Good everyone. I'm Phil Ng, Jefferies Building Products analyst. I'm glad you can join us this afternoon. We're delighted to have Robert Buck, COO, incoming CEO of TopBuild, to present today and join me for this fireside chat. It's obviously a very exciting time for the housing industry. I'm sure many of you've seen the very strong housing starts today that came out today. I guess, to kick things off, I'm just gonna give you a really brief bio of Robert. He joined TopBuild in connection with the Masco spin in June 2015. He will be assuming the position of CEO officially on January 1st , 2021 .
Prior to assuming that role, Robert has served as Group Vice President at Masco, where he was responsible for the Installation and Other Services segment, and has had very senior leadership roles at Masco, notably with Liberty Hardware. Robert has earned a master's degree in Business Administration from the University of North Carolina at Greensboro. In terms of logistics today, I'll kick things off with a handful of questions, and at the halfway mark, we'll open it up for Q&A from the audience. The best way to kinda ask your questions, within your screen, there should be a little box in the dashboard for you to type in your questions, and I will relay those questions back to Robert. So Robert, I guess, thanks for taking the time to speak with us today.
Sure. Thank you, Philip.
I gave a very brief bio, but I think it'd be helpful for the audience to hear it from you and the journey you've had with TopBuild since becoming a public company.
Yeah. Thanks, Philip, and thanks for hosting today. So I'll give a little bit of my background, not all fifty-one years, but give a good flavor for it. So my educational background is Operations and Systems, so whenever I talk about technology a little bit, maybe that'll ring true. I started my career in the brick-and-mortar industry, so I've really been building products my entire working career. Well, I spent most of my thirties all over Asia, working for Masco, mainly in the hardware industry, but other products that we were sourcing and manufacturing from that perspective. Came to TopBuild, or what was the old Masco Contractor Services model, in late 2009, early 2010.
Right, right in the depths of the recession, the Masco executive team asked me to come here, and the challenge at hand was taking a company that was definitely suffering in the depths of the housing bust and turning the company around. So been here in this business for almost 11 years now. And so if I think back to those years in 2009, 2010, both myself and John Peterson, which a lot of folks know, our CFO, we came into the business and, you know, I think we took a pretty common sense approach of looking at the business, rationalizing the footprint across the country, really focusing the business on the core business of insulation installation and insulation distribution as well, and really focusing on the core products around that insulation perspective.
Cut a lot of fixed costs out of the business, and really got involved in some repair, remodel business. Started growing the commercial business as well during that timeframe, and those years really have served us well, I think, as part of TopBuild, as far as what we learned about the industry, as well as what we learned about the business during that timeframe. Obviously, speeding up to the spin-off from Masco in 2015, it really created and gave us a great opportunity to really evaluate the business, you know, front to back. That is, looking at the culture, looking at the processes, looking at how we did business, our branch structure, and everything from, you know, products that we were in, again, to just, you know, productivity measures, that type of thing.
So I think those first couple years after the spin-off have really helped us develop into the company that we are today. Just a real rich focus on the culture, obviously centered around safety, but local empowerment, where we have this nice model of really keeping the local branches, which we have over three hundred today, really motivated to drive results. Really, this focus on operational efficiency and really the alignment of our entire team, including our branch support center in Daytona Beach and across the footprint of those three hundred branches. I think that culture of local empowerment really ignited the fact that we're able to bring some new talent into the business, but also bring some talent that had left the industry in the past back into the business as well.
It also allowed us to really take a look at our supply chain. We really made some, what I'd say, significant changes in shoring up our supply chain, strengthening our supply chain, across the network as well, so if I think back to, you know, those changes that we made, kind of the reevaluation and the, you know, results-oriented approach that we took, it's really driven today the strategy that we have and the results that we've been able to deliver and drive from the strategy as well, and that is, you know, this focus on our core business being residential, being installation and distribution, our core business of commercial, and then we built a couple more legs to the stool over the past five years. You know, we've talked about, obviously, installation, distribution.
We've talked about commercial, that being the core, but now the glass adjacency that we've added to the business as well. And that's a significant business for us, and we consider that to be core today. And then the other piece that I think we've really honed the past five years is that M&A strategy and that M&A integration, as well as driving M&A results for the shareholders. You know, I'll talk about a little bit later, I'm sure as questions come up, but just a very robust process that we have about around evaluating targets, integrating targets, but most importantly, producing results post-acquisition. You know, insulation install and insulation distribution is our core.
It's what we believe we're definitely the industry leaders in, and I think as we think about the culture of the company, we've got a very, I'd say, high-performing culture, a very aligned team, and if you're in my role, coming into the CEO role January first, just super excited. Super excited about the future of the company, super excited about where we're going, the backdrop of what's happening in the industry today. You know, I just this is my passion. It's what I love to do, love the team that I work with, and what we've developed here at TopBuild, and what we're gonna do in the future.
... That's super, Robert. That's a great overview. You and Jerry obviously have partnered together, and the strategy you have in place have unlocked a lot of value. I mean, it's obvious with the stock price. But with you taking the helm early next year, and as we kind of pivot into this next leg of this, cycle, any change in strategy or philosophy? And, what are some of the things that keep you up at night?
Yes, I would say with number one, Jerry and I have worked together for a long time. You're exactly right, Philip, 20-plus years. He's been a great mentor, and we definitely teamed up here at TopBuild to, you know, with the rest of the team, to drive some great results. So and I don't see any hard right or left turns, I mean, just continue to focus on the core business that I mentioned this drive for operational excellence, and then this drive around M&A and continue to grow the business profitably. I mean, that's what we're all about. I think we've continued to deliver on that promise of growing the business profitably.
