Greetings and welcome to the TopBuild Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, August 4, 2020.

I would now like to turn the conference over to Tabitha Zane. Please go ahead..

Thank you and good morning. On the call today are Jerry Volas, Chief Executive Officer; Robert Buck, President and Chief Operating Officer; and John Peterson, Chief Financial Officer. We have posted senior management's formal remarks on the Investor Relations section of our website at topbuild.com.

As shown on Slide 2 of today's presentation, many of our remarks will include forward-looking statements concerning the company's operations and financial condition. These forward-looking statements include known and unknown risks, 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 other than as otherwise specifically stated, 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 reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in the presentation accompanying this call. Please turn to Slide 3.

I will now turn the call over to Jerry Volas..

Good morning and thank you for joining us today. Let me begin by acknowledging the ongoing impact that COVID-19 is having on our employees, their families and all of our other stakeholders. We understand it's a difficult time for everyone.

Here at TopBuild, we continue to manage every aspect of our operations, to provide a safe environment for our employees, our supplier partners and our customers. At our Branch Support Center in Daytona, we continue to work remotely, with technology keeping us connected and effectively supporting our broad network of branches throughout the country.

At every one of our branches, we have implemented best practices in terms of sanitizing and disinfecting, and we enforce social distancing there and on job sites. As we as look back on the month since our last call in early May, we've seen the resiliency of the residential new construction industry.

We started the second quarter with extreme uncertainty as the country was under a national lockdown, our installation and distribution businesses were deemed non-essential in 4 states and unemployment reached levels not seen since the great depression.

Yet as we reported to you in May, our April financial results were still relatively strong, and they continue to improve as the quarter progressed. We're also encouraged that while second quarter housing starts are lower than last year, our builder customers are reporting a steady increase in traffic and orders.

This should lead to improving housing starts as the year progresses. Historically, low interest rates, very little inventory and growing desire to escape cramped urban environments are many of the key factors contributing to this quick rebound.

While we recognize that there will likely be bumps in the road as our nation continues to manage through the pandemic, we remain bullish on the overall fundamentals of the U.S. housing industry. Turning to our second quarter financial results on Slide 4, net sales declined 2.1%, primarily as a result of the COVID-19 pandemic.

Despite this revenue drop, we continued our strong margin expansion at both TruTeam and Service Partners. At TopBuild in total, our adjusted operating and EBITDA margins increased 130 basis point and 250 basis points respectively, which drove adjusted EPS to $1.68.

We feel very good about this performance, which once again demonstrates the flexibility and strength of our operating model in any type of environment. Turning to Slide 5, on our last call, we noted that given the current level of uncertainty, we were hitting the pause button on further acquisitions.

We had a full pipeline of prospects at that time, and thanks to the ongoing hard work of our M&A team, that pipeline has expanded over the past few months.

With a clearer outlook of the positive trajectory of the housing industry and a strong balance sheet with almost $650 million of liquidity, we are resuming our acquisition program and should close on a number of these deals in the next several quarters.

And having developed a core competency, integrating acquisitions onto our systems and supply chain, we expect to drive meaningful synergies quickly from these deals.

As a reminder, our primary focus remains on acquiring core insulation companies, but we continue to evaluate a number of glass companies that would fit well within our existing $160 million business in this product adjacency.

Before turning the call over to Robert, I wanted to note that in late June, we were pleased to learn that TopBuild was moving from the S&P SmallCap 600 to the S&P MidCap 400, effective June 30. Some of you may remember that at the time of the spin in June 2015, our market cap was approximately $1.1 billion.

Today, it is over $4.5 billion, more than a 300% increase. This move is clearly a recognition of our strong growth and the tremendous value we've created for our shareholders over the past 5 years. I will now turn the call over to Robert..

Thank you, Jerry. Beginning on Slide 6 and before reviewing TruTeam and Service Partners' financial results and our continued operational response to COVID-19, I want to thank our entire TopBuild team for their dedication, teamwork and ongoing push for operational excellence, especially during these difficult times.

Everyone from our installers, to our warehouse workers, drivers, office and sales staff, build leadership and Branch Support Center team have pulled together to deliver a very strong second quarter results.

Moving to Slide 7, as we respond to the current environment, our cornerstone value of safety for our employees, their families, our customers and supplier-partners remains the guiding principle for all decisions.

We enforced social distancing and sanitizing both in our branch operations and on job sites, and our work-from-home policy at certain operating facilities, including our Daytona Branch Support Center, remains in place.

Internal communications have become even more important, bringing our employees together with central themes, including safety, diversity and inclusion. We push these values throughout every level of our organization, building a stronger team, creating a better workplace and helping us win in the marketplace.

