Greetings, welcome to the TopBuild conference call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tabitha Zane. Thank you, Tabitha. You may begin.
Good afternoon! On the call today are Robert Buck, President and Chief Executive Officer, and Robert Kuhns, Chief Financial Officer. We have posted a PowerPoint presentation on our website at www.topbuild.com, that will be discussed in conjunction with management's prepared remarks. Turning to our safe harbor statement, 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 afternoon'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. I'll now turn the presentation over to Robert Buck.
Good afternoon, and thank you for joining us on such short notice. It's an exciting day for TopBuild and our stakeholders. A short time ago, we announced that TopBuild has entered into a definitive agreement to acquire Specialty Products and Insulation, or SPI, as we refer to the company on today's call, in an all-cash transaction valued at $960 million.
This acquisition brings together two leading specialty distributors of mechanical insulation and further differentiates TopBuild's unique operating model. We are excited about this transaction because it adds scale and capacity to better serve our customers and further reduces the cyclicality of our business by increasing our recurring revenue stream. Equally as important, we expect it will drive significant returns for our shareholders as we look to achieve $35 million-$40 million of run rate cost synergies within two years after close.
SPI supports our profitable growth strategy, expanding our North American footprint and broadening our exposure to all three insulation end markets: residential, commercial building, and commercial and industrial mechanical. We see great opportunities to drive mutual operational improvements throughout the business, are particularly excited about SPI's high percentage of recurring revenue from maintenance and repair operations, especially on the industrial side.
The SPI leadership team is talented, experienced, and engaged, and they're excited about bringing their expertise to TopBuild. Having spent time with Ray Sears, President and Chief Executive Officer of SPI, as well as other members of SPI's leadership team, it is, it is clear that our corporate values and culture are very similar, with a strong emphasis on people, safety, integrity, and execution. TopBuild has built a strong foundation for growth, which has prepared us for this next phase of expansion in our core insulation business.
Throughout our history as a public company, driving operational excellence and executing well on our strategic goals have been our most important areas of focus. This has resulted in strong financial results for our shareholders. Through a combination of organic growth and acquisitions, our five-year compounded annual growth rate for revenue is 21%, and 37% for free cash flow. Plus, our adjusted EBITDA margin has expanded by 840 basis points, and our total shareholder return is 244%.
We are confident TopBuild's business will be further strengthened for the future with the addition of SPI. Our acquisition strategy is disciplined and strategic, and our ability to successfully integrate the companies we acquire ensures we deliver strong returns for our shareholders. Our acquisition criteria is simple but important. We look for leading companies operating in our core business of insulation.
They must be strategic in their business approach and provide value, accretive growth opportunities. They must have strong relationships and a solid reputation with their customers, as well as an engaged and a talented team that leads a culture complementary to ours. Given this criteria, SPI is a great fit with TopBuild.
While identifying acquisition opportunities is essential, the ability to successfully integrate these companies onto our systems and platforms is even more critical. I'm proud to say this is a TopBuild core competency and one of the keys to our success. Two great examples, our highly successful integration of DI, acquired in October 2021, and our return on invested capital, which has increased from 8.6% in 2017 to 18.5% at the end of 2022.
I'd like to take a step back for a moment and talk about the evolution of our specialty distribution segment over the past six-plus years. In 2017, it accounted for 33% of our total revenue and primarily distributed insulation products and accessories to the residential end market within the US.
Over the next few years, we made some important changes, bringing in new and energized talent into the business, walking away from unprofitable volume, and driving operational service improvements throughout our branch network. When the opportunity to acquire DI arose in 2021, we were thrilled to expand into the third insulation end market, commercial and industrial mechanical insulation. This core insulation area had been on our strategic roadmap for a number of years, and it was our time to execute.
For those who know the TopBuild story, the DI acquisition has been a home run for our company and stakeholders, providing us a leadership position in this highly fragmented end market. Fast-forward to 2022, our specialty distribution segment now has a strategic fabrication footprint, operates in both the US and Canada, and is the leading provider of insulation and related accessories in all three insulation end markets we serve, which combined, represent a total addressable market of $17.5 billion, excluding the non-insulation products we sell.
