Q3 2022 TopBuild Corp Earnings Call
Greetings and welcome to the top though third quarter 2022 earnings call and webcast. At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to tap at the Zahn Vice President of Investor Relations. Thank you you may begin.
Thank you and good morning on the call today are Robert Buck, President and Chief Executive Officer, and Bob Kuhn, Chief Financial Officer, We have posted senior management's formal remarks, and a powerpoint presentation that summarizes our comments on our website at <unk> Dot com.
Many of our remarks will include forward looking statements, which are subject to known and unknown risks and uncertainties, including those set forth in this morning's press release as well as in the company's filings with the SEC. The company assumes no obligation to update or supplement forward looking statements that become untrue because of subsequent events.
Please note that some of the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release.
And in our third quarter presentation, which can also be found on our website I will now turn the call over to Robert Buck Good morning, and thank you for joining us today are.
Our third quarter financial results reflect the strength of our operating model and our continuing focus on improving our operational efficiency.
Revenue increased 53, 8% 22, 6% on a same branch basis, and adjusted EBITDA margins improved at both business segments.
On the installation side, our volume continues to outpace completions as trades and supply chain is ahead of us showed improvement accelerating our ability to work through the housing backhaul.
In addition, our commercial business, both heavy and light is steadily improving.
This resulted in third quarter installation revenue growing 27, 8% 26, 1% on a same branch basis.
Our specialty distribution segment on a same branch basis grew revenue 18, 7% driven by strong execution and improved volume.
We saw solid demand from the commercial and industrial end markets as new projects came on line.
Our results are a testament of the hard work and dedication of our employees and their continued focus on driving operational efficiencies and executing well and the evolving economic environment.
Switching to distribution international it's been just over a year since we closed on this acquisition, providing us with a direct entry and leadership position in the highly attractive and growing $5 billion mechanical insulation business.
We have a talented team.
Projected synergies and strong growth opportunities. We're obviously critical factors in our initial evaluation of the eye.
We're also we're also attracted by the opportunity to enter a new insulation end market industrial and increase our penetration in the commercial end market, both of which operate on a different cycle than residential housing.
The integration of this 1 billion dollar acquisition is going extremely well with most branches now on our ERP system and supply chain optimized.
In addition, we continue to identify opportunities to streamline operations through our specialty distribution network by leveraging technologies and best practices.
As projected we have met our goal of achieving run rate cost savings of between 17% and $20 million in the first year of ownership and we're highly confident we will meet and likely exceed total cost savings of between 35 million to 40 million by October of next year at the very latest.
The ice financial performance has also exceeded our expectations in part due to large scale commercial and industrial construction and maintenance projects no longer delayed due to the pandemic.
The team has done an outstanding job managing the business and working hand in hand, with our other operational leaders to identify growth opportunities across our North American branch network.
We are pleased to see our commercial business in both segments.
Installation, especially distribution improving and we're optimistic our commercial business will continue to demonstrate positive growth both organically and through targeted acquisitions.
Our outlook is based not only on our own bidding activity and backlog, but also on year to date nonresidential construction data, which points to a resurgence in demand. However, we also acknowledge there is still much uncertainty with labor and supply chain constraints continue to hamper industry growth and higher interest rates.
Possibly putting some projects on the backburner next year.
Turning to material fiberglass remains on allocation.
Despite signs in the housing slowdown inflationary industry has not abated as evidenced by the fact that all four of fiberglass manufacturers have announced a 10% cost increase effective either in December or early January .
On the other side of the equation builders are seeing a slowdown in orders and beginning to push back on price in general.
While this has created an unprecedented situation of our industry. We will continue to strive to strike the optimal balance and timing market by market between price and volume.
Moving to M&A, we completed one small acquisition this quarter and year to date have completed five all of which are residential and light commercial installation companies. In total these firms are expected to generate over $17 million in annual revenue.
The highly fragmented nature of our three end markets provides us with solid opportunities to continue to execute our acquisition strategy on both installation and distribution sides of our business. We are steadfast in our belief that acquisitions are the best use of our capital and will generate the strongest returns for our shareholders in both the near and long term.
With the successful integration of D I, mostly behind US our team is focused on building and working a robust pipeline of targeted acquisitions.
