch the replay on our website. I'd like to start my comments today by reiterating a couple of the key themes and messages that we shared in December. First, we have a clear, profitable growth strategy and a proven track record of delivering compounded growth and strong shareholder returns. Second, we have significant growth opportunities across our $95 billion total addressable market, which has increased non-cyclical and non-discretionary revenue drivers. We generate very strong free cash flow and we're disciplined in deploying capital both organically and through M&A. Third, we have a differentiated business model and we will continue to leverage our connected technology platform to continue driving growth and operational excellence to improve the customer experience. Finally, we have a cycle-tested leadership team. We're proud of the people-first culture we've built at TopBuild and we're grateful for the commitment of our nearly 15,000 employees to growing our business and to working safely every day. Let me now transition to discussing the operating environment at a high level. In the fourth quarter, weakness in the residential and light commercial end markets persisted. Consumer confidence remains low, interest rates are still elevated, and affordability continues to be an issue, all drivers of muted demand in the current environment. We continue to believe the underlying fundamentals are strong, supported by household formations and an underbuilt housing market, and this means there is great long-term opportunity for new residential construction. The commercial and industrial end markets remain solid. We continue to see expansion across a variety of verticals. Bidding and backlogs are healthy, and we're well positioned to capitalize on that growth both in the insulation and commercial roofing space. Turning now to our results, fourth quarter sales rose 13.2% to $1.49 billion, fueled by the seven acquisitions we completed last year including SPI in the fourth quarter. We finished the year with over $5.4 billion in revenue and adjusted EBITDA of $1.04 billion, or margin of 19.2%. Rob will discuss the financials in more detail later in today's call. Acquisitions continue to be our top priority for capital allocation. Last year, we deployed $1.9 billion in capital across the business, adding approximately $1.2 billion in annual revenue. Our M&A pipeline continues to be very healthy; the environment is active and we're off to a solid start this year, having recently closed the acquisitions of Applied Coatings and Upstate Spray Foam. We also announced our second commercial roofing acquisition earlier this week, Johnson Roofing. Last year, we returned approximately $434 million to shareholders through our share repurchase program, demonstrating our ongoing confidence in our business and long-term strategy. Now let me hand it over to John to cover operations and Rob will follow to discuss the results and guidance, and I'll come back at the end with some closing thoughts.

John Achille, Chief Operating Officer

Thanks, Robert. I'm glad to be here with you today. I'd like to cover two key areas, the supply chain environment and our ongoing efforts to drive operational excellence across the business. As housing demand has softened, we've seen the supply of building insulation and more specifically fiberglass loosen and become more available. In the second half of 2025, we saw a couple of fiberglass lines come down for extended maintenance as manufacturers work to balance supply with demand and stabilize pricing. We have strong relationships with our suppliers and our conversations are ongoing. Importantly we are leveraging our tools and technology platform to manage inventory across the branch network. On the spray foam side, we continue to see plenty of availability. For mechanical insulation, fiberglass pipe insulation remains on allocation, and we continue to work closely with our supplier partners to ensure that we receive our fair share of existing supply. Turning to operational excellence, we have great control of our business. You'll remember that in the first quarter of 2025, we were able to quickly take actions to align our cost structure with the demand outlook. Our work here continues as we navigate changes in the macro environment. We talked at Investor Day about how we leverage technology and take information from our businesses to share best practices, be more efficient and further optimize the network, everything from installer productivity to job site routing to shipments. Our field teams are doing a great job managing profitability. As soft demand has persisted, we are responding appropriately and making disciplined pricing and volume decisions at the local level. Our efforts to optimize our cost structure across the business are ongoing, and operations leadership continues to focus on the bottom quartile of our branches to improve performance. On the Specialty Distribution side of the business, we are making great progress on integrating SPI. Late last year, we realigned Specialty Distribution field leadership to better serve our customers, and we've identified several cross-selling opportunities we expect to realize over time. On the supply chain side, we're capturing rebates and building on existing supplier relationships. Finally, our teams are working diligently to transition the SPI business to our technology platform and importantly, do so in a way that is seamless for our customers. We expect the IT integration to be completed by the end of the second quarter. As we move forward, we're confident that we'll meet or exceed our original synergy targets. Let me also say a few words about our commercial roofing business. Nick Hadden and the team continue to do a great job. As Robert mentioned, we announced the acquisition of Johnson Roofing this week and expect it to close later in the first quarter. Johnson Roofing generates about $29 million in annual sales and is based in Waco, serving the Texas, Louisiana and Oklahoma markets. The acquisition will enable us to maximize many of our relationships with general contractors in the area that serve the technology, industrial manufacturing and education verticals. We're really excited to continue expanding our commercial roofing platform in a very large and highly fragmented space, which looks a lot like insulation did 20 years ago. Finally, I want to echo my thanks to our employees across the network. We appreciate your hard work to lead your business, work safely and drive operational excellence in everything you do. With that, I'll turn it over to Rob.