On the next slide, I want to stress that our strong results are due to many factors; most importantly, our flexible business model, enabling us to quickly adapt to changing market conditions; our ability to attract and retain labor; our integrated systems that allow us to share labor, equipment and inventory; our strong supply chain which ensures we can meet customer demand; our long-term customer and supplier partner relationships; and our company-wide focus on operational efficiency and sales and labor productivity.

As such, when the pandemic hit, we were confident in the steps we needed to take to care for our employees, serve our customers and ensure the financial health of TopBuild.

Turning to Slide 9, we entered the second quarter operating in all of the 4 states, New York, Pennsylvania, Washington and Michigan; where residential and commercial construction have been deemed not essential. As a reminder, Washington represents our fourth largest state in terms of annual sales.

At that time, in response to the shut-down and overall uncertainty due to the pandemic, we began pulling multiple levers to take costs out of the business, including eliminating most discretionary spending and non-essential capital expenditures, cutting overhead, and reducing labor in those states where construction was deemed non-essential.

We also implemented a COVID-19 Leave Plan, paying impacted team members for a period of time to help provide assistance to them and their families. We did this to create goodwill and to increase the probability they would return to TopBuild when conditions improved.

It has definitely been a success, enabling us to quickly ramp up in those four states where construction has again been deemed an essential service. As we moved through the quarter, our branches stayed busy, most working on a strong backlog.

In addition, our builder customers' optimism grew steadily as they saw buyer traffic and orders increase along with consumer confidence, fueled in part by very low interest rates. Moreover, based on recent builder surveys, there appears to be a shift of buyers moving to more urban and rural areas.

We are optimistic this shift will stimulate demand for single family homes. Along with this good news, by late May/early June, the four states that had deemed construction non-essential had reopened and our crews quickly got back to work.

Looking at TruTeam's second quarter results on Slide 10, sales declined 3.4%, in large part due to our being shutout of commercial construction in several metropolitan areas in addition to the 4 states I mentioned previously. Sales improved as we moved through the quarter, and June revenue increased compared to the same period a year ago.

Despite this drop in revenue, TruTeam's adjusted operating margin improved 100 basis points in the second quarter to 15.2% and increased 110 basis points for first half of the year to 14%, clearly demonstrating the strength and flexibility of our business model and our focus on bottom line results.

Turning to Service Partners on Slide 11, in the second quarter total sales grew 1.3% and for the first half of 2020, sales increased 3%. Service Partners' adjusted operating margin for both the second quarter and first half of the year was 11.6%, an increase of 170 basis points and 160 basis points, respectively.

As you can see on Slide 12, we introduced a new product line at Service Partners, professional grade sanitizing and disinfecting supplies and equipment. We are marketing to contractors who are already in the commercial cleaning industry as well as to contractors who may see this as an opportunity to create a new revenue stream.

While relatively small in terms of revenue generation thus far, it demonstrates our team's creativity and flexibility in meeting new market demand with minimal investment. Moving to Slide 13, our commercial business, on a same branch basis, declined 12.9% in the second quarter and is down 6.9% for the first 6 months.

We have seen a number of large commercial projects delayed or slow to ramp up due to new guidelines governing the density of construction crews on site. Pre-COVID-19, it was not uncommon to have 10 to 12 trades working on a job site at the same time. Obviously, that has changed with social distancing rules, elongating project timelines.

We have also seen some projects cancelled, but during this same timeframe we have been awarded a number of new projects that will help offset some of these cancellations.

As a reminder, comps this quarter and last were very difficult as commercial revenue increased almost 22% in the second quarter of 2019 and close to 25% in the first quarter of the same year. On the heavy commercial side, bidding activity remains strong and we are looking at potential jobs with start dates through early 2022.

A lot of the projects we are working on and have been awarded are distribution centers, healthcare facilities, and infrastructure projects. Overall, the commercial recovery will be slower than residential, but we remain confident in the long-term growth of our commercial business.

Material costs are holding steady and it's too early to predict whether we will see a second cost increase this year. Labor is still tight, though in certain markets, particularly those hit hard by the steep declines in the oil and gas and hospitality industries, we believe there could be an increase in the available labor pool.

However, this will depend, in part, on the federal government's subsidies of unemployment benefits which are yet to be determined. Looking ahead, we, like all of you on the call, are closely monitoring housing starts and are optimistic the industry will continue to see strengthen as we move through the year.

Thank you again to the TopBuild Team and congratulations on another strong quarter.

John?.

Good morning, everyone. As both Jerry and Robert have noted, our strong financial performance is a direct result of the hard work of our outstanding team, both in the field and at the branch support center, and provides great evidence of how we can quickly flex our business model to respond to changing market conditions.

With 70% of our costs being variable, we are able to initiate cost savings fairly rapidly, which we did in March as the pandemic hit. These savings helped bolster our robust margin expansion this quarter.

