Greetings. Welcome to TopBuild's Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Tabitha Zane, Vice President of Investor Relations.

Thank you. You may begin..

Thank you, and good morning. On the call today are Robert Buck, President and Chief Executive Officer; John Peterson, Chief Financial Officer; and Rob Kuhns, Vice President and Controller. 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 be found on our website.

I will now turn the call over to Robert Buck..

residential, commercial and industrial. We added 101 branches to our specialty distribution network, including 17 in Canada, increased our customer base by close to 13,000 and welcomed 1,300 DI associates to TopBuild.

Our teams are working closely to ensure a smooth transition as we integrate DI into our systems and supply chain over the next 12 months. As noted previously, we anticipate $35 million to $40 million of run rate cost synergies over the next 24 months.

Looking ahead, our M&A prospect pipeline remains robust for residential and commercial installation companies and for mechanical insulation specialty distributors, and we expect to remain very active on all three fronts going forward.

We also used our capital in the third quarter to repurchase 60,000 shares and year-to-date we’ve repurchased just over 183,000 shares at an average price of $194.15 per share.

Before turning the call over to John and Rob to discuss our financial results in further detail, I want to emphasize once again that our strong operating performance quarter-after-quarter is the direct result of our uniquely diversified model and the ability of our experienced and cycle-tested leadership team to manage our businesses well in any environment.

John?.

Garland, LCR, Ozark, ABS, Creative Conservation, RJ Insulation and Valley Gutter Supply. For the first nine months of 2021, net sales also increased 21.3%, primarily driven by increased selling prices, sales volume and $172.2 million of revenue from acquisitions.

Gross margin improved 120 basis points in the third quarter and 100 basis points in the first nine months of 2021 to 29.6% and 28.5%, respectively, driven by higher selling prices and lower insurance costs, partially offset by material inflation.

Adjusted operating profit in the third quarter grew 35.2% to $137.4 million, with a corresponding margin improvement of 170 basis points to 16.3%, driven by the same positive factors that I just mentioned that led to gross margin improvement, but partially offset by increased travel and entertainment activity and the initial absorption of fixed costs of new acquisitions.

For the first nine months, adjusted operating profit increased 42.7% to $364.5 million with a corresponding margin improvement of 220 basis points to 15%. Adjusted EBITDA for the third quarter was $158.2 million compared to $119.2 million in the third quarter of 2020, a 32.8% increase, and adjusted EBITDA margin expanded 160 basis points to 18.7%.

For the first nine months of 2021, adjusted EBITDA grew 34.4% to $423.9 million, and adjusted EBITDA margin was 17.5%, a 170 basis point improvement over the first nine months of 2020. Third quarter SG&A as a percent of sales was 13.8% compared to 13.9% in the third quarter of 2020.

The year-over-year decrease as a percentage of sales was primarily the result of higher sales partially offset by increased travel and entertainment and the initial absorption of fixed costs of acquisitions. Adjusted income for the third quarter was $97.7 million, or $2.95 per diluted share, compared to $69.6 million, or $2.10 per diluted share.

For the first nine months of 2021, adjusted income was $256.4 million, or $7.73 per diluted share, compared to $171.2 million, or $5.14 per diluted share. Third quarter adjustments to net income were $3.6 million, all related to acquisition expenses.

Adjustments to net income in the first nine months of 2021 were $20.4 million, primarily tied to $13.9 million of debt refinancing costs and the remainder related to acquisition expenses and the COVID-19 Leave Plan initiated March of 2020. As of July 1, 2021, that plan is no longer active.

Our effective tax rate for the quarter was 25.7% and 24.7% for the first nine months of the year. Interest expense in the third quarter of 2021 was $5.5 million compared to $7.7 million in the prior year, primarily driven by lower interest rates on our senior notes issued in March 2021, and borrowings under the Amended Credit Agreement.

During the fourth quarter, we successfully closed on a $500 million senior notes offering priced at 4.125% and maturing in 2032. In early October, we amended our credit agreement, increasing the revolving credit facility from $450 million to $500 million and adding a new $300 million delayed draw term loan.