Robert Kuhns, Chief Financial Officer

Thanks, John. 2025 marked our 10th year as a standalone public company and so I thought I would take a quick second to reflect back on our growth. Over the past decade, we have grown our sales and adjusted earnings per share at compounded annual rates of 13% and 31% respectively. This extraordinary growth has been the result of our unique business model that is driven by our people and culture. I want to take this opportunity to thank our teams in the field and at our branch support center for their efforts in delivering these results. And while we are proud of TopBuild's past successes, we are even more excited about the growth opportunities that lie ahead, which we detailed at our Investor Day in December. Before I dive into the numbers, I wanted to point out that we've provided a little more detail in our presentation this quarter to split out our same branch results versus M&A results. Given the sizable impact of the Progressive and SPI acquisitions that we closed last year, we thought that would be useful. Shifting to our fourth quarter results, total net sales were $1.49 billion, up 13.2% to prior year. Acquisitions contributed 23.0%, as both Progressive and SPI had solid quarters and exceeded our expectations. Pricing added 0.7% as positive price on gutters and mechanical insulation was partially offset by lower pricing on residential insulation products. Volume declined 10.5% driven by ongoing weakness in the residential and light commercial end markets. Turning to our segments, Installation Services sales of $798 million rose 1.2% compared to last year. The M&A contribution of 16.3% more than offset the volume decline of 14.5% and pricing decline of 0.5%. Specialty Distribution sales totaled $755 million in the quarter, up 25.5% versus last year. Acquisitions added 28.9% and pricing rose 2.2%. This was partially offset by a volume decline of 5.5%. Fourth quarter adjusted gross profit was $416 million with a margin of 28%, down 190 basis points to prior year. 100 basis points of the decline in margin was driven by a higher mix of distribution versus installation sales as a result of the SPI acquisition and weaker sales volumes in the legacy Installation Services segment. The remainder of the gross margin decline was driven by price/cost pressure and deleveraging on lower sales volumes. Adjusted SG&A as a percentage of sales in the fourth quarter was 14.1%, compared to 13.2% last year. The increase in SG&A was driven by acquisitions, including amortization of customer lists and trade names. On a same branch basis, SG&A was down $19 million or 20 basis points due to cost reduction actions taken during the year. TopBuild adjusted EBITDA in the quarter totaled $265 million, or a margin of 17.9%, down 180 basis points compared to prior year. The drivers of the EBITDA decline were the same as discussed with gross margin. Installation Services adjusted EBITDA margin was 21% in the fourth quarter, down 40 basis points year-over-year. Specialty Distribution adjusted EBITDA margin was 15.4%, down 230 basis points to last year's fourth quarter. Excluding the impact of M&A, EBITDA margins were down 80 basis points to prior year. Fourth quarter interest and other expense rose to $36 million due to the expansion of our credit facilities and the addition of the $750 million bonds due in 2034. Fourth quarter adjusted earnings totaled $4.50 per diluted share as compared to $5.13 in 2024. Moving to our balance sheet and cash flow, total liquidity was $1.1 billion at the end of the year. Cash was $185 million and availability under our revolver totaled $934 million. We ended the quarter with net debt of $2.7 billion, and our net debt leverage was 2.35x trailing 12 months adjusted EBITDA. Working capital was $959 million or 15.4% of sales. For the full year 2025 we generated $697 million in free cash flow. We deployed $1.9 billion for acquisitions and returned $434 million to shareholders via share buybacks. Turning now to our 2026 guidance, while there are signs for cautious optimism in our end markets, significant near-term uncertainty remains as the residential market continues to deal with challenges from consumer confidence and affordability. We remain highly confident around the long-term demand fundamentals and the 2030 projections we shared at our Investor Day in December. As we worked through our guidance for 2026, our overall philosophy at the midpoint was to assume no significant change in end market conditions. Under that lens, our 2026 guidance is for sales of $5.925 billion to $6.225 billion and adjusted EBITDA of $1.005 billion to $1.155 billion. The midpoint of our revenue guidance at $6.075 billion is based on the following key assumptions: Overall, we expect volume and price to each be down low-single digits in 2026. From an end market perspective, residential sales, which account for roughly 52% of our total sales, will be down mid-single digits, inclusive of both volume and price. Commercial and industrial, approximately 48% of our total sales, is expected to grow low single digits, inclusive of volume and price. We expect M&A, which we have closed in the last 12 months, to contribute $800 million to $850 million of revenue. The midpoint of our adjusted EBITDA guidance at $1.08 billion assumes the following: an EBITDA decremental of approximately 27% on lower volumes; $55 million of price/cost headwinds; and EBITDA margin on M&A in the mid-teens, inclusive of $15 million of Progressive and SPI synergies that will impact 2026. Those synergies are in line with our initial projections, and we remain highly confident in delivering at or above the high-end of our two-year synergies targets. With regard to the quarters, we expect quarterly sales to range between $1.4 billion and $1.6 billion and our EBITDA margins to range between 16.5% and 18.5%, with the first quarter being the weakest and the third quarter being the strongest. Finally, let me give you a few additional inputs for your models. We expect the combination of interest and other will be $143 million to $149 million. Our tax rate will be approximately 26%. CapEx will be between 1% and 2% and we expect working capital to be in the range of 15% to 17% of sales. With that, I'll turn it back over to Robert.

