Q4 2020 Installed Building Products Inc Earnings Call
Greetings and welcome to installed building products fiscal 'twenty 'twenty fourth quarter financial results Conference call.
At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder of this conference call is being recorded.
I would now like to turn the conference over to your host Jason Nighswonger. Thank you you may begin.
Good morning, and welcome to installed building products fourth quarter 2020 conference call.
Earlier today, we issued a press release on our financial results for the fourth quarter, which can be found in the Investor Relations section on our website.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements within the meaning of the federal securities laws.
These forward looking statements include statements with respect to the housing market in the commercial market industry conditions and trends, our financial and business model payment of a quarterly cash dividend the possibility of an annual variable dividend in 2022, our stock repurchase program, our efforts to manage material inflation our ability.
For the increased selling prices the demand for our services and product offerings. The impact of COVID-19 crisis will have on our business and market expansion of our national footprint products and end markets, our expectations for our end markets, including our large commercial businesses and multifamily our ability to strengthen our market position.
Free to pursue and integrate value enhancing acquisitions and the expected amount of acquired revenue our diversification efforts our growth rates and the ability to improve sales and profitability the impact of COVID-19 crisis on our financial results and expectations for demand for our services and our earnings in 2021.
Forward looking statements may generally be defined by the use of words, such as anticipate believe expect intend plan and will or in each case their negative or other variations or comparable terminology.
These forward looking statements include all matters that are not historical facts by their nature forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.
Any forward looking statement made by management. During this call is not a guarantee of future performance and actual results may differ materially from those expressed in or suggested by the forward looking statements as a result of various factors, including without limitation the duration of effect and severity of the COVID-19 crisis, the adverse impact of.
Of the COVID-19 crisis on our business and financial results the economy and the markets we serve.
General economic and industry conditions, the material price environment, the timing of increases in our selling prices. The risks of the company may reduce the suspend or eliminate dividend payments in the future and the for.
Factors discussed in the risk factors section of the company's annual report on form 10-K for the year ended December 31, 2019 at the same may be updated from time to time, Inc. Subsequent filings with the Securities and Exchange Commission.
Any forward looking statement made by management on this call speaks only as of the date hereof, new risks and uncertainties come up from time to time and it is impossible for the company to predict these events or their affect the.
The company has no obligation and does not intend to update any forward looking statements. After the date hereof, except as required by federal Securities laws.
In addition management uses certain non-GAAP performance measures on this call such as adjusted EBITDA Adjusted EBITDA margin adjusted net income and adjusted net income per diluted share adjusted gross profit adjusted gross profit margin and adjusted selling and administrative expenses.
You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our Investor presentation, which are available on our website.
This mornings conference call is hosted by Jeff Edwards, Our Chairman and Chief Executive Officer, and Michael Miller, Our Chief Financial Officer, I will now turn the call over to Jeff.
Thanks, Jason and good morning to everyone joining us on today's call.
As usual I will start the call with some highlights on the quarter and then turn the call over to Michael Miller, Ibp's, CFO, who will discuss our results and capital position in more detail before we take your questions.
IBP produced another strong year of record operating and financial performance for.
For 2020 revenue increased nine 4% to a record $1 $7 billion earnings increased 43, 4% to a record $3 27 per diluted share and adjusted EBITDA increased 24, 8% to a record $245 $6 million.
I am proud and humbled by our performance as we achieved these record results. Despite the unprecedented the effects of the COVID-19, pandemic, which demonstrate the hard work dedication and commitment of our nearly 9000 team members nationwide.
2020, we maintained our commitment to quality and dedication to providing our customers unparalleled service, while protecting the health safety and wellbeing of our employees customers partners and communities the.
The most important part of our business as the men and women working on our locations throughout the U S. We strive to provide an environment, where people want to work and succeed focusing our resources on attracting retaining and developing talent.
I'm pleased to report that we've continued to maintain employee turnover well below industry averages of direct result of the employee programs. We've introduced since 2017 and the culture we value.
Our record results also demonstrate the success and the resiliency of our proven business model, our strong position within compelling geographies and end markets the strength of our balance sheet and capital position and the experience of our senior leadership team.
In addition, since our IPO in 2014, the compound annual growth rates of revenue net income from continuing operations and adjusted EBITDA have grown at 21%, 38% and 33% respectively. Our consistently strong performance is encouraging and we believe we are well positioned for the.
Future as we continue to focus on creating sustainable value for our shareholders.
Before discussing our operating performance and outlook in more detail I want to review this week's announcement outlining our capital allocation priorities the.
The strong free cash flow of our business model and our strong balance sheet provide us with considerable flexibility to pursue our growth oriented acquisition strategy. While also returning capital to shareholders and supporting the long term capital needs of our business.
As a result, I am pleased to announce Ibp's board of directors approved the initiation of a quarterly cash dividend.
The first quarterly dividend of <unk> 30 per share is payable on March 31, 2021 to shareholders of record on March 15th 2021.
In addition to the quarterly cash dividend the board of directors will consider an annual variable dividend to be paid during the first quarter of each year commencing in 2020 to the.
The variable dividend will be determined based on the cash flow generated by operations with consideration for planned unexpected cash obligations for acquisitions and other factors as determined by the board. The board of Directors has also increased the existing share repurchase program to $100 million and extended the program to March one 2022.
Yeah.
It is important to note we will continue to prioritize capital investments on profitable growth through our proven acquisition strategy acquisitions typically contribute to profitability immediately and generate strong returns on investment. In addition, we have been able to self fund our acquisition strategy through the IBP strong free cash flow while simultaneously strengthening.
Our balance sheet, we believe we can support these capital priorities, while targeting a net debt leverage ratio under two times trailing 12 month adjusted EBITDA.
As you can see we have come a long way since our IPO and I'm extremely pleased with our ability to support our growth plan, while simultaneously returning capital to our shareholders with this update let's review of 'twenty to 'twenty performance and favorable outlook in more detail.