But I think you'll see some things, and I've got the technology background, and we've implemented some things in the past three or four years in the business. I think we'll continue to build on that. You know, I'm very focused on the talent of our team. I think the best local team wins and building a great bench strength, which we've done, but I think we'll continue to focus on that talent piece of the business. You talk about what keeps me awake at night. You know, I'd say number one is safety. I'm very passionate about the safety of our team. We have, as you know, over 10,000 employees. We between our install crews of about 8,000 employees, our plus 1,000 salespeople, you know, 500 delivery drivers.
We're visiting over 15,000 job sites a day across the country, and so this culture of safety and making sure this well-being of safety for our employees, for the well-being for their families, that's a passion point of mine. So if you think about us visiting all those job sites every day, that's something I'm always thinking about, how we keep our team safe. And I would say COVID has highlighted our strength of a safety culture, but it's also made sure that we continue to raise our game from that perspective. So I'd say safety is one. I'm always thinking about the challenges of our industry. If I think about labor, if I think about material, materials, that type of thing, disruptors, you know, always looking out to the future of what could disrupt our industry or our business model.
So I think we've got a proactive approach from that. Doesn't necessarily keep me awake, but things that I'm always thinking about.
That's great. That's really helpful. It's incredible how much of a V-shaped recovery we've seen in housing in light of, you know, record unemployment, obviously, we have a pandemic. So, you know, when you think about the outlook on housing, how do you kind of envision that unfolding the next few years, and where are we in the cycle?
Yeah, I think it's a hugely exciting time to be in the industry for sure. If I think about housing and what's happened with the pandemic, I mean, it's the historically low interest rates, the fact that we were underbuilt going into the pandemic, you know, what the millennials are doing now and this move away from the metro areas. I mean, it's an exciting time to be in the industry. You see that. You mentioned it earlier, see the housing starts today, that just supports that. So, but I do think it's gonna be more of a steady recovery. I mean, the builders are very optimistic. We're talking to builders across the country of all sizes, every day. And so I think with the labor, with materials, we're gonna see a gradual ramp up.
I think that's good for the industry, by the way, so that we can keep up and see this gradual ramp. But there's a lot of exciting work coming our way. I think the backlogs from the residential side are gonna continue to, you know, go through Q4. I think it's gonna go into Q1 of next year, so it's gonna provide some smoothing from a seasonality perspective, which isn't a bad thing for the industry as well. But definitely the builders are very excited. We are. We think we're in a great place to service those housing starts that are gonna happen here in the coming months, and I think well into 2021 .
I think the underlying demand and the drivers for that is very much intact. You kind of highlight demographics, lower interest rates, but you kind of pointed out some of the bottlenecks, whether it's labor, availability of building material. I think if you look at your business this cycle, it's grown pretty steadily in that low to mid-single digit range.
Right.
Is there an opportunity given, I guess, the stronger demand backdrop, where you see volumes inflect noticeably, or these governors that I talked about that kind of limit some of that growth, but, you know, on the flip side, it provides a very steady growth for many years versus a boom-bust cycle? How are you gonna think about that?
Yeah, I think it's a great question, Philip, and I think that's, that's what we probably see in here. I think it's gonna be more the steady ramp. I think both from a, a labor perspective and from a materials perspective. I think, you know, some manufacturers probably faced some challenges during the pandemic, maybe slowed down production. Now they're starting to ramp back production. And then we know going into it, over the past several years, labor has been an issue, maybe not necessarily for, for TopBuild, but for the industry. And so I think labor will be part of that. So again, I think it'll be a nice, steady ramp, which will be good for the industry, and again, it'll smooth out some seasonality, and I think we'll carry on. I, you know, I said 2021.
I think based on what we see and hear from others, I mean, this isn't just twenty twenty-one. I think it's gonna go out into the next several years.
Got it. So your view for the next few years is more of the same, very steady growth rather than, like, a big pop.
I think-
That's how you're managing your business.
Yes. I think nice, steady growth that that'll be good for TopBuild and good for the industry as a whole.
And then you mentioned labor. How are you positioned in terms of a tight labor environment, and you know, how do you kind of stand out versus your peers?
Yeah, I think it is a strength of TopBuild. I mean, starting with, we absolutely consider ourselves to be employer of choice in the industry. And that goes from our benefits package to how we bring folks into the company, and I think about that from a training perspective. Training, including safety, but also training, including how they can get up to become very productive in their role. I think we probably mentioned before, the majority of our workforce is piece rate, so as they get more productive, you know, better earnings potential and better earnings power for us and for them and for us as a company, and then again, back to that safety training.
So, you know, bringing them in, ramping them up, both from a, a training perspective, from a productivity, and from an earnings perspective as well. I mean, an installer in our business can get up, you know, very easily to that $50,000 mark, $45,000-$50,000 mark coming in. So I think that's one, how we bring folks into the industry, that employer of choice status. But then we, we work two sides of the, two sides of the funnel, if you will. So, you know, how do we get more people into the company, which labor's been a constraint?
And I think that, again, that employer of choice, but I think we have something unique at TopBuild that no one else has, Philip, and that is we have ten thousand recruiters out there every day, and that is, that's our employee base. Our best, you know, input comes from referrals of our employees, and they do a great job helping us with that. We call it our friends and family recruiting. And, you know, they go out and sell our company and help bring in some of their friends and family. And we've seen that as a big win in the past, and we're building upon that success now, ramping up for what we think is coming, with that growth that we both talked about. So I think that's one end.