In the third quarter, we also returned capital to our shareholders by repurchasing almost 270000 shares at an average price of $185 50 per share returning approximately $50 million to our shareholders.
Year to date, we've repurchased slightly over 1 million shares returning $200 million to our shareholders.
On the ESG front, we are pleased to learn that MFC I upgraded our rating from Triple B to a high recognition of our strong governance platform and our improving disclosures.
One metric, we were particularly proud of which I mentioned on our last call is the improvement since 2017 of our safety metrics, which continued year to date.
While the safety of our employees is Paramount improvements in total recordable and lost time cases rates.
Provide additional benefits, including enhancing our ability to attract and retain talent.
And reducing total cost to the business.
I also want to again emphasize that the core of our business is inherently environmentally friendly.
Installation, we install and distribute drives thermal efficiency lowers energy usage and reduces carbon emissions. We are the leader in delivering these benefits for new and existing homes and commercial and industrial facilities across the United States and Canada.
Energy savings, we deliver far outweigh the impact of our own operations.
And finally as you know, Florida was hit by Hurricane Ian in September .
While the storm did not have a material impact on our business several of our branches in the state were shut down for a few days directly impacting our employees.
To ensure their priorities remain with their families. During this difficult time, we paid our team in full for the days their respective branches were closed. This is another example of why we believe we are the employer of choice in our industry.
Looking ahead, we recognize theres a lot of uncertainty around the economy.
While there is a general consensus the economy is slowing down the optimist or predicting a shorter pulse and growth while the pessimist see a longer slowdown.
Regardless of how this eventually plays out we believe our business model in both installation and distribution can outperform in any environment.
Our team managed the business with a constant mindset of driving improvements and achieving operational excellence, we have the best the most talented operators in the field and a dedicated and experienced group at our branch support Center.
Our entire team remains focused on continuing to deliver strong results and creating shareholder value in every operating environment.
Thanks, Robert and good morning, everyone. We're pleased to report another excellent quarter of profitable growth delivered by our experienced and talented teams across the U S and Canada.
As Robert mentioned, both installation and specialty distribution reported strong results with improved sales volume and strong profitability.
Our unique business model and relentless focus on driving operational improvements continues to provide us with a significant competitive advantage and positions us to outperform in any environment.
We are keenly aware and are closely monitoring the changing economic environment, and our flexible cost structure with over 70% variable cost enables us to make adjustments quickly if conditions warrant.
Moving to the financials I'll start with an overview of the third quarter results update you on our balance sheet and provide the latest on our full year guidance.
Third quarter net sales increased 53, 8% to $1 3 billion and 22, 6% on a same branch basis.
Same branch volume improved both year over year and sequentially.
Breaking that down our installation segment third quarter net sales were $783 1 million an increase of 27, 8%.
Higher selling prices contributed 13, 8% increase sales volume added 12, 3% and acquisitions accounted for one 7% specialty distribution.
Distributions net sales were $583 5 million an increase of 111, 1%.
On a same branch basis revenue grew 18, 7% driven by a 13% increase in price and a five 7% increase in volume.
Third quarter, adjusted gross margin expanded 80 basis points to 34%.
On a same branch basis gross margin expanded 170 basis points to 31, 3% driven by operational efficiencies and increase in sales volume and higher selling prices, partially offset by an increase in the cost of material.
Third quarter, adjusted EBITDA increased 63, 8% to $259 2 million and our adjusted EBITDA margin was 19, 9%, a 120 basis point improvement compared to last year.
On a same branch basis, our adjusted EBITDA margin was 26% an improvement of 190 basis points from third quarter 2021.
Our third quarter same branch incremental EBITDA margin was 28, 8% and our acquisition EBITDA margin came in at 17, 4%, primarily driven by strong results from D. A.
Third quarter adjusted EBITDA margin for our installation segment was 21, 6% and 18% for our specialty distribution segment.
An improvement of 200 basis points, and 10 basis points respectively.
Third quarter interest expense increased from $5 5 million to $14 6 million, primarily as a result of additional borrowings from our acquisition of <unk> in the fourth quarter of last year and higher variable interest rates.
Third quarter adjustments to net income were $1 3 million and primarily related to acquisition integration cost.
Third quarter adjusted earnings per diluted share were $4 80.