Looking at our end markets 2020 was another strong year of residential multifamily and commercial growth across many of our geographies. Despite the impacts of the COVID-19 crisis.
Total residential completions in the United States increased two 5% in 2020, which included a nine tenths of 1% increase in single family completions.
Single family housing demand continues to benefit from low mortgage rates and favorable demographics have driven an increase in demand for entry level housing.
In response homebuilders land positions improved throughout the year and many adjusted their communities to develop more affordably priced entry level homes. We believe these trends will continue supporting further growth as the industry approaches stabilization in the years to come.
And the 2024th quarter, our multifamily revenue increased approximately 34% compared to the prior year quarter, an increased nearly 38% over the full 2019.
We continue to perform well in the multifamily end market as a direct result of our enhanced sales strategy. As we are growing the end market in locations that had previously been over index to single family construction.
As expected 2020 would also benefited from a pricing environment more in line with historical trends for the year, our price mix improved to 8% and on a two year stack basis price mix was up over 8%.
The four 5% decline in fourth quarter price mix was not a result of pricing deflation, but reflects a mix shift in the single family end market. During the fourth quarter, we experienced a higher volume of sales to production builders compared to last year and overall the same branch volume was up 7% this shift within the singles day.
The end market impacted price mix as the average installation of selling price for entry level of production builder jobs is typically lower than the move up or custom home.
Given consumer demand for entry level homes. We believe this trend in mix may continue over the near term.
Even with the decline in fourth quarter price mix fourth quarter gross margin increased 70 basis points as profitability benefited from higher volumes increased efficiencies and the contribution from sales of complementary building products.
Early into 2021, we are experiencing inflation in many of the products we install.
The January 2021 price increase for fiberglass insulation materials was in line with our expectations and was followed with another price increase effective in April of 'twenty 'twenty, one while the timing of the fiberglass increase of similar to what the industry experienced in 2018. The current housing demand environment is considerably different.
With our availability of labor on our strong position with our customers and suppliers. We believe we are well positioned to navigate the inflationary environment in 2021.
Furthermore, we believe single family industry dynamics remain strong and support the continued demand for our services. According to the U S Census Bureau single family starts in the fourth quarter were up over 12% in single family homes under construction increased to 590000 units the highest level since November of 2007.
We also believe we are well positioned for continued multifamily growth as a result of our suburban market focus and success of our expanded multifamily sales strategy.
Covid related safety protocols on large commercial construction sites affected our commercial operations throughout the year. Despite these unique challenges large commercial sales growth increased 15, 3% for the year and on the same branch basis increased two 8%, our total pipeline and bid activity within the large <unk>.
<unk> market has improved over the past three months and based on the long lead time nature of our projects. We believe this trend will benefit our large commercial end market in the second half of 2021.
We also believe our solid pipeline on growing presence within the large commercial end market will help us navigate any near term softness in the commercial market.
Long term fundamentals are expected to remain intact and diversifying our end market exposure continues to be an important component of our growth strategy.
In addition, we continue to pursue additional opportunistic commercial acquisitions that increase our scale and competitiveness.
2020 was another strong year of acquisition growth and we completed nine acquisitions, representing over $107 million of annual revenues during.
During the fourth quarter alone, we completed four acquisitions, representing nearly $50 million of annual revenues.
Acquisitions included a Georgia based installer of complementary building products to residential and multifamily customers, a Virginia based installer of installation services to residential customers.
A washington based provider of installation waterproofing and fire stopping installation services to commercial and multifamily customers in a Washington based installer of specialty coatings for fire protection installation and acoustics and commercial and industrial applications.
Our acquisition pipeline remains robust and we continue to actively pursue acquisitions of well run residential multifamily and commercial installers that support our geographic and product and end market diversification strategies. Our acquisition strategy is supported by a solid and flexible capital structure and we are targeting approximately 100.
Of acquired revenue in 2021, we may exceed this target depending on the timing of acquisitions within our large and growing pipeline.
Before I turn the call over to Michael I want to provide additional information on our expectations for 2021, and our longer term outlook, which was included in our investor deck is available on the Investor Relations section of our website.
We believe most of our markets will remain strong in 2021, and we expect 2021 will be another good year of growth and profitability for IBP. Despite the continued effects of the COVID-19 pandemic for.
For 2021, we expect single family completions to increase in the mid to high single digit range. The increase lag between starts and completions combined with the dramatically increased order volumes from our builder customers are expected to continue throughout the year, which may positively impact the seasonal trends in our business that we historically and counter.
We believe our multifamily end markets remained strong during 2021 and while near term demand remains uncertain within the commercial end market, we expect a rebound to occur in the second half of the year.
Gross margins are anticipated to remain favorable despite the impacts of the material inflation and higher mix of sales to entry level single family homes.
We continue to proactively manage our expenses anticipate higher sales will continue to leverage administrative expenses throughout the year. As the result, we believe 2021 will be another strong year of profitable growth with annual adjusted EBITDA margins expected to be in line with our long term mid teens expectations. So.
To conclude my prepared remarks, I am extremely pleased with how our team has responded to the unique challenges that have occurred throughout the year on.
Our continued success reflects the power of our business model the experience of our management team the long standing customer relationships, we have developed and the strength of our balance sheet and operating cash flow. We are off to a strong start to the year in 2021 is expected to be another great year for IBP.
As always I'd like to thank all of those on the field, who are hard at work every day, representing the IBP and serving our customers.
On behalf of the entire leadership team, we recognize your efforts and I want to personally. Thank you for your dedication.
With this overview I would like to turn the call over to Michael to provide more details on our fourth quarter results.
Thank you, Jeff and good morning, everyone net sales for the fourth quarter increased to a quarterly record of $441 5 million compared to $401 $2 million for the same period last year, the 10% year over year improvement in sales was mainly driven by a higher volume of customer jobs completed during the quarter.
Growth in other complementary products and the contribution from our recent acquisitions on the same branch basis net revenue improved to 8% from the prior year quarter.
Multifamily sales increased 33, 6%.