To a lesser degree, the margin expansion also benefited from COVID-19 curtailed expenses, such as travel and entertainment costs, which at some point are expected to return to normalized levels. Starting on Slide 14.

In the second quarter net sales decreased 2.1% to $646.1 million primarily due to a 3.6% reduction in sales volume driven by the impact of COVID-19, partially offset by revenue from 3 acquisitions, Viking Insulation, Hunter Insulation and Cooper Glass.

For the first 6 months of 2020, net sales increased 1.6%, primarily driven by increased selling prices and acquisitions, with overall volume flat due to the negative impact of COVID-19. As a reminder, we were still shutout of 4 states at the beginning of the quarter and were not operating in all of our markets until late May, Early June.

Adjusted gross margin increased 130 basis points in the second quarter and first half of 2020 to 27.8%, and 27.1%, respectively, driven by increased operational efficiencies, cost reduction initiatives and lower insurance costs, partially offset by higher depreciation expense.

Adjusted operating profit in the second quarter grew 9.3% to $83.5 million, with a corresponding margin improvement of 130 basis points. For the first 6 months, adjusted operating profit increased 13.5% to $153.8 million with a corresponding margin improvement of 120 basis points.

In addition to the items discussed in adjusted gross margin, operating margins were favorably impacted by lower travel and entertainment costs. Adjusted EBITDA for the second quarter was $107.8 million, compared to $94 million in 2019, and adjusted EBITDA margin expanded 250 basis points to 16.7%.

For the first 6 months of 2020, adjusted EBITDA grew 16.4% to $196.1 million, and adjusted EBITDA margin was 15.1%, a 190 basis point improvement over first half 2019. Second quarter SG&A as a percent of sales was 15.1% compared to 15% in the second quarter of 2019.

The year-over-year increase was primarily the result of lower sales volume and higher restructuring expenses, offset by savings from cost reduction initiatives and lower travel and entertainment costs. Depreciation for the 3 months ended June 30, 2020 increased $6.1 million compared to the same period a year ago.

This increase in depreciation expense was primarily related to the reduction in the carrying value of older assets that the company was no longer utilizing, and an increase in expense on assets the company has purchased over the last 12 months. On a 6-month basis, depreciation increased $7.8 million compared to the same period a year ago.

Adjusted income for the second quarter was $55.7 million, or $1.68 per diluted share compared to $49.5 million or $1.43 per diluted share. For the 6 months of 2020, adjusted income was $101.6 million, or $3.04 per diluted share, compared to $86.1 million, or $2.49 per diluted share.

Second quarter and first 6-month 2020 adjustments were $3 million and $3.6 million, respectively, primarily related to restructuring costs as a result of COVID-19. Our effective tax rate for the quarter was 23.2% and 20.5% for the first 6 months of the year.

The 2020 effective tax rates are lower than the normalized tax rate we guide to of 26% due to a discrete tax benefit of $1.4 million and $6.9 million related to share-based compensation for the 3 and 6 months ended June 30, 2020.

Interest expense in the second quarter 2020 declined from $9.6 million to $8.3 million versus prior year, primarily driven by a 188 basis point decline in the average interest rate on our term loan compared to the second quarter of 2019. Moving to Slide 15.

CapEx for the first 6 months of the year was $20.9 million, 1.6% of sales, below our targeted long-term range of 2% to 2.5%. As we noted on our last call, with the advent of the pandemic, we pared back our planned 2020 CapEx spend. Working capital as a percent of sales for the trailing 12 months was 10.5% versus 11.9% a year ago.

This decrease was due to improved collections and reduced past due amounts across the TruTeam portfolio as well as lower volume in our commercial business which tends to have longer receivable terms. As you see on Slide 16, we ended the second quarter with net leverage of 1.21 times, using trailing 12 months adjusted EBITDA.

Total liquidity at June 30, 2020, was $648.5 million, including cash of $258.8 million and accessible revolver of $389.6 million. Operating cash flow was $178.2 million for the 6 months ended June 30. Due to continued uncertainty related to the COVID-19 pandemic, we are not providing revenue and EBITDA guidance for 2020 at this time.

However, as Jerry noted, we remain bullish regarding the long-term health of the residential and commercial markets we serve and are confident TopBuild's flexible business model will continue to drive our strong performance.

Jerry?.

Thank you, John. Our business is strong, our team is focused and our future is bright. We recognize there is still a great deal of uncertainty related to the pandemic, but we're confident we will successfully meet whatever challenges lie ahead.

Many people are looking to escape crowded urban living and with historically low interest rates, now is a great time for them to pursue their dream of owning their own home. As we move through the second half of 2020, TopBuild will continue to focus on achieving operational efficiencies, while keeping our employees safe.