This was used along with the proceeds from our senior notes offering and cash on hand to fund the purchase of Distribution International, which officially joined the TopBuild team two weeks ago. CapEx through September 30 was $42.3 million, or 1.7% of sales, slightly below our long-term guidance of 2% of sales.

Working capital as a percent of trailing 12-month sales was 10.3% versus 10.1% a year ago. This slight increase was due to higher inventory on hand which is being driven by inflation, M&A and the timing of inventory receipts. We ended the third quarter with a net leverage of 0.7x, using trailing 12 months adjusted EBITDA of $545.3 million.

Total liquidity at September 30, 2021, was $709.8 million, including cash of $327.9 million and accessible revolver of $381.9 million. Operating cash flow was $309.5 million for the nine months ended September 30.

Assuming the inclusion of DI and associated debt acquired to finance the transaction, September 30 net debt would have been 2.2x on a pro forma basis, pre-synergies. I’m now going to turn the call over to Rob Kuhns, our Vice President and Controller, to discuss our segment results.

As announced last month, I will be retiring from my position as CFO at the end of March and Rob will be assuming this role. Rob and I have worked closely together for over three years and this succession plan has been in place since he joined the company.

He’s built a great team and is involved with all aspects of the company’s operations and we couldn’t have selected a better replacement.

Rob?.

Thanks, John. Starting with TruTeam, sales increased 24.5% in the third quarter to $612.9 million. On a same branch basis, revenue grew 10.3% driven by an 8.4% increase in price and a 1.9% increase in volume.

Residential and commercial markets saw healthy demand in the quarter, but the industry-wide material shortages and labor constraints tempered growth. We are pleased with TruTeam’s third quarter adjusted operating margin of 17.2%, a 20 basis point improvement from the third quarter 2020 even given the significant contribution from M&A.

Our teams did a great job managing both price and cost in this environment and our backlog remains strong. Looking at Service Partners’ third quarter, sales grew 13.2% to $276.4 million, driven by a 16.5% increase in price, partially offset by a 5.2% decline in volume.

Service Partners’ topline was challenged by material constraints in both fiberglass and spray foam. In addition, last year Service Partners’ third quarter volume increased a robust 12.2%, so this quarter was a difficult comp.

A high note was Service Partners’ third quarter adjusted operating margin of 17.1%, a 370 basis point improvement from third quarter 2020. Our Service Partners team continues to do an outstanding job managing cost increases, customer pricing and operating costs.

John?.

Thanks, Rob. Moving to 2021 annual guidance. A number of factors were taken into consideration as we put together our outlook for the remainder of the year.

The most relevant being the industry-wide supply chain shortages and labor constraints which are impacting everyone’s ability to meet the continued strong demand for new residential housing and commercial projects.

As a result, looking at legacy TopBuild, which excludes financial results from DI, we are reducing the midpoint of our 2021 sales forecast by $55 million to a range of $3,255 million and $3,295 million.

For the adjusted EBITDA, as a result of improved operational efficiencies and strong input cost management, we are maintaining the midpoint of our previous guidance of $577 million, but are narrowing the range and now expect adjusted EBITDA to be between $570 million to $585 million.

We expect DI to contribute revenue between $170 million and $180 million and adjusted EBITDA between $15 million and $20 million. As a reminder, this acquisition closed on October 15, so the guidance provided is for approximately 2.5 months.

In total, we are projecting sales to be between $3,425 million and $3,475 million, and adjusted EBITDA to be between $585 million and $605 million.

We are not providing a projection of housing starts for the remainder of the year as there is a weak correlation between starts and our performance, due to the continuing extension of the build cycle tied to the constraints previously mentioned. That said, we remain very bullish on the demand profile of all three end markets we serve.

Looking ahead, we will provide our 2022 outlook when we report our fourth quarter and year end results in mid-February. Now let me turn the call back over to Robert..