And then we're also working the other side, and that is productivity. You know, with ± 8,000 installers in the field a day, anything we can do to just improve ten minutes of their time, you know, stacks up very quickly into improving their productivity, improving our results. And we're constantly working continuous improvement efforts around productivity, but also the inputs of more folks coming into the company as well. And that's why I think we've won the labor game pretty well as TopBuild, and I think that's why we're very well positioned for the future.
In this business, I believe scale matters, right? Both from the labor side, and I would imagine anything on the procurement side. But can you talk about, you know, given the fact that you have a market-leading position, how you kind of differentiate yourself versus some of your peers, whether it's some of the small regional players out there?
Yeah. Specifically from a material perspective, Philip?
Material, labor, or just logistics.
Okay, sure. So from a materials perspective, you know, we work with all of our supplier partners. So think about the fiberglass manufacturers. You know, we work and buy from all four. You know, and there's some things that we do that are very unique. I think we have a very good understanding of supply and demand planning, so we provide all of our manufacturers a forecast that helps them with their level loading of their manufacturing facilities and how they can adjust production as well. So we definitely do some things from a supply chain perspective. We're able to move loads around very easily for our manufacturing partners if they need more help in a certain region of the country, as an example.
We have teams that are available and able to do that from a supply and demand planning perspective. As you know, we're kind of a free agent, so we're able to kind of ramp up and ramp down with some of the suppliers as they have excess capacity. So, I think that makes us unique, and I think we're as they're looking to ramp up capacity in certain areas, then we're usually their first phone call, because we can help level load those lines as they're starting up production in new facilities or making those big capital investments. You know, labor, I spoke to, thinking about that employer of choice perspective and how we, you know, sell the company and how we make sure that we bring folks into the company.
That onboarding piece is so critical, you know, to make sure that we lower our turnover and, and again, get folks productive and out working safely very quickly. And then I think about the footprint, so how we leverage across the country. And I'll give you a couple examples. Just during pandemic time, where maybe competitors have struggled in certain regions, and we're able to quickly come in, maybe bring, you know, crews from two or three cities at a time to insulate thirty or forty homes in a very quick period of time.
On the commercial side, we've done some enormous Amazon facilities in the past three or four months, and we brought crews from maybe eight different locations to, you know, work that the contractor was maybe trying to get done in five weeks, we were able to knock out in four weeks. And I can count a job where a tremendous spray foam job that we're working on out west, again, where we brought crews from six different locations, and what would have taken normally maybe, you know, well over a couple of months to finish that job, we were able to get that done in more like forty days for the contractor. Again, by pulling on our resources, leveraging, you know, equipment, inventory, crews from across different locations.
I think that's a very good differentiation point for TopBuild and really drives great service for our customers.
Great. That's helpful. You talked about the pandemic, and you guys have managed that pretty well, but that has led to certain bottlenecks where, you know, lead times are getting pushed out, and there's certain bottlenecks from social distancing. When do you kind of have things kind of, how these bottlenecks started easing, and when do you kind of envision things getting back to more normal? Early next year? Just, I just want to understand the process.
Yeah, that is a, that is a good question. What is the new normal? So I, I think on the residential side, we've probably seen some of that ease over the summer months. So for example, there were a time in a certain region of the country where there could only be one trade. Initially, whenever new requirements were introduced, there could only be one trade on the residential side at a time, and then there was even some areas where maybe only one person on the job site at a time. Those have definitely eased. Do I think that lag time, though, on the residential is extended, Philip? I would say yes. I think some of that from social distancing, but also some from the labor constraints.
I think where we'll see it more and longer term is on the commercial side of the business, Philip, where you've got, you know, nine or 10 trades working a job site at a time, or nine or 10 trades potentially working on one floor of a high-rise building at a time. So we still see social distancing, more stringent guidelines on the commercial side. And you can just think of some practical measures, like, getting material up the freight elevators, those types of things, where they can create a little more challenges. So requires more planning, requires some, you know, third shift stocking of jobs, that type stuff. So there's some workarounds, but I think we'll see it longer term, and may become a little more of the new normal on the commercial side of the business.
Great. And you kind of alluded to it as well earlier, some of the manufacturers were curtailing production pretty aggressively at the peak of the pandemic, and we've seen a pretty sharp rebound in demand. I believe a few of the insulation manufacturers have put insulation product category on allocation right now. You know, what are you seeing that? Are you having any, you know, difficulty in terms of getting product, lead times, and whatnot?
Yeah, I think given the, you know, maybe two or three factors, some of that slowdown that happened on their manufacturing lines. But then as things have as we've all got visibility of this ramp-up that's coming, I think you see people are, you know, things are getting busier, number one. Number two, I think people probably ramped up their buy of materials in anticipation of that ramp of housing coming, as well as, as you're aware, there was a price increase announcement that came out here for mid-September. So I think those factors, slowdown of some production lines, as well as this ramp-up that's coming, are a material cost increase announced in the industry. That's definitely caused some tightness in the industry from a material perspective.
I could see that carrying on here, Philip, as we go into Q4, and depending on how that those starts ramp up, how quickly they ramp up, you know, could carry some into 2021. I think we feel very comfortable from a TopBuild perspective. Again, back to the philosophy, we buy from all four manufacturers, work with them very closely, provide that forecast to them. So we feel very comfortable and confident in our supply chain. But you do hear about it, and I think there's some dynamics that have happened here in the past six or eight weeks that may be driving some of the tightness of material.