Contributing to an 11, 3% increase in total residential sales during the fourth quarter sales.
Sales of our large commercial construction business increased 44% and on the same branch basis increased $6 four per cent. It is important to note that sales from our large commercial construction business are not included in the volume and price metric price.
The metrics we disclosed.
Profitability remained very strong during the quarter.
The adjusted gross profit margin was 36% for the 2024th quarter. The 70 basis point increase over the prior year period, primarily reflects the benefits of our product diversification strategies and a higher volume of complete the jobs.
Administrative expenses as a percent of fourth quarter sales were 13, 7%, an 80 basis point improvement from the prior year period.
Adjusted SG&A as a percent of fourth quarter sales improved 80 basis points from the prior year period, and improved 20 basis points from the 2023rd quarter the.
The improvements in SG&A, primarily due to higher sales leveraging expenses and the benefits of gross profit improvement over the prior year quarter.
On a GAAP basis, our fourth quarter net income increased 45% from the prior year quarter, the $27 8 million or <unk> 94 per diluted share are.
Our adjusted net income improved 32, 5% to $36 $6 million or $1 23 per diluted share compared to $27 $6 million or <unk> 92 per diluted share in the prior year quarter.
During the 2024th quarter, we recorded $8 2 million of amortization expense compared to $6 $4 million for the same period last year as a result of our acquisition strategy. This non cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability.
Based on our acquisitions completed to date, we expect first quarter 2021 amortization expense of approximately of approximately $8 $2 million and full year 2021 expense of approximately $32 $4 million. This figure will of course change with any subsequent acquisitions.
For the 2024th quarter, our effective tax rate was approximately 25, 2% and we continue to expect our full year effective tax rate of 25% to 27% for 2021.
Adjusted EBITDA for the fourth quarter of 2020 improved to a record $67 1 million represent representing an increase of 27% from $55 6 million in the prior year.
The branch incremental adjusted EBITDA margins were 55, 9% for the fourth quarter as a result of our higher sales and operating leverage.
Adjusted EBITDA as a percentage of net revenue increased 130 basis points from the prior year period to 15, 2%.
Now, let's look at our liquidity balance sheet and capital requirements in more detail.
Our business model continues to generate strong operating cash flows for the.
12 months ended December 31, 2020, we generated $188 million in cash flow from operations compared to $123 1 million in the prior year period, an increase of 46, 9%.
Our asset light business model does not require a significant amount of capital expenditures and our primary capital requirement is to fund working capital needs.
At December 31, 2020, we had $155 $9 million from working capital, excluding $231 $5 billion of cash and cash equivalents.
Total expenditures at December 31, 2020 were $33 6 million, while total incurred finance leases for $1 million.
Capital expenditures and finance capital leases as a percentage of revenue were two 1% at December 31, 2020 compared to three 5% at December 31 2019.
At December 31, 2020, we had total cash and short term investments of $231 5 million compared to $215 9 million at December 31, 2019.
Total debt at December 31, 2020 was $565 3 million compared to $569 2 million at December 31, 2019.
Considering cash and short term investments at December 31, 2020, our net total debt was approximately $334 million compared to $353 million at December 31, 2019.
At December 31, 2020, we had a net debt to adjusted EBITDA leverage ratio of one four times and well within our stated expectation of maintaining the leverage ratio of less than two times.
Looking at our capital allocation priorities in more detail, we continue to prioritize profitable growth through our proven strategy of acquiring well run installers of installation and complementary building products.
During 2020, we invested over $76 million on acquisitions compared to operating cash flow of nearly $181 million.
As a result of the cash generation strength of our operations.
The Vps board of directors approved the initiation of a quarterly cash dividend.
The first quarterly dividend dividend of <unk> 30 per share is payable on March 31, 2021 to stockholders of record on March 15th 2021.
In addition to the quarterly cash dividend the board of directors will consider an annual variable dividend to be paid during the first quarter of each year commencing in 2022.
The variable dividend will be determined based on the cash flow generated by operations with consideration for planned and expected cash obligations for acquisitions and other factors as determined by the board.
This week Ibp's Board of Directors also increased and extended our stock repurchase program effective as of as of February 26, 2021, pursuant to which we may repurchase up to $100 billion of.
Our outstanding common stock the program will remain in fact in effect until March one 2022, unless extended by the board of directors.
The board previously approved stock repurchase program effective as of November six 2018 for up to $100 million of the company's outstanding common stock and there was $26 $7 million remaining availability.
Under this prior authorization IBP repurchased $33 $9 million of its common stock for the year ended December 31 2020.
Which included $18 $2 million during the fourth quarter.
We continue to believe we have considerable financial flexibility as we have nothing drawn on our $200 million revolving line of credit.
Strong cash position debt.
Our debt maturities and limited financial covenants. In addition, with no significant debt maturities until 2025 and strong liquidity, we have considerable financial resources to withstand the economic impacts of the COVID-19 crisis, while investing in our long term growth opportunities.
With that I will now turn the call back to Jeff for closing remarks.
Thanks, Michael.
I'd like to conclude our prepared remarks by once again thanking IBP employees for their hard work dedication and commitment to our company during this very challenging period.
Our success over the years and more recently wouldn't be possible. If it wasn't for you and our thanks goes out to you for a tough job always done well operator, let's open up the call for questions.
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We ask that you please limit to one question and one follow up.
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Hi, first question comes from Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
I'm wondering if the start out just.
Just on the <unk>.
On the outlook I.
I guess more on the macro side, but since the something that wouldn't be guiding your expectation too with the.
Mid single digit high single digit completions certainly appreciate that there are some constraints in the market.
Whether it's the product availability in some cases or labor.
But given given the trends in the kind of units under construction building backlogs.
From a lagged the completion standpoint, our legg start standpoint that themes.
A bit low.
So can you just walk us through kind of puts and takes around your.
What's behind those assumptions there on the completions growth and how to think about your volume relative to that.
Sure Mike This is Michael Miller good morning.
As we've said in previous calls we believe that the the building products the construction industry.