Before opening up the call for questions, I wanted to mention that in September, we hosted our annual strategy session with our Board and key members of our leadership and operating teams. During this two-day meeting, we took a deep dive into all aspects of our Strategic Plan, including our ongoing ESG efforts.

This was a great planning session with the goal to continue to create great value for all of our stakeholders. I also let you know that we plan to host a TopBuild Investor Day in New York City on Tuesday, March 15. This will be a great opportunity to meet the leaders of our business.

Looking ahead, we anticipate the industry will continue to be impacted by supply chain disruptions and labor constraints into next year.

From TopBuild’s perspective, we believe we are faring better than most in terms of both material and labor, due to our size, scale, strong relationships with our suppliers and our engaging recruiting methods and productivity improvement initiatives.

Our company-wide ERP system also facilitates the sharing of these limited resources, enabling us to best serve our customers. Our teams throughout TopBuild continue to do a great job successfully navigating the current environment as demonstrated by our solid third quarter results.

We are also extremely excited about our entry into the mechanical insulation specialty distribution space through our acquisition of Distribution International and their leadership position distributing and fabricating products for the industrial and commercial end markets.

This acquisition also solidifies TopBuild as the leader in supplying energy saving insulation solutions to a broad range of businesses and industries across North America. To conclude, our team manages the business with a constant mindset of driving improvements and achieving operational excellence.

We are proud of our track record of producing strong financial results and we recognize our success is the result of having the best and most talented operators in the field and a dedicated and experienced group at our branch support center in Daytona Beach. Our goal is to create sustainable shareholder value in every operating environment.

Operator, we are now ready for questions..

Thank you. [Operator Instructions] Our first question is from Stephen Kim with Evercore ISI. Please proceed..

Yes. Thanks very much guys. Thanks for all the info. And I guess my first question relates to DI. I know that you're going to be giving more specific guidance for the business overall on the 4Q call.

But as we think about trying to model out DI, can you give us a sense for how we might be thinking about the sales growth opportunities for that small portion of your business because it's a bit discrete? And then in addition, what kind of incremental margins, excluding synergies, should we be thinking that business can carry?.

Yes. Stephen, this is John. So we will be giving guidance in the fourth quarter call with sometime mid-February. We're going to be putting – we're going to be lumping together the DI with the rest of the business. So we'll provide one sales number, one adjusted EBITDA number in a range, obviously.

I would say, looking forward, though, in terms of the market, we're pretty bullish on the industrial market in terms of both the current status of where it's at. And I think our breakout this quarter of DI reflects that in terms of the revenue we've baked in.

And then going forward, along with residential commercial, we're extremely bullish in terms of that market.

In terms of your last question around the range, similar to Service Partners, as we think about our spread the 22% to 27% on an incremental basis, we always talk about Service Partners being at the lower end of that range, and DI is the same type of position.

So around that 22% on an incremental basis is the way to think about it on a long-range basis..

Okay. That's helpful. Thanks for that. And then I guess second question relates to this unusual environment of homebuilder constraints. Obviously, we all see what's going on and it makes sense that you've called that out.

I'm curious as to whether or not this unusual period of time though provides any market share implications or opportunities for TopBuild? In other words, is there anything about the current disfunctional environment where you have seen an opportunity to lean in and invest, maybe change some things in an effort to grow your market share opportunities as we come out of it?.

Yes. Good morning, Stephen. It's Robert. So yes, I think absolutely it's the case. I mean, I talked about a good example on the phone of where, as you know, the production homebuilders, they're heading toward this time of the season, heading toward the year-end and stuff, that definitely created some opportunity.

If you think about what's happening in the supply chain and upstream from us, downstream from us, but like whenever we would get those homes coming at us, they would come in slots of like 30 to 40 homes at a time because the previous trades are backed up and the previous trades are just there's no smooth even flow of production coming in.

That's a strength for us because even though they're bringing those 30, 40 homes on in one day or two, what we're doing is we're able to move crews around, move our resources around and we can basically insulate those homes for them in the same day or the next day, if you will.

