Q2 2021 Installed Building Products Inc Earnings Call
[music].
Hello, and welcome to the installed building products of fiscal 2021 second quarter financial results conference call and webcast at this time all participants on a listen only mode. If any of what should require operator assistance. Please press star zero on your telephone keypad.
Sure on answer session will follow the formal presentation.
As a reminder, this conference is being reported.
If some of my pleasure to turn the call over the Jason Nice 1 of her senior Vice President Finance and Investor Relations. Please go ahead Sir.
Good morning, and welcome to the installed building products second quarter 2021 conference call earlier today, we issued a press release on our financial results for the second quarter, which can be found in the Investor Relations section of our web site.
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 labor trends, our efforts to manage material inflation.
Fly chain of material constraints, our ability to increase selling prices the demand for our services and product offerings. The impact of the COVID-19 crisis on our business and end markets expansion of our national footprint products and end markets, our expectations for our end markets, including our large commercial and multifamily businesses our ability to strengthen.
Our market position, our ability 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 the COVID-19 crisis on our financial results and expectations for demand for our services and our earnings in 2.
From 'twenty 1.
Forward looking statements may generally be identified 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 fourth looking statements as a result of various factors, including without limitation the duration of effect and severity of the COVID-19 crisis.
Any recurrence of COVID-19, including through any new variant strains of the virus and the related searches and positive COVID-19 cases.
The adverse impact of the COVID-19 crisis on our business and financial results, our supply chain of the economy and the markets we serve.
General economic and industry conditions, the material price and supply environment and the timing of increases in our selling prices of the rest of the company may reduce the suspend or eliminate dividend payments in the future and the factors discussed in the risk factors section of the company's annual report on form 10-K for the year ended December 31.2020.
At the same may be updated from time to time in 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 the effect.
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 EBIT 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 the reconciliation of such measures to the nearest GAAP equivalent in the comp.
<unk> earnings release, and additional reconciliation for adjusted EBIT 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 financial results and capital position in more detail before we take your questions.
<unk> delivered another quarter of record revenues and profitability, our strong operating and financial performance are a testament to the continued hard work of our team members and the valuable services. We provide are nationwide customers. Each day I am encouraged by the strengthening demand that occurred during the second quarter as sales increased 11, 7% from.
The first quarter of 2021, and we were able to manage through continued supply chain challenges and mostly offset the pandemic disrupted the inflationary effects on our business on a same branch basis volume growth increased 17% from the prior year period, demonstrating the high demand we are experiencing for our installation serve.
This is across many of our end markets. Most importantly, we achieved record quarterly profitability as GAAP net income increased nearly 47% to $1.26 per diluted share and our adjusted EBIT increased almost 24% to $78 million.
We continue to attract develop and retain strong team members as the result of the entrepreneurial and empowering culture, we have created and I am proud to report labor trends remain extremely strong across Ibp's platform.
Everyone at the company. Thank you for your continued contributions and dedication to IBP.
So looking at our second quarter results in more detail, we continue to overcome several unique dynamics underway across our markets as expected the supply chain from many of the building products of materials. We installed remained constrained during the second quarter, we anticipate the supply chain challenges will continue for the foreseeable future.
Our asset light business model enables strong long term growth and we continue to benefit from the growth in our core single family and multifamily markets, our national scale buying advantage and our strategic focus on product end market and geographic diversification.
Overall trends throughout the U S housing industry remained robust during the second quarter of 2021 as total residential completions increased by 12, 2% year over year led by 23% increase in multifamily completions and of 7.6% increase in single family completions.
Family housing demand continues to benefit from low mortgage rates and favorable demographics that have driven an increase in demand for entry level housing.
We believe these trends will continue supporting further growth as the industry approaches stabilization in the years to come on.
The focus on entry level homes from high volume production builders continue to bolster activity at IBP.
Our same branch single family sales grew by 19% during the 2021 second quarter.
Notice of notably price mixed trends improved sequentially from the first quarter as selling price increases partially offset the mix shift within the single family end market, a continuation of higher selling prices relative to prior year periods combined with the return to normalized end market mix of revenue is expected to further improve price mix to the.
The back half of 2021.
We anticipate that the housing the industry's growing focus on the construction of entry level homes is expected to help improve affordability in the future and we will continue to provide support to our core single family end market. In addition, based on the U S census Bureau of housing data the amount of authorized but not started single family units at the end of June 2020.
The 1 was up over 50% from the end of last year and represents the highest level in nearly 15 years.
We believe the significant increase in authorized but not started the single family units is indicative of the strong backlog for single family home construction and continued demand for our installation services.
Turning to our multifamily end market demand remains strong within this segment of the housing the industry as U S multifamily home completions rose by 23% over the prior year period, and nearly 30% above the first quarter of 2021 results.
Although our multifamily unit sales grew 14, 1% in <unk> 'twenty 1 the continued disruption within the material supply chain limited our same branch sales to 3.5% over the prior year period.
The COVID-19 pandemic combined with material supply chain issues also continue to impact sales within our commercial markets are commercial end market sales increased 15% for the second quarter. As a result of recent acquisitions, while same branch sales declined 5.3%.
The reduced commercial sales volumes have impact the deficiencies in our large commercial end market impacting gross profit as a result, we have started to realign our cost basis and improve efficiencies within our various large commercial markets. Despite recent trends within this market bidding activity remains strong.
The bid acceptance continues to improve which we believe supports of recovery in this end market and strengthens our expectations for stabilizing trends in the second half of 2021.
As of the end of the second quarter 2021, our large commercial backlog, which consists of the projects forecast to be completed 12 months or more in the future exceeds $100 million.
Up from $90 million in the first quarter of 2021 week.