Got it, and some of this is temporary in nature, but if we see starts kind of growing at a pretty nice clip, let's say we get to 1.4 million starts next year, is that an area where you're starting to get a little more nervous in terms of getting supply, and you need to see the manufacturers add a little more capacity? I'm just trying to gauge in terms of supply-demand dynamics for your suppliers as it and as it relates to you.
Sure. So I think material, you know, will continue to tighten if we ramp up to that level, but you hit on a very key point. I mean, the manufacturers are smart in their planning. They're very optimistic and excited about what's going on as well. So I know that they're reviewing their plans. As you know, there were a couple that were planning on bringing on some additional capacity in originally end of 2020, early 2021. I'm sure they're reevaluating plans, reevaluating capacity as well, because again, everyone in the industry, obviously us, TopBuild, the builder, us, TopBuild, the home builders, as well as the manufacturers there, everybody's excited about what they see. So they're evaluating capacity as well, and I wouldn't be surprised to see some of that additional capacity.
Got it. In a rising raw material environment, just because housing is good and an improving economy, we're probably going to see more broad-based inflation, whether it's material costs, labor, and transportation. How are you positioned to kind of manage through that? I know back in 2018, you know, when you did see a big spike in insulation prices, you guys got squeezed a little bit, but you guys managed it pretty quickly.
Right.
You know, your ability to kind of manage that and, you know, how is this scenario potentially a little different, given the current background?
Yeah, I think I think you're right. We have a track record of doing pretty well there. I think actually in 2018, you know, you saw us expand margins. A couple of things, Philip. I think one is just how we handle it internally. I mean, we have systems in place that really allow us to monitor that, to make sure that we're making the progress. It's obviously thousands of conversations with customers appropriately. So, you know, we have to have the boots on the ground to make sure our sales force are out having those conversations. But we also have some good process and system and controls in place across our entire business to make sure that's happening. So that drives the process, that helps drive the discipline as well.
I think the other piece is thinking about. We offer that bundled solution. So I would say the builders are, you know, probably more concerned about labor. So, you know, we go to them with that bundled package of material and labor, and I think they see that very valuable, equally on the labor side. So I feel very comfortable and confident with our ability to manage that. You know, a rising environment like that is good for TopBuild, and as I said, we feel very comfortable with our ability, processes, communication in the company, about how we make sure that gets implemented on a timely basis.
To that point, I mean, since you control the labor and the builders obviously focus on delivering product, rising raw mat, strong demand, that's actually not a bad backdrop for you guys. Is there an opportunity for you to kind of use that environment as a margin-enhancing opportunity to kind of get, you know, a little more pricing in that environment?
Yeah, we definitely believe there's still room to run, Philip. Again, you know, that labor and material bundle that we bring, but then, you know, the added piece is the service. You know, there's a major inspection that happens after our work, so, you know, making sure that we provide, you know, great service, that bundled package of labor and material to the builder, that we bring our expertise to the table as code changes continue to happen, that type of thing. We see it as, you know, both a margin opportunity, and we think there is continued runway, and obviously, organic growth opportunity for TopBuild.
I think that's why you hear in my voice, and why you probably hear us as a company, why we are, you know, so, so excited about where we are right now.
Great. And just one last one from me, and then we'll open up Q&A from the audience. So please fire away with some more questions. I do see a few in the queue already. You know, we've talked about this, urban migration dynamic post the pandemic. I'm actually a candidate for that right now. I have two very young children cramped up in a two-bedroom apartment, and we're moving to the suburbs shortly. But it feels like we're still in the very early innings of that. Can you talk about, you know, what you're seeing, what you're hearing? And then in terms of if you see that mix shift move from multifamily to more single family, what does that do from a demand perspective and a margin perspective for TopBuild?
Yeah. So we definitely hear about it, Philip, probably, you know, as we're talking to our builders, especially, you know, the larger builders, but also, you know, the custom builders that are maybe more in the rural areas, some of them. I think they're very optimistic about that happening. I think we, you know, hear about it from the large public builders as they're looking at it from a land perspective as well. So we absolutely believe that we'll see that. And, you know, I'll go back to our strength and our footprint. Thinking about our footprint, we're in great position to service that work, whether it was in the metro areas, but as it moves out to the rural areas, as well. So we definitely see that happening.
I think the shift from multi to single family, you know, I think we saw some of that dynamic in the starts today. Although the past few months, the multifamily's been pretty strong, but I think that'll be a market by market perspective. I think we'll see that in certain markets, multifamily will stay strong. I think in some markets that maybe you've had a strong build cycle on multifamily, we'll see that slow down some. Now, relative from a TopBuild perspective, you know, as that mix shift happens from multi to single, you know, obviously more insulation going into a single family, so that mix shift can be a positive for us.
You know, from a margin perspective, both are, you know, pretty equal for us from that perspective, but we're in a great, great position to service both multi and single. And I think as the... Maybe you asked this, but I'll just maybe add on. I think we could see some change in the footprint as well. I think we, you know, we saw back in 2018, the builders going towards more of that entry level, and I think we've seen the size of the footprint decrease some, which leads to a very, you know, to a smaller, somewhat of a smaller take per unit, but not a dramatic impact.
What about from a margin perspective in these starter homes?
Yeah, it, it's about the same for us. You know, the starter homes versus the multifamily side. So we think, you know, margins will hold up pretty well from that perspective.
Okay, great. As promised, I'm gonna read some questions from the audience.
Sure.
Would pushing into heavy commercial increase the volatility in your business? What are some of the synergies with the residential business that you can leverage?