Robert Buck, President and CEO

Thanks, Rob. Let me close with a couple of thoughts on our outlook. On the residential side of the business, external forecasts vary with some optimism for the back half of the year. And while we expect demand will improve, it's not yet clear what that timing will be and it is too early in the year to bank on a second half recovery. This uncertainty is baked into our guidance as Rob discussed. Should the environment improve over the course of the year, we are very well positioned to capitalize. On the commercial and industrial front, bidding activity and backlog are solid and we are poised to capture growth in those verticals that are expanding. So, while near-term uncertainty exists, we remain bullish about the underlying fundamentals of our industry, our $95 billion total addressable market and our ability to capitalize on both organic and inorganic growth opportunities. We have a proven track record of success fueled by our unique, flexible and capital-efficient business model. We are well diversified between residential and commercial/industrial, between Installation Services and Distribution, as well as between cyclical and non-cyclical revenue. We have great control over our business, and we have demonstrated the ability to adapt quickly and navigate broader changes in the environment. Finally, we're disciplined stewards of capital. We have an active and robust M&A pipeline, and we'll continue to focus on compounding returns and delivering increased shareholder value. With that, operator, let's open up the line for questions.

Operator, Operator

Our first question comes from Sam Reid with Wells Fargo.

Sam Reid, Analyst

Maybe starting off with a big picture question. I wanted to dig a little bit deeper into the guide path for single-family starts as we move through the year. It sounds like you're rightfully embedding really no recovery here, which I think is probably the right call. We obviously do have a lot of detail from the public builders, especially on the production side on their outlook for starts. But just curious kind of what you're hearing from the private builders and perhaps any differences in what those private builder conversations sound like versus what the public sound like?

Robert Buck, President and CEO

Sam, this is Robert. So you're right. You get a lot of color from the public builders, which I'm sure you've seen in their guides as well as discussions that came out of the Builders' Show last week. I'd say the regional builders, the private regional builders are keeping very cost competitive there, pushing to make sure that they get their volumes and maintain their own compared to the public builders. And then I'd say on the smaller custom builders, they're probably the least impacted. So they seem to definitely be holding their own relative to demand when you think about their customer base as well. That's some of the color we see regional privates as well as the custom privates.