We continue to believe our large commercial end market has reached the inflection point and look the revenue improvement in the back half of 2021. The large commercial construction market continues to represent the significant long term growth opportunity for IBP and we remain focused on improving our operational efficiency, while expanding our exposure within compelling commercial markets.
Across the U S.
Looking at our acquisition strategy 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.
During the 2021 second quarter, we acquired of Colorado Springs, based installer of drywall framing ceiling tiles and fire stopping and installation for commercial customers with annual revenue of approximately $11.5 million. We also acquired of Louisiana based provider of glass and mirror installation services to residential and <unk>.
<unk> of the customers with annual revenues of approximately $2.6 million.
The 5 acquisitions, we have completed the date in 2021 represent approximately $79 million of annual revenues based on our current acquisition opportunities. We feel confident that we will exceed the targeted $100 million.
Of acquired revenue for 2021.
More broadly our current outlook for the remainder of the year remains encouraging the.
The strong housing trends for 2021 are in part driven by the generational shift amongst millennials, creating demand for entry level housing.
In addition, although the number of existing homes per sale in the U S has increased slightly in the past few months supply remains tight representing less than 3 months sales. We believe this supports continued demand from move up in custom homes.
We anticipate the installation of supply chain to remain constrained for the remainder of the year. Despite 2 fiberglass facilities coming back online during the second quarter, and recently announced manufacturing capacity expansion efforts at 1 of our main fiberglass suppliers.
In addition materials needed for spray foam applications continue to be in short supply after chemical processing facilities went off line during the February winter storms and demand for spray foam components has been high and other business sectors.
We expect this trend will continue throughout the remainder of 2021.
As we stated last quarter manufacturers, including large fiberglass suppliers announced price increases that went into effect in April and more recently in additional fiber glass price increase occurred in June.
And the current demand environment, we are performing well to the material inflation environment and realizing the selling price increases with our customers as.
As the demand for housing continues to rise, we anticipate the favorable pricing environment to continue with.
With the access to labor of strong position with our customers and suppliers.
And healthy housing industry demand dynamics, we believe we are well positioned to navigate the 2021 inflationary environment better than any other period in our history.
It is also important to note that installation represents a small portion of the total cost to build of home, which we believe allows for greater flexibility to maintain margins by prudently increasing prices with our customers.
With this overview I would like to turn the call over to Michael to provide more details of our second quarter results. Thank.
Thank you, Jeff and good morning, everyone net sales for the second quarter increased to a quarterly record of $488 million compared to $394 million for the same period last year, the $94 million increase or 23, 9% 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 revenue from our recent acquisitions on the same branch basis net revenue improved 13, 1% from the prior year quarter driven by single family same branch sales growth of 18, 9% multifamily same brand sales increased 3.5%, which.
And of combined total residential same branch sales growth of 16, 2% outpacing total U S housing completions growth of 12, 2% during the second quarter the.
Of the pandemic lingering effects continue to impact our commercial end market and the same branch commercial sales decreased 5.3% in the 2021 second quarter, which was a significant improvement from the 14, 5% declined last quarter.
Commercial same branch sales were essentially flat in the quarter.
Adjusted gross profit margin declined 130 basis points to 31, 1% compared to 32, 4% per the same period last year as a result of materials supply shortages increased fuel costs and lower efficiencies that our large commercial construction operation. However, on a sequential basis adjusted gross margin increase.
240 basis points from the 2021 first quarter.
We estimate the material supply shortages has an additional impact of $2.8 to $2.9 million on gross profit during the quarter. As we have continued to purchase a small portion of our insulation products through distributors and retail channels.
Administrative expenses as a percentage of second quarter sales were 13, 6%.
140 basis point improvement from the prior year period.
Adjusted SG&A as a percent of second quarter sales improved 150 basis points from the prior year period.
On a GAAP basis, our second quarter net income increased 46, 9% from the prior year quarter of $37.2 million.
<unk> of $1.26 per diluted share our adjusted net income improved 42% to $47.1 million or of $1.59 per.
Per diluted share compared to $33.2 million or of $1.12 per diluted share in the prior year quarter, we believe material supply shortages that force us to purchase certain materials out of distribution and home centers Imp.
<unk> earnings per share by approximately <unk> <unk> per diluted share.
During the second quarter of 2021, our acquisition activity drove an increase in our reported amortization expense to $9.2 million compared to $6.7 million from the same period last year.
This non cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most of the useful measure of profitability.
Based on the acquisitions completed year to date, we expect third quarter 2021 amortization expense of approximately $9.4 million and full year of 2021 expense of approximately $36.3 million. This figure will change with any subsequent acquisitions, we closed in future periods.
Adjusted EBITDA for the second quarter of 2021 improved to a quarterly record of $78 million.
Representing an increase of 23, 7% from $63 million in the prior year adjusted EBITDA as a percentage of net revenue was 16% for both the 2021 and 2022nd quarters and improved 350 basis points from 12, 5% in the 2021 first quarter.
Same branch incremental adjusted EBITDA margin was 13, 3% for the second quarter similar to the impact on the gross profit we estimate that materials supply shortages during the quarter impacted adjusted EBITDA by approximately 2.8% to $2.9 million.
Reducing our adjusted EBITDA margin by approximately 60 basis points.
For the 2021 second quarter, our effective tax rate was approximately 19, 4% and we continue to expect an effective tax rate of 25% to 27% for the second half of 2021.
As we communicated in our press release, the lower second quarter tax rate reflects the tax benefit related to the change in stock price at the time of investing during the second quarter of 2021 and the price at the time the restricted stock was granted while it is typical to the experience of tax benefit or impact from this dynamic during the second quarter of each year the change in stock price.
