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Greetings and welcome to the TopBuild Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tabitha

Thank you and good morning. On the call today are Robert Buck, President and Chief Executive Officer; and Rob Kuhns, Chief Financial Officer. We have posted senior management's formal remarks and a PowerPoint presentation that summarizes our comments on our website at topbuild.com. Many of our remarks will include forward-looking statements, which are subject to known and unknown risks and uncertainties, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Please note that some of the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in our third quarter presentation, which can also be found on our website. I will now turn the call over to Robert Buck.

Good morning and thank you for joining us today. With one quarter left in 2023, this year has exceeded our expectations with solid profitable growth. Our strong results are testament to our team's hard work, perseverance and strategic focus on growing our multifamily and commercial work as well as our continued emphasis on operational excellence and driving improvements throughout all areas of our business. Total sales for the nine months were up 4.4%, our gross margin has expanded 130 basis points to 31%, and our adjusted EBITDA margin has expanded 160 basis points to 20.4%. Reviewing our third quarter results, our Installation segment was able to drive efficiencies and grow revenue 4.9% despite volume contracting from the slowdown in single-family starts earlier in the year. To offset the single-family decline, our branches have actively and successfully targeted multifamily and light commercial work. On the commercial installation front, our dedicated heavy commercial branches are reporting strong bidding activity and are winning their fair share of projects, building up our already solid backlog. As a reminder, we are agnostic as to the types of projects we work on and are not over-indexed to office or any other type of heavy commercial job. Current projects we are working on include renovation of the SeaTac Airport in Washington State, the new Hard Rock Casino in Virginia and several large medical projects. In total, our commercial installation business grew 9.4% in the third quarter compared to the third quarter of 2022 and year-to-date, it is up 13%. Turning to our Specialty Distribution business. Overall sales in the second quarter declined 2.1% primarily as a result of a 1.9% decline in price. The greater availability of fiberglass and spray foam in the quarter put pressure on market pricing. As residential distribution volumes continue to normalize, our teams are doing a nice job of identifying and building attractive new areas of growth, as our overall results demonstrate. We are pleased to see a 1.7% increase in sales from our commercial and industrial channels. Our Specialty Distribution segment continues to support many major commercial and industrial projects, including the Salt Lake City International Airport and the new Intel chip factory in Arizona. We're also seeing quite a few major projects being planned across several diverse industries fueling the demand for mechanical insulation. Maintenance and repair work on many commercial and industrial sites is also being scheduled and this revenue stream should serve as a continued stabilizing revenue driver. We remain very optimistic about the opportunities for growth in both the commercial and industrial end markets in the US and Canada. We've also entered into the second phase of our growth strategy and operational improvement initiatives relating to our specialty distribution model. Over the past two years, we've identified many cross-selling opportunities, including areas of the country where either DI or Service Partners does not have a presence but where there is demand for their respective products and services. In 2024, we plan to co-locate some DI and Service Partners operations, effectively expanding our footprint where we already have existing operations and established customer bases without the investment generally associated with opening a greenfield location. More details to come next year as we continue this process to drive organic growth. Moving to material in the quarter, fiberglass is more readily available than it had been earlier in the year. As a result, some of the manufacturers have pushed the September price increase out until later in the year. Over the past month, however, material has started to tighten. Obviously, single-family starts will be an important bellwether for the industry as a whole as they move through 2024. Also, as a reminder, maintenance on production lines has an impact on product availability, and we work closely with our suppliers to effectively manage our inventory. On the capital allocation front, year-to-date, we've completed 4 acquisitions, which are expected to generate almost $173 million of revenue on a pro forma full year basis. One of these acquisitions was completed this month, Panhandle Insulation, a residential installer generating approximately $5.3 million of annual revenue. In July, we also announced our intention to acquire Specialty Products and Insulation, or SPI, a North American specialty distributor and custom fabricator mechanical insulation and a special distributor of building insulation to the industrial, commercial and residential end markets, generating approximately $700 million in annual revenue. This transaction is currently going through regulatory review, and we expect to close in 2024. We are working closely with the SPI folks to ensure the integration process is smooth once the transaction closes. As we've got to know the SPI team even better, our confidence about the potential of this transaction has only increased. This well-run company has a strong operations team and a culture that aligns well with TopBuild. In the first 12 months, our focus will be integrating SPI onto our systems and supply chain and to further identify operational efficiencies and improvements across our entire organization. We are very confident we will achieve the $35 million to $40 million of run rate cost synergies we've targeted over the first 24 months. Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical insulation specialty distributors. We expect to remain very active on all three fronts going forward. Acquisitions remain our number one capital allocation priority, generating, by far, the greatest return for our shareholders, as evidenced by our return on invested capital, which increased from 8.6% in 2017 to 18.5% at year-end 2022. In summary, we had a great third quarter, and we are on track to report another solid year as evidenced by our increased 2023 guidance, which Rob will discuss. Our team continues to execute well, and our diversified model positions TopBuild to outperform in any environment. Rob?