Our flexible business model, combined with our team's creativity and hard work, will remain key cornerstones of our success. Operator, we're now ready for questions..

Thank you. [Operator Instructions] Our first question is coming from the line of Ken Zener with KeyBanc. Please proceed, your line is open..

Good morning, everybody..

Hi, Ken..

What a quarter. So 70% of your costs are variable. You had up dollars sequentially in TruTeam despite down sales, I believe.

Can you talk to - I recognize you're not giving guidance, but you have talked about operating leverage generally? As your business opens up again, especially in these 4 states, could you just comment on how we should think about incrementals, given that orders are very strong for homebuilders, A; and B, it seems like labor is going to be very tight.

So that pricing on top of whatever units happen, seems to be very favorable for you. I'm just trying to understand your cost actions as opposed to the underlying industry structure that enables you to get the incremental margins..

Ken, this is John. So just a couple of comments and I'll drill down a little bit more in terms of some of the performance versus what I gave in the prepared remarks. So first of all, we are pleased with our margins.

And again, we said it multiple times throughout the prepared comments, we think it's a great, great indication of what we've been talking about for the past 5 years that we've got a very flexible model that can adapt to the puts and takes in the industries we service, certainly.

We did get on it pretty quickly in March when the pandemic hit, so we did take certain cost reductions. I think you saw in our data that we had about $2.4 million worth of [RAT] [ph] charges that we basically provided.

So we did get some benefit from that, probably $1 million in the quarter, on an annualized basis roughly $5 million in terms of the cost reduction activities we took. We also did get a benefit from what I'll call COVID-19 delayed or deferred expenses or reduced expenses, and probably the best example would be travel and entertainment.

So our best estimate in terms of the benefit we received in the quarter that at some point, it's going to normalize and come back would be probably roughly $4 million to $5 million worth of benefit in the quarter that we got. But again, the vast majority of the benefit we did get in the quarter was certainly operationally driven.

So when we look at that on a go-forward, we don't know how quickly that's going to normalize those COVID-19 reduced costs. It will really depend on the pandemic and how things come back and how quickly we can get back to travel and other things that we normally do. But on a go-forward basis, we're not going to give any guidance, as you said.

We're certainly confident in the long-term capability of our model. We talk about a 22% to 27%. We would certainly agree with that number in the long term. And we're just going to have to see how this plays out over the next 3 or 4 quarters, 2 or 3 quarters I should say from the pandemic standpoint.

But again, pleased with our results, and again, operationally driven by far so..

I appreciate that. I guess, as the largest installer of insulation, therefore, you probably have the most data points as a company to what's happening on the builder side.

Can you talk to this resurgence of orders' tight inventory and many builders selling through finished? But can you talk to the industry's ability to, obviously, I think you can provide labor, and that'll benefit your pricing.

But can you talk to what you think might be constraints in the industry ramping up sequentially out of this COVID stuff? Because it seems like lumber is really high, insulation prices are seemingly flat for the time being.

But can you talk to what you're seeing in terms of constraints in terms of the growth that might be happening in the industry and how that might be different versus a year ago, excluding the commercial? Thank you..

Yeah, hi, Ken, this is Robert. So, yeah, I think if you look at, it's a lot of positive news coming out from the trends from the builders. And I think everybody ramping up here, a very, very strong finish to the year, especially the follow, which is always a seasonally busy time. You're right. I think we'll fare well from a labor perspective.

But I'd say, given the industry as a whole, whether it'd be some of the new regulations on job sites, the number of trades on job sites, whether that'd be residential or commercial, because there's new regulations for both, I think that combination as well as the heavy order flow, we are seeing some elongated lead times for sure.

We think the lag is extending in the industry due to some of those factors. And you're right about what you say. We do believe that labor will remain tight. There could be some influx of some employees into the industry, given some of the other industries that have been constrained.

That being said, the extra unemployment benefits have probably been hindering some of that recruiting up until now. So I think that will be dependent on what we see happen relative to employment benefits going forward.

I would say, from our perspective, as we look back, I think I mentioned in the prepared remarks, the COVID lead-plan that we did really benefited us to bringing employees back, as well as I think that's allowed us to get some references of attracting some new folks in. So did I think it will elongate the lead times? The answer is yes.

I think the industry will have some struggles keeping up with that, which will just extend that backlog later into Q4 and could carry into early 2021..

Thank you..

Our next question is coming from the line of Phil Ng with Jefferies. Please proceed, your line is open..

Hey, guys. Just following on that line of questioning, orders obviously picked up pretty nicely and appreciating some of these bottlenecks that could lead to more elongation.

But if you kind of think that through, when do you expect the uptick in orders kind of flowing through from a timing perspective?.