Yeah, so heavy commercial, so if you think about the pandemic, you know, the biggest impact has been on the commercial side of business, and specifically heavy commercial. We still see the light commercial business performing well, but heavy commercial has taken the biggest impact of the brunt relative to metro areas, if you think about the high rises of some of the larger products. Larger projects, sorry. We haven't seen a tremendous amount of cancellations, I would say. Definitely have seen projects delayed. Project delayed due to some of the social distancing that we talked about, or the slowness of some of the projects coming back. So definitely been some delay in projects, but we're still very bullish on the commercial side of the business.
I think, you know, if you look at our track record, we've doubled our share in the commercial side the past, I'll call it three or four years, where we have about ± 11% share, and it's still a five, you know, ± $5 billion market opportunity. So we still remain confident in our ability to gain share in that piece of the business, both heavy and light commercial. So but will it be a slower recovery on the heavy side? The answer is yes. But we still think it's a great growth platform for us, and we think that will gradually come back here, and I think we're already seeing it somewhat from a bidding perspective. We're seeing some of that come back.
Relative to how we can leverage on the residential side, I mean, we talked some about material and labor. But I think as, maybe I'll point out a couple of things. As those starts happen in some of the rural areas, that's gonna be, again, a great opportunity to leverage our footprint across the country. So you know, we're able to flex and pivot based on where those starts are pretty easy from a TopBuild perspective. And then I think about the ramp. So I think it's gonna be a nice, steady ramp, but there'll be some peaks that happen in there in certain times of the year, potentially, or in certain markets, there'll be some peaks.
I think the way that we leverage, I mean, I can think back to, you know, starts were pretty active this time last year, fourth quarter of last year. And I can think of some instances where some big public builders were coming up to some closing dates. They needed, I'm gonna call it, 80 to 90 homes insulated very quickly, and we were able to bring crews from, this was a specific Florida example, bring crews from Tampa, Orlando, Jacksonville, West Palm, together, and insulate those homes very quickly for that customer. So I think that's an example of how we leverage, and I think it provides us great growth opportunities, but also really builds on that service reputation that we have as TopBuild.
Great. That's, that's super helpful. Next question: could you please discuss your expectations and/or opportunity for Service Partners for organic growth and margins? Why has its organic growth lagged the insulation segment over the last five years from an organic growth standpoint?
Yeah, good. That's a good question on Service Partners. One is just the. I'll start with kind of the current position of Service Partners. If you look at our results this year, that business is really flourishing. You know, some things, some decisions we made that which answers part of the question. So we look back at 2018, we were talking about the material cost increases back in 2018, and we were definitely going to the street, to our customers with material cost increases. And you know, we definitely got some pushbacks from some customers, but we also saw some low-margin business that we decided to purposefully step away from.
And, you know, I think what we talked about during 2019 is we were rebuilding some of that business, looking at our mix of business, both from a product perspective and from a customer perspective. So now fast-forward to some changes that we've made in that business, just, you know, some great leadership changes that we made in the business, but really starting to see the fruit of those decisions that we made around mix. And now you see it in some nice margin performance in Service Partners. I wanna say in, you know, Q2, you were seeing some performance above 11% in the Service Partners business, and saw some nice organic growth that was happening in the business as well, selling more to current customers, but also reaching some new customers.
And so I think those decisions that we made the end of 2018, beginning of end of 2018 and into 2019, we're definitely seeing the fruits of that, and seeing some nice results in Service Partners. In a distribution business, that's always been, you know, considered kind of top-of-class performance. We're seeing improved performance there, and we're very optimistic about what's coming in that business relative to organic growth, and continuing to leverage that footprint and, you know, just some creativity we're invoking into the model there. I think we talked about in our Q2 call our sanitize and disinfect product line that we went into. So we're seeing some nice early wins there as well.
Great. With TopBuild and IBP at a combined 70% market share within resi, is it realistic for you to keep acquiring $50-$70 million of revenue through M&A? And I guess my question as well on top of that, how's the pipeline looking, and where are you seeing some of the best opportunities? Is it on the residential side, commercial? Any geographic markets that really stand out for you as well?
Yeah. So we see a lot of runway on the acquisition side, and specifically on the residential side. Let me start there. So, you know, this is a very fragmented industry, and there's a lot of avenues to that residential side. If you think about, you know, Home Depot or Lowe's, there's a lot of avenues to tackling that residential side, so it's very fragmented. We're not worried about, from a regulatory perspective, you know, any issues there as we look to move forward with our very active pipeline that we have. And maybe to your point, or your question, Philip, so I would say our pipeline on the acquisition front has never been more active with more candidates than it is today.
So, you know, first, our core insulation business, residential, we have a lot of great companies that we're talking to there and are moving along at different stages of the acquisition path. But then I'd say on the commercial and glass front as well. So I think, you know, people realize it's a good opportunity now. I think maybe as people went through the pandemic and reviewed their business, and I think we did a good job of staying in contact with folks and just continuing to build the relationships from multiple angles, our folks in the field, as well as our dedicated M&A team. So, we see a lot of good opportunities, starting with the core of residential and insulation, but then also drifting right into commercial and the glass side of the business.
So, so very active, and we expect some good activity there ending 2020 and definitely heading into 2021.
Great. Speaking of home builders, do you expect the market to consolidate as large players are looking to acquire land inventory to support growth? And I guess for me, what kind of impact would that have for TopBuild?
