TopBuild Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2025

Key Takeaways

  • Positive Sentiment: We completed the acquisition of Progressive Roofing, entering the $75 billion commercial roofing services market and beginning integration of best practices.
  • Negative Sentiment: Total top-billed sales in Q2 declined 5% to $1.3 billion, driven by continued weakness in residential new construction despite growth in heavy commercial and industrial.
  • Positive Sentiment: Adjusted EBITDA margin improved sequentially to 20.1% in Q2, reflecting cost optimization and supply chain efficiencies.
  • Positive Sentiment: The company is prioritizing M&A with a robust pipeline and returned $136 million to shareholders through share repurchases in Q2.
  • Neutral Sentiment: For 2025, TopBuild forecasts full-year sales of $5.15 billion to $5.35 billion and adjusted EBITDA of $970 million to $1.07 billion, with residential sales expected to decline low double digits.
AI Generated. May Contain Errors.
Earnings Conference Call
TopBuild Q2 2025
00:00 / 00:00

There are 9 speakers on the call.

Speaker 6

Greetings and welcome to the TopBuild second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce P.I. Aquino, Vice President of Investor Relations.

Speaker 4

Please go ahead.

Speaker 8

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 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.

Speaker 8

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. Let me now turn the call over to our President and CEO, Robert Buck.

Speaker 2

Good morning. Thank you for joining us today for our second quarter 2025 earnings call. With half of 2025 behind us, I want to start by saying how proud I am of everything our teams have accomplished so far this year. In July, we completed the acquisition of Progressive Roofing, establishing a new platform for growth in the large, highly fragmented $75 billion commercial roofing services market. The transaction aligns very well with our core strengths, expands our installation service offerings for commercial customers, and increases our exposure to non-cyclical, non-discretionary revenue drivers. Commercial roofing is a natural adjacency to our core insulation business with exciting potential, and we're delighted to welcome the talented Progressive Roofing team to TopBuild. Our teams are starting to work together, including sharing best practices and thoughts on an integration roadmap.

Speaker 2

We also took steps in the first quarter to better align our cost structure with the demand environment and optimize our footprint, including the consolidation of 33 branches across our network. On a daily basis, our team has put a great deal of effort into driving our performance, and I want to thank everyone on our team for continuing to strive for improvement across our business and delivering solid results. Our continued solid profitability in the second quarter is a testament to our ability to successfully navigate changes in an uncertain macro environment. We're pleased with our sequential improvement from the first quarter with our second quarter adjusted EBITDA margin of 20.1%, which is a direct reflection of the command we have over our business and is supported by our ongoing work to drive improvements across the business and our supply chain.

Speaker 2

Softness in residential new construction was partially offset by growth in heavy commercial and industrial, where verticals like technology, education, and health care continue to flourish. Total TopBuild sales in the second quarter declined 5% to $1.3 billion as the new residential construction market remained weak and single-family demand slid further on a year-over-year basis. While the housing market in the U.S. is still underbuilt, mixed economic signals, interest rates, and affordability concerns continue to weigh on consumer confidence, keeping some home buyers on the sidelines. We'll continue to closely monitor the macro environment. Turning to capital allocation, we have a robust pipeline of acquisition candidates and M&A is still our highest priority for deploying capital. In addition, the Progressive team has several acquisition opportunities in their pipeline. As always, we'll stay disciplined around valuation and focused on driving strong shareholder returns in the second quarter.

Speaker 2

We also repurchased just under 455,000 shares of our stock, returning a total of $136 million in capital to our shareholders. Before I turn it over to Rob, I want to give you a brief look back at our business, but also share with you some thoughts on how we're positioning TopBuild for the future. This past July 1 marked the 10 year anniversary for TopBuild as a public company. When I look back over that time, it's remarkable how much we've grown. When we spun in 2015, we had $1.6 billion in sales and mid single digit profit margins. Last year we were roughly $5.3 billion in sales or about a 14% compounded annual growth rate. With Progressive, we'll be more than $5.5 billion on a pro forma basis this year. Since 2015, we've also more than tripled our EBITDA margin.

Speaker 2

Our safety metrics have also improved as we stay focused on keeping our people safe. Ten years ago, about 85% of our sales were tied to residential and 15% of our sales were tied to the commercial industrial end markets. Now, having completed 44 acquisitions, we've grown our commercial industrial sales to approximately 40% of our total sales. This year we've successfully diversified our business and in doing so we've also improved our sales resiliency. About 20% of our total sales are considered recurring, non-discretionary or non-cyclical. As we look out, our runway for opportunity for growth is exciting. We have a total addressable market of nearly $95 billion for insulation and commercial roofing and are encouraged by our growth prospects.