Sam Reid, Analyst

All helpful color there. And then maybe switching gears. It does sound like you're seeing some relatively solid backlogs on the commercial industrial side. But I did perhaps pick up on a little bit of a delineation between light versus heavy commercial. Would just love to hear kind of where we are on the light commercial side and maybe just talk through kind of how a recovery on the light side could potentially work.

Robert Buck, President and CEO

Yes. I think we typically see the light follow residential. I think we see some positive trending in some of our backlogs on the light side. As we talk about backlogs relative to commercial industrial, as we think about mechanical insulation, as we think about roofing, we see those probably trending at a faster clip. But typically, lighter commercial does follow residential. But we see some trending there in the right direction, we believe. But again, more optimism on the mechanical and the commercial roofing side.

Operator, Operator

And our next question comes from the line of Michael Rehaut with JPMorgan.

Michael Rehaut, Analyst

First wanted to also kind of delve in a little bit to the outlook and really focusing around the pricing trends. You mentioned that embedded in your outlook is $55 million in price/cost headwinds and also that your mid-single-digit decline for residential is inclusive of pricing. So I guess it's more of a revenue type of number. Just wanted to get a better sense for when you think about the $55 million, how much of that is negative price or if all of that is negative price? And how you would expect that to flow through and impact the results throughout the year, if it's going to be more first quarter or first half weighted? Just trying to get a sense of the degree of impact, particularly as we start out the year.

Robert Kuhns, Chief Financial Officer

Yes, Mike, this is Rob. So similar to last year, we started talking about these price cost headwinds, definitely something we started seeing pockets of in different markets as certain markets slowed, pressure picks up around that side of things. We obviously were pretty successful last year doing a lot to take cost out, both through negotiations with our suppliers, but also a lot of costs we took out in the business to help maintain margins. And certainly, that's going to be the focus and the things that we can control in 2026. But since the main tenet of our guidance was really around, hey, the environment here from a macro standpoint, we're not going to forecast it improving dramatically. We do think we'll continue to see those headwinds similar to what we saw last year. It pops up in different pockets and different markets as you go through the year. I'd say, just like we said last year, it probably progressively gets a little worse as the year goes on. But we definitely saw some of that pressure in the fourth quarter, not quite as much as we had thought in our guidance, but we thought it was prudent to continue that given the macro environment we're in right now.

Robert Buck, President and CEO

I would say, Mike, this is Robert. I'd say the teams in the field did a nice job. I mean they remain very disciplined. They were driving where they could the operational excellence piece that Rob talked about. But they did a nice job staying very disciplined during the year and to announce Johnson Roofing earlier this week. So we spent time in the first six months with Progressive, working the M&A process, working the integration of the M&A process. So we're in a really good space there relative to how our process works and even front end of identifying deals to diligence to the back-end integration. So we've made a lot of progress there. Very active on the front, I would say, smaller deals to bigger chunkier deals. And I would say, given the relationships that the Progressive team have on some of the smaller deals and some of the relationships we have in the industry, I'd say we're not competing right now in those bigger deals, but we are being disciplined. We're looking for good quality companies, and we're definitely building some relationships and evaluating several right now.

Michael Rehaut, Analyst

Great. That's super helpful. And then switching topics here a little bit. On the prepared remarks, I think you mentioned the realignment in the specialty distribution field leadership. Can you talk about that a little bit more and kind of what the intention was there?

John Achille, Chief Operating Officer

Yes. This is John. As far as the changes that we made, when you think of three distinct businesses that we have on the specialty distribution side, just making sure we have the right leadership in place. And I think coming off the SPI acquisition, we got some nice talent there that was able to accent with our existing talent. So just really good experience that we have leading those businesses today, driving the operational excellence that we expect of those teams. So that was really the biggest change there.

