I'm Phil Ng, Jefferies, building products analyst. We're delighted to have the TopBuild team with us today. Representing the firm, we got Robert Buck, the COO, CEO of the company, as well as Tabitha Zane, who Heads of Investor relations. Well, Robert, you guys have been awfully busy on the M&A front. This latest acquisition seems like a really, really good fit, and you had great success on DI. Why don't you talk about, you know, the opportunity with SPI, what you guys can do, and how you think about that business going forward?
Yeah. So super excited about SPI. It's pretty much a mirror image of a company we bought late 2021 called DI. Really main player in the mechanical industrial space, all insulation related. So, you know, we're the number one player in the space with our DI acquisition, and this really brings together with SPI, two of the leaders in the specialty distribution space. It's about $700 million in revenue, about 100 locations, both in the U.S. and Canada, and really focused in that mechanical, industrial, insulation space. A little bit of play in the residential space as well.
You know, SPI brings along with a lot of great characteristics as a DI, both around fabrication and really a great reputation around service and around customer relationships as well, again, both the U.S. and Canada. So I think what you saw us, you know, what we were able to do with DI, with bringing the company on board, integrating them into TopBuild, you know, both bringing operational improvements as well as synergies to the business. I think we're very confident as to what we'd be able to do with the SPI business. And, you know, it really builds upon our specialty distribution platform. If you look at that business, our specialty distribution business, after the SPI acquisition, it'll be about 46% of our mix of business.
If you look at the commercial industrial space, it'll get us to about 39%-40% mix in the commercial industrial. So it really starts taking shape. You know, we've already been diversifying, you know, from residential into commercial industrial. We think SPI gives us that next, you know, couple of steps ahead with that, and we're, you know, great company, great leadership and talent there, very good culture fit to TopBuild. So we look forward to, you know, completing that acquisition here in Q4.
Does having scale and having some of the fabrication component really puts you in a better spot when you compete with some very smaller guys, or this is pretty fragmented, and scale matters a little less?
Well, it's definitely very fragmented, but having, you know, the capabilities from a fabrication perspective, you know, in a very diverse footprint across the U.S. and Canada, definitely gives us an advantage. And then I also say there's a big piece of this business on the mechanical industrial side, and SPI, about 50% of that business is MRO or recurring revenue. So having the fabrication capability to, you know, service an Exxon or a Shell or these large mechanical contractors is definitely an advantage. And again, between what we have with our current DI business and SPI, really gives us that unrivaled footprint across both the U.S. and Canada, both from an MRO perspective, but also from a, you know, day-to-day new construction perspective in commercial industrial.
That's helpful. Well, Robert, I probably should have kicked off the with this question. Since you guys have actually spun out of Masco, while you're levered to pretty cyclical end markets and your stock will whip around on sentiment around housing, the free cash flow and earnings power has been pretty explosive. I mean, even in a down year for housing, you're gonna grow earnings. So talk to us, you know, since spinning out of Masco, what are some of the things you guys have done structurally, whether it's a portfolio or cost side of things, that allow you to kinda deliver such consistent earnings power and free cash flow?
Yeah, we got this question earlier, and as you think about a spin-off from a large company like a Masco, it obviously brings the management team to focus on our core business, and our core business has been and is insulation, and we just continue to focus in our core of insulation. Obviously, we're the largest in our three end markets, the residential, commercial, industrial, and as we just continue to focus now, you know, our core insulation business is about 83%-84% of our total mix of business. So we're very focused on our core of insulation, but then we diversified in that core. And what I mean by that is just, you know, not just being focused in residential, but now continue to grow that commercial, industrial mix of our business as well.
So again, as I mentioned, after the SPI acquisition closes, you know, we'll be in that, you know, call it 40% range of our commercial industrial piece of our business. So we diversified the business and then also created this kind of multiple avenues for growth around residential, but commercial industrial, and then even within commercial, light commercial and heavy commercial. So we're able across our footprint. Light commercial is like your local Hampton Inn, your local Panera Bread, your kinda wood-frame structure, similar to a residential home. We do that work across our footprint. And then heavy commercial is like in the large metropolitan areas, the high rises, the stadiums. We do that work as well. So we've really been able to diversify the business, these multiple avenues for growth.