So we've seen that, we absolutely think given what we've done relative to labor material. There's definitely been some gain share.

I think as we look at our results in Q3 and we look at our residential buy and compare that to what the builders are reporting as well, we feel really good about our residential volume, what's happening there and the results that we produce.

So I think good environment for TopBuild, good environment for us to leverage our strengths, and I think we're seeing that on a day-to-day basis across the country..

Yes. That's very clear. Thanks for that.

And just to clarify, is that an opportunity on sales or margins or I should say, sales or pricing or both? Volume of the pricing?.

Yes. I would say both, Stephen, I think, as we think about share, but I think also as builders are pushing for this and stuff, then labor constraints, concerned about supply chain, we're obviously pricing appropriately to drive value for us and for them..

Got it. Thanks very much guys..

Welcome..

Our next question is from Ken Zener with KeyBanc. Please proceed..

Good morning, everybody..

Good morning, Ken..

Good morning..

So very interesting times here. Pricing is up 8% on the install, distribution 16%. Both of those numbers are about half of that on a two-year stack basis.

With the December increase of 10% on price and volumes flat, maybe up a little bit really over the next six months based upon what the builders are saying, can you maybe give a little context for this type of pricing situation amid flat volumes? And I'm asking this specifically as it relates to the conviction you have to hit the 22% to 27% operating leverage historically, which usually we talk about more efficient drive times, et cetera, et cetera.

So maybe if you could just kind of lay out how your business model fits into high pricing, but not such high volume environment related to your operating leverage?.

Hey, Ken. Good morning. It’s Robert. So I'll take the first part of that, and John will take the second part.

So I think given that material is still constrained and thinking about even what's coming online here, which is loosefill material, the bath side is still constrained as well as spray foam is still constrained and growing backlog, there's a lot of work stacked up here as hopefully, the supply chain continues to improve, even though we think that's well into 2022, it still creates an environment of supply and demand dynamics that will allow for the appropriate pricing.

So as we think about this December, January increase coming and stuff, I think we're pretty comfortable from our pricing perspective, appropriate conversations and again, given that supply demand dynamic and what's in the backlog coming as well?.

Yes. Ken, this is John. So I think in terms of any environment, we've shown pretty good evidence of operating well, whether it's low growth, low price or high growth, high price. Right now, we're seeing some challenges certainly in terms of the volume coming through the pipeline, but a very inflationary environment.

So I think our businesses have shown great capability in terms of performing well under any of those scenarios.

And I think what we're seeing right now in the third quarter is just one of those cases where – and we've said this many times, and I think you've heard this on many other calls from builders and distributors and building product companies that demand is extremely strong, but unfortunately, the pipeline continues to be the issue.

And when we get to our guidance as an example, we're back in August. We were counting on some slight incremental improvements throughout the third and fourth quarter, and we're just not seeing that right now.

But I think in response to that, our teams have done extremely well in terms of obviously dealing with an inflationary environment, taking advantage of that volume and again, the margin expansion you saw is great evidence of that.

So again, I think we're comfortable under any scenario you kind of point to us, and I think we've got pretty good evidence of performing that way..

Good. And just my second question is specifically on distribution, the operating model, the margins seemed to be moving up along with sequential pricing, first quarter, second quarter and third quarter.

Is there any reason to assume that dynamic would change? I'm just thinking about how the business looks sequentially and specifically in the next year with that same net pricing structure seemingly in place? Thank you..

Hey, Ken. This is John. So again, I think, really, we don't anticipate a change. I think, as we look forward, if, in fact, we were to see some type of correction in terms of the industry or a slowdown, I think there's two things that will happen pretty much simultaneously.

Certainly, from an external standpoint, there will be some pressure on topline pricing. But again, I think there will also be some probably excess material. And of course, we're going to put pressure on suppliers in terms of material pricing. So I think we'll balance those as well as possible.