62, 7% increase from prior year.
Moving to our balance sheet and cash flows our September 30 year to date operating cash flow was $335 6 million compared to $309 5 million last year.
This was driven by our 67, 8% increase in net income, which was partially offset by growth in working capital.
Working capital as a percent of trailing 12 month sales was 15, 5% 520 basis points higher than a year ago.
This increase was driven by the higher working capital requirements of D. I continued price inflation ongoing recovery from supply chain disruptions in certain strategic inventory buys related to our industrial business.
Over the long term, our working capital target remains 11% to 13%.
On the capital allocation front September year to date, Capex was 56 million approximately one 5% of revenue and consistent with our long term guidance.
In addition year to date, we have allocated $25 million to acquisitions and just over 200 million to share repurchases.
There were no significant changes to our debt structure and our outstanding short term and long term debt balances remained at just under $1 5 billion.
Our debt structure is roughly 60% fixed and 40% variable with our current average cost of debt at 375% and no near term maturities.
We ended the third quarter with net debt leverage of 149 times trailing 12 months adjusted EBITDA. This is down from one six to eight times at the end of the second quarter and down from our pro forma leverage of two two times at the time of the <unk> acquisition, just over a year ago.
We are often asked about where we are comfortable taking leverage and we've noted that between one and two times is a good range for us and is well below our bank covenant of three five times.
Total liquidity at September 32022 was $591 7 million, including cash of $159 4 million and an accessible revolver of $432 3 million.
Moving to annual guidance, we expect to close out 2022 with a strong fourth quarter. We are projecting total 2022 sales to be between $4 95 billion and 5 billion a $150 million increase on the low end of the range and a $100 million increase on the high end of the range.
We have also raised our 2022 guidance for adjusted EBITDA to be between $915 million and $935 million a $55 million increase on the low end of the range and a $35 million increase on the high end.
Our long range modeling targets are unchanged from those we published on February 20 <unk>.
I will now turn the call back to Robert for closing remarks. Thank.
Thank you Rob before opening up the call for questions I want to emphasize a few points about our business and the three end markets we serve.
Starting with housing this end market is clearly being negatively impacted by the fed's efforts to curb inflation through interest rate increases as.
As buyers face rising mortgage rates and elevated home prices. Many are choosing to stand on the sidelines and take a wait and see approach despite.
Despite this following demand much of the housing industry is still being impacted by inflationary pressures across most of the supply chain, creating an unprecedented market dynamics that will take some time to resolve.
Taking a step back from the current situation, we still believe the long term fundamentals for the housing industry are solid.
Demand may be on the sidelines today, but we believe buyers will return when economic conditions improve and mortgage rates stabilize.
Our commercial industrial end markets, which operate on a different cycle than residential housing and contribute 35% of annual revenue provide a bright spot in our outlook bidding activity is strong and we have healthy and expanding backlog.
We see continued opportunities for growth.
Regardless of economic environment chart, though will continue to focus on driving operational improvements and efficiencies, while adapting our highly variable cost model in anticipation of market changes.
We remain confident that our unique business model, combining both installation and specialty distribution, a key differentiator and a critical component of our success should enable us to outperform in any environment.
Operator, we're now ready for questions.
Thank you I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing that.
He is.
Our first question is from Ken <unk> with Keybanc capital markets. Please proceed.
Good morning, everybody.
Good morning, Ken.
I two questions, but I guess the first one is since you mentioned D. I was ahead of schedule.
I know you broke that into the synergies into different cost buckets was part of that related to your purchasing synergies because I think that's part of one of your strategic elements that you really keep strengthening your purchasing power could you expand on that please.
Yeah, Ken this is Rob so so from a DIY perspective definitely another strong quarter from them.
We couldn't be more pleased with their performance since the acquisition the volume really strong again in the third quarter similar to the second quarter, we want to keep reminding folks the volumes there can be a little bit choppy due to the project nature of the business.
And then obviously youre seeing our M&A EBITDA really strong ahead of our guided range N. D. I, obviously makes up you know the 90% of that and a lot of that is driven by the volume that we're driving but also then the synergies that we're realizing so if you'd go back to what we signed up for the.
The $35 million to $40 million run rate.