Speaker 2

Let me give you just one example of how our business diversification positions us well for our next level of growth and more exposure to commercial, industrial and non-discretionary spend and reduced dependence on residential housing. Just last week our leadership team was on site at a multi-phase data center campus in Arizona. At the same data center campus, our now combined TopBuild family of companies was providing multiple services and products for the same contractor. The Progressive Roofing team was providing new construction roofing services for the first 200,000 square foot facility at the site, while our Distribution International team was delivering fabricated mechanical insulation parts, and prior to that, our local TruTeam business had provided building envelope insulation solutions in the form of fiberglass and spray foam installation. Currently, there are 324 data center projects under construction and 110 data centers that are in the engineering stage.

Speaker 2

We're also tracking nearly 2,000 more projects that are in the planning stage. This growing vertical, data centers, is just one example of the commercial and industrial projects for which TopBuild can now provide a full suite of service solutions. Let me conclude my remarks today by recognizing and thanking each one of our employees. Our success over the last 10 years would not be possible without the hard work and support of our talented and highly motivated teams. Rob, thanks Robert.

Speaker 4

First, I'd like to thank our teams for delivering another quarter of strong results in an uncertain macro environment. While weak demand in the residential markets continued, our teams have done an outstanding job adjusting our cost structure and driving profitability. In addition, our teams are continuing to drive profitable growth in heavy commercial and industrial end markets. Turning to the second quarter results, total sales declined 5% to $1.3 billion. Volume was down 7.8%, partially offset by M&A of 1.9% and pricing of 0.9%. Our installation segment sales totaled $780.7 million, down 8.3%, driven by a 10.5% volume decline, which was partially offset by acquisitions of 1.4% and pricing of 0.9%. The volume decline was driven by weakness in new residential construction and light commercial end markets. Heavy commercial projects continued to be a bright spot and posted solid growth in the quarter.

Speaker 4

Specialty distribution sales improved 1.1% to $599.2 million in the quarter. Acquisitions grew our sales by 2.3% and price added 0.8%. This was partially offset by lower volume of 2.1%. Lower volumes were driven by slower sales of residential products, which were partially offset by continued strong growth in mechanical insulation for the commercial and industrial end markets. Adjusted gross profit in the second quarter was 30.3%, and 70 basis points lower than last year. Adjusted SGA as a percentage of sales in the second quarter was 13.3% versus 13.6% last year. Second quarter adjusted EBITDA for TopBuild was $261.3 million, which was 20.1% of sales. Our EBITDA margin improved 110 basis points from the first quarter and was down only 20 basis points from the prior year. This strong profitability was driven by the cost actions we took in the first quarter and supply chain improvements.

Speaker 4

These savings almost entirely offset the EBITDA margin pressures from lower sales volume and price pressure on residential products in our specialty distribution segment. Installation adjusted EBITDA margin was 22.3%, up 120 basis points sequentially and flat versus the second quarter of last year. Specialty distribution adjusted EBITDA margin of 17.2% was up 90 basis points sequentially and down 50 basis points versus the second quarter of 2023. Other expense for the quarter was $16.2 million compared to $7.2 million last year. The increase is due to the combination of lower interest income from lower cash balances and higher interest expense from our expanded credit facility. Second quarter adjusted earnings per diluted share was $5.31 and compares to $5.42 last year.

Speaker 4

Turning to the balance sheet and cash flows, we ended the second quarter with total liquidity of $1.8 billion, of which $842.5 million was cash and $938.8 million was available under our revolver. Our total debt at the end of the quarter was $1.9 billion, $500 million higher than prior year due to the refinancing and expansion of our bank credit facility. This new $2.25 billion credit facility includes a $1 billion term loan, a $1 billion revolver, and a $250 million delayed draw term loan, all of which mature in May of 2030. Net debt at the end of the quarter totaled $1.1 billion and our net debt leverage ratio was 1.01 times trailing twelve months pro forma adjusted EBITDA. Year to date our free cash flow is $321.4 million, up approximately 38% from the prior year, primarily due to the improvement and timing of working capital.

Speaker 4

Working capital as a percentage of sales totaled 13.7%, which compares to 14.8% last year. We continue to prioritize our strong free cash flows towards M&A and in July we closed the acquisition of Progressive Roofing. This acquisition establishes a new platform for growth and expands the building envelope installation services we can provide for commercial contractors. We funded the transaction with cash on hand and proceeds from our expanded credit facility. Assuming Progressive Roofing was in our results for the second quarter, our net debt leverage would have been approximately 1.65 times trailing twelve months pro forma adjusted EBITDA. In the second quarter, we also repurchased shares totaling $136 million. On a year to date basis, we've returned a total of $351.6 million in capital to shareholders representing about 1.1 million shares. We have approximately $836.4 million remaining under the current authorization.