Just from the grant date to the vesting day during the second quarter of 2021 was more substantial than prior years.
Now, let's look at our liquidity balance sheet and capital requirements in more detail.
Our business model continues to generate strong operating cash flow for the 3 months ended June 30 of 2021, we have generated $83.4 million on cash flow from operations compared to $105.5 million on the prior year period the.
The year over year decline in operating cash flow was primarily associated with higher working capital requirements needed to support robust year over year sales growth.
Our asset light business model does not require a significant amount of capital expenditures and our primary capital requirement is to fund working capital.
At June 32021, we had $168 million on working capital, excluding cash and cash equivalents.
Capital expenditures for the 6 months ending June 32021 were $20.3 million, while total incurred finance leases were $1.1 million capital.
<unk> and finance capital leases as a percentage of revenue were 2.3% for the 6 months ending June 32021, compared to 2.1% for the 6 months ending June 30 of 2020.
32021, we had total cash and short term investments of $203.9 million.
Compared to $231.5 billion of December 31, 2020.
Total debt at June 32021 was $572.5 billion.
Third to $569.9 million at December 31, 2020, and $574.6 million at June 30 of 2020.
Our net total debt was approximately $368.6 million at June 32020, compared to $338.4 million at December 31, 2020, and $322.1 million at June 30 of 2020.
At June 32021, we had a net debt to adjusted trailing 12 month EBITDA leverage ratio of 1.4 times.
Well below our stated expectation of the leverage ratio of less than 2 times, we continue to prioritize profitable growth through our proven strategy of acquiring well run installers of insulation and complementary building products year to date, we have invested over $67.7 million of acquisitions compared to operating cash flow of the $83.4 million.
We also continue to return capital to shareholders and today, we announced that Ibp's Board of directors approved our third quarter dividend of <unk> 30 per share, which is payable on September 30 of 2021 to stockholders of record on September 15.2021.
Year to date, the company has not repurchased any shares of its common stock compared to $15.8 million of shares repurchased during the same period last year.
$100 million of availability remains under our current share repurchase program, which expires March 1.2022, unless extended by our board of directors. We continue to believe we have considerable financial flexibility as we have nothing drawn on our $200 million revolving line of credit of strong cash position staggered debt maturities and limited financial covenants.
In addition, with no significant debt maturities until 2025 and strong liquidity.
Of considerable financial resources to invest in our long term growth opportunities with that I will now turn the call back to Jeff for closing remarks. Thanks.
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 of more recently is made possible because of all of you operator, let's open up the call for questions.
Thank you well now be conducting a question answer session, if you'd like to be placed on the question queue. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star 2 of people that can move your question from the queue.
Participants using speaker equipment, maybe in the 30 to pick up of handset before pressing star 1.1 moment. Please while we poll for questions.
Our first question today is coming from Michael Rehaut from Jpmorgan. Your line is now live.
Hey, Thanks, good morning, everyone.
Good morning on that 1 question.
I wanted to get a sense of.
Of pricing and price realization.
This.
This year has progressed.
You talked about managing the <unk>.
Cost increases of the price increases from the manufacturers.
Just wanted to get a sense for you know.
If you look at the first quarter in the second quarter and then.
Towards the back half of the year.
Theres been any type of of lag.
That you've experienced.
Passing those price increases through.
In the first and the second quarter.
What that impact might of been.
And the.
The outlook for the back half of the year.
So this is Michael.
I think what.
It is important to note is that the price mix growth that we disclose again includes both the combination of price and mix as we've talked about for the past couple of calls and we've seen as we talked about in the first quarter call sequential of significant sequential improvement in the price mix, but as it relates particularly to.
Insulation.
During the quarter, our single family insulation alone price mix was up mid single digits whats important to note in there is that the combination again of price and mix and 1 of the most.
The strongest headwinds associated with mix that we've talked about is not just the other products, but as the mix shifts towards the production builders we are seeing.
Really strong growth within our production builder business.
And that is a pretty heavy headwind to mix of the fact that ended the quarter of the price mix was mid single digit for single family installation, we think it's pretty indicative of our ability to kind of maintain price relative to the cost inputs.
This is Jeff.
Theres always a little bit of lag I mean, that's just inherent in the process but.
Across the board, we can say, it's a very favorable time to get price increases.
And I would say that.
For proper for fiberglass products, we've still been getting fairly the insight from the manufacturers in terms of when they announced the price increase and when it becomes the factor that is.
Not necessarily true of all of the other products that we install.
Sometimes you are actually getting the same day price changes. So it's just a little bit different dynamic now unlike any we've seen in the past couple of decades.
Right.
I think that and I guess.
Full of days ago, the competitor mentioned that.
There was maybe the experience perhaps of about 100 basis points of the lag in passing through the price increases from the manufacturers in the first quarter on that was effectively de minimis for them at least in the second quarter.
So that there was there was some type of maybe little greater lagging the highlighted that day.
<unk>.
Elongated build cycles that just kind of caught them it was a little bit of a.
<unk>.
On a GAAP in in <unk>.
Leading the work more than anything else.
But that had really narrowed materially in the second quarter. So I guess, that's really what I was looking for if that makes sense to you of the plumbing kind of <unk>.
That you've seen in your business in terms of the the.
Price pass through.
Yes, it's interesting that in I would say in the second quarter of the lag or the backlog has actually gotten extended and build times of even extended more than the first quarter, but I think what's happened.
Allow better price realization in the second quarter and we see this going into the back half of the year is that builders behavior is changing and the <unk>.
That they are limiting and this has been widely discussed the they are limiting the quarters limiting sales.