So I think, again, we'll manage that well, I think, going into the future. And I think it plays out well for TopBuild..

Thank you..

You're welcome..

Our next question is from Philip Ng with Jefferies. Please proceed..

Hey guys. John, thanks for all the help through the years. It's been a pleasure, and Rob, looking forward to working with you a little more intimately going forward. I guess to kick things off, the constraints you called out obviously weighed on 3Q volumes and your guide implies still some hangover effect in the fourth quarter.

But any color if some of these constraints are beginning an ease a little bit? And when do you kind of expect volumes to kind of reflect some of the underlying demand that you're – strength you're seeing at this point?.

Yes. Good morning, Phil. It’s Robert. So still tight in the industry, and we talk about the pipeline and the congestion, if you will, both labor and material. We would say we're definitely faring better than most, but material is still tight. And let's talk maybe fiberglass and spray foam.

So fiberglass bath and below, we've got a little more below capacity coming on end of this year, beginning of next year, that will help. But at the same time, I think you've heard me say before, these plants are going to have maintenance. And some of that additional capacity will be eaten up with maintenance activities that have to happen in 2022.

On the spray foam side, it's really been a rollercoaster. I mean, I spoke in the prepared remarks about things even pre-COVID, there was some tightness relative to input chemicals. We had to freeze and we've had some things relative to the ports and materials coming in from overseas.

So there's continued to be issues in the spray foam side of the business as well. So we see these going into 2022, as we mentioned, but I'm sure all trades are working on that, on the pipeline piece of it. And we would hope as we get into 2022, maybe midyear or in back half of next year, we start to see some of that ease.

But given those backlogs and stuff, we would think materials are going to continue to be tight.

And I spoke specifically about spray foam and insulation fiberglass, but it's really across all products, trades before us, trades after us and even some other products we do, like garage doors as an example, there's a major constraint there given all the component items as you think about some of those components come from overseas as well..

Got it, Robert. That's helpful. I mean, I think some of the builders have talked about maybe some of the supply chain easing to more normalized levels by spring.

So could you see that pick up and certainly some of that capacity that's coming on, on the loosefill or are you trying to signal that your volume is going to be really compressed until the back half of next year, which seems bit draconian but any color on that front would be helpful.

And then I guess bigger picture with some of this capacity coming on in the next few months and then longer term with the Knauf expansion, have you guys looked to like secure some of that supply in a more solidified approach or it's still kind of an ongoing negotiation? Thanks a lot guys..

Yes, Phil. So I think relative to that first question with the builders, I think they're probably thinking exactly what we spoke to earlier. There shouldn't be the seasonal slowdown here in Q4 and Q1, given seasonality assuming no harsh winter weather, as we mentioned.

So given that seasonality factors should be smooth, they would expect some catch up that would happen as part of that and so would we, that's what we said. We don't expect the seasonality.

So I think the builders are thinking through that as well, which going into March and April, whenever things start picking up and coming out of that spring selling season, I think we'll see demand ramp up again. So I think that's probably what they're thinking from a seasonality perspective.

To your second question about Knauf, I would say, we worked very closely with management at Knauf in the planning of that capacity, and so we've absolutely secured a majority of that capacity for TopBuild and we have a great relationship with Knauf management team and so glad to work with them on that..

Thanks a lot. Really appreciate it..

Our next question is from Mike Rehaut with JPMorgan. Please proceed..

Thanks. Good morning, everyone. First question, I just wanted to kind of review a little bit if possible, this is the mechanics of how the manufacturer price increases flow through because, take for example, the upcoming 10%, price increase. You have a portion of TruTeam sales that are not residential oriented.

Obviously you have a smaller portion of Service Partners that is not residential installation.

Is there kind of a good rule of thumb to use when you think of like a 10% installation price increase through the industry, assuming that all of it goes through, how much proportionally you'd see that come through in each of your segments?.

Yes. Mike, this is John. So we're not going to provide a number of rule of thumb. I think that all the manufacturers, of course, we have relationships with. And each time there are pricing increases announced by them, we obviously sit down and negotiate both the timing and the magnitude.