Hey, Phil. This is John. So, listen, the reason we didn't provide guidance or one of the major reasons we're not, it's not because we're not optimistic. We are about both commercial and residential, but really, 2 primary reasons. One is we tend to rely on lag starts following some type of normalized or seasonalized pattern.

That's kind of out the window right now, certainly. So what we saw was, pre-pandemic, very, very strong starts profile, then we had roughly 3 months' worth of relatively weak, started to see that recovery in June. And we certainly expect July forward to have a nice starts profile.

But it's tough for us to project the backlog we had, whether it's fully depleted as an industry and then how quickly these new orders come online and then we get to them at our job sites. So that's one. The other is commercial where we have, and as you know, that's almost a quarter of our business.

And on the heavy commercial side, as Robert said, we've been disproportionately impacted there from a social distancing standpoint. So how quickly those job sites get back to a normalized type of cadence is something that we just can't estimate with any granularity at this point.

So that's why it's difficult to kind of look forward and give a full projection from our guidance. But listen, we are as optimistic as everyone based on the conversations we're having with one of our customers, what we know is out there and what we know is coming..

See, Phil, this is Jerry. The one thing I would add to that explanation would be, we had talked about an air pocket. That's kind of a phrase that people have used here over the last several months.

I guess, it's fair to say that our point of view now is that if there is one, it's probably more shallow and shorter than we probably would have said 90 days ago, and looking out over the landscape. So to John and Robert's point, we see strengths out there. And we think builders are going to be responding to consumers looking at buying homes.

And then, we think that's all going to benefit the entire industry going forward here. As to whether or not there's a bump some quarter, maybe. But overall strength, I think that's the summary statement..

That's really helpful. And then your ability to kind of leverage your labor has kind of been a hallmark of TopBuild.

In this surging demand backdrop, is that something you think you can be able to take advantage of even more so compared to your peers, your mom-and-pop competitors and opportunity for you to potentially take share?.

Yeah, Phil, this is Robert. So absolutely. I mean, I think I'll hit it from multiple angles. I mean, we're always working on the productivity side, from a labor standpoint. And we really believe and we think has shown through integrated systems, how we move labor around, equipment around and how we're able to service customers.

There's - the peaks of demand, and if you look at these order flows coming from the builders, there's going to be some big spikes coming in some of these - the robust fallout period that's coming to us. We'll be able to service that.

And we think by our ability to do that, manage and leverage the labor systems, that type of thing, that we will more than gain our fair share of those orders that are coming. So yeah, we have a high level of confidence there..

Got it. And then just one last one question for me. I mean we use broad strokes and define non-res as non-res, but appreciating there's pockets where it's stronger, let's say, warehouses and data centers, and maybe stadiums and office is a little weaker.

What's your ability to kind of flex your labor force between heavy commercial versus light commercial? And how are you kind of thinking about that outlook going to 2021, appreciating you do have some tough comps..

Yeah, it's a good question. So as you look at some of the commercial construction that's taken place, I mean the applications and the products are kind of merging closer. So I'll give one good example here.

We're doing several Amazon facilities today, and our residential crews can do that type of work and some of the same applications, some of the same board product we would use in light commercial applications. So we're leveraging that labor today to move around to some of the commercial projects.

And we think that, that differentiation between heavy and light commercial continues to narrow some. So it will play to our benefit to be able to leverage labor and move that around among bigger jobs..

Okay. Thanks a lot. I appreciate the color..

Our next question is coming from the line of Reuben Garner with Benchmark. Please proceed. Your line is open..

Thank you. Good morning, everybody..

Good morning, Reuben..

So I had a little bit of a static or breakup on my end during your prepared remarks, so if you said this already, I apologize. But can you just talk about what the difference was in the volume profiles in the second quarter between installation and distribution, whether it's as simple as geographical location.

And then I guess, on the same point is, should we expect that the installation of pricing profile to continue to outperform distribution in the near-term as you guys are selling labor increases more so than materials?.

Hey, [Phil] [ph], this is John. So actually, in the quarter, TruTeam was disproportionately impacted by the impact on commercial that Robert talked back, because it was primarily heavy commercial, and that's where a greater piece of our heavy commercial business is.

So when you look at the residential, I'll say, just pure residential new construction, TruTeam was relatively flat, up slightly versus a year ago. On the other side of that, though, our Service Partners business was probably up close to 3.5% on the volume side from an R&C standpoint and, not near as impacted by the commercial.

So residential, I think, and especially considering what happened to us in April, I think results were really strong. We had a nice May and June recovery and exited the quarter with some nice momentum certainly in that area.

So on a go-forward - and by the way, the other thing I'd point out is the fact that if you look at Service Partners, we go all the way back to fourth quarter 2018, where we talked about the fact that we were actually modifying some of our portfolio of our customers.