We said we'd be about halfway there through the about by about this time and we're a little bit ahead of that right now so from a supply chain perspective.
So we basically realized all of those synergies from a from a back office perspective, I'd say, we're a little over half of the way there on those we just completed the ERP.
Conversion, which is going to help us drive the rest of those efficiencies and then on the operation side, we continue to search for things on that side, we're probably a little less than halfway there on that piece, but we have driven you know synergies from insurances logistics and indirect spending so.
As you can see in the numbers, where we're really happy with the performance there.
Yeah, No. That's good and then Robert you mentioned that.
To paraphrase you bet the builders are beginning to push back on price.
Given.
At least the public homebuilders, we can see that there starts are down about 25% year over year.
Obviously, that's a little cleaner than the census data and you guys have probably the best data in the country.
What does that mean pushing back on price I mean, with you announcing price increases from the manufacturer that would seem to point to margin squeeze you know it's been a very good run in recent years. So I'm looking at the fourth quarter 18 when.
You guys actually had.
Thank you you're only down margins modestly, but your margins were at 12% not where they are today. When you had negative volume. So could you just try to give comfort around how that 70% operating leverage.
You know you see.
Unfolding.
Yes next year when starts are clearly going to be down. Thank you so much.
Sure. So I'll take the first part of that Ken relative to the builders. So obviously a lot of conversations if you take the past two years, given what was happening with the demand curve. There was a lot of conversations in but as you saw the inflation as people were concerned about labor and stuff as well.
Those conversations exist in the past two years, but theres a lot of demand drivers there as well as things that started to show the signs of slowing is just further conversations, but I would say the <unk>.
Backlog is still there I would also say that labor is still at a premium fiberglass is still on allocation, so but they're linked year conversations more conversations if you will with the builders they still recognize some of the supply chain constraints.
But they obviously see what's on the horizon here. So it is.
Dynamic here, if there is inflation and you see the slowdown so it's further conversations and partnerships with each one of those builder customers really across the country and that's really the big builders, but also the the regionals and the smaller builders as well yeah, Ken and I will just add to that I mean as far as from a margin perspective.
And looking forward right I think the best word to use where we sit today, we're cautious right I mean, it's a it's unprecedented times as Robert talked about.
And so we're cautious where things are going to get sorted out here on the residential side and you see that in our guidance right. Our EBITDA margin for the fourth quarter is coming down a little bit from from what we had here in Q3.
Yeah.
Okay.
Our next question is from Stephen Kim with Evercore ISI. Please proceed.
Yeah. Thanks, very much guys I appreciate all the information.
I guess my first question would be related to the the residential side of the business Theres been a pretty big difference between trends in multifamily and single family recently and I was curious if you could talk a little bit more about what you're seeing in multifamily residential specific.
<unk> you.
High rise mid rise versus low rise, perhaps you could give us a sense for you know what your market share looks like within the multifamily space and are you seeing a significant significantly different trends in multifamily versus single family. So far.
Maybe give us a little sense for you know what the competitive dynamics look like in multifamily versus single family.
Yes, Stephen this is Robert so yeah, you're right I mean, if you look at our performance in Q3 and as we started off Q4 strong here definitely as trades ahead of us have shown some improvement, especially on the single family side, you never see that into the backlog that we're working on but the multifamily building.
<unk> is very strong I think our backlogs in multifamily are had a historical high levels and no doubt about it and I think even if you look at the census data of units under construction that percentage of multifamily has continued to grow if you look at if you look back over 2022 here. So a lot of multifamily work out there for the <unk>.
Future.
Really I'd say across our markets. If you if I look if I had looked at and maybe earlier this year at a today some markets on a multifamily side seem to be a little saturated that we're sitting seeing bidding activity and potential projects pretty strong across the board in multifamily.
I think given some of the dynamics that exists and you know you see some of that multi use type of multifamily where youll see units up top some retail down to the bottom we still see that as some of the some of the trends as well.
And how about your market share like how does that look in terms of your ability to service and Oh, yeah in that side of the business. Yeah. Good question I missed that so we are pretty well aligned with the starts if you look at how we're kind of where you're taking more on the.
Market share side with multifamily so we're pretty in line with that same starts percentage as well.
Okay. That's great that's helpful.
And then I think just another clarifying question here when.