Robert Buck, President and CEO

I think it really speaks to the pace at which John and the team have really worked the integration piece. So really quickly getting the right leadership team in place, which, by the way, some of that was SPI folks from the SPI side, some of our folks from the DI side. So a nice mix of the team, which we think is driving buy-in and integration pretty aggressively here. And I think we said in our prepared remarks, we're highly confident in the top end or exceeding our synergy number that we talked about whenever we announced that deal.

Robert Kuhns, Chief Financial Officer

Yes. And just one more comment on that just around guidance, right? In terms of we've included the run rate that we signed up for, for year one around synergies. And if there's anything we see opportunity in this year in terms of overachieving the midpoint of our guidance, it's definitely around the synergies, right? And so that's why when we think about what we can do, we're about controlling the controllables. The macro is going to be what it's going to be, but we're focused 100% on driving these synergies and getting the results that we can control there.

Operator, Operator

And the next question comes from the line of Susan Maklari with Goldman Sachs.

Susan Maklari, Analyst

My first question is on the cross-selling opportunities that you highlighted in your prepared remarks as you're working on the integration of SPI. Can you give a bit more color on what those are and how we should think about them coming through?

John Achille, Chief Operating Officer

Yes, Susan, this is John. I would say that cross-selling for us primarily involves our team members communicating with each other. For instance, we might have a DI customer with whom we have a strong relationship, and they might be working on a project where we can also provide installed services. Currently, it's mostly about connecting our sales teams and managers. However, we plan to implement some digital resources in the future to leverage this strength, as we engage in various types of projects across our different businesses. It's an exciting opportunity for us, and we intend to invest in making this process seamless for our internal staff.

Susan Maklari, Analyst

Okay. That's helpful. And then as we do enter another year that seems like it could be fairly challenged as we think about the outlook for housing and the macro. Can you talk a bit about the cost structure across the business? How you're thinking about your positioning? Are there opportunities to perhaps make further adjustments in there? And what you're watching to determine if that needs to happen?

Robert Kuhns, Chief Financial Officer

Yes. I mean, Susan, this is Rob. That's something we're constantly monitoring, certainly something we have an advantage given a common ERP across our footprint, our ability to see activity going on in the business on a daily basis and make adjustments. Last year was a great example as we saw things begin to slow early in the year, we quickly took action. And we'll be doing the same thing this year, right? We're going to continue to monitor the macro situation, continue to monitor what's going on. More than 70% of our costs are variable. So we can adjust quickly and make changes where we need to.

Operator, Operator

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

Margaret Grady, Analyst

This is Maggie on for Phil. First, I wanted to dig into the pricing outlook. I mean pricing held up pretty well in the quarter and even stepped up in distribution, maybe a function of the end market exposure. But how should we think about that guide for down low single-digit pricing in the outlook between the two segments and how the $55 million price/cost headwind is split? And I think you also said fourth quarter or maybe it was 2025 total, you saw some inflation in gutters and spray foam and fiberglass saw some pressure. Any color on how that's trending into 2026?

Robert Kuhns, Chief Financial Officer

Yes, Maggie, this is Rob. The price cost category consists of a variety of products, some experiencing price inflation while others face price pressure and deflation. This is an advantage of our diversified model. We observed that pricing on the specialty distribution side increased in the fourth quarter, primarily due to a higher exposure to commercial products like mechanical insulation and an increased concentration of gutters in distribution compared to installation. Throughout last year, we began with some favorable carryover pricing in fiberglass, but as the year went on, that pricing faced pressure and declined in the latter half. Similarly, we saw solid price increases for spray foam, particularly in strong commercial mechanical projects. Gutters were affected by tariffs, impacting pricing as well. Overall, we achieved positive sales prices for the year, though it did slightly impact margins, roughly by about 10 basis points when considering costs, but it wasn't significantly detrimental. Looking ahead, we anticipate a similar market environment, expecting strong pricing on mechanical due to high demand, while we foresee continued pricing pressure on fiberglass and spray foam, which will be a major factor in the price challenges we expect for 2026.