On the macro level not on an individual builder basis, but on the macro level really has the ability to grow sort of given where we are at the current levels at the high single digit rate from of completions perspective, We said that I think the last couple of court quarterly calls and we still feel that's the case I mean clearly.
There has been an unprecedented extension of the backlog.
And the cycle times to build the new home.
On right now as Jeff mentioned in his prepared remarks.
Authorized but not started.
Single family homes are equivalent to where they were back in 2007, So we're really in.
Unprecedented point quite frankly in the cycle.
But what it does is it gives us an extreme level of confidence around the ability of us to perform over the next couple of years, because we think of constructively that we are in a multiyear.
On the situation, where we're going to continue to work through this very heavy backlog and we think it's providing an extremely constructive environment for us.
The lack of confidence around the business well and we feel we feel great about our position I mean, let's just say that it is higher than the COVID-19.
On the high single digits, we're not worried about our ability to perform at a higher level than that we're in great shape on our labor as I mentioned again turnover has remained well below industry averages productivity is great. So if if in fact, the trades that come before us are able to push more more houses through the pipeline of grow faster than what.
We believe to be the case, then we will be prepared to do the work, yes, absolutely I mean, we've talked a lot about this before Mike is that we're not the bottleneck the bottleneck of the trades that come before us.
Yeah, Okay, great. That's very helpful. Thank you.
My second question is related to price mix and how to think through.
I think through the the moving pieces.
I guess not the pump.
Other than.
Your mouth, but it does sound like Youre fairly supportive of the trajectory of of price increases.
That have been announced given given the dynamics in terms of the demand.
On supply, but then you've got this potential for what.
At least in <unk> was a pretty meaningful.
Mix headwind, so when you kind of layer in the kind of accumulative pricing versus some of the some of the mix headwinds we should be contemplating.
Any ballpark on just kind of magnitude of how we should be thinking about all in price mix for this year.
Yes, I mean, there is no doubt debt.
On the particularly our largest customers the production builders that are building entry level.
Homes are seeing a much higher and you've seen this in the public disclosures from the public builders right.
The heavily weighted entry level of builders are seeing much higher sales growth than other builders are and we have very strong relationships with those builders and we continue to believe that some of the kind of move up and kind of custom homes.
And the sort of regional and local builders are still planning to some extent a bit of catch up if you will with some of the other big production builders and it's going to take time as we go through the course of the year.
To get a more historical balance if you will from a mixed perspective in terms of.
The.
More even growth coming from kind of all of our customers. If you will.
But certainly we're seeing the trends of the strength of that entry level of market, continuing but and we've talked a lot about this before but yes, absolutely. It is a lower price to job because it's the lower cost house. It does give us very strong volumes as we demonstrated in the fourth quarter.
Which then gives us very strong G&A leverage because of the efficiency of doing that work. So.
We are.
Extremely confident and very.
Dave around the strength that we're seeing in that entry level.
On market and in our market share with those customers that are performing extremely well now it does create noise. If I can use that word around the price mix.
But.
The price increases that you referred to I mean, yes, we do think debt, we're constructive on them and we've always talked about a rising price environment ends up being constructive for us.
And we are supportive of that.
And the.
The reality is is that.
There's a lot of demand out there.
Very tight demand environment, it creates a favorable pricing environment as well so I think through the course of the year what Youll see is.
Perhaps some.
Pressure on price mix in the first half of the year that'll be abated in the second half of the year as we continue to get higher selling prices combined with a more even trajectory of sales growth among all of our customers.
Okay. That's very helpful. Thank you.
Our next question comes from from Ken Zimmer with Keybanc capital markets. Please proceed with your question.
Good morning, gentlemen.
Good morning, Ken.
Alright, let's try this another way.
I think people are just misinterpreting the price mix and the revenue.
Okay didn't you just say on your presentation gross margins are going to be favorable in FY 'twenty one versus FY 'twenty.
Which means that positive growth year over year is that correct.
Correct.
And that stands in contrast to 2018, where gross margins fell 100 basis points year over year as you're behind.
Price.
Announcements because they happened so quickly.
<unk>.
So and then on SG&A just mentioned leverage is gonna be SG&A is going to be low or.
And if that's the case your margins are expanding and the actual negative price mix, we see in the Red line is actually not affecting the operating leverage it's just the revenue component and it's not actually compressing the margins right yeah.
Absolutely right and the volumes help that SG&A leverage exactly right just to be clear. We don't think SG&A is going to decline in an absolute dollar perspective, but we would expect that we would continue to see operating leverage from an SG&A perspective.
Correct and within each of your 'twenty.
Yeah, but I would say to your point on which is extremely important and Jeff pointed this out in his prepared remarks is that the current demand environment that we're in now is 180 degrees different from the demand right.
In 2018, and even at the beginning of 2019.
Right and other I mean, you all have perhaps you know along with another company. The most direct contact to new construction given your upwards of 30% share so.
Yeah, I think you're speaking from some degree of insight that others lack.
Now.
The increase.
Incrementals that you guys, usually give and Michael correct me, but I mean 2025 per cent that that's where you guys are at right for incremental EBIT.
Yep.
Would you say there is any sort.
<unk> cadence first half versus second half of that you.
See you on your business based on backlog.
On the EBIT line not the gross for SG&A.
Yeah. So historically, we would have in the first half of the year, we would have lower incrementals than in the second half of the year Admittedly 2020 was the from so many levels an extraordinary year.
And we saw incredibly strong incrementals in the second and third quarter, but you know.
2020 was I mean every quarter was a record for us.
And the remarkable.
<unk> by our team just I mean, as Jeff gave them a shout out in his prepared remarks, we can't say enough right. What are the incredible job. Our every one of the field has done this year.
Given the environment, but we would expect that 'twenty, one and we talked about this previously that given the current demand environment and debt. We are seeing a lot of demand from what is typically parts of the country that build all year round, obviously, there was big disruption in Texas.