And that is a little bit of the secret sauce that toppled certainly in terms of the scale and the leverage and the value we bringing in, in the vis-à-vis the value they bring us. So yes, we're not going to give those types of percentages because quite frankly, they vary by time period and by segment.

I think if you look at by segment, you're typically always going to see a higher number on the Service Partners side on a time where there's material inflation because, of course, material makes up a much larger piece of the P&L.

So as our numbers reflects in the third quarter, second quarter and first, Service Partners price percentages are higher, but that's really required because material obviously is much bigger piece of what flows through.

But yes, we really can't provide any type of guidance in terms of by segment or timing because again, it varies and – but we do think we've done a great job certainly in terms of getting that into our bids in both areas. And I think it's reflected in the performance we've had this year..

And Mike, this is Robert. I’ll add on. So yes, the manufacturers do a nice job of getting the announcements out 60, 90 days in advance. To John's point, we start the discussion with the suppliers, but at the same time, we start the discussion with our customers as well.

And as you can imagine on the TruTeam side, there’s thousands of builders we start the conversations with, but we also start communicating with our contractors and our customers on the specialty distribution side of the business as well..

Okay. Appreciate it. I guess, secondly, just shifting to DI for a moment.

Can you just remind us, again, the amount of synergies that you expect out of that acquisition? And as you've spent more time over the last month or two, what perhaps is not included in those synergy numbers? And as you become more and more comfortable with the acquisition, how to think about that from potentially an upside scenario?.

Yes. So what we've provided – this is John, by the way. What we provided on the call was a $35 million to $40 million total synergy on the business. The first year – by the end of the first year, the run rate is 17 to 20, by the end of the second year, the full 35 to 40 run rate achieved.

And that breakdown by the way was about 40% supply chain, about 35% back office and another 25% operational improvement.

So in terms of where we sit today, Mike, we obviously had done a lot of work in advance of the transaction closing mid-October, but in between that September sign period and the close period and up to right now, we've been very active in terms of working the integration strategy and digging more into the synergy.

And I can tell you, we feel extremely good about the guidance we provided. We're not going to sit here and tell you there's upside to that at this point in time. We're certainly going to be pushing for that. And I think as we drill in, we're going to look for those opportunities.

But I will tell you, we feel extremely good today about that projection we provided you back in mid-October when we closed the transaction..

Fair enough. Thanks guys. Appreciate it..

Thank you..

Our next question is from Adam Baumgarten with Zelman & Associates. Please proceed..

Hey. Good morning, everyone. Thanks for taking my questions. I guess, you haven't really touched much on the commercial business.

You maybe give us some color on what you're seeing there? Are you seeing some project push outs due to labor and material constraints?.

Yes. Good morning, Adam. It's Robert. So on the commercial side of the business, yes, definitely project's been delayed relative to the Delta variant ramped up. Even though we saw some nice year-over-year performance from the commercial side, definitely it was slower than we anticipated especially to have more heavy commercial projects, if you will.

And then I think as on the residential side, we saw some of the material constraints earlier, we've seen some of those, let say, drifts in more on the commercial side of the business like in Q3 as well.

So that being said, really bullish on the health of the industry and the prime indicator for us is the backlog and the bidding activity and what's going on. So our backlog continues to grow bidding projects not just in 2023, but actually some bigger projects in 2024 right now.

Our contract flow coming in, still very healthy, so yes, a little slower than we would have anticipated on the commercial side given some of the supply chain constraints. And I'd say probably more specifically, COVID hitting on the commercial side of it, but really like what we see longer term there.

And again, the mix of projects there is driving the health of that. If you think about the warehouse projects, the healthcare projects, even education, if you will, it's very healthy and that's what we see the type of projects that we're bidding as well..

Got it. Thanks. And then just on the strength in incremental margins in Service Partners.