When you talked about commercial are you, including multifamily in that I know, sometimes it's not some folks do and then the last time, you talked about labor shortages, maybe extending cycle times, and maybe depressing a little bit of activity in commercial has that situation improved at all.
Yes, so on the commercial side, we do not include multifamily and commercial so anything Thats census reports of units. They include on the residential side. So multifamily is not included in those commercial numbers or in our outlook for commercial.
And then relative to what was your second question there.
I was just like on the labor shortages. It yeah. So we've talked about that last time relative to labor on the commercial so I wouldn't say that's improved I would say is the backlog has continued to get work on the residential side that labor is really not none of that shift to commercial so we still see a cycle time extension on commercial projects, both light and heavy commercial.
<unk>.
Okay, great. Thanks, very much guys sure.
Our next question is from Adam Baumgartner with Zelman and Associates. Please proceed.
Hey, good morning, everyone just.
Just could you give us a sense of maybe the magnitude of improvement you're potentially saw and homebuilder cycle times, if we look at the third quarter versus the first half.
Given the still elevated backlogs when would you expect some of the recent starts weakness to start to show up in your results.
Yeah I'll take the first part on cycle time, Rob can can handle starts discussion. So cycle time, we definitely say the trades in front of us improve thus the reason we bid into that backlog, especially on the single family side here in Q3, probably even going back earlier in the year Q2, we were probably into that backlog as well and we would say looking at this.
Started the fourth quarter, so I'd say that's improved.
Hard to say, but I'd say, maybe a couple of weeks on the front end piece of it if you will but they give you a list of the builders the backend trades really haven't caught up and even some of the public builders have said that got a tad bit worse in the quarter. So I don't know that overall cycle times have improved but we would say definitely trades in front of us we see some some improved.
For sure and I think the builders stated premier so very.
Very similar to what we saw on cycle times. Adam. This is Rob I would just add to that I mean, if you look at our volumes in the quarter and even year to date I mean, we are significantly outpacing completions right now so that's kind of evidenced we're looking at to say that hey, we're working into that backlog.
A little bit here. So so our best estimate and we definitely think the backlog is going to last us into Q1.
But then obviously a lot to get sorted out after that.
Okay. That's helpful. And then just just on the upcoming fiberglass price increases from the manufacturers a couple of questions. One do you think they'll largely stick given tight capacity and you know as we look out to next year and maybe some of the conversations you've had do you expect a return to a more normal cadence maybe a couple of year in 'twenty three.
Yeah, Let me take the second question first this is Robert so hard to say I think it depends on that demand curve through 'twenty three what that cadence of increases looks like for 'twenty three so that was.
A little harder to say I think that again to us on that that demand curve piece in that obviously, you havent see drive how much supply available relative to the current increase I mean.
Fiberglass lives on allocation.
Labor is still tight, but we're going to have that dynamic that I think Rob and I, both spoke to where the sun president of piece of builders or are definitely having more conversations and pushing back on that but there is still inflation really across the industry right. Now so those are going to be.
A more in depth conversations for sure.
But there are some dynamics that are working where material is still on allocation. So it'll be a very balanced conversation and as a as we've said here, we're kind of cautious about that outlook as we go into those conversations December and January and that increased our taken effect.
Great. Thanks, a lot.
Our next question is from Mike Rehaut with Jpmorgan. Please proceed.
Hi, guys. Good morning, Doug Wardlaw for Mike I, just wanted to know how we should think about decremental margins amid a 10% revenue decline.
Yeah, Doug So this is rob so.
Our goal on a decremental is to be similar to our incrementals, so somewhere in that 22% to 27% range, but.
It will vary.
A couple of things that will make that very one is.
That 10% decline depending on how long we think that's going to last we may hold onto labor a little bit longer. So that'll obviously that could make that decremental a little bit worse and then the other thing that could make it a little bit worse on the price side right at that 10% decline as volume base for sure we expect that decremental to be closer to that.
27 number but if.
If it is price related.
Still got to go do the work. So we don't variable is the direct labor piece of that as much. So so that that would make that flowed through a little bit higher on that in that case.
Okay, great. Thanks.
And then you know how much visibility do you guys have in both your industrial and residential businesses and how do you see those end markets moving forward in this environment moving into 'twenty three.