Recently, but you know we would expect that the seasonality in the business would flatten out a little bit.
And as a consequence, then you would probably see.
The incremental margins being more stable across the year.
As opposed to getting that back half weighting of incremental margins.
And could we get that sequentially given the stability I mean, it suggests that sequentially ality might be as applicable as year over year.
Yeah, I think thats, probably a reasonable comment.
Great and the last question Geoff to your annual variable dividend does this.
Can you.
Well, what does that mean I mean does that mean, if you guys have 100 million extra.
50 million of on the balance sheet, it's basically elective to the board to have a special dividend is that how I should interpret that or how do you want to communicate that.
More or less I mean, we haven't disclosed the circumstance of the exact criteria that we'll use for it but we certainly do have criteria. We're not it's not just the ouija board so.
It is it is based on.
It's based on all of the things. We said you know kind of how much we acquire in a year, where we sit from a cash perspective.
How much cash we generated in the year et cetera, and if we.
The performed on the other things that we believe take priority.
Mostly both acquisitions and then ultimately if we feel.
It's appropriate stock buybacks, then what's left of its excess we're going to end up returning to shareholders.
And I think interest.
And I think the key a key here and it was both in my prepared remarks, and ingest the prepared remarks, our number one priority from the capital allocation perspective continues to be without a doubt act.
Acquisitions and.
For where we are of very robust pipeline.
Just like we've been performing record quarters from earnings and revenue we wanted to be record years in terms of acquired revenue as well on.
There's no reason why given the cash flow that the company is generating given our view over the next several years, particularly that single family residential debt, we shouldnt be looking toward multiple ways to create shareholder value absolutely.
Thank you gentlemen, sure thanks, Ken.
Our next question comes from Adam Baumgarten with Credit Suisse. Please proceed with your question.
Hey, good morning, everyone.
Again on the acquisition strategy I mean, it seems like you guys are pretty clear that share.
Very much intact, yet the business has grown and you're kind of guiding to $100 million or above and acquired revenue I guess given the bandwidth you have why not go much bigger I mean, some of your of one of your peers is talking about some pretty sizable opportunities out there and you guys do seem to have a lot of white space within even just your existing markets, especially in.
Commercial and some of the ancillary products so.
Has there been any change in acquisition strategy in terms of the aggregate amount that you guys are willing to do or maybe the opportunities that are out there just if we can get a finer point on that.
I would say if anything there there's more opportunities at higher dollar revenues.
And it's why.
As stated as an answer to Ken's question debt.
We want every year to be of bigger year from the acquired revenue perspective, I will say, though and I'll, let Jeff talk about this as well.
Our extremely disciplined about our acquisition criteria and the multiples that we pay for businesses, we will not period overpay for a company and that's been the case for the past 20, plus years and it's going to be the case for the next 20 years.
Yes.
And then there are bigger deals out there and when the right deal presents itself to us under the right circumstances.
We will get it done.
But we can't force people to sell who arent yet sellers.
So on.
We have a tendency as you may or may not remember I mean, I think when we originally came out.
The IPO, we had suggested maybe we might do $40 million a year on acquisition.
Revenue acquisition, and we've ended up averaging closer to the 100 million so.
Kind of we're a little conservative I guess, we don't like to give guidance as you know, but we're conservative and usually stating what it is that we want to try to get done. So I think the step up from us, saying $40 million to $100 million is actually kind of big and we hope to outperform that considerably but at.
At least for now on record as saying $100 million at least at the habit right.
Yeah, No. That's helpful makes sense and then just on price mix.
Can you maybe give us a sense for what like for like pricing looked like in the quarter and how much of the headwind you saw if you could size it from the entry level mix, maybe if there was any deflation across some of the ancillary products or spray foam.
Yes, it was.
It had nothing to do with price. It was all mix it was mix related to the production builder entry level and greater growth than the other products.
Which we've talked.
I think every quarter for the past couple of years about that that strategy is great from a leverage perspective in terms of creating.
G&A leverage but it is at it does create a negative price mix. So it had nothing to do with price deflation at all.
Got it really helpful. Thanks.
Okay.
Our next question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone. Good morning.
My first question is you know Michael you touched on this a bit on one of your previous comments, but obviously, we've seen from extreme weather, especially in Texas and even in some parts of the east coast and the northeast over the last month or so can you just talk to any implications that you're seeing from that or what you are hearing on the ground there.
Yes, I mean, theres no doubt theres been significant.
Everyone knows there's been significant weather events.
In the month, I would say that the east and northeast they are accustomed to the lots of snow and bad weather. So it had really little disruption there the.
Branches that may have had a day or two where they were shut down up there. They made it up over the weekend. So there is not pressure there I would say, though.
We use this word of lot over the past 12 months, but the <unk>.
Other event in Texas was a bit unprecedented quite frankly.
And.
All of our operations quite frankly in Texas for shut down for the week.
And just as a context for people.
Texas, both residential and commercial represents about 12% 13% of total revenue now the good news is as debt.
On a couple of fronts as debt, we did start working again on the weekend.
A lot of our branches actually worked for Sunday, as well to try and catch up.
The work is there as we've talked about before it's not as if we've lost the revenue. It's just a question of when we get to the revenue.
On <unk>.
And I would also say is that it wasn't just us that wasn't doing work basically all trades were shut down in.
In Texas.
For basically a full week so.
That work is coming to us, but again it can only come to us as quickly as the framework and the Maisons and everybody else can get their job done.
Got you. Okay. That's very helpful and then not to beat the debt going back to the shift between volume and price net of.
For the last couple of years, maybe two years or so it's really been the price mix that has led the revenue gross but if we go back further.
We've seen that they were either more balance of that it was actually the volume that really kind of what that gross.
You think about coming into this kind of a multiyear housing growth environment should we expect that it'll go back that volume of really likely be what leads more of your gross <unk>.
The price mix of that those two will be as much more closely in line together.
Yes, so that's actually a great question and you're absolutely right as you look at the historically they've been much more balance I mean, I think this is probably the most pronounced quarter, we've ever had in terms of the delta between the two.