When the acquisition of SPI is completed, our specialty distribution segment will expand once again. 89 branches will be added to our network, recurring revenue for the segment will increase to one-third. In total, specialty distribution will contribute approximately 46% of TopBuild's total revenue. I'll now turn the call over to Rob, who will talk about the transaction in further detail.
Thanks. As Robert mentioned earlier, we have agreed to acquire SPI in an all-cash transaction valued at $960 million on a cash-free, debt-free basis. Using the purchase price of $960 million, less $90 million of tax benefits, the transaction's last twelve months multiple on a pre-synergy basis is 11.4x and 7.6x post synergies.
We intend to fund this transaction with cash on hand and a $550 million delayed draw term loan. Once the transaction is completed, our net debt to pro forma adjusted EBITDA as of March 31st, 2023, will be approximately 2.0x within our previously stated comfort zone. We expect to delever quickly as we have in the past, after similar transactions.
The transaction, which has been approved by our board of directors, is subject to customary closing conditions, including expiration or termination of the waiting period during the regulatory antitrust review. To give you a little bit more background on SPI, the company has been in business since 1982 and is headquartered in Charlotte. They are currently owned by Incline Equity Partners. SPI has strong and long-standing relationships with major insulation manufacturers and is national in scope with 89 locations, 85 in the US and four in Canada.
SPI has been acquisitive and brings with it a strong business development team and a robust pipeline of acquisition candidates. Breaking down SPI's revenue mix, 64% is generated from the distribution of mechanical insulation products, 21% from building insulation products, primarily spray foam, and an additional 15% from metal building insulation products.
81% of their products are sold into the commercial and industrial end markets and 19% into the residential end markets. SPI also enjoys strong recurring revenue stream, which is primarily driven by maintenance and repair work. This next slide shows the three core insulation markets that both TopBuild and SPI serve, which combined, represent a total addressable market of $17.5 billion, excluding the non-insulation products we sell.
SPI sells into all three of these end markets. These products include mechanical insulation, metal building insulation, fiberglass, and spray foam. SPI custom fabricates mechanical insulation for commercial and industrial facilities, and provides customized solutions for a wide variety of commercial building projects. Slide 11 shows what TopBuild will look like with the addition of SPI to our company.
As Robert noted earlier, specialty distribution will account for 46% of our total annual revenue, compared to 39% today. Our focus remains on core insulation products, which will increase from 84% to 86% of our total revenue. Revenue from the commercial and industrial end markets will account for 39% of our total revenue, compared to 34% today. In addition, specialty distribution's recurring revenue stream will be roughly 1/3 of this segment's total revenue.
As outlined in today's press release, we expect to achieve synergies between $35 million and $40 million within 24 months after the close of this transaction. Breaking this out further, by the end of the 1st full year, we expect run rate cost savings to be between $17 million and $20 million.
The synergies will be from a combination of supply chain savings and operational improvements, as well as leveraging technology and best practices across the entire organization. Finally, before turning the call back over to Robert, I want to reiterate how strongly we believe this transaction provides significant value for our shareholders and is a great use of capital. We're acquiring a well-run company that is complementary to TopBuild's business. As you've seen from our specialty distribution solid results, we are effective at leveraging our core capabilities to deliver strong returns on invested capital. Robert?
Thank you, Rob. The acquisition of SPI is another important step for TopBuild, bringing together two leading specialty distributors to further promote innovation and deliver best-in-class customer experiences. This transaction will reinforce our leadership position in the large and highly fragmented insulation end markets. The additional scale and capacity SPI brings will enable us to better serve our customers and partner with our suppliers throughout North America.
SPI also enhances our position as a leader in supplying energy-saving insulation solutions. Insulation is critical for the reduction of a company's carbon footprint. We believe energy codes will continue to strengthen, providing additional growth opportunities for all areas of TopBuild's business. We are already in integration planning stages so that when the deal closes, we can hit the ground running.