Margaret Grady, Analyst

Okay. Got it. That was all really helpful. And next, on the margin guidance, the pressure makes sense with volume deleverage and the price cost headwinds you've outlined. But you're always doing stuff on the bottom quintile branches and the special ops teams to drive margins. Wondering if the outlook incorporates any of those productivity initiatives or if that could be upside to the guide? And then maybe just walk us through some different levers you have if demand is weaker than the outlook currently.

Robert Kuhns, Chief Financial Officer

Yes, this is Rob. In the prepared remarks, we aimed to outline the expected EBITDA margins for the year. As mentioned, Q3 is anticipated to be the strongest quarter, likely around 18.5%, or between 18% to 19%, while Q1 is expected to be closer to 16.5%. We are currently facing price cost pressures, but we've effectively managed to mitigate much of that through cost reductions, and we intend to continue this approach. Additionally, M&A activity, especially the SPI transaction, is impacting our margins. This acquisition, which was a 10% EBITDA business at the end of last year, is still around 10% today. However, we see significant opportunities for synergies, and our aim is to elevate that to the mid-teens this year. We anticipate improvements as the year progresses, which will play a crucial role in our overall performance this year. We're also focused on our cost structure and will continue to assess our environment. We've made necessary adjustments for the current volume situation, and if conditions worsen, we will take further action. Our volume guidance indicates a slight decline for the year, with a decremental of 27%, which factors in efforts to reduce costs. This is something we've successfully done in the past, and we're confident we can achieve it again this year.

Operator, Operator

And our next question comes from the line of Ken Zener with Seaport Research.

Kenneth Zener, Analyst

Can you discuss the shift toward being more residential focused? The guidance for residential is down mid-single digits. Can you explain the dynamics on the installation side, where we see a 15% decline, noting that some residential is going through specialty distribution, which is down 6%? Additionally, could you address why there is a drop in volume on the installation side and whether you observe a similar decline in the residential products that are not being installed?

Robert Kuhns, Chief Financial Officer

Yes, Ken, this is Rob. So from a volume perspective, on the install side in the fourth quarter, we definitely saw residential down single-family and multifamily as we've seen throughout the year, we would definitely say particularly December slowed down significantly. We were well ahead of our expectations at the end of November and then December slowed significantly on the residential side. And on the install side, our commercial business, as we've talked about throughout the year, about half of that business on the install insulation side is light commercial work. That's been slow throughout the year. So that also has been a drag on volumes on that side. So that's the residential side and light commercial side, really driven by the slower starts environment. On the specialty distribution side, because of the diversification of our end markets there, right, and now that being a much heavier commercial focused business, you're not seeing as big an impact. We definitely have the residential products down, and that's why volumes overall were down, but we were able to offset a good portion of that with a really good year in mechanical insulation and also on some of the other commercial products we move through the Service Partners side of things and through our metal building business.

Ken Zener, Analyst

Okay. Given your strong visibility on builder activities and the mid-single-digit decline, could you discuss the dynamics you’re observing in Florida and Texas? It appears that Florida is recovering from COVID more effectively than Texas. How is this affecting your business?

John Achille, Chief Operating Officer

Yes, Ken, it's John. On the residential front, Florida is looking a bit more optimistic as we observe signs of recovery. Compared to Texas, which remains somewhat flat or slow, we see a mixed situation between the two states. Taking a broader view across the country, the Northeast has had a flat start but I anticipate positive developments there, likely affected by recent severe weather. The Midwest also appears flat, but in the central U.S., there’s optimism in states like Arkansas, Missouri, and Iowa as a promising situation is developing. Moving west, Colorado is still slow to start, but in the Northwestern region, there looks to be a positive outlook in places like Montana and Utah. The only region that hasn’t shown signs of improvement yet is California, which I would say hasn’t fully hit rock bottom.

Operator, Operator

And our next question comes from the line of Mike Dahl with RBC Capital Markets.

Michael Dahl, Analyst

Sorry to belabor the pricing point. I just want to make sure we understand kind of the out-the-door pricing versus the cost you're taking. Our sense has been that on the residential fiberglass side, there is kind of low single-digit price pressure that the OEMs are also seeing. So if you're looking for down low singles on price out the door, is that worse for you in the residential insulation and that's why you're seeing the price cost pressure? Or just maybe a little more color on that kind of differential and what's actually driving that? And I think, Maggie, you asked this, but also maybe just another clarification on how much is assumed within the install versus distribution side?