Yeah, I don't know anything directly on that, but we've seen it, right? We've seen the bigger production builders continue to do some consolidation. I think if you look at some of the things that we look at, we would expect that to continue, to some extent, that the large production builders will look to continue to do acquisitions and some consolidation, as well. But I think the regional builders, you know, that are in good position from a land perspective, they'll continue to grow as well. Relative to... What was the-- I'm sorry, Phil, what was your question on top of that?
What does that mean for TopBuild with increased consolidation?
Oh, yeah. So, you know, I think given our relationships with the larger builders and larger regional builders, I think we try to build these relationships throughout, so kind of a tops-to-tops relationship, as well as a local, regional relationship as well. So I think that'll play well for us. I mean, you know, we do work for all the top production builders and builders of all sizes across the country. So, if that consolidation happens, I think given that footprint of ours and, you know, their ability to rely on us from a labor perspective, material perspective, I think that only plays to our strength and our value proposition.
... Great, that's helpful. California is a big state for TopBuild, and it's currently partially locked down from the fire. How much of an impact are you feeling from that? And number two, Washington is the number four state for TopBuild, I believe. How concerned are you about people leaving that area due to the unrest, and how could that impact your business? So two big states for you, California and Washington.
Yeah, California, you know, unfortunately, we've seen wildfires in California in the past, so even though this time, a little more severe, so we've dealt with that in previous years. So, you know, there, there's definitely a lot of activity in California right now, so are we moving crews around to adjust for where those fires are? The answer would be yes. I don't expect dramatic impact from that. Also stretches up, by the way, into the Pacific Northwest and in Oregon as well, so we're staying close to our branches, from that perspective. So I think one good thing about our footprint is, you know, we're not necessarily skewed to one area whenever, unfortunately, these natural disasters, whether it be a hurricane or the wildfires happen, and, you know, there'll be a lot of rebuilding, afterwards.
Relative to Washington State, so that's an interesting one, and one we were just having a conversation with our local folks in the past couple weeks. So, you know, where there was more people moving into Seattle, now you're seeing people move more out of Seattle, but back into the rural areas. We're not necessarily seeing them leave, or we haven't seen them, hearing from our builders, per se, leaving the state of Washington. So it does maybe, you know, people may be heading out of Seattle proper or Bellevue, out into the rural areas. I'm sure that is happening, and that will happen, but again, we have quite, to your point, fourth largest state for TopBuild.
We have quite a footprint there that can service those new demand trends that'll happen in some of those outlying areas of Washington State.
Great. Did we have temporary incremental margin drivers in the first half or Q2, and more indefinite permanent margin drivers? Not with that, notwithstanding some short-term cost, price, pass-through impacts, what are some of the puts and takes for incremental margins in the medium and longer term?
Yes, I think in Q2, we probably talked about on the Q2 call, you know, we had some things that happened relative to, you know, lower spending. If I think about, you know, a good example could be travel and entertainment, right? Maybe that could've been worth, you know, a couple, maybe $2.5 million in the quarter. So there's definitely some things relative to the pandemic that drove lower spending in Q2, and we saw in the results. We absolutely think some of that cost, over time, will drip back into the business. We also did some restructuring in the quarter as well, that we saw some benefit, that we think will add, I'm gonna say, plus or minus maybe $5 million of annual benefit based on that restructuring that we did.
So some of that will live through, or definitely the restructuring will live through. Some of that spending will come back into the business. If I think about margins for the future, you know, we think that there's still margin opportunity in the business as we look forward. I think, you know, we think about some of those, you know, puts and takes. I mean, definitely in the pandemic, I think we've all learned some things that can benefit our businesses of being more efficient in the future.
But, you know, I think what we've said, and I think what we've proven, which is most important in these times, is the track record. We're always looking for those areas of continuous improvement and driving productivity, whether that be the labor productivity in the field, whether that be our sales force productivity. And I would give an example of one that we've really been focused on, coming out of 2019, here in 2020, is our fleet and transportation productivity. Some new technology we put in place to really watch how our fleet's being used, making sure we're using it efficiently, and helps us track other things in the business as well.
I think you can expect from TopBuild this constant focus on operational improvements, which is really, you know, at the core of that, is driving improved and increased productivity and leverage in the business.
Great. I had a question from the audience. How does the continued industry transition to spray foam insulation affect TopBuild's operation and value proposition to customers going forward?
Yeah, I think as we've talked about spray foam in the past, you know, what we've said is, you know, pretty similar margins to fiberglass, but the dollars from a sales dollar perspective can be two to two and a half times that of a fiberglass install. So, you know, nice margin, more margin dollars, and obviously dollars. And, you know, we do that around the country in our regions, where spray foam is a, is in demand. I think relative to the value piece of it, so, you know, as codes change, there are certain instances where spray foam is a better insulation option, so we're able to offer that to our customers.
On the residential scene, spray foam growth is on the commercial, getting more commercial jobs, and so one of those jobs I mentioned previously on the West Coast, that was a commercial job that was going on there, where it was all spray foam and we were able to do that in a quicker time period, quicker turnaround time for the customer. You know, that was specifically spec'd for that, for that type of construction, for that type of job, so I think, you know, we're pretty agnostic.
We can do, you know, we can do spray foam, we can do foam board, we can do fiberglass, we can do mineral wool, whatever spec that is needed to meet the requirements of that contractor or that building code, that's, that's what TopBuild brings to the table, and I think those large contractor and large national relationships.
Got it, are raw materials like MDI a direct pass-through? And I guess, a tack on for me, are there certain windows in a year where, you know, the conversation to push price is more convenient, and more obvious, as you kind of negotiate with your customers?
Yeah. So, on the first question, I think if it's, if it's referring to, you know, additives into the, into the foam side, yeah, I mean, I think we've been pretty successful as there's been some increases on the spray foam side to appropriately pass those through to the customer. 'Cause it's, you know, it, it's about the material, obviously, on the spray foam, but it's about the quality of the install as well, and the safety of the install. So I think there's value that's driven by that. You know, relative... I'm sorry, what was the second part of the question, Philip?
Are there any, you know, certain windows in a given year where you could actually raise prices, that make a little more sense?
Yeah, so definitely supply and demand. If it was a normal year, and you went through a harsh winter, that could be a little bit harder to go with an increase to the builders, as they may be slow and fewer starts coming out of the ground. I think with the current environment, where we expect a steady ramp, I don't see that seasonal impact or seasonal concern that could happen, you know, if there was an increase to happen in a harsh winter, and an increase to happen in the middle of January. But that's, I would say.
Got it. Could you please share your thoughts on the retrofit market? Specifically, could you comment on, one, Biden green pledge? Two, possibility of a European-style resi retrofit subsidy from the government to a homeowner.
Yeah, so on the repair/remodel side, you know, I'll give a little bit of history from a multiple different angles. So you saw a lot of activity back in, especially the Obama administration time, where there were more tax credits, maybe some of the similar stuff that Biden's talking about. You did see more interest because you saw, you know, some government incentives that were coming, then you saw some local municipalities or potentially some, you know, local energy companies that were providing that. At the same time, you know, oil and gas were at higher prices. I think in the current environment, we don't see as much. You know, oil and gas prices are definitely, you know, lower today. So you don't see as much of that from a repair, remodel, refurbished perspective.
Some of the weatherization programs, you've seen some of those go away. We saw some slow down again during the pandemic. We're starting to see some of those come back. I'll speak specifically to in the Northeast, maybe the Boston area and Southern California as another example. I do think if there are more incentives that come, or if the dynamics around oil and gas prices drive that, I think you could see more repair/remodel. But I'd say current environment, sitting here, you know, fall of 2020, I wouldn't say there's major demand drivers from an installation perspective on the repair/remodel side, outside the normal, you know, folks looking to drive better comfort in their homes, getting ready for the winter months, those types of normal cycle things that happen.
Got it. We've seen outside strength in the home center channel across the board, and I think insulation included. And to your point, it's not, historically, been a big part of our market. What's driving that strength? And it seems like it's been sustainable, even of late.
Yeah, I think. You know, I think there is so much, just in general, for the home centers, Lowe's and Depot, there's so much DIY activity, where you have consumers doing projects themselves, as they were, you know, probably stuck in their house for three or four months at a time. And I think they found things that were either unsightly or projects they finally decided to jump on. So at that DIY approach or mentality right now is absolutely driving the terrific results we see Depot and Lowe's putting up, for sure. And I think you put that on top of, you know, the timings. We're sitting here in the fall. If you're gonna put a little more insulation in your attic, that would be the timing for that. We obviously see that seasonally happen from a repair/remodel perspective.
So I think probably specifically that's what you see on the insulation side, but I think that's absolutely what's driving the consumer demand at a big box today.
Got it. I know you guys are big, and you have a lot of means of getting product insulation in a tight environment. I'm just curious, are you seeing any of your competitors on distributor side having a tougher time getting product, and maybe these contractors looking at the home centers to kind of procure product to make sure they finish the job? Have you heard any rumblings of that yet?
Yeah, I don't know that I've heard any specific issues from that perspective, Philip, as of yet. I think there's been, you know, maybe some instances relative to some of the natural disasters you spoke of, where somebody may have an immediate need. But I've not heard an overall trend to that, as of yet in the industry, or any specific competitors.
Got it. That's great. And then, on Lennar's call earlier this week, they were talking about how, you know, they've seen some lumber inflation, just inflation more broadly, and they want to be disciplined on price. So what they've done is, while they've seen pretty strong underlying demand, they've been working down their inventory and want to be, you know, disciplined and rational on that. Have you heard any of your, you know, builder customers talk about that? And is that a risk in terms of the growth trajectory as we kind of look out to 2021?
Yeah, I think one thing that I have heard along those lines is, you know, their approach to... Or some builders, not specifically Lennar, but some builders, they're definitely their approach and their look at, at spec homes, right? So their comfort level in building a spec home whenever this, you know, inflationary environment's happening pretty quickly, you know, can they go out and build a spec? Can they go out and promise a certain price whenever there could be... You know, I think I saw an article recently, maybe on average, where lumber was adding $14,000-$16,000 to an average start, if you will.
So I have heard and seen them maybe changing their approach from a spec perspective, given that rise in inflationary environment, and I'm sure trying to manage their inventory to the point that Lennar made on their call.
... Got it. That's, that's super helpful. And then can we talk about commercial briefly again? You know-
Sure.
Within non-res, I mean, there's definitely a bucket that's gonna do better, right? Warehouses, distribution centers, versus, let's say, office buildings, and hospitality, for example.
Correct.
In terms of margins and insulation intensity, are there any big nuances between those two?
There really isn't. I mean, I look at some of the jobs. So obviously, we highly focused on big commercial jobs that we're doing, watching margin performance, watching labor performance, those types of things. You know, really, we don't. I think that bundled solution that we go with, whether it be, you know, a large high-rise, or whether it be a distribution center, or, you know, healthcare-type facilities and stuff, we see pretty similar margin performance. It really is about managing material, managing your labor, and that's something that our team stays hyper-focused on.