In order to have a much better sense of what the full cost of construction of the house is going to be given the inflationary environment and as a consequence I think what youre seeing is for all of building products that we're able to get on top of the price inflation, a little bit faster than we would.
Certainly in the first quarter or in a typical period because of the the actions that the builders are taking.
Okay.
And then secondly, I was just hoping to get a little bit of of cents on the.
Of this margin.
On an adjusted basis.
The accounting for or adjusting for the.
Yeah.
The gross profit.
2 basis points the year over year decline was a little bit greater.
This quarter than last quarter last quarter, if you adjusted the storm impact.
So I was hoping to go into the the drivers of that decline again, excluding the EBIT impact.
And how we should think about the back half of the year as well on a year over year basis.
Yes, So I think 1 thing that is important to keep in mind as debt our second quarter. Adjusted gross margin last year was the highest we ever reported as a public company. So the comp there and we've talked about this in the first quarter call of the comp there was very difficult, but I think theres a couple of other things that we would point out besides just buying out of.
Distribution of the home centers, which was at 60 basis points that we've talked about.
Actually we had and as Jeff mentioned in his prepared remarks, we definitely had some <unk>.
Challenges within the heavy commercial business, particularly alpha which makes up the vast majority of the large commercial business for us where it was also of about a 60 basis point.
Headwind to gross margin and clearly we like everyone else.
<unk> had some headwinds of about 40 basis points from fuel now I will say with the 40 basis points from fuel. If you look at our total vehicle costs that are in cost of goods sold.
For the quarter it was kind of flat second quarter, 20% of second quarter 'twenty 1.
Because we had some efficiencies in other aspects of the cost of running the fleet, but theres no doubt debt fuel costs are going to be continue to be of headwind relative to last year. Although we are starting to catch up to that are quite frankly, as we go into the back half of the year.
Okay, 1 last quick 1.
You mentioned single family installation price mix up mid single digits. This quarter what was it in the first quarter.
We haven't disclosed that but it was not sequentially. It has improved in the second quarter from the first quarter.
Okay. Thank you.
Thank you next question today is coming from Susan Mcclary from Goldman Sachs. Your line is in that line.
Theres the perhaps your phone is on mute please pick up the yes, sorry.
Sorry about that good morning, everyone can you hear me okay.
Good morning, everyone.
My first question is you, obviously talked a little bit about some of the manufacturers, adding some capacity and making some changes to their production can you just talk to how you're thinking about that coming through and what the flow through will be for your business and the ability to get materials.
I would say Susan this is Jim that really everything is kind of being talked about is really on the margin honestly I mean, the industry from a capacity perspective, as well pretty tight right now and what we continue to face and this is really with the many times with all of the math.
The factors is when everybody is running 100% all out in every facility that they have things happen.
So either.
When 1 positive thing happens of 1 little increase the se.
And in the line added here or there is a tiny little positive movement, but invariably it feels like something else happens where the.
Theres not a big effect so.
My opinion and I think they would say the same thing I think given the demand scenario of its out there.
This is a long term.
The situation in terms of supply being tight.
Okay. That's helpful. Jeff on that.
My next question. The again later on they get a little better obviously, but.
They are still trying to recover to a degree from kind of the curtailment that happened with COVID-19 because not only did it not slowed things down the and honestly over time of set it up even a bit.
And for them to get back on top of the mix the inventory mix that they need.
Which is part of what really is the crux of what is causing our problems in terms of having to run to retail or.
The distribution.
Not that it's a full trailer load or anything like that force typically it's the oddball items that they may not have on their mix, which is frustrating.
But I understand it's hard for them to fixed when the running flat out selling everything they really can.
Gotcha Okay.
On my next question as you know when we think about the breakdown between volume and price mix in the quarter is there anything regionally that you would call out, especially as the kind of got past some of that weather that impacted Texas and some of the southeast regions earlier. This year anything there that we should just be aware of or thinking about.
Yes, I'd say of the second quarter, which is probably no surprise.
We talked about this in the first quarter that there was very balanced growth.
In the first quarter between our various regions I would say that tilted in the second quarter of more towards the south and the west.
And for US the South includes the Florida and <unk>.
Texas and just given the strength that we've talked about.
With the production builders and their over indexed to those markets and we think we have pretty good market share with them in those markets clearly were seeing now greater sales growth in those markets.
And.
And again, we've talked a lot about this the production builders are definitely a headwind to mix and they are as well of headwind to gross margin, but as you see you saw that this quarter, we got very good SG&A leverage.
And Thats really the efficiency of doing that work with those production builders. So.
We'd like that work.
It is a headwind to the price mix and at the headwind to gross margin, but ultimately it is good margin EBITDA margin work.
Okay. Thank you that's helpful and good luck.
Thank you.
Thank you. Our next question today is coming from Trey Grooms from Stephens. Your line is now live.
Hi, Good morning. This is actually none of our counts go on for Trey.
Good morning.
So my first question here.
Clearly volume is picking up here very strong demand environment and you continue to run into.
Some supply constraints, where you are having to go to like you said retail and others to get supply.
Also it sounds like that's going to continue but.
If demand and volume continues to run this hot.
Is the risk that you're going to have trouble even getting.
Products from retailers is that a significant risk of that youre thinking about the volume as you go into the back half of this year.
Okay.
I don't think so I mean honestly, we still believe that.
The trades.
Even land cetera that comes before we go to the house of.
Or at least is constrained if not more constrained certainly.
Certainly than we are so.
I think right now I think everybody's opinion, you'd say the $1.6 is kind of where we're building 2 currently but it's flex the times I mean based on orders and sales to as much as $2 million and Thats, where the pain is is getting from here to there and we've said I think on many calls that ultimately it's going to take time to rebuild that kind of <unk>.