Speaker 4

Turning to guidance, as you saw in the release, we are issuing guidance today that includes the impact of the Progressive Roofing acquisition. For the balance of the year, we expect full year sales to be between $5.15 billion to $5.35 billion. Our assumptions are as follows. On a same branch basis including price, we are now assuming that residential sales will decline low double digits for the year, driven by continued weakness in both single family and multifamily activity. Commercial and industrial same branch sales are expected to be flattish to up low single digits. We expect heavy commercial to remain strong while light commercial will continue to be challenged. The full year impact of M&A is expected to add approximately $300 million to sales. Inclusive of M&A, total net sales will be flattish in the third quarter and up low single digits in the fourth quarter.

Speaker 4

As the fourth quarter will benefit from a full quarter of Progressive Roofing sales and the comparison to prior year is slightly softer, we expect adjusted EBITDA for the year to be between $970 million to $1.07 billion. At the midpoint of our guidance, our adjusted EBITDA margin will be 19.4%, a very strong profit performance. In closing, I want to thank our teams once again for their efforts and I would also like to welcome our new teammates from Progressive Roofing. As TopBuild enters its second decade as a public company, I couldn't be more excited about the growth opportunities that lie ahead for our company and for our shareholders. With that, I'll turn it back to Robert.

Speaker 2

Thanks, Rob. I want to express my confidence in the underlying fundamentals for our business. Our flexible and diversified business model enables us to deliver solid results. We have incredibly focused teams that have great control over our business. We've proven that we can adjust our operations as demand changes and expect to outperform in a changing environment. As always, we'll stay focused on driving profitable growth and increasing shareholder value. We are planning to host an Investor Day in New York on Tuesday, December 9th. We'll be sharing more details in the coming months and look forward to having you join us in person. With that, operator, let's open up the line for questions.

Speaker 6

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your.

Speaker 2

Question from the queue.

Speaker 6

For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Michael Rehaut with JPMorgan.

Speaker 1

Yes, thanks. Good morning, everyone. Thanks for taking my questions.

Speaker 2

First.

Speaker 1

I wanted to dive in a little bit to Progressive and, you know, just the impact on the second half, more so from the margin side if you expect that to be dilutive or accretive to margins and how you're thinking about the contribution in 2026, and I guess more broadly how you're seeing early opportunities, perhaps even from the sales synergy side as well.

Speaker 4

Sure. Michael, this is Rob. I'll start and Robert will jump in with the second half. In terms of our guidance, what we have baked in for Progressive, from a sales perspective, it's roughly about $215 million incremental for Progressive. Our guide last time was around $85 million. For M&A, we're up to about $300 million. The EBITDA that goes with that is going to be right around, in the neighborhood, a 20% EBITDA. It's really not decremental or heavily incremental to where we're running right now, pretty much in line with our core business.

Speaker 2

Yeah, Michael, relative to the question on cross-selling and the synergy piece, really excited about that. I mean, just that data center project I gave you the example of in the prepared remarks, that's one example. As we've started working with the Progressive team and looking at crossover and projects, customer base verticals, that type of thing, we definitely see an opportunity. I've already been on a few M&A visits with the Progressive team as well and talking to some, I must say, future companies that will be coming on board. We see that as well and some crossover where they have relationships with our installation contractors and stuff as well. We think it was a part of our model, but we definitely see upside to that as we're starting to work together.

Speaker 1

That's great to hear and obviously very exciting in terms of the multi-year prospects that whole vertical can lend itself to. Congrats on that. Secondly, appreciate also the, I guess, more challenging core business, specifically residential end markets down low double digits versus down high single digits before. Maybe you could just talk about that.

Speaker 2

Which.

Speaker 1

Parts of the business that's hitting more. Is it kind of equally on installation or distribution, and also just, you know, if there's particular areas of the country or, you know, any more color in terms of what's driving that softness and if we should expect perhaps a down low double digit rate, you know, into let's say 1H2026.

Speaker 2

Yeah.

Speaker 4

Michael, this is Rob. I'll start with what we've got baked into our guidance and what we saw. Robert can get into some of the details of what we're seeing across the country. We've adjusted our midpoint guidance around residential to be down low double digits from high single digits before. That's really primarily driven by deterioration in single family that we've seen. The guidance we had previously assumed things weren't going to get worse from what we saw in the first quarter. We definitely saw the starts environment slow down here in the second quarter, so we're baking that into the guidance. I'd say the other piece that's been a little bit softer is light commercial. Heavy commercial, as we talked about, has been strong, industrial has been strong, so seeing a lot of good growth there. Light commercial has remained challenged.

Speaker 4

We've eased up a little bit on the commercial guidance as well to being flattish to up low single digits. That's really the core changes in the guidance. Robert can take you around the country a little bit in terms of what we're seeing.