Yeah, I think as far as visibility. So if you think about if you think about commercial and industrial pretty good visibility and we were bidding projects well into 'twenty for now.
In the commercial space and in the industrial space and when I think about some of that especially on the mechanical insulation side. Some of that was slower to recover coming out of the first round of Covid. If you will that really started recovering.
Later in 'twenty, one or mid 'twenty one so.
I'd say based on projects, we see based on projects that we're bidding based on projects that are getting started as we said we think that's a bright spot here and again, a key part of our model about how we differentiated.
Bill with that commercial and industrial business now being 35% of the revenue so.
And there is some really good capital spend projects coming up across both the commercial and industrial space.
Doug This is Rob I would just add to that you know we look at a lot of the leading indicators that others look at as well Abi and the Dodge momentum index and definitely those are pointing towards growth.
We're cautiously optimistic in that area for sure obviously, knowing that interest rates if they continue to rise.
Have an impact on that space as well, but like we said we think there's there's reason for optimism on that front.
Got it thank you guys.
Our next question is from Phil.
With Jefferies. Please proceed.
Hey, guys. This is maggie on for Phil.
Yeah, I guess my first question is around pricing and maybe looking past this December increase and enter 2023 on.
With a weaker demand backdrop on and potentially declining insulation pricing, how do you see yourself kind of managing that spread.
Particularly with your hair labor piece.
On just how do you see your pricing playing out and Ah and a weaker demand backdrop.
Yeah. So Maggie this is Robert so if you think about that out is focus more on the labor side of the equation here. So even if you went back into the housing starts were 131 4 million.
Labor was still a constraint and so I think you're still going to have that value add piece of what's going on the labor side of the equation.
We say that theres enough fiberglass through at least for one 5 million housing start that's running at full capacity, there's going to be maintenance and the issue in the industry as well. So I think that will play into the discussions I think it will depend on that that demand curve and where does it where does it go.
But again I think labor will continue to be.
At a premium and obviously, we provide great service, we have great relationships across the across the footprint, so a little bit of the unknown there but.
I think there are some known as relative to you know labor capacity in the industry.
Okay got it that's helpful.
And then it looks like you closed some small acquisitions. This quarter can you just talk about what you're seeing in the M&A market with multiples or the types of deals out there and how does your approach chill M&A change going and chill, a potentially more challenging demand backdrop.
Yes, Maggie this is rob so so from an M&A perspective, obviously, we've done a little less on that front. This year. Our focus was really on the <unk> integration, which has gone great and we're really getting focused now getting us to get the pipeline filled up on the M&A front.
We know even if there is a downturn, we're going to continue to generate cash and we're hoping.
To pick up some some deals in that timeframe I mean, obviously from a from a financial perspective, we got to be disciplined on that front you know knowing that there's uncertain times ahead, we're modeling things in various scenarios looking at downside scenarios, so making sure we don't overpay for any assets, but.
It's certainly going to be a big part of our strategy going forward.
Okay, great. Thank you.
Our next question is from Jeff Stevenson with loop capital. Please proceed.
Hi, Thanks for taking my questions today, and congrats on a nice quarter.
Thank you.
Just wanted to dive into the strong volume improvement on the coking coal.
Or was this primarily driven still by the catch up and elevated completions are or were there share gains there as well.
Yes, Jeff This is Rob I mean from our perspective, our best estimate is that I mean, there could be some share gains in there, but our best estimate is that we're working through that backlog that's out there.
So you know there's a historic level of how of units under construction right now and as we've exceeded that completions number for several quarters in a row.
We're pretty certain we're eating into that backlog.
This is Jeff <unk>, Robert So just to build on what Rob said I mean, nice commercial volume in the quarter, we were glad to see improvements there and we think that's.
Some good signs of what's going on in the commercial and industrial quite honestly, both service partner side, we'd say it was an easier comp if we compare to Q3 of 'twenty, one as well by the teams in the field did a great job really servicing the customers whenever we have the ability to work that backlog and stuff. So we're really happy with the volume and what happened in the quarter.
Great. That's helpful. And then you had a strategic inventory buys last quarter, particularly with the and I'm. Just wondering is that largely done now and then current inventory levels I'm, just wondering kind of where they're at right now and do you see any need for potential destocking in the future.