<unk> into the U S homebuilding industry and I think we're going through a little bit of those growing pains right now, but a year over year.
Past the is going to come back to the build out.
And if you just look at the LTM completion, they were like a 1 million $3.50, that's total obviously.
But.
June.
The <unk>.
Darts were running at almost $1.6 ft. So there's a very significant disconnect between kind of starts and completion.
I think there are a lot of people have talked about it and I believe we talked about it in the first quarter, but.
We believe what's going on right now with builders moderating their borders right their sales.
But yet accelerating their starts is absolutely what needs to happen right because not just installation and not just the products that we installed at the entire building products channel is just extremely stressed and disrupted right now with Jeff said relative to fiberglass working on 100% capacity in 1 little.
<unk> causes.
On a lot of disruption that's true of just about any building products right now and what we need is a bit of a pause quite frankly to get caught up so that we're all working on I'm not talking about us talking about the whole industry and even for the builders as well that we're all working in a much more efficient process because the way that it's going right now share we love having.
On the lift demand, but it's not the most efficient way for the industry to work.
Net.
We pointed out the the premium for buying out of distribution and provide on out of retail.
Yes it.
Is the painful number to us we frankly don't obviously want to be doing that but in the scheme of things. It really is the <unk>.
Relatively small percentage of what revenue is less than 2% of what were buying on a monthly basis day.
The basis that we're struggling to get so it's inferior right and its inefficient.
But for the most part.
The capacity is there to get done what we're doing is just struggled over the last little bit unusually it's an odd ball product for us.
In terms of on Gotcha.
Alright that makes sense I appreciate that and then just a quick follow up here.
Again building on the margin discussion a few headwinds in the quarter.
Nothing massive but the organic incremental was maybe a little lighter than we expected do you think the.
20% of 25% is still a good expectation for the full year.
Yes, I mean, the so in the quarter.
Backing out the headwinds that we've talked about relative to alpha and purchases from the distribution home centers same branch incrementals would've been at about 23% so kind of right in the middle of that 20% to 25% so but for some of these headwinds that we're talking about yes, we continue to believe 20% to 25% makes sense.
As you know typically we get better incremental margins in the back half of the year end of the first half of the year in a normal year clearly last year was nothing normal about it.
So it's not of great comparison, but yes, we think that certainly as we go into the back half of the year, particularly given the pricing actions were taken absent. Some of these headwinds that we've talked about that the 20% to 25% Incrementals makes sense.
Thanks for the time I'll leave it there good luck with the next work.
Thank you. Thank you.
Thank you for the next question is coming from Adam Baumgarten from the government of your line is now live.
Hey, Thanks for taking my questions.
Maybe just thinking about seasonality this year, just given the level of backlog out there and I guess this would be weather permitting but should we expect another kind of much seasonally stronger than usual quarter in <unk> at this point.
Obviously.
It depends right, but if things play out the way that we.
We just described in terms of the moderation of all.
Other growth kind of imposed by the builders themselves.
And it can create a more steady state sort of building environment.
You could see again, we've talked about this before I think you can see.
Less seasonal kind of year than we would have had in the past I mean, there'll probably be some level of seasonal pickup.
In the third quarter as there always is but quite frankly as we've been talking about I mean, everybody's working kind of flat out right now.
So I don't think youre going to see kind of the big fourth quarter bump but.
There really wasn't on winter.
And I don't mean from a weather perspective, I mean, there is enough backlog carried in from the third and fourth quarter of last year to make the first and second quarter of this year, you'll have a pretty robust growth.
And I think the it's just going to be a less seasonal year. Because there is so much backlog and I think thats, where your question was going.
Yeah, no great until the you know adjusting for weather. So yeah, that's what I was getting at I.
I guess, maybe switching gears to the commercial law.
Large commercial seems to have been a little bit better than light is that simply just the comp issue are you seeing weaker trends in like commercial it seems like the message. We've been hearing is that that tends to follow on residential.
Been quite strong just maybe some more color as you break out the commercial business.
The light commercial absolutely Power's residential.
And we feel very good about that business, but I will say, we had some incredibly difficult comps from some very very large.
<unk> in multiple geographies throughout the country and Thats why youre seeing that on that number.
Got it thanks guys.
Sure sure.
Thank you. The next question is coming from Ken Zenner from Keybanc capital markets. Your line is that line.
Good morning, everybody.
Morning, Brian.
The gist of I had the little nuance question since you disclosed the at the higher gross margin related to retail it should we assume and I realize you just.
Yeah.
You're talking about mix at the small piece of your overall business, but are those like kind of a whole projects because of.
It seems are those whole projects basically with the guidance sort of go into your warehouse just has to go to home depot or low to pick it up.
That 1 I assume and I assume the dollar.
Value of the headwind is essentially.
The GAAP between what you would buy at scale and what you are paying at retail is that correct.
Yes, that's correct. It is the delta between what we would pay for it and what we're paying for it.
But it will not hold projects at all its single items.
In some instances.
Theres truck, we didn't we haven't really pointed this out but the trucking the industries.
Wild as tight as it can be too so.
On the confirmation of the orders are not are confirmed even let's say, but then theres of trucking issue and it's as tight as it is right now.
You get to the point, where yes, sometimes you run on there to buy 8 bags of what should be of normal products, but it's just that tight so rather than send guys home.
Im not just saying that sometimes that hasnt happened, but we don't we never we haven't tried to quantify.
Of the inefficiencies that come with this just simply the premium associated with the raw material, but it's really it's a case by case basis on a spot basis.
Rather than incentives on so many hallmarks of just the last thing you need to finish the house, let's say.