Speaker 2

Yeah, it's a mixed bag around the country, as you might expect, Mike. I'll give you a few instances. Here in Florida, where we are, South Florida is slow. Orlando has some positive trends. The Panhandle has some positive trends, but Jacksonville is slow. You move up to the Southeast. We like what we're seeing coming here in the Carolinas, and I'd say even optimistic up in the Northeast. In the Midwest, Texas is the mixed bag again. We like what we're seeing in Dallas and San Antonio, but Austin and Houston are slow from that perspective. Just a couple others, Colorado single family is slow, building some multifamily backlog in Colorado, so a little mixed bag there. Some better trends in multifamily, probably Vegas and Southwest. We see some positive things building in the Northwest right now. It's kind of mixed as you go around.

Speaker 2

A little mixed, multi versus single.

Speaker 4

Great.

Speaker 1

Do you have any thoughts about how that might carry over into the first?

Speaker 4

Half of next year?

Speaker 2

I think you're seeing some of the builders where they're coming out with the public builders as they're talking, as you've seen their guidance and stuff. I think we're aligned across the variety of size of builders there. We're definitely starting to bid work for the fourth quarter into the first part of next year. I think some of that multifamily that we're talking about and even seeing some of the starts that's probably heading into the first quarter of next year. That's kind of how we think about it and see it.

Speaker 4

Great.

Speaker 1

Thanks so much.

Speaker 2

Certainly.

Speaker 6

Our next question is from Susan Maklari with Goldman Sachs.

Speaker 8

Thank you.

Speaker 5

Good morning, everyone.

Speaker 4

Good morning.

Speaker 8

My first question is focus.

Speaker 5

Good morning. My first question is focused on the commercial industrial side of the business. Can you give us a bit more detail on how you're thinking about the volume versus price breakdown in there? Maybe with that, are you still seeing some of that momentum on the price side within that segment of the business that you talked to in the first quarter?

Speaker 4

Yeah. Susan, this is Rob. From a price perspective, what we talked about in the first quarter was we saw some incremental pricing on some of the mechanical insulation products and mineral wool products that we use on that side. Those definitely stuck through the second quarter. We're continuing to see that. The weakness is really, you know, from a volume perspective on the light commercial side of things, where we're down, you know, double digits, I'd say, on a year to date basis. We're up, you know, on the heavy commercial side of things more in the high single digits, almost double digits on a year to date basis. Seeing good growth there. The light commercial is weighing a little bit heavier on us right now.

Speaker 8

Okay, that's helpful.

Speaker 5

One of the things that you mentioned in your prepared remarks was improvements to the supply chain.

Speaker 8

Can you talk a bit more about?

Speaker 5

What some of those efforts are, how we should think about them continuing to flow through the business in the back half of this year, and any potential for additional opportunities there, and what those could mean for the business?

Speaker 2

Good morning, Susan, it's Robert. A couple of things to talk about. In first quarter we talked about some of the work we did in optimizing the footprint that's obviously coming through in supply chain savings for us relative to logistics, relative to even some productivity measures that we track as we work through that, as we've made sure we positioned our resources appropriately based on where work and jobs are happening. That will definitely be part of it. Obviously, working with our supplier partners, I think we've talked about openly around spray foam as an example. We're obviously working with those supplier partners as there's been some dynamics change there. We expect that to continue the back half of the year here as we're in constant discussions and constantly working to drive improvements in our business and working with our partners as well.

Speaker 8

Thank you for the color.

Speaker 5

Good luck with the quarter.

Speaker 2

Thank you.

Speaker 6

Our next question is from Phil Ng with Jefferies.

Speaker 7

Hey guys, congrats on a really strong quarter in a dynamic environment. I guess question for me is around pricing. Pricing was actually pretty solid in the first half. It's holding despite a pretty tough resi backdrop. Rob, I guess implicit in your guide and your conversations with your big builder customers, how are you seeing that pricing backdrop kind of unfolding? Obviously, they're dealing with a lot of affordability headwinds as well. On the flip side, the cost side, what are you seeing on that side of things, especially material costs, whether it's fiberglass or spray foam in the back half. When you kind of think about price costs, what's embedded in your guide and how you're thinking about it. Thank you.

Speaker 4

Yeah. So Phil and Rob, I'll start. Robert will jump in. I'd say what we've got baked in from a guidance perspective, similar to what we talked about last quarter, we do have some price-cost headwinds baked in, roughly $30 million of headwind in the back half of the year. Knowing that really the price in the first half of this year was driven by the carryover benefit of fiberglass pricing that hit kind of middle of last year, we're going to be rolling over that, no longer benefiting from that. As well as the commercial products that I talked about a little bit earlier, we're seeing the benefits of those. We do expect those to carry forward through the remainder of the year. Obviously, with that dynamic, the comparisons are going to get a little tougher on price.