We took a little bit of hit on volume there, but I think the team has been doing a great job of building that volume back up, with additional customers and also getting some additional volume of the core customers we have. So I think you saw nice evidence of that in the quarter, and we'd expect that to continue..

Great. That was very helpful. Thanks, John. And let's see, to follow-up on that commercial piece. Is it - I think it's a piece of your business that most are less familiar with.

Is it fair to say that because of the differences in regulation and just the differences in how the business works, that you have a longer backlog or more visibility, I guess, assuming that people can get back to the job site, that you have some runway for that business, even if there is kind of limited new projects in the coming couple of quarters, that you'll be able to kind of work through what was already in the pipeline kind of coming into the pandemic? And thanks again for taking my questions and congrats on the strong results..

Yeah, thanks, Reuben. This is Robert. So yeah, longer lead times, I think it had for commercial projects. I think I mentioned here, we're bidding projects into 2022. So there's a backlog that exists in that business. Some of those projects have been pushed out or delayed.

Some cancellations, but not - I wouldn't call it a tremendous amount of cancellations that we've been able to offset with some new projects. So yeah, there's a backlog. There's a backlog to work through. But commercial will take a little longer to ramp back up than residential.

But as we said, we feel really good about the long-term growth prospects on the commercial side, both the industry as well as our ability to continue to gain some share in the commercial space..

Our next question is coming from the line of Trey Morrish with Evercore ISI. Please go ahead. Your line is open..

Thanks very much, and great quarter, everyone. It's absolutely fantastic. I want to stick on commercial for a second. It sounds kind of like the way you're talking about that your backlog in commercial is modestly down as you're looking up. So if you could kind of clarify that for me. And second, on commercial.

You've previously talked about wanting to expand your commercial footprint a little bit further south and southeast.

Given the job site restrictions that are happening right now, does that - do those restrictions have you resulting going to accelerate that expansion into the south and southeast?.

Hey, Trey, this is Robert. So yeah, the backlog may be down slightly from - if we went back to, I'm going to say, 4 or 5 months ago, it would be down. Again, some projects canceled or delayed, pushed out, some new projects that we have been able to put into the pipeline. But I would say, one of our leading indicators is bidding activity.

And I would say our bidding activity on the commercial side has been very strong, I'd say even stronger and a positive surprise from what we were thinking as we went into the pandemic. So that's a positive side. I think we do stay very bullish on the long-term piece of the commercial industry and our ability to grow there.

And again, we're agnostic to the type of commercial projects. So where we may see projects such as high-rise offices or high-rise residential, or convention centers, that type of thing being delayed or potentially canceled.

At the same time, we're seeing things such as warehousing, manufacturing, data centers, infrastructure, healthcare, we're seeing those projects pick up, and we're bidding a lot of those projects as well. So I think we feel comfortable from that perspective, and again, positive on the long-term look..

Got it. Thanks for that. And then just looking at your EBITDA bridge, your D&A was significantly higher this year, not only just related to last year, but also last quarter. Was there something accelerated in there? Or is this a new step function higher? Just wondering if you could clarify that for me..

Yes. So this is John. So yeah, in March, we talked a little bit about the fact that we have - the majority was really driven by a reduction in carrying value of older assets that the company will utilize. And by far, the biggest driver was the fact that we basically adjusted our salvage values on our depreciation schedule.

So we put a period-to-date adjustment. That was about $4.5 million of the growth. The other piece was just tied to what we've seen traditionally, which is we have been adding more assets online basically.

So the $6.1 million split, about $1.6 million between, just growth of our assets and the growth under depreciation of about $4.5 million tied to, I'll call it, a policy change around depreciation..

Got you. Just a slight clarification, that $4.5 million that's the acceleration, is that something that is sustainable? Or is that just a onetime thing that's going to reverse next quarter..

It's a onetime adjustment in the second quarter..

Okay. Thank you very much..

Yeah..

[Operator Instructions] Our next question is coming from the line of Adam Baumgarten with Credit Suisse. Please go ahead..

Hey, good morning..

Good morning..

Just on the spike in orders from the homebuilders, and potentially some tightening capacity.

How should we be thinking about the potential for a price increase from the fiberglass guys, maybe later this summer or early fall?.

Hey, good morning, Adam, it's Robert. So I think a little early to tell, given that spike in stuff, there could be - as you probably remember - I'll step back a little bit. As you remember, there were a couple of fiberglass manufacturers that pre-pandemic had announced they were bringing up additional capacity late 2020, early 2021.

They - after the pandemic hit, they subsequently pushed that out or delayed that new capacity. So that being said, depending on that ramp-up of orders and stuff, could there be some tightness of material like in labor? Potentially, there could be.