How should we think about what's driving that? As part of that perhaps accretive pricing given the tight supply environment, how much of that's maybe related to fixed cost leverage as most of the growth being driven by price versus volume? So if you could maybe walk us through the moving pieces there?.

Yes. Hey, Adam. This is Rob. Our TruTeam operations team has just done an excellent job, continuing to execute at a very high level and providing customer service.

For sure, what's driving their bottom line performance is a combination of strong price management with demand so strong and supply tight, they've done an excellent job managing that piece of it. They're extremely focused on their cost controls, so they've done a great job around cost controls.

And then we did get a little bit of benefit on our insurance costs in the quarter. Some of that's driven by our focus on safety, but we also had a benefit on our medical costs as well..

Got it. Thanks..

Our next question is from Keith Hughes with Truist Securities. Please proceed..

My question is on Service Partners, great margins this quarter. I assume that's price and cost.

Can you just talk about moving forward, will that lessen over time as the industry catches up with increases before the new announcement hits next year?.

Yes. So Keith, this is John. And I think that was an earlier question, too. Listen, we're confident we've obviously been seeing margin expansion there over the past six-plus years that we've been a public company.

Certainly, our team has been doing a great job of managing an inflationary environment right now in both segments obviously, with Service Partners also. And again, we've been leveraging that fixed overhead base we have, albeit smaller than TruTeam.

So I think on a go-forward basis, as I said, if there is some type of correction in the industry or when there will be some type of, we're confident that we can manage both the topline in terms of selling prices and the material cost side of it because I think, again, we're going to have to balance those out and manage that throughout any type of downturn, but we're confident we'll be able to work that into the future and maintain the margin base that we have today..

And moving forward, will DI be included with the Distribution segment combined together for reporting purposes?.

Yes. So you'll start to see that on our fourth quarter call. We'll report on two segments, installation and specialty distribution. So Service Partners in DI will be consolidated under one segment..

Okay. Thank you..

You're welcome..

Our next question is from Noah Merkousko with Stephens. Please proceed..

Good morning, and thanks for taking my question..

Good morning..

So first, I understand you're not giving guidance for next year yet, but just how are you thinking about the pricing frequency and magnitude that you're expecting from manufacturers next year? At least maybe can you compare it to what we have this year? I know it sounds like capacity effectively isn't really changing much, and you've got very elevated demand in backlog.

So just curious on your thoughts there..

Yes. Good morning, Noah. It's Robert. So I mean I think if you look at this year, you are going to see four really announced increases basically one per quarter, probably two in the second quarter there. So I think it is supply/demand. As we mentioned earlier, we expect supply to stay tight into next year, again, with the backlog that we have and stuff.

So I'm sure the manufactures are going to look at that. I mean, obviously three of the four have announced here for, call it, December, January.

My guess would be evaluating as we come out of spring selling season given the demand and the starts and stuff, and they'll be evaluating, but we definitely expect to see additional increase, additional inflation into 2022 frequently and how many, a little hard to say, but I think we all are pretty bullish on the residential environment, the commercial environment into next year and what that's going to drive.

So we would exactly expect to see more inflation and multiple increases next year. And hopefully, we see the spray foam side of the industry stabilize next year, some of that supply chain gets under control, both the input materials from overseas as well as some of the domestic blending and manufacturing as well..

Thanks. That's helpful. And then I guess kind of a similar question, but on sort of what you've got going on in the M&A pipeline outside of big deals like DI.

Obviously this year has been – there's been a lot of activity, so just kind of what you're seeing now and maybe your expectations into 2022 on sort of smaller to medium-sized deals?.

Yes. So pipeline is really active right now, really across multiple areas, residential, commercial and then specialty distribution, which is both DI and Service Partners for sure. So we definitely got many things working across all three of those areas.

I think we've done a good job of really focusing on integration, doing integrations right, at the same time, balancing that with new deals coming along.

And I think while we were working on DI, as announced on the DI piece, you saw us do the Valley Gutter acquisition, you saw do the California Building products, those are really nice companies and nice growth areas out west. So I think you can expect us to continue to be active across all three of those end areas in markets, if you will.