Thanks Robert and good morning everyone. We are pleased to report another strong quarter of profitable growth, a reflection of the continued success of our focused strategy and the hard work of our teams. Our third quarter net sales increased 1.9% to $1.33 billion. Breaking that down, our Installation segment's third quarter net sales were $821.7 million, an increase of 4.9%, driven by M&A of 4.8% and price of 3.6%, partially offset by a 3.5% decline in volume. While multi-family sales remained strong throughout the quarter, we did not see the traditional second quarter to third quarter increase in single-family activity due to the slower single-family starts earlier this year. As the third quarter unfolded, single-family sales began improving each month in line with the growth in single-family starts that occurred beginning in May. I also want to highlight that the strength of our diversified end market strategy was evident as our commercial sales for the Installation segment grew 9.4%, driven by strong activity from both light and heavy commercial projects. Specialty Distribution net sales were $571 million, a 2.1% decline from prior year, primarily due to lower prices. Specialty Distribution residential sales were down 7.5% as a larger percentage of construction activity continues to be focused on multi-family, a channel with lower participation from the smaller installation contractors we service. Specialty Distribution's commercial and industrial sales were up 1.7% in the quarter. Third quarter gross margin expanded 130 basis points to 31.7%, driven by operational efficiencies and strong margins on Installations multi-family and commercial projects. Normally, the margins on these larger commercial and multifamily projects are similar to what we see on the single-family side. However, on many of our recent projects, our teams have done a tremendous job delivering higher margins through outstanding execution. Third quarter adjusted EBITDA increased 9.4% to $283.7 million, and our adjusted EBITDA margin was 21.4%, a 150-basis point improvement compared to last year. Adjusted EBITDA margin for our Installation segment was 23.7%, up 210 basis points and driven by the gross margins discussed earlier. Despite lower sales, Specialty Distribution segment delivered an EBITDA margin of 18.2%, a 20-basis point improvement from productivity and continued realization of synergies from our acquisition of Distribution International. Other income and expense was $2.1 million lower than prior year as higher interest expense on our variable term loan was more than offset by higher interest income from our cash on hand. Adjustments to net income were $8.4 million and primarily related to acquisition-related costs and the opportunistic disposition of a small non-core business. For the quarter, adjusted earnings per diluted share were $5.43, a 13.1% increase from prior year. Moving to our balance sheet and cash flows, our working capital as a percent of trailing 12-month sales was 14.6%, 90 basis points lower than a year ago. We have worked hard over this past year to get working capital in line with our long-term guidance of 12% to 14%, and this has helped drive our 75% increase in year-to-date operating cash flow from prior year to $588.5 million. September year-to-date CapEx was $48.1 million, approximately 1.2% of revenue. In addition, year-to-date, we have allocated $147.6 million to acquisitions. We ended the third quarter with trailing 12 months EBITDA to net debt leverage of 0.79 times. Total liquidity at September 30th, 2023, was $1.1 billion, including cash of $615.6 million and an accessible revolver of $436.2 million. Moving to annual guidance, we expect to close out 2023 with a strong fourth quarter and have adjusted guidance accordingly. We are projecting total 2023 sales to be between $5.13 billion and $5.21 billion, a $105 million increase on the low end of the range and a $35 million increase on the high end. Breaking that down, same-branch residential revenue is expected to be relatively flat for the year, and same-branch commercial and industrial revenue will be up mid-single-digits. We have also raised our 2023 guidance for adjusted EBITDA to be between $1.025 billion and $1.055 billion, a $75 million increase on the low end of the range and a $55 million increase on the high end. Our long-range modeling targets are unchanged. I will now turn the call back to Robert for closing remarks.