I assure you, the leadership teams at both companies are committed to helping ensure a smooth transition. We're confident we can achieve the synergies we published within the time frame outlined and drive overall value creation for the business. We will leverage our track record of strong execution to make this combination a great success. We see this acquisition as a winning combination that will drive value for our stakeholders. Our successful track record supports this confidence. Operator, we are now ready to take questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. To remove your question from the queue, you may press star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Joe Ahlersmeyer with Deutsche Bank. Please proceed with your question.
Hey, good afternoon, everybody, and congrats on this, this acquisition. Looking forward to seeing what you guys can do with it.
Thank you, Joe.
Just looking at the release, I see the word install, and I see a lot of the, you know, the end markets that you've said install maybe doesn't make a lot of sense for you. Just maybe wondering if the install is, you know, ring-fenced to the, the residential side of what you're acquiring here.
Yes. Hi. Joe. This is Robert. Rob and I will tag team. Yeah, there, there's really nothing on the install side of the business with this transaction. It's all distribution. But, you know, one thing we like is that SPI does play in all three of the end markets, so they are in the residential space, but they're distributing spray foam and spray foam equipment. That may be what you're seeing, but this is all distribution, specialty distribution, no installation as part of this.
Okay, great. Just, just had to follow up on that. Thinking about what this adds as well, if we're looking at maybe the footprint, is there anything to call out there? I think you said they're nationally scaled, but even just looking regionally, are there, you know, pockets where you're getting into that you're not currently? On the fabrication side, if you could just talk maybe more specifically about what the additional capabilities are that you're acquiring here?
Yeah, great question, Joe. On the footprint, that's one thing we really like about the transaction. It gets us into some white space areas where we're not present today. A stronger footprint in the Southeast, and I would call out specifically Florida, where today, the, you know, our distribution or national footprint, from a mechanical perspective, is not in Florida. It gets us into a great market in Florida, a stronger footprint in the Southeast.
I also would point out the Northeast, which you, you can imagine with these mechanical type of products, how big that Northeast area is, from a service perspective. It's going to give us a nice complementary footprint, but get us into some nice white space areas. I would say the same on fabrication.
Definitely, SPI and DI are both, you know, very strong core competency in fabrication, of those, you know, engineered mechanical insulation parts. It's going to complement that both in the US and Canada. It's going to really give us some great opportunities to serve our customers, in really a unique fashion that nobody has the capability to do other than us.
Great. Thanks a lot. Good luck.
Thank you.
Thank you. Our next question comes from Rafe Jadrosich with Bank of America. Please proceed with your question.
Hi, good afternoon. Thanks for, for taking my, my question. Just, just on the recurring revenue, can you just give a little bit more, more color there in terms of the, the, the visibility that you have on the backlog? Do you have, like, long-term customer contracts on the SPI side to sort of pre- pre- prevent churn? Then what is sort of the breakout of new construction versus RNR within that, that, that recurring revenue? Is this more of a, an RNR leverage business?
Yes. Let me start with the, you know, from a recurring revenue perspective. You know, this is, this is things you would think about kind of required and nondiscretionary, kind of maintenance types of insulation and insulation accessories on mechanical systems. Yeah, there's, there's definitely, you know, contracts with it. It could be, you know, oil refinery-type customers, or clients. You think about they have to do regular turnarounds in those facilities.
It can also be, you know, areas like food and beverage industry, where there's regulatory requirements for the replacement of, you know, certain types of equipment, where you think about high temperature or also, you know, some environmental conditions where these pipes, in, in this example, may be exposed to.
Yeah, definitely long-term contracts, definitely, you know, what we call maintenance and repair work, heavy in the industrial and the commercial side. If you think about that SPI revenue piece of it, and Rob may want to add something here as well, but, you know, kind of new construction is about 50%. This repair and maintenance, or as you refer to, maybe remodel piece, that's 50% of it as well.
It's kind of a 50/50 split there in that SPI revenue that we spoke to. We love that recurring piece. It really brings our total specialty distribution segment to about a 1/3 revenue split of that recurring revenue on the other side of this transaction.
Just following up on that, for what, how far out, is your visibility in terms of the revenue there? Is it similar to your existing non-res business where you're already, you know, seeing bidding out into 2025? Just trying to get a sense of the backlog that's already there.