Speaker 4

To your point, the builders are pushing out there and where necessary, we do make adjustments. We're definitely seeing the price impacts a little heavier, impacting the margins on the distribution side of the business, the residential side of the distribution business. Like I said, we've got some headwinds baked into the second half forecast. That's why the EBITDA margins are a little bit worse than the first half. Hopefully that proves to be conservative, but we got to see how that plays out.

Speaker 2

Yeah, I think, Phil. To add on to what Rob said, you can see the performance in the second quarter, you can do the calculation in the back half. Still very solid profitability. What that equates to is great work by the teams in the field from a few different things. One, driving productivity, working all elements, including labor productivity, sales productivity, where do we get, where do we pick up more volume and how do we leverage that relative to driving our efficiencies in the field. I think that speaks loudly to that. Also, definitely working our supply partners, you talked about the foam side, fiberglass as well. Continue to work with our supply partners here because we can provide some uncertainty in an uncertain environment.

Speaker 7

No doubt, Robert and Rob, I mean, that margin performance guidance for the year is pretty incredible given the current backdrop. True testament to the business. On your C&I side of things, any more color on how booking orders are progressing as well as the Progressive Roofing deal, any cancellation, project delays, and how's the order book looking into 2026?

Speaker 2

Yeah. Phil, Robert, I'd say solid as we look at, just give a few data points there. As we look at bidding, as we look at bidding activity, backlogs here, heavy commercial industrial looks positive, continues. I would say cancellations, nothing on the radar that we're seeing on cancellations. I'd say just, you know, obviously we've been working the relationship with Progressive for a while and now being part of our team here for nearly a month, love what we're seeing there and that team just does a fabulous job of continuing to work their relationships across multiple service areas and continue to build backlogs there as well.

Speaker 4

Yeah, Phil, I would just add to that. I mean, we were in Arizona with the Progressive folks about a week ago and they're really happy with where their backlogs are sitting right now, definitely stronger than a year ago. Feeling really good about that.

Speaker 7

That's really great, Card. Anyway, besides, on the stronger end markets in CNI that you're seeing, whether it's data centers or perhaps some of these LNG projects and whatnot, just kind of give me a little perspective and how impactful it is for your CNI functions.

Speaker 2

Yeah, a couple points there. Data centers, key one, if you think about power, power generation, which you got to have. You got to have that infrastructure relative to the data centers. I'd say that's another one to point to. By the way, as we think about power, you think about LNG, that's U.S. and Canada. I mean, our Canadian team is doing fabulous. Maybe look at their results. When we look at backlog there for the rest of the year, we're seeing that strength across verticals in Canada. I'd also point out definitely healthcare and then manufacturing, food, beverage, and then we're seeing it. Again, because of the relationships we have, we're seeing in education as well in some key markets.

Speaker 7

Okay, appreciate all the great color, guys. Continue the good work.

Speaker 2

Thank you.

Speaker 4

Thank you.

Speaker 6

Our next question is from Keith Hughes with Truist Securities.

Speaker 2

Thank you. You had said earlier on the call.

Speaker 7

I think you're about 40% commercial industrial sale. Did that include the roofing transaction, or was that before the transaction?

Speaker 4

That's inclusive of the roofing transaction.

Speaker 7

Okay. On Progressive Roofing, can you give us a feel how much of their business would be in the heavy commercial versus the light commercial? Something, you know.

Speaker 2

On the Progressive side of the business, by far the majority heavy commercial people.

Speaker 4

Yeah. The important part to remember there is that it's only 30% new construction. You know, 70% is reroof and services. To Robert's point, more towards heavy commercial projects.

Speaker 7

Does Progressive Roofing slant towards any one of the different applications, even CPO, anything like that?

Speaker 2

No, they're agnostic. They really got a great skill set there to provide any of the solutions, including, to Rob's point, you know, can handle it on, you know, construction, but definitely any of the applications from a reroof service maintenance perspective as well. Great, great skill set across the team there.

Speaker 7

Okay, and final question, as you progress in the second half of the year, those commercial numbers are, I think they're weakening. I think you said that in the call. Is there any, you know, signs of life in terms of order activity coming in that could point to something brighter in 2026?

Speaker 4

Yeah. Keith, this is Rob. I'd say, you know, on the heavy commercial side and some of the larger projects, we still feel pretty good given the backlogs we have there. Definitely feel good about the back half of the year. We'll have to see on 2026, but we're definitely bidding work out that far. Like I said, Progressive's backlog's strong there as well. The headwinds on the light commercial side are what's been the drag on that side of things.

Speaker 7

Okay, no light at the end of the tunnel on that yet.

Speaker 2

Not unlike commercial, to Rob Kuhns' point, I think we feel solid about heavy commercial on the industrial side based on the backlogs.