Thanks Rob. As 2023 draws to a close, we are very pleased with how this year has progressed and our results once again demonstrate the strength of our operating model and the hard work of our TopBuild team. In addition to successfully managing inflation, we continue to make operational improvements throughout our organization as we drive both growth and profitability. I'm also pleased to report that our MSCI ESG rating improved from A to AA, a direct result of the hard work of our dedicated sustainability team. We made great strides over the past few years, and our ratings improvement reflects this progress. In closing, I thank the entire TopBuild team for their focus on working safely to deliver value, quality, and service to our customers. Operator, we are now ready for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Mike Rehaut with JPMorgan. Please proceed with your question.

Thanks and good morning everyone. Congrats on the results.

Thank you.

I wanted to focus first -- you kind of mentioned some of the improvement that you saw during the quarter from single-family new res -- from, I guess, some of the improving trends in the second quarter. Given how that's trended through year-to-date, I was curious if you had any early views around -- at least the first half of 2024? And as the market is kind of shaping up -- and obviously, there's a lot of volatility currently in the market. But any thoughts on how single-family, and for that matter, multifamily and non-res, are at least shaping your views early on for the first half of 2024?

Hey, good morning Mike, it's Robert. So, as we mentioned, the quarter started out slower on the single-family side as we progressed through the quarter, we saw single-family activity pick up as we think about ending the year going into first quarter next year. The public builders continue to be optimistic. You've heard it on their call. Majority of them are looking for growth next year. That's what we hear from them and see as well. Some of the smaller builders, a little more, I'd say, talking more flat next year. But right now, heading out of Q4 heading into Q1, we expect single-family and given some of that pickup in starts that you saw coming in May and June to carry forward. From a multifamily perspective, definitely, backlogs are down slightly, but we say still very healthy. We think that demand carries into 2024 as well. So, I think overall, we remain positive. We'll see what happens here with the single-family starts as we finish up Q4. And that will be the bellwether as we get into Q1, Q2 of 2024.

Great. Great. No, I appreciate that. I guess, secondly, when you think about insulation capacity currently and perhaps what the industry has planned for the next six or 12 months, do you anticipate any significant change in either availability of product, or for that matter, pricing to the extent that capacity might change and, let's say, in a more stable or just moderately improving backdrop, how that might impact industry pricing or the ability to push through price increases over the next six or 12 months?

Yes. So, as we mentioned in the remarks, materials had tighten as we finished Q3 and now in Q4, with definitely at least one manufacturer documenting allocation in the market. And I think that's supply driven, given the maintenance that's going on really across the industry. So, I think gets into two dynamics. You've got maintenance, which a lot of manufacturers have maintenance planned and announced. And then, again, the single-family starts will be that kind of bellwether point. So, as maintenance and single-family keeps up, from a curve perspective are growing, I think you see material stay tight as we head into 2024 into Q1 here and possibly definitely into Q2, again, given that maintenance schedule and if we see the single-family starts continue to grow.

Great. Thanks so much.

Thank you.

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

Yes. Thanks a lot guys. Appreciate it. Just to clean up a couple of those that Mike just asked. So, first of all, regarding the rebuilds, our sense is that we're going to have an unusually high level of rebuilds across the fiberglass industry in 2024, which we're expecting to at least offset the capacity additions that are planned. Curious as to whether or not you would agree with the magnitude of the rebuild in 2024 being higher than normal? If you could just sort of comment on that, relative to what a normal year is? And then regarding the drag from single-family being offset by the multifamily and light commercial, just to get a sense. I'm wondering whether the drag from single-family was about equal to the 7.5% decline you saw in your spec distribution business that you referenced? And if so, does that mean that multifamily and light commercial sort of recovered back about 400 basis points, just strictly talking volume?