Yeah. So so this is this is rob Jeff So from an inventory perspective, we do still have some of those strategic buys on hand, it's roughly about $20 million of inventory in addition.
We're a little heavier in certain areas, where we've had some supply chain disruptions and lead times change and then you get you know you get a bunch of inventory and so that's probably another another $20 million in certain categories. So there's there's definitely some opportunities for us to lean that down and that's definitely a focus of ours. If you look at the prior year or about five days of <unk>.
Inventory heavier on an apples to apples basis with last year.
Very helpful. Thank you.
Our next question is from Trey Grooms with Stephens. Please proceed.
Hey, good morning, Thanks for taking the question.
Rob you guys have a highly variable cost structure.
Fairly capital light as well I'm, sorry, if I missed this but.
How should free cash flow behave once we see the lower starts begin to move through the system and start to.
Possibly negatively impact demand for you guys I guess, maybe after first quarter of next year I think is what you pointed to I'm sure.
Working capital should be a strong source of cash in that environment, but any any color on maybe how conversion rates may change or any additional detail on free cash flow generation in a in a down market.
Yes, Okay, you hit on it for sure I mean, with our with our high variable cost structure.
And our capital light.
With one 5% of our of our sales roughly going towards Capex.
We will continue to generate strong cash flow, even if we do have some some downward pressure on sales and will have working capital come out of the system in that first year right. So we'll get a one time benefit as they are it gets collected this year, we've kind of got the onetime hit with with organic sales growing over 20% for the year.
We've obviously increase they are in inventory to support that that's really been the biggest piece of our working capital increase.
So in a in a downtime if that's what you're forecasting for next year, we will get the benefit of that coming back so.
So the first year of a downturn, there's definitely a free cash flow benefit.
And kind of a follow up to a question earlier you talked about.
Still having appetite for M&A.
Kind of through the cycle, but in the absence of good M&A.
It's out there.
Just don't work out for whatever reason in the absence of M&A.
With this free cash flow.
What are your next kind of proud.
Priorities as you can.
Kind of look at the capital allocation, yes. So trade, we're always focused on making sure we keep a conservative balance sheet right now and that we're working in a cyclical industry here. So we're going to stay focused on that and obviously if things you know get get worse, we'll be more conservative on that front.
Hold cash a little bit longer, but if this turns out to be an air pocket. We're certainly going to be you know like we said, we're going to be aggressive on the on the M&A front.
But knowing that that can be choppy and the timing of that varies you know just like we always do we'll continue to evaluate options of returning that cash to shareholders.
Thus far we found buybacks to be the most efficient with that so one.
I wouldn't be surprised to see us continuing with that moving forward.
Thank you very much good luck guys.
Our next question is from room Rubin Gardner with benchmark company. Please proceed.
Thank you and good morning, everybody.
So the new housing piece I understand I wanted to see get your thoughts on the potential positive.
Impacts of the inflation reduction act and the tax credits on the repair and remodel side I know, it's not historically been a huge part of your business, but are there any opportunities for you guys to maybe.
Participate there in a bigger way, particularly in light of the softness in the new housing side that that's likely to come next year.
Hey, Reuben this is Robert so there's definitely some opportunity there.
People could look at the credits that can happen coming from multiple different directions. There is a possibility of some maybe re insulation. If you will I'd say the bigger upside is through some of our testing programs, because because theres going to be some credits going back, including I think to the builders relative to you know ratings of homes and stuff. So as you know we're the largest writer in the U.
With our Taco home services.
Business is probably more upside from that perspective, and the value add that we are that we bring on that side with with the.
With that act, which you mentioned.
Okay, and then on the commercial and industrial.
I guess the top.
Two part question. One are you seeing any signs of softness kind of early pipeline to date and then you know can you remind us how the backlog looks and works there relative to housing obviously.
The prolonged construction cycle in residential gives you some visibility at least into the early part of next year is there a similar dynamic in the C&I side.
Yes, so definitely the commercial industrial works on a different cycle than residential.
If you just kind of break it down a little bit further if I think about the building envelope and light commercial that's been our policy and residential trends, but on a different cycle right because as you're building infrastructure in our community to support the new communities that will that light commercial fallow that heavy commercial there's such a backlog and those projects have been delayed and the cycle time of those projects have.