Robert Kuhns, Chief Financial Officer

Yes, this is Rob. We don't provide guidance by segment, but I can provide some insight on pricing. There is clearly price pressure in the market that builders are facing due to challenges with affordability and demand. Manufacturers are experiencing this pressure as well, resulting in price reductions. It's important to note that pricing is a local decision in our business—builders are making thousands of local pricing decisions. We believe we effectively respond to local market conditions and manage that with our ERP system. However, given the current macro environment, we observed this in the fourth quarter, with some markets becoming more competitive and prices increasing. We aim to recover these prices, but even if we achieve that, it may still create margin challenges for us. We will do our utmost to mitigate this, but as we indicated in our guidance midpoint, we do have a headwind factored in.

Robert Buck, President and CEO

Mike, this is Robert. Just to build upon that. I mean, I think we've done exactly what we said, right? We talked about being disciplined in 2025, but volumes have stayed slower for longer. And so as they stay slower for longer, you get the things that John talked about in his prepared remarks where we're making some good disciplined decisions at the local level, which is what Rob just talked about. So disciplined. And then as things stay slower for longer, then we appropriately stay disciplined but pivot appropriately as well.

Michael Dahl, Analyst

Okay, I understand. That's helpful, and I appreciate it. My second question is about the commercial roofing dynamics. I value the high-level commentary you've provided. Given that this business currently has significant geographic concentration, could you explain what you're observing at the market level regarding commercial roofing volume growth? Additionally, what kind of growth is Progressive experiencing, and what assumptions are you making versus the market in 2026?

Robert Buck, President and CEO

Yes. This is Robert. I'll start by looking back. Progressive had an excellent 2025, showing solid organic growth and really strong performance in the fourth quarter. When we consider our ownership of Progressive during the latter half of the year, it reflects a job well done in '25. As we turn to 2026, I previously mentioned that our backlogs are increasing at a faster pace. Our presence in the Southwest, particularly in Arizona and Texas, is significant. Johnson, which we just acquired, is focused on Texas but has also worked in Oklahoma and Louisiana, giving us a solid footprint in that region. We engage in a lot of travel for those projects. Recently, we secured a major project in Idaho and have ongoing projects in Utah as well. For larger projects, travel is necessary. As we pursue mergers and acquisitions and consider our future, expanding our footprint is a key element. We anticipate a strong 2026 for commercial roofing, with backlogs as a leading indicator, and we are closely monitoring the Progressive team, which, as John mentioned, is doing an outstanding job. We are confident in building upon this platform.

Operator, Operator

And our next question comes from the line of Trey Grooms with Stephens Inc.

Trey Grooms, Analyst

So you guys have been realigning headcount and some other actions you've taken. When we get back into an eventual kind of recovery mode, I guess the question is, how much of these cost outs do you see as sustainable versus kind of what you need to bring back pretty quickly as you look at the different levers you guys have been pulling?

Robert Kuhns, Chief Financial Officer

Yes, Trey, this is Rob. I'll start. From a cost perspective, there's definitely a portion of what we did last year that we think will stick, right? I mean some of the facility consolidations, that rent cost isn't going to come back on us. Some of the back office fixed costs, we like to try to move on. We're trying to do things in the back office to automate and do things more efficiently. So our hope there would be to not have to add back as much on that side. And then obviously, the installer side, we're going to need to add back to adjust to the volumes as they go. But that's where our recruiting practices and our skill at doing that comes into play, and we've always outperformed at that. So we're confident we'll be able to adjust and get labor back as volume comes back.

Trey Grooms, Analyst

All right. I know you touched on this a little bit. As we look at the guidance on margins, you mentioned synergies as a potential area for upside, and you seem quite confident in that. However, when considering the high end of the margin range compared to the low end, we are specifically asking about margins. What other factors could influence reaching the high end versus the low end, apart from synergies? Will it be more related to volume, or could there be fluctuations in pricing and costs? What are the more likely factors that could swing in either direction?