And it's for the reasons that we talked about but we would expect particularly given the pricing environment that we talked about as it relates to kind of the inflationary environment that as we go through 'twenty, one that we would probably get more balance between the two certainly more balance than we have.
Currently our we did and I should say in the fourth quarter. So we think that over time and because you asked the question from a multiyear perspective, I think from a multiyear perspective, we would be more in balance from the price mix on a volume perspective, but again, we are leaning in hard.
To the very strong tight relationships that we have with the production builders that are heavily focused on entry level, it's great work for us yes.
It has created the price mix headwind, but its also super efficient and those are great customers that we're working hard to gain market share with.
Okay. That's great color. Thank you and good luck. Thank you.
Our next question comes from Michael Rehaut with J P. Morgan. Please proceed with your question.
Thanks, Good morning, everyone.
The first question I, just wanted to dial in a little bit more on the the.
The drivers of the gross margin in the fourth quarter.
You kind of went through I guess year over year.
Being driven a little bit more by some product mix diversification and higher volumes in terms of the year over year expansion I was hoping to get the sense of the sequential move down I think you know that.
That.
It was a little bit of a surprise to us.
And then as you look at.
'twenty one.
You clarified that your outlook.
Outlook for gross margins to be favorable would mean of year over year expansion in effect over the 39 for 2020.
It's the.
That.
It's that year over year improvement would be kind of across the quarters or if it would be more back half weighted.
Well as you know, we don't provide guidance but.
We believe that you know.
Again on a full year basis that we would see improved gross margin.
As we sit here today there is no reason to not think that we would have improvement.
Over quarter from.
On the prior year, but obviously things can change from quarter to quarter and you can have.
Changes to that but right now we feel extremely constructive about kind of the overall volume environment and our ability to.
To get price.
Given the demand environment, and we believe that that ends up being constructive from.
Uh huh.
A.
Quarter over quarter improvement in gross margin and as we've been talking about obviously volume is.
Good contributor to the G&A leverage.
And.
Yeah. Thanks for that and then just about the first part of the question around the sequential move in gross margins that declines of about 80 basis points for Q from <unk>.
Yes, I mean, I think we've always talked about the seasonality of the business and that we generally speaking generate our highest gross margin in the third quarter, which has a lot to do with the type of work that we're installing in the fourth quarter versus the third quarter. So we fully expected that.
That we would see improvement like we did.
From the.
The fourth quarter of <unk> 19.
And it's very typical that we see this sort of slight compression if you will and.
On gross margin from third quarter to fourth quarter.
Okay.
Yeah Okay.
And I guess that seasonality wasn't the case of the last couple of years, which again is why was the little surprise, but.
Secondly, I just wanted to go back to.
The thoughts around capital allocation and.
Don't want to beat a dead horse, but I think it's an important point for investors I think you've kind of said repeatedly that.
Very comfortable with the acquisition pipeline.
You're targeting to continue that $100 million per year or at least in <unk>.
2021, and perhaps it could be you would always like you've even the bigger year after year.
Yeah.
Yeah, I guess, just again kind of clarify here.
The the idea of.
The dividend and perhaps even a special dividend at the beginning of the year.
That is not at all a reflection on.
You know the the opportunity set in front of the diminishing in other words.
Certainly.
It's a positive thing to say.
On your number one priority remains acquisitions and also the fact that youre looking to continue that $100 million per year.
I think is consistent with how we've understood your your goals.
In terms of M&A.
But just to kind of round out the overall discourse on this.
The other part of it is that while it remains the number one priority you could think okay. It's still the number one priority, but maybe the opportunity set is diminished.
And that's part of why Youre looking at this more well rounded capital allocation approach. So just wanted your thoughts on that.
This move in capital allocation.
Again doesn't.
Reflect the view that.
While still the number one priority you just have less of opportunities in front of you.
Yeah I'll start the answer to that question and then let Jeff kind of completed but absolutely 100%, we the opportunity set in front of US from an acquisition perspective is better than it's ever been the dividend is absolutely a signal of our confidence of where we are in the cycle that we have of multiyear.
The benefit that we can see in front of ourselves and our absolute confidence in the business on our ability to continue to generate record cash flow.
Yeah, and I'll, just say the needs around numbers, we have six to eight of them, but I mean more or less we started the.
The year last year, let's say December 31 of the 19th of January one 'twenty more or less with <unk>.
Roughly $250 million of cash on the balance sheet, we acquired $107 million worth of revenue throughout the year. We ended the year with roughly $250 million of cash on the balance sheet and we've got undrawn lines of credit.
That is easy to get so if an opportunity presents itself, we feel very confident of our ability.
Is it out stretches of kind of what we what we've said in relation of the $100 million on the right deal comes along we will absolutely.
Look very hard at it and go ahead and hopefully get the deal done.
But at the time and part of the reason for the idea behind the variable is it if that deal isn't in front of you at that moment, then we should probably the returns from some.
The dollars of the shareholders.
Great. Thank you.
Sure.
Our next question comes from Phil Inc. With Jefferies. Please proceed with your question.
Hey, guys day.
I hear you correctly, you reiterated your longer term mid teen EBITDA margin target, but you may have the chance to get there this year and I guess longer term just given the momentum of demand profile of <unk> seen youre calling out.
Whats the aspirational of longer term target.
Well, we have reconfirmed and I've always talked about the mid teens EBITDA margin I guess it sort of depends on how you define mid teens I mean, because basically this year, we were at 15% and I think what we're saying is is that we believe that over the course of 'twenty, one that's going to improve so.
And once we continue to make that.
Proven.
Not going to stop right. This is the continual process to continue to improve.
Margins so.
The mid teens is definitely what we've talked about and arguably arguably we're there now, but we continue to believe that especially given the current demand environment debt.
We can continue to improve gross margin and also continue to leverage G&A.
Great that's helpful.