And then I think as we spun off, became our own company, just what we've been able to drive, you know, a simplification in the business, improving processes, improving systems. You know, one thing you hear us talk a lot about, Phil, is that in our industry today, we're about 450 locations across the U.S. and Canada, and again, leader in our space, but we're the only business that has a fully integrated technology platform, starting with our ERP system across all those businesses. So the ability for us to drive productivity, to drive efficiencies, to drive simplicity across the business is, is a huge advantage for us. So, and I think by doing that, how we really drive local empowerment, we believe in the local business. We believe in trying, in really driving the entrepreneur spirit in the business.
It's really helped us bring a lot of talent back into our business that maybe had left at one time, but then also attract new talent to the business as well. So it's really shown through, I think, in the results, and what we've been able to accomplish as a company, and we see a lot of white space for the future. I mean, by diversifying the company, we've been able to grow our total addressable market to a little over $17.5 billion in that residential, commercial, and industrial space. So we got a lot of white space, both organically and through acquisitions, and I think, you know, one competency that we've built has been around M&A. We've done a lot of transactions over the past five or six years.
We definitely have a core competency around M&A, but also M&A integration into the business, and really, you've seen us expand margins nicely on the companies that we've acquired over time. And, you know, as we think about the acquisition perspective, you know, most of the previous owners that we bought their businesses, they're still part of our business today. Matter of fact, our M&A function is ran by a previous business owner today. So he's got a great story to tell about what it means to become part of TopBuild. So a lot of changes in the past 6-7 years as we spun off Masco and, you know, we see still a lot of room for to drive the business in the future as well.
Super. Obviously, the last, call it three to four weeks, anything that touches housing, investors been hyper-focused on perhaps a higher interest rate environment. Talk to us how, you know, your conversations with your customers, if that's shifted. How does that kind of position you looking at 2024? You know, certainly, a lot of home builders have bought down mortgages to kinda, offer incentives to kinda drive up that, demand factor up. But just kinda walk us through, what you're seeing out there and how you think about, higher rates, as we look out to, 2024.
Yes, our conversations with the builders, especially the large, you know, production builders, regional builders, I'd say they're still optimistic. You know, we're still seeing specs come out of the ground at a rate that we haven't seen in the past 2 or 3 years. So and I think even to look at their activity on the land side, you can see that the, the larger builders are still optimistic. You know, obviously, with single family, you've seen some nice improvement in the starts around the single family side, and I think obviously that's driven by you don't see a lot of resales on the market. People have these low mortgages today, so they're not gonna, you know, get into a new mortgage, given some of these elevated rates. And so new construction's really been the only game in town in many, many markets across the U.S.
So, you know, I'd say midterm, long term, we're still very optimistic. You know, we've been underbuilt for a decade, and there's still plenty of opportunity and pent-up demand out there. You know, relative to builders buying down mortgages, hard, hard to say, but I would just say they continue to be optimistic, and I think you see that in some of their activities. And, you know, they're, they're smart in their business model. They're obviously doing things to address affordability and continue to, continue to work that angle as well as they realize some of the challenges with the, with the homebuyer today.
Super. Based on some of the actions you guys have taken, and actually your volumes have outperformed starts and completions, what are some of the great things that you guys are doing on that front to kind of manage this shock we've seen at least the start of the year on the completion side of things, and when do you see volumes bottoming out and ideally inflecting for your portfolio overall?
Yeah, so it's definitely about this multiple avenues for growth that you hear us talk about. Again, we were heavily, heavily residential laden business, if you look back in, you know, 16, 17, 18, and we've really shifted that. Again, you know, we're gonna be after their SPI acquisition, you're gonna see us, you know, about 54% installation, about 46% specialty distribution, so we've diversified from that perspective. And then you see our Commercial Industrial segment of our business getting up to about 39%-40%. So this multiple avenues for growth has really de-risked our business off what can be cyclical in the residential side. And as we look across those different segments, as I mentioned before, our residential businesses can do this light commercial work.