Right no good.
Wanted to get a little clarity since you guys were focused on that.
Obviously youre watching the homebuilders.
Talking about slowing orders building up their inventory, which is really what your business will come from you probably all of a sudden notice their margins have expanded nicely.
Is there something that keeps you all within this you know I realize when you back out the material costs of the Alpha Youre on your normal range Michael.
What keeps you guys from getting a little bit tighter on.
Right.
Pricing on.
Narrowing the lag I understand the.
Customer mix issue and that's fine and gross margin SG&A leverage that's that all makes sense to me, but why do you think it is that the installers in general don't have tighter pricing.
Such a constrained environment because it seems as though it's not going to get any better I'm not negative I'm, just saying if not now.
Len.
I think to a large extent that's true I think theres still as Jeff was saying there is a lag.
I think the lag is getting tighter than it has been in the past.
But quite frankly, there is a lot of things in the mix because I know we have a tendency to focus primarily on fiberglass installation because its the largest thing we do on the single family side, but as you were saying as an answer to an earlier question I mean, while the fiberglass manufacturers have been pretty disciplined and giving us enough.
Adjustment time, if you will from announced the effective price increase it everything else that we installed including spray foam has not fallen into that category. So that's just presenting a bit of the lag issue, but we're working hard to get caught up on that and you know.
To your debt to your point now is the time to get price and we're working hard.
To get that price Ken This is Jeff So Jeff hire is unable to be on the call. This morning, but.
Part of B in the room, even lots of times he is but all true.
He has been in the industry as we know for I think 43 years 31 years at Owens Corning or.
So here we had of first the other day he announced that it ops meeting that we have every couple of weeks, we actually received a 25% price increase from the supplier on top of the 26% price increase from the same supplier that had not yet taken effect.
So I don't know how you would get on top of of.
The 51% price increase.
I'm just pointing out the line.
And it's the first time, Inc.
The price the price increase on top of the price increase that has not yet taken effect on 1 of 'twenty..1 does that sound yeah, because that's when we obviously focus on fiberglass for all sorts of reasons, but I mean that sounds like gutters of steel or something like that where.
It just is what it is in the spot market and there is no way around it and is that an accurate.
Yes.
Yeah, Yeah, I mean, there is.
I mean, there are just as you were saying I mean, there is so much constrained with in.
The materials environment, right now and it stems from steel lack of steel the transportation issues.
On the spray foam for an insulated garage door is.
Hardly available I mean people are closing homes in putting the curtains up as opposed to garage doors.
There's just a lot of disruption going on right now and.
We're doing an incredible job of managing through it.
Certainly.
It puts a lot of pressure on our field team to manage through it but I think again to your point Ken you know now is the time for us to get the pricing to cover all of this and the builders again right. So the.
Small dollar value things that need to get done.
And on the builder gets it so and you know.
Clearly as it was pointed out earlier, it's not as if their gross margins are hurting.
Right I agree that's the supply.
I need to share thank you gentlemen.
Yep.
Thank you. Our next question today is coming from Mike Dahl from RBC capital markets. Your line is now live.
Good morning, Thanks for taking my questions.
Just wanted to I wanted to.
Stick with kind of of the product cost dynamic can you just when we think true kind of the back half of the year. It sounds like things are still going to be paid.
With the backlogs youre seeing probably half of it in absolute.
In terms of sequential increases in revenue is coming so.
How should we be thinking about the.
The excess product cost dynamic in any hangover from the alpha the dynamics that you are too.
Talking about understand the ex those youre still looking for the 2025 incremental but.
Help us ballpark on what.
What those incremental costs can be please.
Well I guess I would say that.
This time last quarter, we felt based on everything that we knew that we would see.
Continued improvement as we went through the back half of the year, particularly on the sourcing of material.
We've been disappointed by quite honestly, a lot of our suppliers that they quite frankly haven't been able to get on top of it as much as they said they would.
So we think that we're going to continue to have this headwind quite frankly, certainly through the rest of the year hopefully not into 'twenty 2 as it relates to that as it relates to alpha.
We believe the headwind is going to diminish as we go through the year.
They have been getting good debt acceptance in bid activity.
On.
Fundamentally that business is pretty decent we've been very very pleased with some of the recent commercial acquisitions that we've done.
And at good margins, which you see reflected in our acquisition EBITDA margin contribution in our disclosures today. So.
<unk>, we feel good that.
The large commercial business makes a lot of sense for us.
We're just facing some headwinds there right now, it's incrementally going to get better but.
It's not going to be where we want by the end of the year meeting Alpha.
Right. Okay. That's helpful and my second question is the follow on to outflow of our heavy commercial so you quoted the backlog level and clearly a year ago, you were kind of cycling down and.
Backlog of bit are presumably you were so.
Could you help us understand how the $100 million in backlog compares against maybe 2019 levels and then if he thinks about that backlog being up.
On the 11% year on year at this point.
How should we think about the inflection to growth that you're expecting in the back half is it.
Kind of modest step ups in <unk> or is there anything that's more of kind of a step function change as you get into the <unk>.
Third quarter.
Well, yes, I think debt.
The.
Third quarter and fourth quarter of this year or easier comps certainly than the first quarter of.
Of <unk>.
Last year to the first quarter of this year, obviously, we improved sequentially.
In the second quarter to the.
First quarter on the same branch basis from a sales perspective.
As we did disclosed and as you pointed out the backlog is up kind of low double digits I would say that the mix from.
On 19 in the mix from 'twenty.
There's no surprise here has changed pretty dramatically in terms of what's in the backlog right. So no surprise pretty significant decline in lodging the hotel transportation and very significant increases in <unk>.