Commercial has been really impressive I mean, you were up in the fourth quarter again can you expand on what's driving that and I. Appreciate that you called out more of a recovery in the back half just due to the timing and the lag in your backlogs, but do you expect commercial to be up from the first half.
We talked about this I think the past couple of.
Calls, where we do think the first half of 'twenty, one and the commercial business on the same branch basis and you probably saw that we've added additional disclosures.
In the release this quarter just to help give people more and more insight into that business, but we would expect that it is going to be challenged in the first half of 'twenty one on the same branch basis, but.
Based on the backlogs and the bidding that we're seeing we feel pretty good about the second half of this year.
Quite frankly, and this is not news to anybody.
What we're seeing as gcs and owners stretching out their decision, making process around certain projects and waiting to award bids. So when we look at our kind of backlog of work that we bid but that hasn't been awarded yet.
It gives us that confidence around kind.
Kind of the back half of 'twenty one.
Okay. Thank you appreciate it.
Sure.
Our next question comes from Keith Hughes with true as Securities. Please proceed with your question.
Thank you just two questions first.
A lot of op margins ex of some of this call I guess the bottom line is you've got the 20% to 25% EBITDA contribution margin.
The.
In 2020 is that still on the table for 'twenty, one, giving a lot of moving parts on March.
Yeah.
You mean, beating it or the 'twenty to 'twenty five.
Start with the 20 to 25 of the pivotal.
We feel of what's going on in Michigan, Yes, we feel extremely confident debt on our full year basis will be in the 20% to 25% Incrementals if.
If not better.
Okay, Great second question back to the capital allocation on to make very clear acquisitions or the.
The already.
But theres only so many you can do on a year I guess the questions. What's the next.
The dividend the special and reoccurring is that now the next choice of.
Use of cash before.
For share repurchase.
It's really going to depend because as you know we've been very opportunistic from a share repurchase.
Perspective, we did acquire a $33 million of shares during 2020.
And the bulk of that was in the fourth quarter of this year or for more than 50% of that was in the fourth quarter of this year. So we're extremely opportunistic with it and we will remain in that case, but from a I would say from a capital priority perspective.
You know, we definitely believe that.
Again, we're going to use multiple ways to return a quarter.
Quote unquote excess capital to shareholders, but.
We do think that the dividend is an important component of that.
Just given kind of where we are as the company. So again the main focus is.
The capital deploying capital to do acquisitions.
Obviously investing in the existing business.
Maintaining a very strong.
Balance sheet with a lot of financial flexibility.
But then clearly the dividends are going to be an important component of it.
Increasing shareholder returns going forward.
Okay. Thank you.
Sure.
Our next question comes from Justin Speer with Zelman and Associates. Please proceed with your question.
Hey, good morning, guys. Thank you.
That's the starting off just starting off just thinking about your comments on the completion of the just if you could reiterate kind of what youre thinking that the industry can do and then maybe juxtapose that with what you think you can do and the completion of environment that Youre looking for at least for the single family side of things just trying to get a sense for.
The volumetric Lee what Youre thinking of what Youre trying to message there.
Yes.
As we stated in previous calls.
We do think debt on a macro level debt a high single digits completions, and we're talking primarily about single family year non multifamily of total completions, but that single family completions, just given the constraints that the the industry has.
And particularly some of the material disruptions that have occurred because of.
The production and I'm not speaking necessarily about just installation, but all building products the disruption that they've seen for.
Curtailments or manufacturing capacity of they've been taken down during the spring that's really just catching up with the industry right now quite frankly, because what happened is most manufacturers during the summer.
Just worked off of existing inventories, so thats why youre seeing incredible taken us quite frankly across the building products market now.
Now as builders excuse me as manufacturers are trying to rebuild.
Inventories and get product out as you all know there has been quite of bit of disruption from the shipping perspective, our transportation perspective across the country, which has sort of exacerbated.
That issue, but.
We think all of those things plus then labor, particularly for subcontracted labor.
At the say the framing level is just the ability to size that up given where we are today greater than a high single digit.
We just we don't currently see that happening quite frankly, now obviously theres going to be exceptions. There are certain builders. They are absolutely going to perform well above that but we're thinking about it in more of a macro level basis.
When we think of the bottlenecks that are being created in the industry right now the material that I just talked about getting permitting done.
The challenges that builders are experiencing there across the board not all builders.
Just.
From again from our perspective, I'm, not saying, we're right I'm just saying that's our perspective, we think it's of high single digit single family completions number.
So as you think about I guess, if you think about that I guess within the context of that kind of an environment, maybe historically you've you've.
Taking pretty considerable share and I guess the market back drop like that do you think that still continues.
Top of that just that price mix comment I guess, we got two price increases this year.
Yes on Youre, assuming there's going to be a third are you are you prepared for that and that's kind of of IR or do you think you can easily you're obviously messaging that you can but do you expect there might be any friction.
Or maybe lagged impact to your profitability in the course of the year from from that kind of cadence of price increases.
Yes. This is Jeff I don't think so at all really and as we've said, it's a far different environment than it was in 2018.
Not in any way to make light of it but.
Whatever we're doing on installation pales in comparison to the things of that builders are dealing with otherwise I wouldn't think about lumber for a moment right. So.
For a distant afterthought, which we've always said basically everything we installed.
We lovingly call solutions products, but they are typically small ticket items.
We are the least of the worries I think when it comes true.
Home price increases in builder cost increases.
Yeah, and I think to to the kind of first part of that question in terms of our ability to grow above the market honestly. If you look at our volumes this quarter compared to the completions, we grew way above the market.
And.
We're really the only major.
Install our contractor that buys from all for fiberglass manufacturers, which we believe it gives us the opportunity to have greater access to material.
And as Jeff commented earlier.
Of our turnover is well below industry averages, we continue to see labor productivity. So we're very confident that if the trades before us can come call. It 13%, 14%, we absolutely can meet that demand or exceed that demand.
Excellent and then just kind of following up on that question.
And thinking about the the SG&A needs and requirements of the business the overhead requirements I know, there's some maybe some temporary good guys from 2020 of that maybe.