Hey, good morning Stephen, it's Robert. I'll take the first part of that on the material and rebuild side. So, yes, I think it is a little above average, what we're seeing scheduled for the rebuilds in the industry and enough Q4 and heading into 2024. Some of the manufacturers haven't exactly nailed down when those rebuilds start. So, it's kind of hard to say what that does with the capacity coming on. But given those rebuilds and if that single-family start number continues to improve, yes, I think you could see material stay tight in 2024, at least to start the year until some of those rebuilds get finished. And that new capacity comes on, just a reminder that new capacity comes on sometime around end of Q2 and early Q3. And as always, we're staying close to the manufacturers, we have good insight into that.

Yes, Stephen, and then this is Rob. On the second part of your question there around the single-family decline we saw on the install side. I'd say you're in the ballpark there. The decline we saw was definitely in that mid-single-digits that we saw in the Specialty Distribution side, right? And that really just goes to show you what we've been talking about here in terms of multiple avenues for growth. What we were able to do on the installed side of the business this quarter by completely offsetting that with growth for multifamily and commercial.

Okay, that's encouraging. And then you talked about the fact that margins in commercial and multifamily were stronger than single-family, and that's rather unusual. I was wondering if you could comment a little bit on maybe what drove those higher margins in commercial and multifamily. And you talked about multifamily demand carrying into, I think, the middle of next year. But given the starts we're seeing in multi, is it also reasonable to think that maybe that might crest in midyear and become a little bit of a headwind in the back half of 2024?

Yes. So, Stephen, to your question on margins, we talked a little bit about at last quarter that on the commercial side, the multi-family side of things, these larger, more complicated projects on average, the margin is going to be similar to single-family. But back in Q3, we mentioned it, we probably had about 80 basis points of benefit, about $10 million due to just out performance, both operationally as well as -- we bid a lot of these projects early on. And -- I meant back in Q2, we had that happen. We bid these projects, maybe anticipating some inflation. So, we've performed very well on those jobs. And here in Q3, we probably had another 110 basis points, call it, about $15 million of benefit from that. So, that benefit we're not baking into our guidance going forward. We're certainly -- and it's part of our culture of constant improvement to try to continue to achieve those levels. But it's not something we're baking into our guidance moving forward.

All right. Thanks very much guys.

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

Hey everybody. Congrats on the strong results and thanks for taking the questions.

Thanks Joe.

If we could just talk about the commercial business and the outlook going forward, I think there's some leading indicators showing some potential weakness and commentary from others in the industry about certain end markets within commercial, but you held the commercial and industrial revenue guide flat. And I'm just curious if that is purely a reflection of the backlog you have now and just how you might be thinking about the sales opportunity there year-over-year into next year?

Hey, good morning Joe, it's Robert. I think it just really speaks to what we've built and what the teams in the field are doing. So as we mentioned, we're agnostic to the type of projects. And as we bid our work, we're looking at that mix of business as well as to what we're bidding. So, it gives us a lot of bandwidth. So, I think if you look at our light commercial work -- which just a reminder, the majority of our -- really all of our residential branches do that work, and then our heavy commercial dedicated branches do that. So, we see that as -- we're growing share from that perspective. And quite honestly, it's part of the -- part of the business that we're investing in. I'll give you a couple of examples. One is sales force. We're continuing to add sales talent in that area across commercial, industrial, light, heavy, really across the business. And then number two, you've heard us talk about our Lead App tool that is really a fabulous tool for really bringing together leads across the business that exists today, and that's being rolled out to our industrial business here in the future. So, I think it's -- we're optimistic about the growth there, and we're really confident of our ability to outperform in any environment based on the model that we built around commercial and industrial.

That's great. And then also something you said in the prepared remarks piqued my interest around the co-locating of the branches. It sounded like this is more of a sales expansion effort, not really a cost reduction or consolidation -- footprint consolidation effort. I don't think you mentioned this as part of the DI acquisition. First, do I have that right that this is sort of incremental that what you've talked about? And then I understand it would be difficult to quantify it certainly in advance, but can you give us a sense maybe of how extensively you're going to pursue this strategy?