Healthcare multifamily actually entertainment and believe it or not so.
I would say that the complexion of the backlog has changed consistently with what we've talked about in the past.
And we believe that we're going to continue to realize that kind of a higher level of backlog over the next 12 months.
Okay, great. Thank you.
Sure.
Thank you. Our next question today is coming from Reuben Garner from benchmark. Your line is now live.
Thank you and good morning, everybody.
Hum.
Maybe just to clarify on the seasonality comments that you've made.
Is it safe to say that.
You mentioned, you're kind of running full out in the second quarter and I assume the industry is like is the biggest delta between you know.
The second half of the year like third and fourth quarters versus the second quarter is going to be.
The incremental price increases that you layer through or the.
Does the capacity coming online from some of the suppliers allow you to grow grow volume off of what you did in the second quarter just trying to understand.
What that looks like and then as the part of it does this sort of mean that we should anticipate Q1 and Q2 of next year would remain.
Elevated in a big way relative to normal seasonality, just because of how tight the the industry is.
So yes.
Yes put all 3 of those I think so yes, the back half of the year, we think theres room to improve pricing as you know that was the price increase in June.
And the took effect on June there was sort of going forward, that's going to be of tailwind.
There is.
That is going to be tight, but there is marginal improvement out of a couple or 3 of the fiberglass manufacturers in terms of bringing on a little additional capacity both in volume all of which you know towards the second half of the year 2 of demand shifts to heavier in the volume will right now much more pressure on past and there is volume will currently but the.
That changes a little bit.
And quite specifically a couple of those capacity additions are in blowing will and then finally, yes, I think next year versus the second quarter.
Don't feel very much like the seasonally down period of time now.
I would say that the 1 comment that I would add to that is we would still expect in the third and fourth quarter.
It's more volume than it is price mix right. So that even though we think that we're going to continue to get and see constructive as we've talked about in the single family insulation business.
On will be constructive on price.
Still on he is going to continue to be happening with heavily volume driven.
From a growth perspective as compared to on the on a year of on a year over year perspective correct.
Got it okay.
Got it okay.
And then my second question is.
As of fourth price increase this year later this year of been communicated to you guys and if they are if not if 1 were to come would that change.
Your perspective or outlook on the incremental margin from just because you're constantly.
You're in a situation, where you've got another price increase or cost increase the deal with.
I mean, I think it would depend upon.
Theres not a fourth of it.
Just on and not now not out of the announced and I would say that it is.
As long as they continue with the cadence of providing sufficient.
Sufficient time between announced and effective.
And given all of the things that we talked about earlier in the call just given the kind of pricing dynamic in the market and the market.
Would think that it would continue to be constructive, but that being said I mean, while single family of fiberglass is the largest part of our business. There are a lot of other products that we installed and theyre not going at the same cadence that the fiberglass guys are in terms of some of the announced price increases in their effective dates so there.
A lot of moving pieces, but.
The reality is the demand environment is very solid we expect it to continue.
Particularly when we look at the elevated levels of backlog I mean, as Jeff mentioned in his prepared remarks the.
The author rise, but not started number is out of 15 year high.
And we think that's extremely constructive for pricing.
And for volumes going forward.
Understood. Thanks, guys for answering the questions congrats on the quarter and good luck to the rest of the year.
Thank you.
Thank you. Our next question today is coming from the Stephen Kim from Evercore ISI. Your line is now live.
Yeah. Thanks, a lot guys just wanted to clarify 1 thing first of you I think you mentioned an incremental margin.
In the second quarter of 22%, if you would sort of added back supply chain disruptions, but.
From page 12 of your release and are just the if you take the $2.85 million. I think you said was the impact I'm coming up with 19% adjusted incremental margin. So I just want to make sure.
Debt that there wasn't something else you were adding other than the 2.8 to $2.9 million or if maybe that number was and I heard it wrong.
Yes actually so.
Set of incorrectly so I apologize for that but.
It's actually 23% and that is a combination of both the distribution component that you talked about plus the headwinds from alpha.
That they presented to the incrementals in the quarter.
Okay got it got it and sort of okay, and so that must have been another $2 million or something like that I guess right episode of over $2 million.
Yeah, Okay that makes sense okay.
Well you know theres been a lot of discussion are you know already I think of lot of my questions that I would have already asked but I think.
2 more that I had was 1 you're.
Inventory level rose pretty significantly in the quarter about 16% sequentially.
I was wondering if you could talk a little bit about that what that was is that it seemed to me to be a little bit more than I would've expected a little more than normal can you just sort of talk about what was behind that increase.
Really it's a large.
The large part to support the.
Growth in the business right. So on a sequential basis, our sales increase from the first quarter in the second quarter of about 12%.
And.
We obviously need inventory to support that clearly as we've been talking about the inflation rate that plays into the the carrying value of inventories because of their at higher prices than they were at the end of the first quarter of certainly at the end of the year.
This is Jason I would also add that would include inventory brought on in the acquisition.
And that gets a little misleading on right because so we did the inner mountain West acquisition, which is a decent sized acquisition and their revenues are only in the the numbers that you see for a very small portion of that.
Oh, okay.
That makes that makes sense.
Okay, Great how would you generally describe your inventory levels.
I would think with supply chain disruptions and maybe you know even having to go out in.
To your competitors and by some stuff here of there to get jobs done I would think that inventory levels would generally be quite low would you still say that you're operating at the level of inventory turns that are lower than you would expect going forward.
It really is sort of ex alright more range more rapid than you would have been then you would expect on my part I misspoke.
Its very product specific so, particularly with say fiberglass and spray foam our inventory days as it relates to those products is much lower than it normally would be.