Have extended its just continue to build that backlog so.
I think that that cycle has even been more extended on the heavy commercial side, if I think about mechanical insulation, there's been some different dynamics there one is.
That was later to start the recovery number two is there hasn't been the major supply chain constraints on that piece of the business and so there's a lot of good capital spend going on there some of that could be infrastructure related.
But theres also projects that are required to kind of move forward given regulatory environments that type of thing Thats why thinking about that business and then think about that MRO that maintenance repair side of the business that's a real positive on.
On that so whenever we look at projects projects, we're bidding projects that are coming online and even projects, we're talking to customers about we think there's.
There is definitely some good positive momentum in commercial and industrial again, both on the mechanical side in what I'll call. The the building envelope side as well and then the third piece of that is as you know we are the largest player in the metal building space.
And some really positive trends there.
We expect that to continue to show.
Positive trends here as we go into 'twenty three.
Thanks, guys. Good luck to the rest of Europe .
Thanks.
Our next question is from Keith Hughes with true Securities. Please proceed.
Thank you.
In the future if you do get pressure from the builders on install of insulation pricing how quickly can you get some relief from the manufacturers would it be a drag associated with that or do you have other mechanisms in place that would make it fast.
Yes, I think Thats Keith this is Robert I think that's the dynamic that you're here Robyn I talked about right I mean in the past.
How this works right volume start to slow.
We worked with the manufacturers on the.
The input costs, but why the inflation is still exists there's pressures on both sides. There. So this is going to be a little different dynamics and folks have seen and it will happen I think we said in our prepared remarks, we're taking a little time for this environment and to play out here. So that being said I think you've seen from US we're great at executing.
Across our footprint across the branches given some of the tools that we haven't given the great leadership that we have in the field. So we will continue to strike that appropriate balance, but it is a very different dynamic today than it has been in the past and you've been around this industry for a while so I'm sure you could recognize that as well.
Just one other question on spray foam if you could talk about availability there I know there's been a lot of ups and downs of chemical both prices and supply where you stand.
Yes, definitely improvement I think probably last call we talked about the open sale had improved.
Even the closed so all of those tighter than the hope is that we'll see some improvement on the closed sales side of the materials vaccine is to improve that being said costs are still elevated there.
No question that we usually get about that relation to fiberglass, we still think that.
That comparisons escalators for the spray foam is probably in that ballpark is still three times.
The amount of fiberglass, but definitely the supply chain there has improved okay. Thank you.
As a reminder to star one on your telephone keypad, if he would like to ask a question. Our next question is from Dan Oppenheim with Credit Suisse. Please proceed.
Great. Thanks, very much just a quick question in terms of the acquisition.
Acquisition environment, given what you talked about in terms of the potential margin pressure from sort of increasing costs in some of the pushback.
What does that make you think in terms of some of the other smaller competitors and seeing that same thing are looking for some liquidity in this environment does that make you any more optimistic in terms of the ability to look for acquisitions I understand that you're still looking at scenarios and being cautious as you proceed with them.
Yes, Dan This is Robert said Robin and I will tag team. This I'll just say in the environment is a little bit of a mixed bag.
Some folks some of the smaller.
Contractors. If you will that are thinking about now is can be a time to make that decision you got some that.
Are still performing well and they think they've got some more runway left in the business there to continue to drive improvements. So it's a little bit of a mixed bag.
And I'd, just say, Dan that's where are the modeling we do on these deals is critical right and we're being like I mentioned earlier, even more cautious now in terms of modeling downside scenarios and making sure.
We're not overpaying. So so we're looking at those dynamics and those risks that are out there.
And valuing those into deals as we look at them.
Great. Thank you.
We have reached end of our question and answer session I would like to turn the conference back over to management for closing comments. Thank.
Thank you again for joining US today, we look forward to reporting our fourth quarter results in February .
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
Uh huh.
Okay.
[music].
Uh huh.
[music].
Yeah.
Yeah.
[music].
Yeah.
Yes.
Yeah.
[music].
Yeah.
Okay.
Okay.
[music].
Yeah.
[music].
Yeah.
[music].
Okay.
Yes.
Yes.
Yeah.
Okay.
[music].