Yes, if you think about some of the large, what I'll call turnarounds, which is what the refineries do, those are pretty well-planned projects. Yeah, you do see visibility of that definitely out into what I'll call 12 months-18 months out, as they're planning that, and they bring us into that fold as we're, you know, looking at the, at the plans and, and giving them options as to what they can do there.
There is some visibility, especially the bigger projects, which as we talk about in this space, there comes with some bigger projects, you know, as, as the timeframe goes through the, through the project cycle.
Last one is just, can you just talk about the post-deal market share for, for some of the key end markets?
Rafe, this is Rob. You know, from a high level, like we said, you know, the nice thing about SPI is they're selling into all the same end markets we sell into today, right? It's highly fragmented in all those, like we've talked about. It's a $6 billion residential market, $6 billion commercial building market, $5.5 billion commercial and industrial mechanical market. You know, we'll pick up, you know, a little bit of share on the residential side. That's obviously the smallest piece of what they do today. It's about, you know, 19% of their revenue is, is going into the residential space. The other 81% is going into commercial and industrial.
You know, in the commercial building with their MBI business, we'll, you know, we'll still be around that, you know, low, low teens type market share. We were talking about 11% before. We'll pick up two points there. Then on the, you know, commercial, industrial, Mechanical, you know, we're about 10% today. That's obviously the biggest piece of their business today. It's about 64% of their revenue. We'll be somewhere mid-teens type share in that side of the business.
Okay, great. Thank you.
Thank you.
Our next question comes from Stephen Kim with Evercore. Please proceed with your question.
Yeah, thanks very much, guys. Appreciate it, and congrats. Was curious if you could talk about, is, is there any particular power alleys? I know that, you've discussed about the, you know, the, the distribution of the mechanical. Are there any particular, you know, verticals where they may have a power alley that's distinct from DIs? Similarly, you know, the MBI business, anything particularly distinct, or are these just really, very similar businesses, is my first question?
Yeah. Hey, Stephen, this is Robert. Whenever we look at the SPI business, they have a pretty strong presence in the commercial side. And, you know, it's probably about, I'm gonna say, Rob, correct me if I'm wrong, about 2/3 commercial, about 1/3 industrial, plus or minus. DI was more kind of about a 50/50, if you think about that. It's a little stronger in the commercial piece of this, which again, we like. It brings, you know, more diversification there.
Then I'd say, you know, pretty similar businesses from a, from an MBI perspective, you know, really providing, you know, custom solutions. We think about those jobs are, you know, job by job, measurements, job by job, you know, products that we're providing them from that perspective. Yeah, it does, it does give that mix from that perspective.
I think the other thing that we like about it, Stephen, as we think about from a customer perspective, they're bringing on 4,500 + customers, and that's gonna be some new space for us because, new space for us in general, because there's some nice cross-selling opportunities we've learned here with DI, relative to some, like, some of the products you may see in our traditional fiberglass or fiberglass accessories as well. We, we, we like the cross-selling ability it's gonna give us also.
Yep, that's not included in the synergies or is it, or is it?
Nope, we've not included that in, in the synergies at all.
Yep. Then you talked-- Would there be any purchase accounting associated with this deal? Then, I, I, timing-wise, I think DI took about six weeks to close or something. I mean, is that, is that anything particular about this that would cause that to be very different?
Yes, Stephen, this is Rob. From a purchase accounting standpoint, yes, there'll be purchase accounting that goes with this. We've got to work through all that valuation to see how the purchase price gets allocated with this. That's all still to come. From a timing to close perspective, you know, we're filing for HSR here in the next 10 days, and we expect that to move along smoothly. We anticipate closing this transaction this year.
Okay. Yep, I would expect that. That's great. I think that's it. All right. Thanks very much. Oh, one more, sorry, one more thing. Management. Anything in terms of, can you talk about how you're gonna manage the combined entity? It sounds like there's an awful lot of, you know, similarities between the business, but can you just sort of talk about, you know, what you're planning from a management perspective?