But there are some other products, where just because right now there's availability of those products would be stocking up on them. So for example on our shower shelving and mirror business. Our inventory days is extended from what it typically is.
So it's really just the question of trying to manage what we can get and we have the space to put it on inventory and we're doing that just because.
About earlier things are tight across everything and to the extent, we can get the material, we want especially on the lower price we're going about it.
Yeah, I guess that makes sense, yeah, so definitely a mixed bag depending on the product on the availability of okay.
Going back to the incremental just 1 thing I forgot to ask about.
The acquired the incremental from acquired was quite strong I imagine that can fluctuate from quarter to quarter, but was curious if there was anything worth calling out with respect to the strong incrementals associated with the acquired rats.
Part of the goes back to an earlier question, but you were talking about the large commercial business, we've been very encouraged.
Encouraged with the recent acquisition acquisitions that we've done in that space.
And.
Quite frankly, the inner mountain West acquisition that we just talked about.
It was a very good transaction growth, so youre, absolutely right it fluctuate quarter to quarter, depending upon whats in that acquisition bucket.
But we've been pleased with the recent acquisitions that we've done and I would say as well.
If we're building talk very much about this but.
On.
Our acquisition pipeline is the deepest it's ever been in our history and as a consequence really over the past I would say 6 to 12 months, we've got in line.
More sensitive to acquiring higher margin businesses. So I think that's reflective of the the margin there.
Got it and would I be right in in estimating that.
The overall.
The Alpha sales this quarter were somewhere in the vicinity of $40 million to $50 million.
We do not sorry, 40, sorry, sorry, $35 million to $40 million I read the wrong line, sorry, $35 million to $40 million.
For the quarter.
Yeah. The other quarter, yes, yes, that's very reasonable yeah, I would say that they were a little bit of harder at the higher end of that estimate estimate of excuse me okay.
Okay.
Yeah I appreciate that guys. Thanks very much.
Thank you.
Thank you of our next question today is coming from filling from Jefferies. Your line is not a lot.
Hey, guys on it.
Actually Maggie on for Phil.
Good day.
And of a broader industry question on.
And we're seeing broader inflation across building.
Building products on builders are taking price.
Home prices are up.
On.
So just given a lot of those dynamics starting to hear some concerns around the corn ability, but it seems like definitely within your customer base, you're seeing more of a shift towards entry level homes.
So just wanted to get your thoughts on.
Where you think we are within affordability dynamic starting to impact demand and if there's anything you're monitoring around interest rates on the.
You would start to expect more of an impact.
Yes, I would say from the affordability perspective, right now we're more concerned about inflation than we are.
Interest rates, although that sort of the counterintuitive statement, because if you're worried about inflation ultimately you have to be worried about interest rates right.
But.
Clearly what we're seeing from again all of building products as you've pointed out on what the builders of realizing from price and what the existing home market is doing.
I think that it is putting a bit of a.
Pause on people pulling the trigger to buy but I think fundamentally the demand underlying demand is there.
And I think what's interesting.
I don't think of a lot of us would have necessarily called this a year ago is that the tightness within both of the new and existing single family market has created intense demand most of it and I think what most people would have expected for multifamily because people. The household formation that we've all talked about on the demographic change that's going on on the car.
It's happening I think what Youre seeing is just because theres not the availability of products and toward the higher pricing the people need to adjust to that people are going into multifamily on on what I think most people would consider to be of temporary basis and.
And that ultimately supply catches up to this demand both from an existing and a new <unk>.
<unk> family of perspective, I think you'll see people getting back into the game so to speak of buying of single family homes, because fundamentally we believe that the demographic shift that's going on as the millennials age and the.
The fact that most of.
You know.
Older people are aging at home and not giving up their home is just going is creating a dynamic where there is the strength for single family.
And it's been well talked about that for the over the past 12 years.
We'd be underinvested in single family. So we believe that provides what right now is not the perfect dynamic just given all of the things that we've talked about.
Fundamentally in.
In the medium and long term debt demographically that ship is shift is happening and it will continue to happen.
As we said earlier a bit of a pause in order growth would be extremely constructive for the industry to just let those catch up.
Got it thanks, guys. That's all from me.
Sure.
Thank you. The next question is coming from Ryan Gilbert from <unk>. Your line is that line.
Hi, Thanks, guys I appreciate all the detail and I jumped on a little late so I apologize if you already answered this but.
I think typically we think about gross margin is improving sequentially in the third quarter from the second quarter or do you think that's still going to be the case in 2021 or do you think these.
Distributor issues could weigh on weigh on the gross gross margin.
Uh huh.
We do think that as we said that the back half of the year, we're going to continue to have this frustration if you will.
From the supply disruptions, you're right tailwind of believing that in a normal year, which that was not the case last year, we would expect improvement in gross margin as we go into the third and fourth quarter.
Absent some of these headwinds that we talked about both alpha and distribution, we would expect that particularly given the pricing environment that we're on the.
Would expect that to be the case, but I do think it's helpful to just kind of level set debt again, the adjusted gross margin that we reported in the second quarter of last year was the highest we've ever reported as a public company and we stepped down in the third quarter on the fourth quarter of last year from that.
And quite frankly.
Well, we're frustrated that our adjusted gross margin was down from from last year, it's still at a fairly elevated level.
So we feel good about that and we feel good about as we head into the in the back half of the year, particularly as we continue to get price realization.
Absent again, some of the headwinds that we've talked about.
Okay. That's all I had thanks very much.
Thank you the game.
Thank you we've reached the end of our question and answer session I'd like to turn the floor back over to management for any further of closing comments.
Thank you for your questions and I look forward to our next quarterly call. Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Okay.