Don't repeat maybe could you give us a sense for your SG&A expense growth for or design as you think about mapping out 2021 on kind of high level of the Directionally I guess, how much is again I need to increase the to accommodate the growth.
So from a sales are really our selling expense excuse me of really directly correlated.
The variable if you will.
On to sales, so theyre going to run between four 5% of 5% on the G&A side.
We.
Obviously, you got leverage this quarter and we would expect that we would see.
A lower rate of growth on.
On the same branch basis, obviously, when we acquire acquisitions they bring in G&A.
With one of the notable exceptions and we've talked about this on previous calls is that our field management team is there.
The vast majority of their compensation is tied to profitability.
As we increase profitability that increases the G&A costs associated with that variable component to their compensation.
But structurally there is nothing significant within our G&A.
Currently as we look towards 'twenty, one that's going to substantially change that outlook to be more than the typical sort of inflationary rate I would say to the kind of the first part of your question in terms of.
Good guys that we had in 'twenty.
On.
Really at this point the only thing looking in 'twenty.
Still from an expense perspective, that's benefiting us quite frankly is at lower fuel cost fuel has been if you look over the past 10 years.
Pure has been and is continues to be obviously, it's changing a little bit.
Yes.
Fuel has been a good guy if you will going into or throughout 2020.
And we would expect that that would normalize more on.
As we go through 'twenty, one and to give you a sense of context.
Right now, we probably haven't benefit of about $1 million of quarter from the lower fuel costs.
Okay. Okay, and then just follow up on that last question for me is on the cash flow side as you think about free cash conversion for 2021 on your capital needs.
Are you do you have any thoughts there in terms of not just for 2021, but just sort of normalized free cash conversion on net income.
On forward.
I would say that it's going to be consistent with historical trends.
Obviously since the tax rates have been lowered.
It would be consistent with those trends, we don't see anything.
Especially unique relative to kind of 'twenty, one and 'twenty two with the one exception, which this is true really I don't think many companies talk about it but it is true of every company is that as part of.
The first Covid Relief Act.
We were able to defer we still expenses, but we've been able to defer the.
The.
Employer portion of certain taxes that are paid in the government and what we have to pay that back in the end of the end of this year and the end of 'twenty two.
So that always slightly just slightly impact cash flows in 'twenty. One of 22 non expense again its all been expense, it's just that it's the deferral.
But other than that there's really nothing significant from the historical trends.
Thanks, guys really appreciate it I'll get you on the other side.
Yep.
Our next question comes from Ryan Gilbert with <unk>. Please proceed with your question.
Hi, Thanks, guys. Good morning on really appreciate all the detail that you've provided on this call just one question.
For me on multifamily really strong growth over the last couple of quarters, and it's pretty clear that the the new bidding system that you've put in place of allowed you to take some market share.
Just looking at the I guess the nationally that the <unk>.
Multifamily permits and starts numbers, we've seen a pretty meaningful year over year decline over the last few months. So I'm just wondering if you could.
Add a little detail or give us some color on what youre seeing in your multifamily markets. Just in terms of permits start sort of just overall construction activity.
Yeah, you're absolutely right in your question and comments there.
We feel from a multifamily perspective that we still have a lot of opportunity because we're sort of under index to multifamily. If you will and the focus of our multifamily is really suburban as opposed to urban.
Which we think if you kind of break apart where permits and starts or it is more suburban rather than the urban driven right now from a multifamily perspective, and we have performed extremely well with our strategy of gaining market share in markets, where we werent doing multifamily we're going to.
You need to do that that being said I mean.
We continue to perform on the strategy the comps become incredibly difficult right.
Talk about growing extremely well against the market.
We've really just.
Honestly our team there has done an incredible job of.
For me well above any market expectation as it relates to the multifamily opportunity. So we would continue or we believe we will continue.
To outperform the relative market, but.
When you gross sales almost 40% it becomes a really tough comp going into the next year.
Just reiterate our specific market opportunity absolutely runs against in a good way that any the tide really in multifamily.
There's so much market opportunity for us.
Okay.
Okay, great. Thank you very much.
<unk>.
Our next question is from Reuben Garner with Seaport Global Securities. Please proceed with your question.
Thanks, Good morning, guys and thanks for squeezing me in.
Most of my questions.
The been answered I, just have one kind of high level macro question.
I think one of the headwinds.
For just the broader industry coming into 2020 was kind of the shrinking square footage per <unk>.
Household.
You guys already talked about this apologies I had been in the now.
On the call with the connection issues, but what what are you guys seeing or hearing anything from the builders about maybe that trend turning around and even in the high single digit completions.
Completions growth environment, maybe you know the amount of material lead it needed is.
Maybe a tailwind instead of the the headwind that it had been for the last several years.
Well I think it goes back to the entry level.
<unk> continues to gain share if you will or continues to come back to more historic levels as a percentage of total.
Single family starts and completions I think that naturally means that square footage comes down because those are obviously much smaller homes than move up or custom homes that being said from a fiberglass demand perspective.
That entry level products, it's pretty much almost exclusively fiberglass as opposed to spray foam or cellulose. So I do think it creates.
Good demand for for fiberglass and for our services.
It definitely will if you look at the aggregate macro numbers I would imagine that again as we get back to a more normalized mix between entry level move up and custom debt you would see square footage has come down but I don't think people are building.
A smaller house in the same category.
No what I mean, so they're not building smaller entry level houses theyre not building smaller move up houses I think of anything there is probably a bit of the.
The weighting towards building the houses of little bit bigger.
Given some of the obvious things that are happening from the work from home perspective.
Perfect. Thank you guys and congrats on the close to 2020 and good luck this year.
Great. Thank you. Thank you.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Jeff <unk>.
<unk> for closing comments.
Thank you all for your questions and I look forward to our next quarterly call. Thanks again.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.
Yeah.
Yeah.
Yeah.
Today's conference call has ended please disconnect your lines at this time. Thank you.
Okay.