So if you look at our results, I think like in Q2, as an example, you know, record profitability, but from a sales perspective, how we grew the business, you know, I think we were up 22-23% from a commercial perspective. So if things do stumble from a residential standpoint, you know, we've diversified the business with these multiple avenues to continue to grow our overall base of business as TopBuild. So, you know, as we look out, we think that's a great thing. As we've made investments in the business, you know, we're constantly feeding our branches, you know, leads to new work so that we're making sure we're driving that productivity overall, including that sales productivity.
Again, we think that multiple avenues for growth is really, you know, a great model for us in the future, just to continue to leverage and continue to drive both organic and M&A growth.
Super. From a pricing standpoint, we've seen a handful, actually, all the fiberglass insulation manufacturers announce a price increase for this fall. Any thoughts on whether or not, one, that would stick, and two, in this current environment, do you have the ability to kinda push that price in a margin-enhancing fashion?
Yeah, I think it's gonna, as far as it sticking, it's gonna be really, you know, the equation of supply and demand. You've seen the multifamily starts decline, but you've seen some nice single-family start volume the past couple of months. I think we hit 1 million in the month of May, and we've been in the 900,000s here the past couple of months. So I think it's really gonna be dependent on those single-family starts to finish out 2023. The industry's off allocation, which means today there's plenty of material available. So I think that supply and demand will drive the stickiness of the price increase that's out there. You know, obviously, that dynamic can change depending on those starts.
You probably saw or a lot of you saw Owens Corning took down a plant in Arizona in the past few weeks. Not a dramatic impact on capacity, but some impact. There's still maintenance to be happening at these plants as they've been running full out the past three years, and there's really no new capacity coming on until one of the top four manufacturers opens their new plant in Texas, probably towards the end of Q2 in 2024. That being said, if there's the ability out there, you've seen us perform very well in the inflationary environment. I think, if you look back our margins the past five years, we've improved our margins by about 800 basis points.
So we've proven through a combination of our operators in the field, the ability we have through our technology platform, that we perform very well in that environment, and we execute well whenever that exists.
Okay, so it sounds like it's an environment that's, you know, favorable from a pricing standpoint for you guys at this point.
Yeah, I think, again, depending on the start, that starts trend.
Okay. From an M&A standpoint, as you kinda highlighted, that's a good avenue for growth, and you guys have a strong capability. How should we think about that algo as it relates to the commercial and industrial side of things with the DI and SPI? I mean, historically, you would go buy some of these smaller bolt-ons, and you pay 5x-6x, you get synergies out of the gates. Is that algo any different on the distribution side for commercial industrial?
That's a great, great question. So we definitely, from an M&A perspective, still see a lot of opportunity in that space. There's some chunkier acquisitions in that mechanical, industrial, side of the business. Whereas, you know, the residential side, they're still very fragmented as well, but super fragmented on the mechanical industrial side with some chunkier acquisitions. But the same formula works, relative to if you think about the main supply chain elements, same supply chain partners, both on the residential side and commercial industrial. You know, we're still partnering with the same folks in that business as well. And I think the one part of maybe the story about TopBuild that's been underappreciated is just what we've driven from an operational improvements perspective in the businesses we've acquired.
If you look at, you know, the accretive margins that we've produced and you look at what's happened to our M&A integrations, you know, we've often, I'd say most always exceeded the numbers that we've put out there. And I really think it, it comes from both the synergies we talk about on the supply chain side, but definitely the ability to drive operational improvements in those businesses that we acquire. So I think the same formula definitely does work. And, you know, I think the fact that, you know, we have a, you know, dedicated resources around that side of the business, and again, how we're... You know, I think there's a real spirit in our company that lives with driving improvements. You know, we talk a lot about bottom quartile.