Speaker 7

Okay, thank you.

Speaker 4

Thank you.

Speaker 6

Our next question is from Stephen Kim with Evercore ISI.

Speaker 3

Yeah, thanks very much, guys.

Speaker 4

Appreciate it.

Speaker 2

All the color.

Speaker 4

Let me start on the M&A side.

Speaker 2

I think you had talked previously about.

Speaker 3

The fact that Progressive Roofing has superior margins to its competitors in the space.

Speaker 2

I'm curious as to how you.

Speaker 3

Think Progressive might go about raising any acquired entities, you know, kind of up to their level. If you could just walk us through what you think the opportunity there is and how you would go about capturing that, that would be helpful. You also have this other vertical where it seems like it's.

Speaker 2

Been a little quiet in the mechanical.

Speaker 3

On the industrial side, on the M&A side, notwithstanding the efforts at SPI or with SPI, curious if you can give us an update specifically on the mechanical and industrial pipeline, how that's looking.

Speaker 7

Thanks.

Speaker 2

Yes, Stephen, this is Robert. Good morning. Let me start on the Progressive side. Something that we spend a lot of time with, understanding and learning and seeing the track record. If you think back to our announcement about the transaction, it's really about the business system that Progressive has, and their ability to, you know, how they target jobs, how they bid jobs, even selecting the job there based on the scope of the bid, if you will, or the spec of the job, if you will. Obviously, as they get involved, how they engineer and how they track and manage the job, man hours, man days, and they've got certain checkpoints, if you will, throughout the process there of making sure that jobs are staying on track.

Speaker 2

That's really the business system and how they manage those jobs everywhere from what they go after to how they bid it to how they manage the job to make sure it's landing appropriately or exceeding. I'd say other things around, they're definitely, from a synergy perspective, things they bring to the table whenever they do a transaction. There are obviously going to be some of those that TopBuild adds as well. You're right, there's a variety of margins that we see across the M&A landscape and roofing. As we looked at those, and Rob and I've looked at some recent ones here, the record of what can happen there, high level confidence, and we would say generates a great, great return for our investors. Progressive, we dug into that, a lot of detail and high level confidence in their business system and how that works.

Speaker 2

I think relative to mechanical, you bring up a great point. We did two transactions in the space at the end of 2024, Shannon Global and then Metro. We've definitely got things in the pipeline here. Those companies have come on board, have gotten integrated, but we continue to have pipeline opportunities there. We've had a couple that we've walked away from because we continue to remain disciplined here and are going to bring on ones that are going to drive great returns here. There's definitely activity in that space, but we'll stay targeted there and we see opportunity continue to be on the mechanical side. That's a great, great question. As we said on the M&A standpoint, the core still has a lot of opportunity and Progressive's bringing in a ton of opportunity as well.

Speaker 3

Thanks for that, Robert. On the Progressive, the system that they.

Speaker 2

Are there proprietary computer systems?

Speaker 4

Software that they utilize, or is it.

Speaker 3

merely the way in which they utilize or employ just the standard type of computer systems or management systems that everybody else has? It's just they utilize them in a better way.

Speaker 2

I'll hit that from two or three different directions. Rob may have some additional comments here. I think what they've done from a job costing perspective, in that I'd say there's some things others don't have. You could call that proprietary, but I would just say their training, how they bring folks on board, how they train, the talent development, the focus on talent development, whether it be leadership in the field or whether it be from a sales talent perspective, they've got something they've developed there that works and that's how they've continued to scale the business. I think whenever we made the announcement, we talked about the organic growth rate. That's something that has led to that organic growth rate in that business. I'd say some proprietary, but I'd also say beyond what I call business system, some great training and talent development as well.

Speaker 4

Yeah. As Rob, I just add, I mean, I think, you know, similar to our business, it's a relationship business. Right. Nick and team do a great job of building relationships with key contractors and getting bids on jobs where they know they're going to have a right to win. Robert touched on it in terms of their job tracking and cost tracking that they do. They've developed and worked to put together a tool that's really helpful for them with that. It's really integrated not just into their accounting but into their operations. That's certainly not something we see with every company we've looked at in that space. While, as Robert mentioned, the margin profiles of other companies in the space are not as strong as Progressive's, that just makes a bigger opportunity for us in terms of what we can bring them to.

Speaker 4

That's another reason we're so excited about the space. Appreciate that.

Speaker 3

That's really clear. Last one for me, staffing. I think in previous calls you had.

Speaker 2

Indicated that you were.

Speaker 3

Reluctant to move too quickly on reducing staffing levels on the idea that you might see a recovery in volume and you want to.

Speaker 2

Be ready for it.

Speaker 3

Simply put, do you feel that given the modest deterioration in the market in the last several months, that maybe you're taking a harder look at staffing levels?