And if that's the case, I would speculate, they're probably looking at that and considering could there be another material cost increase maybe later in the year..

Okay, got it. Thanks.

And then just on the acquisition front, is most of the pipeline filled with smaller tuck-in type deals? Or are there some larger opportunities out there?.

Jerry here. There's a couple of larger ones. I mean, there's always a variety of potential target both from the standpoint of residential, commercial, insulation glass and then size as well. So to answer your question, there are a few that are bigger.

But there are a number of ones that are, what we call tuck-ins that are highly effective in terms of the returns that they provide to us. So yeah, hopefully, that gives you a little bit of color. I mean, we, as you well know, have been highly successful with acquisitions here since 2015.

And we've deployed close to $1 billion of capital, two-thirds of that is acquisition-related. So that train continues. We've got a team here that's highly effective in terms of integrating. And yeah, you can look forward to us over the next number of quarters to be back in the acquisition game for sure..

Great. Thanks a lot..

Sure..

Our next question is coming from the line of Seldon Clarke with Deutsche Bank. Please go ahead..

Hey, thanks, operator. Is there any way you can give us a sense of where sales trended in June and into July, and what impact you could be seeing from pent-up demand in either of those months? And I understand, sales were down 9% organically in April and you're not giving guidance.

So even if you could just give some context around how the rate of improvement changed throughout the quarter and maybe that - how that compares to July? Thanks..

Yeah, Jerry here. I'll tell you that as the second quarter progressed, it - on a sales per day sort of basis, which is kind of how we look at it, is it improved. It improves from April into the May, June timeframe, for sure. And what we can tell you about July is that July continues at about that pace.

And it's hard for us to know how - we just stepped into August here, how that's going to look. But yeah, it has improved from what was the trough. So I would say April was the trough, and it's gotten better from there. And as we move into Q3, it's continuing at that level..

Do you mean continue to improve or continuing at the level of where June was?.

I would say July is looking a lot like June at this point in time..

Okay. That's helpful. And then you typically see from 2Q and 3Q a little bit of an increase in sales and higher EBITDA margin.

And again, I know you're not giving guidance, but is there any way to think about how the moving parts shake out as it relates to just normal seasonality this year, given everything taking place with the elongated construction cycles, the various moving parts on the cost side and some potential cost creep showing up in the third quarter, or either fourth quarter.

So how do we think about - or how should we think about normal seasonality this year relative to what we've seen over the past several years?.

Yeah. I mean, we would love to give you some more specific guidance on that. But as John has said, most of the historic relationships around lag times in the building cycle, a number of things are kind of being disrupted here because of the volatility of what's happened, COVID driven.

So John may have some more specific comments, but my take on that would be that - is that we're optimistic about the sales level and what we do from a margin standpoint in whatever we have. And the reason we're not giving guidance is just because some of dependable relationships that we use have really been taken off the table.

And that's not necessarily a negative. I mean we are still going to perform really well, just based on the flexibility that we have. And Robert and his team are just outstanding when it comes to making the most of whatever environment we're stepping into. So we would expect that to continue. John, I don't know if you have anything else to add to that..

No, I think Jerry said it well. I think from the profitability side, I think we were very confident on a go-forward basis. As I said, some of the benefit we got on - to a lesser degree, was driven by expenses that were down due to COVID-19, and we expect those to normalize, but that's going to happen over time.

So again, very bullish about the top-line and bottom-line on a go forward basis. The struggle for us or the challenge is how do we look at seasonality and how quickly do we get back on commercial job sites, as I said before, that we've been disproportionately put off also..

Okay. That's helpful. I appreciate it. Thanks, guys..

Yeah..

Our next question is coming from the line of Ryan Gilbert with BTIG. Please go ahead..

Hi. Thanks, guys. First question on the distribution business. Just wondering how I should be thinking about volume growth going forward. It sounds like you expect to see continued increases. I think my understanding of the business, that it was a little more countercyclical than the install business.

So just - yeah, how we should be thinking about volume growth in distribution?.

Hi, Ryan, this is Robert. So I think if we go back to the end of 2018 and through 2019, we're talking about our focus on Service Partners and growing the business there. And I think we're seeing some of the fruit of that live through that, selling more to existing customers as well as attracting some new customers as well.

Although a small example, I talked about the disinfectant sanitizing product line that we're rolling out. So I think we're pretty positive about the Service Partners' growth. And then also, we'll see potentially smaller contractors come back to us if they're having a hard time taking full truckloads of shipments that plays to our value proposition.

And one thing that we've always focused on, and we continue to see improve is our service levels. So really keen focus on service, and especially if you think about things ramping up, the orders for builders, that type of thing, service becomes even more part of the value. So we're keenly focused on that.