You can always look at bottom quartile of anything, bottom quartile of branches, customers, products, labor, you know, anything like that. And so we're constantly working those elements of the business, and again, I think it's shown through in how we've driven the improvements in the business. I think whenever we bought the DI business, that was about a 10% business, and I think at the end of 2022, within about the first twelve months of ownership, we drove about, you know, 600-700 basis points of improvement in that business. So we're very confident in the synergies that we talk about. Very confident the synergies we delivered on DI, we delivered above the upper end range of our synergy estimates.
Super. Your margins have been stellar, right? I mean, from an incremental margin standpoint, you guys generally outpunch what you guys guide in that mid- to high-20% range. When we kind of look forward, assuming a normalized demand environment, how much more runway do you have to go, and what are some of the big buckets? I know operations and technology is a big passion for you, Robert, but kind of talk to us what that opportunity could be and some of the big buckets that you saw in front of you.
Yeah, I mean, we're I go back to that spirit in the company and what's driven the results around really driving improvements. And I would say, you know, we still see plenty of room to drive improvements across the business, and we feel very comfortable with that 22-27 that we guide on. You know, distribution may be at the lower end of that, installation at the upper end of that range. But we still see opportunities for improvements in driving operational excellence throughout the company. You know, we've obviously been on a great trajectory. If you look at the margins, we don't expect that we're gonna continue that steep trend that we've seen the past few years here, but we still see room to improve the business.
You know, if you look at our guidance, we—you know, how we're guiding the margins for the rest of the year, you know, they're—we'll see what the opportunities exist there, and we'll see how the environment plays out from that perspective. But, you know, we just continue to drive improvements around your points. Productivity. This is the example I always give: So we have 10,000 installers today across the U.S. installing insulation, and if we can drive 10 minutes of productivity in that group a day, it's $millions, tens of millions on the bottom line for the company. So you're right, we're using technology, we're working processes and stuff to continue to drive labor productivity.
And then one thing that we introduced about a year ago is around how we're able to distribute leads in a very proprietary way out to all of our branches in that commercial industrial space as well. So we're driving sales productivity and labor productivity, and we see more opportunities to do that. Again, we've been proud of the margins that we delivered. Our operators have done a great job, as well as our back office folks have done a great job, and we'll continue to look for those opportunities.
How are you guys positioned to capitalize on some of these mega projects I've often heard about, and then certainly on the LNG side? How are you positioned, and how should we think about that ramping up? There's different acts out there. There's CHIPS Act, IRA Act. So just kind of give us a little flavor, how do you kinda see that ramping up and the visibility to that business?
Yeah, so it's definitely a big part of the advantage of having, you know, our leadership position from a DI perspective and as we're looking to close SPI. So, you know, those businesses have, you know, a great footprint, the service network, again, both the US and Canada. Great capabilities relative to, you know, how they service the customers. Matter of fact, the companies are known for that customer service element, but then also that fabrication capability as well.
So if you think about some of these projects, whether you think on the commercial side, medical, some of the higher education perspective, if you think about on the industrial side, you talk to LNG, some of these semiconductor plants, EV plants, you know, we really have that capability to service that across the footprint and given some of our unique capabilities that we have, on the fabrication side of the business. So, yeah, we're, we think we're in great position to not just service it, but to provide solutions, 'cause it really does come down to you know, different types of solutions for some of those bigger projects.
Given our expertise, both in the business as well as some of the engineering factor that goes into it, we're in a great position to support that, and a great position to grow with it as well.
Super. Any questions from the audience? All right, Robert, I will continue then. We talked about how the housing cycle, from an inventory standpoint, we've underbuilt pretty materially. During the COVID boom years, starts were explosive, but completions kind of peaked at in that 1.5 range. Talk about how you think about these bottlenecks, could impact the industry from a growth standpoint, and do you see that easing over time the next few years for the broader industry for housing?
Yeah, I think that, you know, you talk about completions. I think the metric has definitely changed over the past three years, right? Everybody used to look at starts, but now you definitely have to look at completions to understand, you know, what's happening, single family versus multifamily. We seem to have, you know, for a couple of months, we had about a 1.5 million completions rate, but it seems like that 1.4 to 1.45 is probably more the norm from a completions perspective. You know, I think you see builders making investments to improve productivity. I think you definitely see those in the building product space and service providers looking for things to do that. But I think, you know, construction labor will be the constraint.