Robert Kuhns, Chief Financial Officer

Yes, you touched on the two main factors. The higher end of our range definitely assumes increased volumes. If we see that, we expect our incremental margins to fall within the 22% to 27% range, which will help us raise margins at that volume level. Should demand strengthen, we would also anticipate improvements in the price versus cost dynamics. Additionally, we’re concentrating on our cost structure, as I mentioned earlier. We’re committed to what we can control and continue to pursue operational excellence. This year, we also have a unique chance to excel in this area thanks to synergies.

Operator, Operator

And our next question comes from the line of Adam Baumgarten with Vertical Research Partners.

Adam Baumgarten, Analyst

Just back to the price/cost outlook. I guess is it fair to headwinds, you noted that $55 million will be felt more acutely in installation than specialty distribution given the competitive behavior that you guys mentioned earlier?

Robert Kuhns, Chief Financial Officer

I would say that the price cost pressure on residential products has been more prominent in distribution. The labor component for installation presents less pressure. While we do experience some pressure on the installation side, it is not as significant. However, in distribution, the effects are less visible in the P&L due to the business diversification in that area. Therefore, you will likely see a greater impact on the installation side because of the mix of our business.

John Achille, Chief Operating Officer

Yes, it's quite challenging at this moment, especially since we're still clearing out in some areas of the country. This is definitely significant and has been factored into our projections regarding quarterly revenue based on what we understand today.

Operator, Operator

And our next question comes from the line of Reuben Garner with Benchmark Company.

Reuben Garner, Analyst

Most of my questions have been answered. I just have one about the commercial business and its outlook. I was curious about the data centers, which have been a major focus recently, but I would like to hear more about other areas that are contributing to growth in your mechanical and commercial segment. If you had to choose, do you think the mechanical side offers the most potential for improvement in your outlook this year?

Robert Buck, President and CEO

Yes, this is Robert, Reuben. As we consider various sectors, data centers are a significant topic of discussion. However, it's important for us to diversify our bids across multiple sectors to avoid over-reliance on any single one. Education is currently a major focus, followed by health care. We're also observing growth in manufacturing, as well as in the food and beverage sector, particularly on the mechanical side. We're seeing a broad range of growth in several areas, and we are actively bidding in all these sectors. We are confident that there will be growth opportunities, as Rob mentioned regarding the guidance on commercial industrial growth. We envision potential upsides for both revenue and profitability. We have discussed our commitment to leveraging synergies, particularly concerning the SPI synergies, and we are also confident about the smaller but significant Progressive synergies. Regarding our outlook on commercial roofing for 2026, we are noting positive trends in backlogs and contracts we are securing. Thus, we recognize commercial, industrial, mechanical, and roofing as areas of potential growth across various sectors.

Operator, Operator

And our next question comes from the line of Collin Verron with Deutsche Bank.

Collin Verron, Analyst

Just one for me. You talked about pricing in some of your categories, but I don't think you mentioned commercial roofing. I know it's a smaller piece of the pie right now, but it's growing. So I'd just be curious as to how prices are tracking there and if the price cost expectations differ from the consolidated company at all in 2026.

Robert Kuhns, Chief Financial Officer

Yes. In our guidance currently, any pricing related to roofing, at least for the first half of the year, is included in the M&A number. Overall, I would say pricing is relatively stable on the commercial roofing side based on what we are observing. There can be some variation in pricing depending on the mix of business, whether it’s a new roof or a reroof, and also which end market the new roofs are targeting. So there is some complexity there. However, from an overall pricing standpoint with suppliers, I would describe the environment as generally stable right now.

P.I. Aquino, Vice President of Investor Relations

Operator, do we have anyone else in the queue?

Operator, Operator

No. With that, that was the last question. So I would like to pass the floor back to Robert Buck for any closing comments.

Robert Buck, President and CEO

Okay. Thanks, everyone, for joining us today. We look forward to seeing many of you at the upcoming conferences. Thank you.

Operator, Operator

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time, and have a wonderful day.