Yes. So, we think there's a great opportunity here as we look across -- you're really -- you're right, it's incremental. And we said earlier, when we did the DI acquisition, we thought there were cross-selling opportunities, and we get after those after that first round of improvements and synergies that we delivered on. So, yes, we think it is a great opportunity where a great footprint with DI, great footprint of Service Partners, now we're leveraging the best of the two as we look across. And early on, I'd say we've identified, I'm going to call it, eight, nine, 10 locations that we'll be looking to move forward with. And hard to quantify to your point, but we think this will be great where we have existing customer bases. Now, we can serve them better, and we will grow in those areas given the footprint that we would capitalize upon.

Good stuff. All right. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Ken

Good morning everybody.

Good morning.

Focusing on distribution and kind of the commercial side, can you talk to how the recurring maintenance repair piece of that business, if you could talk about like what percent that is today? As well as with the SPI acquisition, if that's something that has been helping you guys relative to the market, whatever that end market demand is?

Yes. So, as we think about it today, Ken, that's probably about 25% of that Specialty Distribution revenue today. And then with the future of SPI, that gets up to about a third of the revenue. So, yes, we think it is a stabilizing piece of the business, and it really goes across Service Partners, DI and SPI, whether you think about recurring items such as PPE around safety or whether you think about some of the extreme conditions that some of the mechanical insulation is exposed to refineries, food and beverage, those types of things that really requires some regular repair and maintenance on those products. We think it's a great part of the business, and it's something that we'll continue to build upon.

And just one thing to point out there, Ken, on those numbers for the quarter on the commercial side for Specialty Distribution. I mean, it was 1.7% growth, but we also had one less day than prior year. As well as we were comping a pretty tough quarter. So really, the average daily sales for us in the commercial industrial side, for Specialty Distribution was a record this quarter. So, a really strong quarter there.

Yes. Rob, just sticking with that, I mean, it looks like an up 6 comp last year. And then it's been down 5, down 3, down 3. Is -- does that imply that you might be going up against these easier comps? Or how should we think in terms of that perhaps next year?

Yes, I think I'm not sure the numbers you quoted there because I think on the Specialty Distribution side, we would be up each quarter this year for sure on the commercial, industrial side. But going into the fourth quarter here, I can tell you, it's a pretty tough comp there. We grew on a same-branch basis, around 7% last year on the Specialty Distribution side. So, a pretty tough quarter. And typically, the fourth quarter on the mechanical insulation side, things do slow down a bit. So, the activity is a little bit slower, especially in December.

All right. And then I guess, just relative to the operating leverage you got, price is kind of flattening out. We don't know what's happening. But obviously, your labor pool, your piecemeal contracting. Can you talk about the different pressures that margin faced, relative to your material price, the labor, gas? Obviously, with the auto strikes, that's not an issue for you guys. But you're still indicating labor is tight, therefore, it would seem to be inflationary on that side of the business.

Yes, Ken. So, you're right. I mean, on the material front, definitely seeing inflation slow down on that side. The price increase that was announced in Q4 has been pushed out. And on the labor side, we do all we can to get after that with productivity. It's really been one of the secret sauces of our success, particularly on the install side, where the majority of our workforce sits. The fact that we pay them on a piece rate allows us to align their incentives with ours, right? And the more productive we can make them, the more money they can make at the end of the week, which is what they care about. So, we've done a really good job of offsetting labor inflation on that side with productivity as well as price. And nobody has done a better job of that, I think, and we'll continue to do that moving forward as well.

Thank you.

Thank you. Our next question comes from the line of Adam Baumgarten with

Hey good morning everyone. You mentioned that the [Indiscernible] insulation price increase was pushed out. Do you expect that to still be kind of having realized, just given the uptick in demand? Or is that potentially at risk of not being realized at least from the manufacturers?

Yes, morning Adam, it's Robert. I think a little hard to say and that has been pushed out and the traction wasn't as much in September. But given its tightened up here in October, -- and the -- again, the maintenance that we talked about earlier, I think it's probably got some better traction coming. And as we've always talked about before, we stay close to the manufacturers relative to that and have ongoing discussions.

Okay, got it. That's helpful. And then just on SPI, I mean it's been a few months now since you guys announced the deal. Just any incremental benefits that you're starting to see in the business as you kind of get under the hood here?

What we would say there is as we've gotten closer with the team there and just really, obviously, what we can do is planning, integration and how that would look on the other side, our confidence level just continues to rise and strengthen. I mean, it's a great team there. Great operations team as well as throughout the business, including the leadership team there. So, I think our confidence continues to grow as we talk about integration, what that looks like, things about systems leverage, tools, those types of things. So I think you heard it in our prepared remarks, our confidence continues to strengthen there with that acquisition.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Please proceed with your question.

Hey guys. I have a quick question on how we should think about the volume cadence through this year going to early next year. You mentioned, Robert, that single-family -- the pickup in single-family starts kind of started flowing through later in the quarter. So, have volumes effectively bottomed out here, and maybe we see an inflection by early next year? And then on the multifamily side, I mean we could all appreciate, starts at an all-time high right now. But similar to single-family this year, there's a lag dynamic on completion. So, as it relates to completions on the multi-family side, what kind of impact should we expect on demand for you next year, just because there's certainly some concerns around multi-family right now?

Yes. So, this is Rob. So on the volume side of things, as you look at the guidance we've put out there, I'd say if you back into it from a same-branch perspective, we're looking at kind of flattish fourth quarter there. And that's probably with flattish volume, flattish price on a year-over-year basis. So some improvement on the single-family side, but also the seasonality that usually comes in the fourth quarter. We're not anticipating a significant jump up there. And then to your point, as we move into next year, we're definitely cautiously optimistic that single-family will continue to improve as it has. Obviously, we've got to see how things play out with interest rates and the impacts of that. But we're cautiously optimistic there. And the backlog we have on multifamily, we definitely feel it's going to last us into next year. How far that's going to last into next year, we'll make that part of our guide when we talk to you in February.

Okay. And on pricing, on your distribution side of things, pricing was down a little bit, do you see more risk of slippage from here? Any impact -- I mean, it didn't impact your margins in a meaningful way, but in any way if you think about the impact there? And any color where you're seeing more pressure, I guess, perhaps in spray versus fiberglass?

Yes, Phil, this is Rob. So, I'd say the pressure we saw there in the quarter was primarily driven by spray foam and gutters. And so as we move into Q4, I think I don't anticipate it getting significantly worse from where we are. But it's something certainly we'll keep our eye on. And as you mentioned, we're going to do our best to maintain our margins and recover on the material side, anything we give up on the price side.

Okay. Thank you. Appreciate it.

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

Good morning and thanks for taking my questions. So, first, I know there's been a lot of talk about price here, but you've got pricing moving in two different directions on these segments on installation versus distribution. I guess just going forward, should we continue to expect some higher -- I guess, a greater amount of pricing power in the Installation segment that even if we do see material availability increase, that the installation pricing should outperform compared to distribution?

Yes, good morning Noah. It's Robert. So, as you look at that, obviously, Rob mentioned that we saw some pressure on the distribution side, spray foam gutters and some fiberglass as well in the quarter. And I think about the install side, I would -- do know what happened there more to productivity than our pricing. Again, where the team just continue to work the labor efficiency, sales productivity. And again, we talked about some of the tools that we put in place on that side of the business. So, I think you'll continue to see the team work, operational improvements and efficiencies in the business, but I have noted more to that, now we're on the pricing side. And I think we'll see what happens relative to the demand curve here. But as Rob mentioned, we see material getting tighter here in the quarter, and we'll see how that plays out for the rest of the year and heading into 2024.

Noah, and this is Rob. I'd just add to that. I mean, just historically speaking, price tends to be a little stickier on the install side than it is on the distribution side of things.

Got it. That's helpful. And then on my follow-up, leverage here, really low, below one turn. How are you thinking about balancing capital allocation towards M&A versus share repurchases?

Yes, Noah, this is Rob. So I mean our strategy there really is unchanged, I'd say. You layer in SPI, our net debt this quarter on a pro forma basis would have been about 1.59 times, which is right in that targeted range of 1 to 2 that we're comfortable in. So, while we're a little bit lower where we landed for the quarter, I think with SPI sitting just down the road from us here, we see that definitely going higher. And we're going to continue to focus on capital allocation. Our strategy there is to prioritize M&A and then to continue to evaluate stock buybacks, right? And obviously, at our evaluation today, we think that's an attractive opportunity as well. So we'll continue to evaluate both, just like we have in the past.

That all makes sense. I’ll leave it there. Thanks for taking the questions.

Thank you, Noah.

Thank you. Our next question comes from the line of Jeff Stevenson with Loop Capital Markets. Please proceed with your question.

Hi, thanks for taking my questions and congrats on the nice quarter. So, you reported another quarter of healthy high-single-digit commercial installation volume growth. And I just wondered if you could talk more about the success you've had growing your commercial installation business? And whether you've seen any change in bidding activity as we move through the back half of the year as some of the leading indicators have started to slow?

Yes, Jeff, this is Robert. So, I'll hit on several points to that. Number one is just, again, we're in that light commercial and heavy commercial space as well as the industrial space. So, we really cover all the end markets. And all of our residential branches can do that light commercial work, and they're doing a fabulous job of bidding that, staying after it. Heavy commercial, we've not just driven growth in that. We've also driven operational improvements in that, which Rob hit on some of his commentary as well. And I think as we look across that, we continue to make investments. We continue to add sales talent. You heard us talk about some cross-selling opportunities. You've heard about a major investment we've made in our Lead App tool, which is really exclusive to our business -- proprietary to our business. So, I think those are the drivers we've got our team focused on. Our team really dives into this multiple avenues of growth. And so I think you see that coming through in the results and our confidence in this piece of the business going forward, and again, what we built here.

Okay. Understood. That makes sense. And then given your capital-light business model, I'm wondering if you had to make any adjustments to your workforce with demand continuing to hold in better than prior expectations?

No. No change in the workforce. I mean we're always driving efficiencies there. So again, back to some of the margin performance you see that was driven by a lot of efficiencies and continued things that we work in the business. But no adjustments, given the nice growth that we're seeing and our outlook.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Reuben Garner with The Benchmark Company. Please proceed with your question.

Thank you. Good morning everybody. Most of my questions have been asked already, but I just have one quick one. So, a lot of talk about fiberglass availability. Can you talk about availability and pricing trends in some of the more commercial and mechanical areas, anywhere that you -- any particular ones that you expect to remain tight into 2024, any areas that could be at risk of kind of loosening up?

No, I mean there hasn't been a considerable inflation in some of those products. I mean, there are some products that are still kind of tight, I think, about mineral wool, some of those products are definitely still tight in the industry. And then from a pricing perspective, the only thing I'd mention is on the mechanical side or what the industry calls, C&I, commercial & industrial, there is an industry-announced price increase out there in that piece of the business, and we'll call that in January of 2024. Not unusual for that piece of the industry to announce increases at the beginning of the year. So, we'll see how that plays out. But that's out there in the future, and has been announced by the manufacturers.

Okay. I said one question, but one quick follow-up since you brought up mineral wool. I've heard -- we've heard increased usage in the residential space, townhomes have gained steam, I guess you got to use it in that area. Is that something you guys do and maybe have elevated share on, given your commercial exposure maybe relative to some of your peers?

Yes, I think we're probably the largest player in mineral wool both in Canada and the US. Obviously, a lot in the commercial space, some in some high-rise, multiunit-type of development, but definitely a big user on the commercial side. So, very familiar with the product, and we release it across the footprint.

Great. Thanks. Congrats on strong results guys.

Thank you.

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

Thank you. Question on TruTeam, you called out for strong commercial multi-family. As a percentage, what are those two representative TruTeam sales? What's the run rate?