And we think Service Partners and TruTeam both will continue to see some nice improvement..

Okay. Thank you for that. And then the second question is just on the M&A pipeline. I'm wondering if you can talk about your preference for completing deals within the residential end-market versus the commercial end-market..

Yeah, we have both in the pipeline. I think we're a bit agnostic. We've had success on both sides of that aisle. We're really good on the residential side for sure, that's a legacy of the company, and we get huge synergies on when we do those acquisitions. But then on the commercial side, our scale is rapidly improving there.

And as Robert spoke to the future of the commercial business, there's a number of different types of projects that we think will continue to be strong in terms of starting. And we're very anxious to continue to improve our footprint. And if we can do that through acquisition, finding the right partners, we will certainly do that..

Okay, great. Thank you..

Sure..

[Operator Instructions] Our next question is coming from the line of Justin Speer with Zelman & Associates. Please go ahead..

Hi, good morning, guys. Thank you. I wanted to start on the non-residential side, just if you could give us a little clarity on the revenue trends to exit the quarter there. Recognizing you were down, I guess, roughly 12%, 13% in the second quarter.

But as you think about the exit rate into July, how did that look?.

Hey, good morning, Justin, this is Robert. So if you think about it, I think Jerry mentioned it as well. So we continue to see a positive trend of revenue throughout the second quarter. We saw that revenue trend continue to improve in July. We never do that comparison. So we think we're still working on backlog.

We think also - you've seen the order trends from builders. And I would say our crews are busy right now. So we're pretty positive in the trend that we've seen.

And then I think previous question on Service Partners, some nice growth on Service Partners, a combination of selling more to existing customers, maybe some smaller customers that we've been targeting, coming back and seeing the value in what we do as well during this time. So I think good trends in both..

Okay. And then, I guess, the difference in growth between your designation - I think maybe the split between heavy commercial and light commercial would be helpful too in terms of the differences in growth in the quarter..

Yeah, Justin. This is John. I don't have the numbers right in front of me, but I can tell you that commercial was disproportionately impacted by heavy commercial, the social distancing off of some job sites temporarily. And so, certainly, that's where the majority of our decline was on the quarter, was on the heavy commercial side..

Okay. And then, it would be helpful too. I don't know if this is something that's possible. But, I guess, your vertical exposure across some of these areas that are stronger, the healthcare, industrial, distribution centers that you mentioned, juxtaposed to maybe some of the other areas that are obviously more pressured.

I don't know if you have any clarity that you can provide there too..

Hey, Justin, Robert. So we're pretty agnostic quite honestly, as we look across the thing, across the landscape of mix of commercial business. So we're talking high-rise residential, we're talking high-rise commercial. I'd say we equally own healthcare facilities, distribution centers. I mean, I think I mentioned earlier, I won't give the number.

But the number of distribution centers, including like Amazon facilities that were on sites that is right now is tremendous. So we're pretty agnostic of that. Main thing is we're looking at the projects.

We know what the mix of projects are, the projects that we're bidding, applications are very similar, and we're obviously comfortable with those types of projects. I talked about infrastructure projects as an example.

You could say healthcare, but then also we're doing some airport projects now as well that are still got some time to go on those projects also. So I'll go back to my term, agnostic, and just say we're across the landscape and mix of commercial projects..

Sure. And I guess I was thinking about it a little bit differently, but thinking about your actual current mix of business that is through those better-growing businesses versus the verticals that may be a little bit more challenged with a little uncertainty, at least in the near term.

I guess, what percentage of your business is healthcare, industrial and distribution centers?.

Yeah, I don't really have that split or that breakdown, Justin. I would just say we're not heavily weighted in a negative way towards one or the other..

Got it, got it. And then, last question for me, the pricing stability in the quarter was a positive surprise. I guess, how should we think about that in the back half, recognizing there may be some inflationary impulse from the supply chain? But it seems like you did a lot better there.

I'm guessing, how do you think about that and the back half potentially shaping up?.

Yeah, so, Justin, this is John. So the pricing you saw in the second quarter was all carryover pricing, essentially from prior periods. And, listen, we're not going to speculate in terms of third or fourth quarter. I mean, it's going to really depend on the market conditions at the time.

And Robert referred to the fact that there's a potential out there as things continue to recover from material cost increase and to see how labor shapes. So really, tough for us to speculate right now.

But I think one thing, and I think you've got 5 years of evidence of this is we're able to adapt to any environment and any inflationary type of environment pretty quickly, and we're confident of our ability to do that on a go forward, so..

Excellent. I appreciate your time. Thank you..

Thank you..

And there are no other questions at this time..

Thanks, everybody. Stay safe out there. And we look forward to our Q3 earnings call in November..

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..