Yeah, I mean, we're, it is Robert again, Stephen. We're excited about the team. Obviously, you've got to spend some time with Ray Sears and some of his executive team there. They're, you know, very experienced in the business, long-tenured folks in the business. We look forward to bringing them on. We think it's, you know, very similar, you know, cultures. I mean, this is, you know, the landing spot for SPI. They've been sold multiple times.
They're gonna come into a company that's all about insulation. You know, as you very well know, in this environment, we're always looking for great talent, and they've got great talent. We'll bring them in. You know, we're, we're gonna, you know, obviously put them on our systems, which you just know that's something that we're known for.
We think the operating companies will work very well together from that perspective, and, you know, we'll start doing some of the planning on that here. We've already started some of the pre-planning and stuff. We're excited about their whole team, coming over and being on board, and we've got, you know, we've already had some engagement there.
Okay, great. Thanks very much, guys.
Thanks, Stephen.
Thanks, Stephen.
Thank you. Our next question comes from Adam Baumgarten with Zelman. Please proceed with your question.
Good evening, this is Marius for Adam. Just a quick question on synergies. Do you expect to shut any or close any branches?
Yeah. Good afternoon, this is Robert. You know, that's not part of our synergy plan or anything that we've laid out relative to that. I mean, we're gonna, you know, obviously, we'll get together as a team and, and make sure that, number one, that we're able to provide, you know, great service for our customers. We're gonna have, you know, great branch network out there, both in the US and Canada. You know, really no initial plans on that. Really, if you think about any of our synergies, none of our synergies are really reliant on that as well.
I'll just add to that, Marius. I mean, from a synergy perspective, you know, it's gonna be about 50% supply chain, 50% operational improvements, you know, IT spend, insurances, logistics, and freight. Kind of our typical, typical playbook on synergies, similar to what we had with DI.
Got it. Thank you for that. On the, on the revenue side, any revenue synergies? You know, I know you might not wanna quantify that, but any opportunities there?
Yeah, I think, you know, from that perspective, we see some nice cross-selling opportunities. You know, as I me- I'll speak to, you know, we've learned that with DI, that some of our, our typical building insulation type of fiberglass, as well as some of our accessory products, play really well in that commercial industrial space, to complement the mechanical products.
Then, you know, another thing is, SPI is bringing 4,500 + customers along with the, with the transaction. So there's gonna be some new places for us to play there, as well as some new geographical, you know, areas from a footprint perspective. Florida is gonna strengthen us in the Southeast, and then also more opportunity, in the Northeast, would be a few areas that I would call out that we think was, you know, gonna be accretive from a revenue perspective.
Yeah. Just so you know, none of those are baked into the model. That would all be upside to what we've talked about here today.
Understood. Thank you.
Thank you.
Thank you. Our next question comes from Barry Haines with Sage Asset Management. Please proceed with your question.
Thank you. Congrats on the deal. Just a quick follow-up. You answered most of my, my cross-selling questions in the prior answer, but are there any, you know, product lines or brands where, you know, either they've got something you would like, and now you might be able to get it, or vice versa, you've got something that they would like, so that, you know, you'd get some, some extra cross-selling that way? Thank you.
Definitely, Barry, this is Robert. Definitely, as I mentioned, you know, from a cross-selling perspective, some of our, you know, building insulation type materials, and accessories, even maybe on the spray foam side, there'll be some complements there, that now SPI will have access to, maybe in a different way, if you will. We definitely see that from a opportunity perspective.
Also the other thing, you know, as we think I talked about customers before, the customer base, but also from a supplier partnership base, it strengthens that, maybe some new supplier partners that come in and also strengthens our relationships with the current suppliers there. We look at it, you know, customer, suppliers, as well as products, and we see, we see good opportunities across all three.
Got it. Thank you so much.
Thank you.
Thank you. There are no further questions at this time. I would like to turn the floor back over to Robert Buck for closing comments.
Yes, thank you again for joining us on short, short notice this afternoon. If you do have any questions, feel free to reach out to Tabitha Zane, and we look forward to talking with you next Thursday on our quarterly earnings call. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.