I think as supply chain pressures has eased, have you seen, you know, others, other building product materials bring on capacity and stuff? I think it does go back to, to the labor component of it. So I think that can be the governing factor in the future. Focus is on labor productivity and labor in the construction industry. But I think you see companies like TopBuild. I would say that's become a strength of ours, how we've recruited new folks into our business, you know, our training programs, how we get folks up to speed from a productivity perspective.
So I think companies working on the labor side, whether it be, you know, skilled trades and how you get others into this industry, that'll really be the factor that can help us get above that completions rate of a 1.45, if you will, for the future.
That's great. Recurring revenue is growing as a percentage of total revenue with the expansion of SPI. Can you talk about how the MRO piece of the business impacts it and how growth margins compare to the overall business?
Yeah, that's one thing we do love about the mechanical industrial business, even some of our legacy service partners business. So, you know, pre- the acquisition of DI, we would say, you know, we were in that, you know, probably teens % of some recurring revenue. With DI, that got us into, like, 26% recurring revenue, and now once we finish the SPI acquisition, that gets us to about 33% recurring revenue. So it does reduce some of that risk of the cyclicality as more normal demand that we can plan on. And if you, if you say: What's driving that MRO business in the mechanical industrial space?
If you think about some of the environments where those products were installed, you know, in refineries, even outdoors at times, some of the extreme conditions relative to the flow of materials or liquids through that, high temperatures, low temperatures. And then I'd just say from a kind of an environment of, you know, corrosion, those types of things, it drives regular replacement of a lot of those insulation, insulation parts, whether it be fiberglass insulation, rubber, you know, pipe insulation, even some of the metal jacketing as well. But that MRO also exists, and we talk about our marine business as well. So aircraft carriers, cargo ships, that type of thing, there's constant replacement of insulation and those elements as well. So, it is good margin business 'cause a lot of that comes with fabrication.
Some of those are contracts that we'll have as well, because you can think about there can be unique fittings in some of these refineries or some of these food and beverage type of plants. And then, you know, beyond just the elements that happen, you know, some of this is industry-regulated as well, where there's got to be replacement driven there. So that really drives the mechanical, industrial side. Then in our traditional business, you've got things like safety supplies as an example, that are constantly recurring also. So it's gonna give us a real boost in that recurring revenue across our specialty distribution business. Again, we end up being about a third recurring revenue after the SPI acquisition.
From a secular standpoint, insulation certainly is very sustainable. Can you talk about some of the different regulation, legislation that has transpired from a code standpoint or just adoption, whether it's IRA Act, how that could impact your growth profile for insulation to demand?
Yeah, so definitely see it as a tailwind for sure. You know, as building codes have become, you know, stricter across the U.S., although they're adopted locally, you know, they're obviously talked about at the state level. That's definitely provided a tailwind. Now, you see certain areas of the country do a better job than other. I mean, the state of California has done a great job with some of their Title 24 work to have conditioned space, which definitely drives, you know, higher insulation demand or even, you know, kind of better solutions, if you will, from an insulation perspective. But then now with the Inflation Reduction Act, you're seeing with like the tax credits for the builders, they're more lucrative.
I'd say they're also more complex because now you're not just talking about one element, you're talking about a system that includes HVAC, appliances, windows, as well as insulation. So we think it's definitely a tailwind for the industry. Definitely talk around, you know, lowering carbon footprints. If you think about industrial spaces, mechanical and commercial, as you think about, you know, ESG factors and stuff as well, it's definitely created some tailwinds for the industry. Hard to quantify, but if you think about inherently what we do at TopBuild, and that is either supplying insulation or installing insulation, you know, that whole element of driving energy efficiency and stuff, that's right at the core of what we do every day in our business.
Okay, great. Well, Robert, we're gonna stop here. Thanks for all the great insights, and appreciate your time as always.
Great. Thank you.