And we've over the years, as we've grown the commercial business and, again, doubled it in our representation here, I think even, you know, today, being about 23% of our total revenue, we've put better tools in place to allow our teams to do that. I think that's why we've seen some nice margin performance on the commercial side of the business is managing that. And I think the main thing relative to you're right, maybe fewer high-rises, maybe some less concentration in the metro areas, we're pretty agnostic to those projects as well. So if we're doing an Amazon distribution facility or a, you know, we just finished some big projects with Google, we're pretty agnostic to that versus a high-rise in New York City or Chicago. So...
That's one thing, as we think about the commercial space, we're really making sure what projects are we bidding, because you can see the mix of what's gonna happen in the projects. So we've got our teams very focused on bidding the right mix of those projects in the different areas where we're servicing.
It sounds like, you know, you're better insulated than most of your peers on the commercial side. I mean, we all view that commercial is gonna be a little softer next year. You know, your bidding activity and backlog still sound pretty robust, but when you kind of look out to 2021 and maybe the next few years, how do you kind of see that, your commercial business, performing?
Yeah. So we're, I think I mentioned earlier, still bullish on the overall growth of commercial. You know, and I think I mentioned earlier, it definitely will be slower to recover than, residential, but it will recover. I think as we've seen the dip here in 2020, it will improve starting, you know, I think it'll improve here some back half of 2020. I think it'll improve into 2021. But as, as we've said before, I think, we've mentioned, it'll be choppy. Commercial projects are just generally choppy in general, given large projects and how they hit and how projects fall, and some move forward faster, some move forward slower.
It'll be choppy, but we see a continued growth path of you know gaining share on the commercial side, and we still remain very positive about our growth path and our growth ability on the commercial part of the business and gaining share there.
Got it. And we talked about briefly that if there is a changeover from a Trump to Biden presidency, anything that will impact your business positive or negative? I would imagine if it's a blue sweep, maybe M&A opportunity could pick up, just due to any regulation changes or tax. But just curious how what do you kind of see in that backdrop if there is a change?
Yeah, I'll just mention a couple. I think that, you know, M&A, so you do hear some business owners out there talking about that, so that could create an opportunity, for sure. I think you picked up a good one. If there, you know, as there could be more credits associated energy efficiency, those types of things, I think you could see we could potentially see some more of that repair/remodel focus come back or that repair/remodel excitement come back at a consumer level or maybe at a local government level as well. So I think there could be, there could be some things like that as the, as certain administrations take a certain approach to, to elements that, you know, could provide some positive.
I do think, though, given those, I don't think anybody's probably gonna make major changes in the interest rates. I think, probably not gonna have a major impact on the housing starts, and I think that, you know, the things that, whether it be the millennials are doing or folks moving out of the areas, as what they experienced in the past six months, I think that's still gonna give us some really nice, ramp up for the industry and steady growth for the industry for, for the foreseeable future.
Great. I got a question in the audience: Is your labor 100% fungible between commercial and residential, business lines?
That's a good question. So, it's funny, as we see some of the projects. So first off, residential and light commercial, the answer is absolutely yes. And, you know, we refer to lights, as light commercial, as very similar products, very similar applications. That could be your local three-story Hampton Inn Hotel. That could be your Panera Bread that's being built, those types of things. So that labor is absolutely interchangeable. Between residential and heavy commercial, some of the-- we're seeing an intersection here of the type of projects that are moving forward and the type of products that are being used. I talked about spray foam. More spray foam being used in the commercial side of the business, so that's absolutely transferable between our residential crews and our commercial crews.
If I think about an Amazon facility, I keep bringing that up because we've done so many of their big facilities or working on so many of their facilities today. You know, that's foam board product that we use on the residential side. Our applicators are absolutely able to transfer over and work on that type of projects as well. If you get to some more of the specialized parts of the commercial side, could be some of the fireproofing that could happen, could have be some of the potential roof systems that we do. That can be a little more specialized, but we're seeing the intersection of more and more, where we're able to leverage that labor pool across residential and commercial projects.
We think that's gonna be a great potential for us in the future.
Great. And just one last one from me. We talked of potentially some migration trends where, you know, people are moving more to the suburbs or more rural areas, and you talked about how you're pretty well positioned. Are you thinking about, you know, revisiting how you're deploying capital in some of those markets, whether it's M&A or just organically?
Yes, I think that's. We have a really diligent process for how we look at capital from an M&A perspective, Philip, and so we're constantly looking at the market strengths. We're looking at the forward forecast of those markets, and thinking about that as we look at the footprint and where we feel like that we should go. You know, what is, you know, obviously from an install perspective, from a distribution perspective, looking at travel times and how far it is to service customers, what's the cost to service certain geographies and certain customers as well. So I think that's just a constant thing we've looked at as a company, even in the past. I'd say five, six years.
So something we'll continue to look at, and if we feel like we have to adjust or pivot the footprint, that's pretty easy for us to do. But I think as we look at the population, as we look at, you know, the markets across the U.S., our ability to service it stands at a pretty good pattern today. I think we've always talked about we were modeled to service a larger housing starts number, and I think as that happens here, even if it's some rural and away from the metros, I think that footprint is gonna service really well and allow us to leverage well here as those starts ramp up.
Okay, great. Robert, I wanted to thank you for your time and your great insights, and it's certainly an exciting time at TopBuild.
Yeah. Thank you. I'm really excited. A great transition going on for the CEO role between Jerry and I, and looking forward to finishing 2020, but also looking forward to an exciting 2021. I appreciate you hosting this and the time today.
Take care, guys. Thanks a lot, Robert.
Thank you.