Speaker 2

Yeah, I'll start with that, Steven. You saw what we did in the first quarter. I think we appropriately calibrated with those actions. Our team continues at a local market and obviously, you know, the standard ERP gives us that insight to look at that on a market by market basis. We did a lot of calibration there at that first quarter action and I think what you heard us say is we didn't cut muscle. We feel like we're prepared for, you know, if there are uptakes and things that happen here. Yeah, we definitely, the team's taking the appropriate actions to this point.

Speaker 4

Yeah. I'll just add, Steven, we talked about last quarter those cost actions we took. It's between the lease costs and the people costs, north of $30 million a year in savings, and you can see the benefit of that in this quarter's results. Right. Our decremental was 23% for the quarter, same branch decremental. When you pull out the impact of M&A, so below what we've talked about as a target from 27%. Our full year guidance is closer to 29%, and that's because of the price-cost headwind we've got baked in that I talked about. I definitely feel like we've calibrated from a headcount standpoint to the volumes we're seeing right now. As Robert points out, we're going to continue to monitor that, and we'll take further actions if necessary.

Speaker 2

Perfect.

Speaker 3

Thanks so much, guys.

Speaker 6

Our next question is from Collin Verron with Deutsche Bank.

Speaker 2

Hey, good morning. Thank you for taking my questions. I just want to start to follow up on the Progressive Roofing here.

Speaker 7

I know you've only owned it for.

Speaker 2

Less than a month, but any early.

Speaker 7

Reads on how quickly you can start executing M&A in commercial roofing.

Speaker 2

What the deals in the Progressive Roofing.

Speaker 7

Pipeline look like from a size perspective.

Speaker 2

When you acquired it.

Speaker 4

Yes. So.

Speaker 2

Morning Collin, this is Robert. I'll start off. You know, we said a few things whenever we made the announcement about a month ago. Number one is there's some nice chunkier deals in the pipeline there. We've seen that, like I mentioned maybe on one of the previous questions, visited a few of those and Rob and I've started getting involved in the process, but Progressive's got a team there that's focused on it. That's why it is exciting. I think we said earlier we think the multiples stay pretty close to what you've seen in some of our traditional multiples for some of the side deals on the roofing side. Good activity there. I don't mind saying this. We're making an investment to make sure that the momentum of M&A keeps up on that side, at the same time staying disciplined.

Speaker 2

We think there's good opportunity there and we'll be excited to be talking to you about that in the future as well. Great, I appreciate the call. And then just one follow up question on the price-cost question.

Speaker 7

I think Rob Kuhns mentioned that it was a $30 million headwind in the back.

Speaker 2

Half of the year. Was that just a price comment?

Speaker 7

Was that a total price-cost headwind?

Speaker 4

It's both, really. It's more driven by the top line, but it's the net impact between it.

Speaker 2

Great, thank you. I'll leave it there and pass it on. Thank you.

Speaker 6

Our next question is from Ken Zener with Seaport Research Partners.

Speaker 2

Good morning, everybody. Morning.

Speaker 7

Ten years, Robert, long time.

Speaker 2

That makes me think because this quarter, you guys had a big footprint, you all said you're going to grow into your branches that would provide you operating leverage with your IT system, et cetera, et cetera.

Speaker 7

We by and large seen that. The concern was during a contraction which, you know, volume down 10% res. That's, you know, it's a modest one.

Speaker 2

You guys cut costs.

Speaker 7

Your SG&A is still, you know, percentage wise the same. Rob, you're talking about the second half price-cost headwinds that are baked in to your guidance.

Speaker 2

It's just you guys have been able.

Speaker 7

To handle the incrementals better.

Speaker 4

Right.

Speaker 2

Specific to the second half, positive.

Speaker 7

Negative factors, what kind of gets you, if you're guiding conservative to that 29. What are the things that you think about in the positive bucket that could get you more to what.

Speaker 2

You saw in the first half?

Speaker 7

What are the things that could go against you to get to that midpoint?

Speaker 2

Is it volume? Predominantly, yeah.

Speaker 4

Ken, this is Rob. Yeah, I mean volume is definitely a player in that. Right. I mean if the residential single family in particular environment continues to get worse from here, that could be a potential headwind. We're not hearing that at this point or projecting it to get a whole lot worse. I'd say it's going to be, our guidance has it a little worse the back half than the first half, but not a dramatic fall off there. I think commercial industrials, potential upside. Right. I mean, as we talked about in the past, those large projects can fluctuate quarter to quarter in terms of timing, but our backlogs are good, so we feel like that could be an opportunity. The back half of the year, I think the big ones that's different than the first half is price-cost.

Speaker 4

We've had kind of a price-cost headwind baked in throughout the year, being cautious. It hasn't cost us a ton so far this year. I think on the distribution side, you see a little bit of impact there. On the install side, not as strong at this point. Hopefully potentially that's a conservative assumption that gets us maybe in a little better spot. There's a lot of potential puts and takes there. I think all in all, we feel really good about the midpoint of our guidance. I think roofing is new. We got to see how they do. Like I was saying before, we feel good about the backlog of work they do or the backlog of work they have and the results we've seen so far, so feel pretty good about that as well as a potential upside, potentially the back half of the year.

Speaker 2

We estimate to the public builders, the res exposure you guys are, you know, call.

Speaker 7

It's 30%, give or take, to the larger builders. Top 10.

Speaker 2

Are you doing better with the publics, would you say, or with the private builders?

Speaker 7

Given your guidance, do you think that the public builders, which, you know, kind of more the smile states, you know, we all kind of know where they are.

Speaker 2

Is inventory more of an.

Speaker 7

Issue in those markets where the publics.

Speaker 2

Is it more on the private side? Thank you very much.

Speaker 4

Ken, I'll start on that. Robert will add on here. I'd say overall, what we're seeing year to date, the private and regional builders have held up pretty well. Custom builders especially, I think have done pretty well so far this year. In a tough environment, pretty well is relative, right, but they're hanging in there. I wouldn't say they're doing significantly worse than the big builders this year.

Speaker 2

I think your custom builders are doing well. I mean, I've seen, think about that client base for the majority of them. I'd say regional builders, look, regional builders have to sell what's coming out of the ground. They've done well, but they have to sell their inventory. We see that in our discussions with them and our bidding with them as well. I think that's where you see the pressure point with the regionals. Thank you very much. Thank you.

Speaker 6

Our next question is from Rafe Jadrosich with Bank of America.

Operator

Hi, good morning, it's Rafe. Thanks for taking my question.

Speaker 4

Morning, Ray.

Speaker 2

Morning.

Operator

I wanted to just follow up on some of the price-cost commentary for the second half of the year. The $30 million headwind, it sounds like that's predominantly price on the installation side. Are you getting any relief? Are you able to push back on the manufacturers yet? If we go into 2026 and say the market stays stable with where it is, remains soft, will there be more opportunity on the cost side of that price-cost equation, like could that narrow going forward if the backdrop stays consistent?

Speaker 2

Yeah. Morning, Robert. Look, there's an abundance of supply out there now, no doubt about it. Obviously, it's constant conversations with the supply partners to make sure we're calibrating. They're important to us, we're important to them. We're definitely having constant dialogue and conversations there. Mentioned spray foam earlier as a good example of that. There's definitely a consistent dialogue happening with the supply partners right now across the business, quite honestly.

Operator

You haven't seen anything on the fiberglass side yet, though it sounds like in terms of the relief from manufacturers.

Speaker 2

I'd say there's been equal discussions there as well.

Operator

Okay. In terms of the outlook for M&A on the commercial roofing side with Progressive Roofing, can you talk about your willingness or the level of leverage you would be willing to take for larger deals, just given some of the weakness on the core business?

Speaker 4

Yeah. Rafe, this is Rob. As we've talked historically, we're very comfortable between, you know, one and two times net debt leverage. That's where we've spent most of our time, but we have gone above that and we'll go above that for the right deals. With Distribution International and USI, we went up kind of north of two and a half times, so I think between two and three times. Certainly very, very comfortable there if we see a good opportunity from an M&A perspective. As we have in the past, we've always delevered pretty quickly after that. We would anticipate doing that if we saw the right opportunity there to do that.

Speaker 2

Great. Thank you.

Speaker 6

Our next question is from Reuben Garner with Benchmark Company.

Speaker 2

Thanks. Good morning, guys.

Speaker 7

Congrats on the strong results. Just one question from me. In the past few years, not a ton of focus, I don't think, from you guys on kind of growing your R and R business on the residential side. Not, you know, didn't have the time, didn't have the resources, didn't have the materials. Can you talk about that market? Is this kind of down cycle in new housing an opportunity to focus more there, or is that still not kind of top of mind for you guys?

Speaker 2

Yeah. Morning, this is Robert. I'd say, you know, our Service Partners team gets after that on the R and R side. Relative to the smaller contractor that's doing that work, that's definitely a focus of our distribution business on the Service Partners side. That continues to be a good part of the business, continues to be a healthy part of the business there because there are definitely, you know, smaller projects going on in the residential side. Our Service Partners team gets after that, and that continues to be a focus for our distribution side of the business. Thanks, guys.

Speaker 7

Good luck.

Speaker 2

Thank you.

Speaker 4

Thank you.

Speaker 6

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

Speaker 4

Okay.

Speaker 2

Thank you for joining us today and we look forward to talking with you in early November, where we'll be talking our Q3 results. Thank you.

Speaker 6

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

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