Commercial runs about 15% of total TruTeam sales. And then on multifamily, we're going to be indexed similar to what the industry is there. So, the split will be -- our residential will be split similar to what the industry sales are.

So, you mean versus what we see on starts? Or what's the benchmark you're referring to?

Yes. It's -- a multi-family is a little tougher because of the choppiness in the starts and completions data, but -- probably completions would be the best thing to look at there.

Okay. And then just a big picture question with the move up in rates in the last month or so. Are you getting any reports from your builder customers, how that's affected orders inflecting down notably? And any kind of intelligence would be helpful.

Yes, Keith, this is Robert. So production builders are pretty positive. They talk about the buy down and the rates and that kind of less than 6 being the magical number, so they're still very active in those buy-downs. And they're pretty, I'd say, optimistic for growth in 2024. You've seen some of their public announcements. Some of them are doing a nice job with new community counts, those types of things. So, production builders, I'd say optimistic. I'd say, the smaller private builders, you're kind of talking more of a flat environment and some of the impact for them. So I think you can probably expect to see production builders continue to grow. And maybe some of the other smaller builders, more of a flat outlook for the future.

Okay. Thank you.

Thank you.

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

Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask on the fourth quarter guidance. If I look at the midpoint, sales are sort of being guided to flat year-over-year, which implies a slight decline organically, which is the slowest growth of the year or the worse of any growth of the year despite what would be kind of the easiest comp. Are there incremental headwinds are parts of the business that are softening as you're starting to see the single-family business improve? Can you just help us understand the fourth quarter guidance, kind of relative to your industry expectations?

Yes. Yes, Rafe, this is Rob. So I think the -- if you take that midpoint of the guide and you kind of break it out between residential and commercial, it's basically going to be flat for both in the fourth quarter. Commercial, definitely, as we've talked about and we talked about in the last call, the second half of the year, definitely a little tougher comp than the first half. So, nothing alarming going on in the commercial side. Normal seasonal slowdown in the fourth quarter, nothing above that. And then on the residential side of things, right? If you think about of last year in the fourth quarter, the single-family side, we were still benefiting from the backlog of work that was out there. So, if you look at the Q4 completions of last year, right, and you compare those to the Q3 starts that just happened, right, that we'll be completing here in the fourth quarter, they were about 5% greater than what we felt. So, that's really the volume slowdown we're projecting there year-over-year.

Got you. Got it. That's very helpful. And then in the quarter, in a softer single-family environment, you've still been able to maintain pricing. And obviously, the margin performance was really strong when completions are down. Can you just talk about your ability to hold prices as builders are trying to solve the affordability issue? Are you seeing pushback at all from the builders in terms of pricing? I know there's another price hike which manufacturers are trying to push through here. Like how do you think about maintaining margins, pushing price in an environment where builders are trying to keep the cost of construction down?

Yes, Rafe, this is Robert. It's a constant discussion with the builders around those points. But I think as you've seen some spikes and stuff, they value the service that we bring. They value the labor that we have on a consistent basis for them where we can handle those spikes. And if you take the time of year where big builders are going through their closures, their year-end closings, and they can have 60, 70 units become available at one time. That plays to our strength, has been able to move labor around and materials and assets and stuff. So, it's a constant discussion, but we do believe they value what we bring forward. And so I think from that perspective, our team has done a nice job with pricing and continuing to show that value to the builders.

And one more just quick one on SPI, if I can fit it in. Can you just talk about the timing? I thought previously, you were expecting the fourth quarter. I could be wrong. I think you said it was going to be 2024. Just -- where are you in that process? And what's your best guess on when it closes?

Yes. So, we're saying 2024. Things are progressing well, continue to work going through the regulatory process. But as we all know, it's a new regulatory process, takes a little longer, but we've been through it before, and we're just work in a normal -- the normal process, as you would expect there. So, we say 2024 with the holidays and everything coming up, that's fully what we expect.

Great. Thank you.

Thank you.

Thank you. There are no further questions at this time. I would like to pass the floor back over to management for closing remarks.

Thank you for joining us today. We look forward to talking with you in February to share our Q4 and full year results. Thank you.