And I think you can expect us to see activity from us. And again, the pipeline, I think, John and I probably said this for the past year, year and a half, but the pipeline continues to remain really, really strong on the M&A side..

Thanks. That's helpful. I'll leave it there..

Our next question is from Ryan Gilbert with BTIG. Please proceed..

Hi. Thanks everyone. First question is on your backlog. I appreciate the commentary around the strength of it. I'm just wondering if you could give us some details such as how much the backlog is up on a year-over-year basis or if you could rank order the strength between single-family, multifamily and commercial? That would be really helpful.

Thank you..

Yes. This is John, Ryan. So we don't give out, and we're not going to give out absolute numbers in terms of the backlog growth. I'd say, especially with the third quarter activity, our commercial backlog is certainly strong at this point in time. As Robert said, the bidding activity has been really strong.

And we saw a disproportionate impact on the volume side, the commercial, on the TruTeam side especially this quarter. So that backlog ruined the quarter significantly. And then in terms of the overall single-family, multifamily, single-family backlog has absolutely grown.

We're at probably about 30 to 60 days on average in most of our locations in terms of our normal time between the bid and when we do the work. So you've got at least a one month to potentially two months worth of backlog activity growing in our branches throughout the pandemic.

So I think one thing we have expressed is really strong confidence around the effect that we're comfortable we're not losing any share in this environment either. I think the volume struggles we had this quarter all tied basically to the material and labor impact we talked about and a little bit disproportionate to commercial.

If you look at our residential volumes, our residential volumes, for instance, on TruTeam ex-price is up over 6% – around 6%, on a year-to-date basis up over 7%. And I think that tracks pretty well with what we've seen in completions and quite frankly, what we've seen builders come out with. So I appreciate the question.

But yes, from an overall backlog, very, very healthy backlogs both in residential and commercial on the TruTeam side especially..

Okay. Thank you. Second question is on distribution volume. It sounded like most of that drop was the tough comp and as you said, material shortages.

Is it fair to say that the customer base at Service Partners is largely intact from 2Q 2021 or 1Q 2021? Or have customers fallen out? Or have you pruned some lower margin business as you've done in prior years?.

Yes. Ryan, this is Robert. I'll take the first part of that, and John and Rob can jump in, if they'd like. So definitely from that perspective, tough comp. If you think about coming out of Q2 last year, we have an abundance of material as things were a little slow in Q2 as COVID hit.

And so we came out really all guns are blazing in Q3 with really executing well on our strategy that we laid out with Service Partners. I think you remember last year to your question, it was a really good question, new customers that we were going after smaller contractors and stuff. So the team did a job with that.

I think about now, you're right, tough comp, some material constraints. But no, that team has done a really good job while material has been constrained. I'd say that team at Service Partners has done a great job of really up in the service levels for the customers.

If you think about kind of some just-in-time things that are happening from a material perspective, that Service Partners have done a great job of communicating with the customer, balancing those loads with different customers based on their immediate needs that they have as well across fiberglass, if you think about spray foam and how big of a battle that's been, they've done a really nice job of it dealing in the spray foam side as well.

So I'd say, no customer fallout. I'd say, if anything, Service Partners is gaining some longer term customers just given the absolute great service that they've been able to provide..

And Ryan, this is Rob. I would just add to that, just to give you a number with it. Just on that comp last year, our volume was up 12% in Service Partners last year..

The last piece, I think on SP that's worth mentioning, too, I think if you think about the Service Partners business for us, that's one of the – between the two segments, that gets disproportionately more R&R through the subcontractor base.

If you think about third quarter with COVID spiking, we probably saw what we definitely saw, less consumer acceptance to have people come into their houses. And so we were down on the R&R side in the third quarter, and that also had the impact certainly on the volume as all..

Okay. Got it. Thanks very much..

You’re welcome..

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Thank you for joining us today. We look forward to talking with you on our fourth quarter call in February..

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation..