Q4 2022 TopBuild Corp Earnings Call
Greetings and welcome to the top dose fourth quarter and year end 2022 earnings call.
At this time all participants are in a listen only mode. A 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'll turn the conference over to Jos Jonathan Zhang.
You may begin.
Thank you and good morning on the call today are Robert Buck, President and Chief Executive Officer, and Rob Kearney, Chief Financial Officer, We have posted senior management's formal remarks, and a powerpoint presentation that summarizes I'll comment on our website at Hotmail 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 fourth quarter presentation, which can be found on our website I will now turn the call over to Robert Buck.
Good morning, and thank you for joining us today.
As you can see from today's press release, we had an outstanding fourth quarter and a record 2022.
Our diversified business model and seasoned management team once again delivered strong topline and bottomline growth.
Our team successfully balanced expected cost increases with selling price adjustments and did an excellent job managing both material and labor constraints by efficiently.
Moving resources across our network to meet the needs of our customers and where our business.
Well, Rob will discuss our financial results in detail.
Like to get a brief overview of our operating results.
Compared to fourth quarter 2021 revenue increased 18, 9%, our adjusted gross margin expanded 160 basis points and our adjusted EBITDA margin increased 170 basis points.
Both business segments reported double digit revenue growth and EBITDA margin expansion.
Installation had an outstanding fourth quarter with volume growth of <unk>.
12, 4% and price increasing eight 2%.
We are working through the single and multifamily backlog.
I believe we are getting more than our fair share of this work.
Specialty distributions volume did decline in the fourth quarter in part due to the Lumpiness of large scale mechanical installation projects, which we've discussed on previous calls.
Especially distributions pricing was strong in the quarter growing 11, 5%.
In addition to reporting a record quarter and year of financial growth and profitability. Our teams realized several other significant accomplishments in 2022, specifically.
Reported our best year ever with regards to our safety and personal injury rate.
The first successfully integrated distribution international into our specialty distribution segment and now expect to achieve the high end of our forecasted $35 million to $40 million of synergy.
Continue to improved labor and sales productivity and drive around operational improvements as part of our overall strategy to grow our business, our technology tools and enhanced our installers efficiency.
And improve the sales process and our back office technology initiatives have resulted an appreciable cost savings.
We completed five strategic residential acquisitions that are expect to generate over $17 million of net annual revenue.
Returning capital to our shareholders acquiring one 4 million shares for approximately $250 million.
Enhanced our disclosures related to ESG, including publishing scope, one emissions data and added human capital management statistics, including more detailed workforce demographic data and enhanced safety performance information and we provided you with a better understanding of our long term growth strategy and the depth and experience.
So the leadership team at our Investor Day last spring.
All in all a very productive and profitable year for capital.
We enter 2023 financially strong and well prepare to outperform in any environment.
We cannot predict the direction of the economy, our unique business model differentiates us from our peers and provides multiple avenues for growth.
We also have several key competitive advantage that positions us well for the future.
First and foremost as our experienced and cycle tested leadership team.
I understand what it takes to execute our business plan successfully and there are 100% focused on growing our company driving improvements and creating value for our shareholders.
A second key advantage is having all of our branches ROE what their single sophisticated ERP system.
This allows us to track activity in every branch daily, enabling us to proactively address business changes through real time data driven decisions.
A third is the command we have as a business coupled with our strong track record of successfully navigating inflationary environment, along with material and labor constraints.
We expect fiberglass capacity remained tight for most of this year and not unexpectedly the December industry cost increase has had good traction.
Our builder customers recognized the supply and labor constraints, our industry's operating under and the value the quality and service we provide.
Our fourth competitive advantage is our core competency around identifying evaluating and integrating acquisitions, which continue to drive shareholder value.
While we have market leading scale, we see lots of white space for growth in all three of end markets. We serve residential building installation commercial building installation and mechanical installation.
Combined they represent a $16 billion total addressable market, where we currently have just over 20% market share.
And our residential end market following the pandemic, we saw demand soar and builders for cylinder sales as they race to obtain permits to start new homes, while facing significant.
Supply and labor constraints of course with demand for LCD supply made worse by years of under building and material labor shortages, you and existing home prices rose significantly.
This created affordability issues for many consumers, which has been further impacted by rising mortgage rates.
So where are we today.
There is still a strong backlog of single and multifamily homes that need to be insulated.
This backlog provides us with visibility on the single family market through the first half of the year and into late 2023 early 2024 for the multifamily market.
There is still uncertainty around the second half of the year. We are encouraged by the recent optimism from several builder customers. However, if housing starts continue to slow we remain at current levels given our strong track record of execution, we still have opportunities to grow both organically and through acquisitions.
Moving to our commercial building insulation end market, we see multiple avenues for growth, including heavy and light installation and product distribution.
As we've done on past calls most of our residential installation branches also perform like commercial work.
With the help of our proprietary lead generation application, which we highlighted at our May Investor day, we are hitting these projects and prospects hard in all markets with solid results and growth as a reminder, like commercial <unk> residential expansion as new home communities require businesses to support them equally.
Retail restaurants, and health care facilities.
For heavy commercial installation, we're looking at a solid backlog and strong bidding activity. We have roughly 20 branches focused on this business and the projects in which we work run the gamut from distribution centers warehouses at hospitals airports arenas and hotels, providing significant diversity and end market exposure.
Sure.
Well, we're the biggest player in the commercial building insulation space. We estimate we have approximately 11% share there's $5 $5 billion end market. So there's clearly significant incremental room for growth organically, our expansion will be driven through existing and new relationships with general contractors for market intelligence intelligence and <unk>.
Project leads gained from our proprietary technology tools and from the hard work of our local teams bidding and winning more projects.
Moving to the distribution of mechanical insulation in the commercial and industrial end markets. Once again, we have a long runway for growth.
Are the biggest player in this space in both U S and Canada, we estimate our share of this $5 billion in market, it's only 10%.
Hasn't been mechanical installation revenue.
Is derived from maintenance and repair work in the other half for new projects, including both the types of heavy commercial projects I discussed earlier and major industrial projects, such as liquid natural gas facilities, food and beverage plants chemical refineries and manufacturing plants.
We believe we will see another year of solid growth in our mechanical insulation business, both organically and through targeted acquisitions.
As far as capital allocation, our strategy remains intact, our number one priority after internal investments in technology innovation and equipment remains focused on acquiring high quality residential and commercial installation contractors and specialty distribution companies are.
Our team has the experience and proven ability to realize meaningful synergies from these transactions, which drive by far the greatest returns for our shareholders.
We have substantial liquidity and expect to continue to generate strong free cash flow, enabling us to target the right deals that meet our specific criteria.
Since 2018, we've acquired and successfully integrated 24, 24 companies, which are contributing over $1 $6 billion of annual revenue.
This includes esri holding a $62 million of residential installation company we acquired in January this.
This well managed high quality company brings with it a strong customer base in markets in the southeast and Midwest.
And its focus on its employees and safety fits well with <unk> culture.
Looking ahead, our pipeline of prospects is strong we remain focused on our core of installation and are targeting companies that will enhance our scale expand our customer base and generate strong returns for our shareholders.
As I've mentioned, we have multiple avenues for growth and you can expect us to remain active on the acquisition front.
In addition, we will continue to evaluate returning cash to shareholders through share repurchases our share repurchase program reflects management's and our directors' confidence in the long term potential of top build our strong cash flow position and our firm commitment to optimizing the efficiency of our capital structure.
Rob will now discuss our financial results and 2023 outlook.
Thanks, Robert and good morning, everyone.
As Robert noted our operational teams throughout the U S and Canada delivered another stellar performance producing record results for both the fourth quarter and the full year.
This is a direct result of our continued focus on driving top line growth and bottom line profitability, coupled with an emphasis on operational excellence at every level of the organization.
Our track record points to the success of our operating model over the past four years, we have more than doubled our revenue more than tripled our adjusted EBITDA and expanded our adjusted EBITDA margins by 690 basis points.
Moving to the financials I'll start with an overview of the fourth quarter results update you on our balance sheet and provide our full year guidance for 2023.
Fourth quarter net sales increased 18, 9% to $1 3 billion and 14, 2% on a same branch basis.
Taking that down or installation segments fourth quarter net sales were $761 3 million, an increase of 21, 4% driven by strong volume growth and higher selling prices.
Especially distributions net sales were $563 1 million, an increase of 15, 9%, primarily driven by price and M&A.
Especially distributions volume declined in the fourth quarter as project related volumes for mechanical insulation were lower than prior year.
As I've noted on previous calls volumes on the mechanical insulation side can be a little choppy due to the project nature of the business.
So the full year total sales increased 43, 7% to 5 billion.
And 18, 8% on a same branch basis.
Installations revenue grew 24, 9%, primarily driven by increased pricing and volume.
Especially distributions full year revenue increased 77%, primarily driven by contributions from M&A and improved pricing.
Our adjusted gross margin for both the fourth quarter and the full year was 29, 7%, which equates to a 160 basis point expansion in the fourth quarter and 130 basis points for the full year.
This was driven by operational efficiencies fixed cost leverage and our continued success in managing inflation.
Fourth quarter, adjusted EBITDA increased 34% to $237 4 million and our adjusted EBITDA margin was 18, 8%, a 170 basis point improvement compared to 2021.
Full year adjusted EBITDA increased 55, 2% to $940 6 million and our adjusted EBITDA margin was 18, 8% a 140 basis point improvement.
On a same branch basis, our EBITDA margins improved by 210 basis points for the full year 2022.
Our fourth quarter and full year same branch incremental EBITDA margins were both 38%.
Fourth quarter adjusted EBITDA margin for our installation segment was 28% and 16, 7% for our specialty distribution segment, an improvement of 140 basis points and 170 basis points respectively.
For the full year adjusted EBITDA margin for installation expanded by 190 basis points to 26%.
Actually distributions full year, adjusted EBITDA margin expanded 90 basis points to 16, 9%.
Interest expense increased from $10 9 million to $16 8 million in the fourth quarter and from $29 1 million to $56 7 million for the full year, primarily as a result of additional borrowings from our acquisition of D. I in the fourth quarter of 2021 and higher variable interest rates are.
Our current debt is approximately 60% fixed 40% variable with no upcoming maturities until 2026.
In the fourth quarter adjustments to net income of $1 4 million and $7 8 million for the full year, primarily related to acquisition integration related costs.
Fourth quarter adjusted earnings per diluted share were $4 40.
A 41% increase from prior year.
Full year adjusted earnings per diluted share were $17, an 11 cents a 57, 7% increase.
Moving to our balance sheet and cash flows our 2022 operating cash flow was $495 8 million compared to $403 million in the prior year.
This was driven by our 71, 6% increase in net income partially offset by growth in working capital.
The increase in working capital was driven by continued price inflation higher fourth quarter sales volumes and normal Q4 seasonality.
This is an area, where we see opportunities for improvement and we are targeting a long term range of 12% to 14% of sales.
Capex in 2022 was $76 4 million approximately one 5% of revenue and consistent with our long term guidance.
Regarding capital allocation for the full year, we spent approximately $15 million on acquisitions and approximately $250 million on share repurchases over.
Over the long term, we will continue to prioritize our healthy balance sheet internal investments synergistic acquisitions and opportunistic share repurchases.
In terms of acquisitions, we have opportunities for growth in all three end markets, we serve as well as a healthy pipeline of acquisition targets.
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.
We ended the fourth quarter with net debt leverage of 131 times trailing 12 months adjusted EBITDA. This is down from 1.49 times at the end of the third quarter and down from our pro forma leverage of two two times. After we acquired D. I in October of 2021.
Total liquidity on December 31, 2022 was $672 4 million, including cash of $240 1 million and an accessible revolver of $432 3 million.
Moving to annual guidance the backlog of single family units under construction should continue to support our residential sales into the second quarter of 2023, while the backlog of multifamily units is stronger and should support our residential sales for the full year.
At this time given this current backlog and the recent trend on housing starts we are expecting our residential sales did decline mid to upper single digits in 2023, as we expect single family activity to be slower in the back half of the year.
However, we believe the long term fundamentals of the housing industry are solid and we were very pleased to hear some of the recent optimism expressed by a number of the public builders. Moreover, we are confident in our leadership team technology tools and flexible cost structure will ensure that top build will continue to outperform in any environment.
Our expectation for our commercial and industrial end markets, which is now 35% of our total revenues is more optimistic.
With strong backlog and bidding activity on new projects is very active.
As a result, we are expecting sales in these end markets to expand by low to mid single digits.
Putting all that together, we are projecting total 2023 sales to be between $4 7 billion and $4 9 billion and adjusted EBITDA to be in the range of $820 million to $910 million.
I'll now turn the call over to Robert for closing remarks.
Thanks, Rob and closing as we look to the rest of this year, we recognize we cannot control the macro environment.
Well, we can't control is how we manage within it and we are well prepared to operate and outperform if a more challenging environment develops.
This is evidenced by our strong track record of executing on our plan producing solid results and creating value for our shareholders.
So excited about our multiple avenues for growth as I mentioned earlier, we have a combined 20% share of the three end markets, we serve which together represent over $16 billion total addressable market.
We are confident in our ability to successfully source and execute strategic acquisitions to further fortify our competitive advantages as always I. Thank our entire <unk> team for their hard work energy and unyielding focus on delivering continued great customer service and strong bottom line results, while operating safely every day.
Yes.
Operator, we are now ready for questions.
Thank you at this time, we will be conducting a question and answer session.
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One moment, please pull for questions.
Our first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your.
Yeah. Thanks, very much guys. Appreciate the all the color good quarter, and Oh exciting times. So I wanted to delve in if I could a little bit.
And to your outlook that you've provided for fiscal 'twenty three I guess the first thing on the top line can you give us a sense for sort of when exactly you think sales are going to turn negative year over year I mean, it basically is it going to be in the second quarter or is it more the third quarter.
And then secondly within that I would say your EBITDA Decrementals that's implied by your your guide seems to be as high as about 40%.
And that's well above your target incremental of 22 to 27 and so I was just wondering you know why why is that so high what kind of outlook for head count or or price cost does this assume.
Okay. Steven this is Rob good morning.
Yeah on the top line the way we're looking at it right now so from a residential side of things. We're looking at the single family backlog that's out there and our best estimate is that it's going to last us into the second quarter.
You know from there on we're modeling single family to take title lineup of what we've seen from a starts perspective here in the last six months or so, but obviously there could be some potential upside to that if you listen to what the builders are saying now so it starts in the spring selling season is strong here.
Yeah, there could be some potential upside to that on the multifamily side of things you know the backlog is even stronger we're expecting that to carry us throughout the full year.
And then if you look at sales, it's important to remember that 65% of our sales on the resi side, but on the 35% side, you've got commercial and industrial and this years, we've got a real opportunity to show the strength of our diversified end markets with that side of the business and we're expecting strong growth in that side of the business throughout the year and in fact right now.
We're bidding some some pretty large projects out in Q3 and Q4 so.
So we're feeling pretty good about that side of the business from an EBITDA perspective.
The high end of our guidance, where we are right around the targeted detrimental of around 27, and 28%, but you know to your point on the on the lower end and the midpoint. It is higher we're looking at potentially holding onto labor through the downturn or because we're thinking it's going to be an air pocket in Q3 Q4, because ultimately you know what.
We're very positive on the long term fundamentals for residential housing I mean, if you look at it.
Just just how we've seen demand snapped back since since mortgage rates got down close to six you know we want to be prepared given how tight labor is when when that demand does come back you know whether that be in Q3, Q4 or Q1 of next year.
Stephen This is Robert I think you've you seen right, we've really done a great job of working their productivity of our business and so yeah. We have a great command and control of our business in the field with our operators and so you know we're always watching the productivity of our crews if we have to make adjustments. We will we've shown that in the past and I always come back stronger if there is any type of slow.
Down or whatever so we're pretty comfortable with that but we're gonna. Rob said, we think this is short lived and so you know we'll watch our labor closely to keep that product labor that we've done a great job of building up.
Okay, Great that's helpful.
I guess my second question relates to the the the distribution side.
You you talked about the Lumpiness, which I and you've certainly addressed this before it sounds like you've got some good projects large projects that you're bidding on now I guess in general, though would you regard the lumpiness quote unquote that we saw in for Q as.
A result of previous strengths.
It sort of you know are a result of some business having been pulled into the third quarter or is it rather more like some opportunities that you think got pushed out sort of into a <unk> or 2023 or 2023, and then also you're reminding me you know you talked about this positive commentary that the public builders have been talking about and that's.
Certainly true.
We've been hearing that from private builders as well and I was just curious have you in your conversations have you seen any difference in the commentary between large and smaller builders and have you seen any difference in their behavior as they maybe get ready to potentially ramp up starts later this year.
Yes, Stephen this is Robert so only industrial commercial side, yes, it's opportunities that had been pushed out.
And you know I think as we've talked about 2023, and we looked at our projects that we have in backlog and we look at building Thats why we are confident in that growth here in 2023 and drop when you frame the back half of 2023 as well as we're looking at projects that will be coming online relative to the builder's commentary. So yes, we're seeing.
And hearing that as you have you know the public builders have several come out with a pretty positive commentary on.
December January but also the start of spring selling season, and then we're hearing it from our local and regional builders as well I think <unk> said any change I think it's the builders or are seeing that piece of it what it's really laid out is they're really appreciating the value of the labor that we provide a service that.
We provide making sure that we have the material for the materials co fight, especially certain material and stuff. So you know there really do appreciate that value. That's why you heard in prepared comments traction with the price increase that was announced in December and January were seeing that and I think that's.
Builders want to make sure they are prepared and we're lined up with them for that.
Excellent. Thanks, so much.
Thank you.
Okay.
Our next question comes from the line of Joe Adams Meyer with Deutsche Bank. Please proceed with your question.
Yeah, Thanks, very much good morning, everybody.
Good morning.
So you grew install volumes ahead of completions throughout the entire area.
And then the flipside gap was particularly notable.
And it looks like even on a stack basis your price mix that started to erode a little bit for the first time really since we.
Hi.
Pricing cycle. So I mean, certainly a strong revenue finish to the year, but that composition trended I think a little bit differently from your your peer who reported yesterday.
Who also at the time reiterated that value over volume mindset. So could you maybe just speak to that composition in your fourth quarter.
And if this is maybe the early signs of different strategies there around price rationality as we go into the next year.
Yeah, No we feel really good about our fourth quarter volumes, you know, what we've seen and what we've heard from the builders that is you know where to start slowing down trades in front of us.
Things have improved so we think we've gotten through a lot more work. Obviously you know we're also happy with the price side of the equation you know, we manage that very well and you can see that reflected in our margins for the quarter with the expansion. We did there yeah I think Joe if you look backwards at our price performance you can see that we delivered price.
A lot earlier as things were moving along here. So you can look backwards at price you'll see that we were very strong on price.
A lot earlier in 2022, so and then the volume is just come along with it and the margin expansion to that point, so and as we talked about getting more than our fair share. So there is nothing but positive and what's happened on the price side and the margin side. We just executed the team in the field did a great job of executing earlier on that pricing continues.
November price.
Yeah, Yeah that makes a lot of sense in looking at the margins slightly differently and the outlook at.
At the high end Youre looking at flattish EBITDA margins, even as you probably will deleverage on SG&A and then also have some mix mixing down on the industrial side. So it seems like your gross margin into next year.
There's even flat to slightly up is that.
Accurate.
Yeah, obviously, we don't we don't guide on gross margins going out, but we feel we feel good with the guidance. We got out there like I said on the residential side, we obviously see the air pocket come in but we feel good about the long term and we'll be prepared to adjust if it's if it's worse than we were thinking but like I said with recent commentary, we think theres potentially.
The upside to that and then like I said on the commercial and industrial side, where we're excited about the backlog and bidding activity that we've got going on in that side of the business I really think 2023 could be a year, where you see our diversified end markets really helping support top those results.
Absolutely, thanks, a lot and take care.
Yes.
Our next question comes from the line of Phil <unk> with.
With Jefferies.
<unk>, what's your question.
Hey, guys congrats on another strong quarter I'm.
Encouraging to hear that you mentioned that trades ahead of you are loosing out I'm just curious if spring selling season is strong how quickly could you see that demand kind of ripple through your business.
And then separately.
More optimism from your builder customers, but with rates kind of ticking back up.
What's driving that optimism is that is that something that we should be looking out with rates kind of person back up here.
Yeah. Good morning, it's Robert so.
As we think about.
Maybe taking the second question first yes, I think they saw unusually good traffic and like that December timeframe, I think some south historically strong traffic in January to start the spring selling season, I think you know what the builders have said something where they are on the sidelines as rates stabilize a little bit even tweak down even.
There's been some recent changes there since <unk>.
Folks have definitely come up come off the sideline for that.
And I think that's what's driving their optimism as well and you know I think there's no. There's no question we've been under built over many years here.
Maybe there's some receptiveness of the new rates and where things are going on where things are going to end up there.
Let's see what was your first question sorry.
The ability to be kind of react.
To have a strong spring selling season with the trades loosening up and how quickly could that ripple through your P&L, yes.
Yes, so youre right trades in front of us have definitely loosened up do you see that as we as Rob talked about the you know the backlog and as we dug into that backlog here in Q4 and the work that we completed so they can feel good as we look at as we're getting on job sites no doubt that we're getting on job sites quicker, especially with a production homebuilder, so let's say that.
Spring selling season continues to be strong to your comp in the month of March I think we could see some of that work start to represent potentially end of second quarter through the summer months and definitely into the fall, which as you know is a seasonally busy time from our perspective, we'll be ready for that that's why we keep talking about our labor our labor productivity.
And how we are preparing for that and really.
As we as you've heard us talking about about how we have great control and insight to our business. So we're monitoring branch by branch, what's going on in performance, what's going on in bidding and stuff. So we're always ready to kind of pull the lever that we need to at a local at a local level anytime.
Super.
Robert I guess last at the last conference call you called out a watch out for 2023 would be you know potentially risk to your margins. If the insulation manufacturers are seeing a lot of pricing power because its tight and maybe your builder customers asking for concessions.
Your guide for 2023, EBITDA margins up 80 basis points compression is pretty benign can you give us some perspective on how you see yourself kind of managing price cost.
And a softening demand backdrop and your ability to kind of react on the cost side as well.
You got it so it's really about the value and the quality and the consistency of what we offer Phil I mean, that's really what's driving it. So let me give you a few different data points. There. So you know as there is has there has been some uptick in optimism that obviously builders wanting to make sure they're partnering with somebody that's going to have a material going to happen.
We're going to be there for them, especially if there's a spike so that definitely plays to our strength, while we provide and then if you think about from a labor code. Our main time, there's no question about that even if there is a little bit of an air pocket.
Second thing is material. So as you look at that mix of business.
And even as you look at the at the multifamily being strong the loose fill material is going to continue to be tight.
Part of the reason isn't loose fill material was heavily used in multifamily construction. If I think about mid floors. Some of those types of applications. So the fact that in that business as it continues to be stronger multifamily, it's not going to do anything to liberty alleviate the material tightness do you think about those dynamics that have transpired since they go back to October .
<unk> or value our quality and our service is definitely appreciated.
Notice and I think that's why you see us talking about traction in the different areas here.
Okay, great color really appreciate it guys.
Thank you.
Our next question comes from the line of Michael Rehaut with Jpmorgan. Please proceed.
Thanks, Good morning, everyone.
Good morning.
I wanted to get a sense of a price carryover in 2023.
You're starting to see some deceleration.
In the fourth quarter, I think average price up 10% versus 14.
With no slow down in both segments.
How should we think about the first and second quarters I'm assuming.
No no no additional pricing kind of comes through the industry and in 'twenty three.
Yeah. So we've got our Michael This is Rob we've got our assumption for price, obviously baked in we don't break out price versus volume, but to your point yes.
The carryover impact is certainly going to be stronger in the first half of the year and the thing to keep in mind as you've seen our you know our price has come down throughout the year, but we're also comping two quarters last year, where we were getting price you know early on and benefiting from it as well so you've got the comp that's going on there, but as we look forward right.
We're expecting certainly not the same type of year is in a pricing environment as what we saw in 2022.
So we've got that baked into our guidance as well.
Right. Okay, no I appreciate that and I guess, just similarly on the topic of price if.
If you could comment at all on the January price increase by the manufacturers and you know.
Any sense of.
How that's being you know that.
The amount of that but that's being realized in the industry at this point.
Hey, Mike Roberts, good traction on the increase.
I think it goes back to the value that I talked about earlier relative to labor definitely loose fill material is still tight.
And the manufacturers, obviously have communicated that the builders recognize that as well and you know as we all know no new supply coming on here in 'twenty four.
The capacity is going to be constrained definitely on the loose fill side.
You even talked about how that impacted some by maintenance that's going to happen in the industry as well as kind of that multifamily mix. So we see the we see the material remaining remaining tight here in 2023.
Okay, Great and just one last one again I guess just more conceptually.
When you think about you know where your margins are.
You know you kind of have stuck to the you know decremental margin guidance long term or decremental such incremental.
But you've seen obviously, a nice improvement over the last several years.
Obviously, theres a value that you provide but the builders at the same time, they've been talking pretty consistently about.
Hum.
Just pushing back on the trades or to the extent that things loosen up a little bit.
How have you started to have any of those conversations with with your builder customers and yeah. How should we think about you know put up margins. Today for example in <unk> being you know several hundred basis points higher than that a few years ago.
Yeah, Mike Robert I'll start with this and I'm sure, Rob why I don't anything as well so.
And if you think about it and what we've talked about before and others in the industry on my right.
Our work is less than 2% of the total cost of the home at.
At the same time, it's all it's important to get a proper inspection after that before you have to make sure you don't hold up either trade. So I think given that I think given the labor component of our package I think also again the realization of the tightness of material and stuff and I think the builders recognize that value.
And I think also codes are changing things are making sometimes its even tougher to make sure that the.
Things are packing in passing inspection. So I think that's I think that's recognized I think the value will continue to be recognized and again I would say if we if you think about margin trends looking forward that even if there is an air pocket, which we think could be brief nobody can forecast exactly the timing of that as well labor will still be.
Tight labor will still be tight and given maintenance in the industry given that mix of multifamily.
Even given you know it could be some tailwind from some of the tax incentives for people to reinstate their home from a repair remodel perspective, that's going to probably material. If we think about lucedale fitness people blowing their apps right and so that's going to continue to drive tightness in the material here in the industry in 2020 through so I think you know our guidance does a good job.
But reflect on how we think about that and really if we think about it.
Anything to cap in there we're going to look at our labor very carefully as I mentioned earlier was that we talked about earlier. So I think we feel good confidence about our trends there and you know that.
Troll and insight we have on our business and how we run the business and everyday and stuff I think we've proven that track record of execution in the past yeah. Mike. This is Ravi I think the only thing I'd add to that Ryan some of that margin expansion is definitely from our operational team's relentless focus on driving process improvements how do we make this brad.
<unk> more efficient how do we make that branch performance is higher performing branch, how do we make our installers more efficient. So a lot of that is changes we've made in the business, it's going to stick.
Great. Thank you so much.
Thank you.
Our next question comes from the line of Keith Hughes with <unk> Securities. Please proceed with your question.
Thank you.
And amongst the guidance you had talked earlier in the call I'm expecting a mid to upper single digit declines in residential.
A little more is that a dollar number and any kind of indication on price versus units within that would be helpful.
Yes, Keith this is Rob yes that is that is a dollar figure were talking about the total residential sales down mid single digits like I said, that's going to be driven by what we're seeing on the single family starts side right now, we're expecting that to roll through Q.
Q3, Q4 and impact of our single family volumes there.
As far as price volume that that's really what's going to drive the volume side of it from a price side like I said, we don't we don't break out our guidance. We do expect this year for inflation to stabilize it doesn't mean, we won't get a price increase at some point this year, but we're expecting it to be a more stable year than what we saw in 2022.
Are you, assuming though that some of the price increases that are.
Last year will roll into that number you know providing at least in the first half of the year, some somewhat because of that a fair assumption.
Yes, yes definitely.
Alright, thank you.
Yeah.
Our next question comes from the line of Adam Baumgarten with Zelman.
Proceed with your question.
Hey, good morning, everyone.
I guess, just going back to the residential revenue guidance of mid to high single digit declines I mean that obviously includes some level of positive price. So you didn't break out the assumptions on single family versus multifamily. It sounds like maybe single family can be down from a volume perspective double digits is that fair in your assumption.
Yeah, I mean, we like I said, we don't we don't break out our guidance there, but you know if you look at the single family starts data you know over the past six months, it's down 15% to 20% year over year. So we are expecting some of that to start to roll through the.
The completion side of things here in the second half of this year.
Okay got it and then just thinking about the the head count reductions and you guys are holding labor just given the perceived.
Short lived downturn here, what would it take from a end market perspective for you to start making more permanent headcount reductions at this point.
Yeah. So.
Thinking about it from that perspective Adam.
We're always monitoring at a local level and if you think about how we work the network right. I mean, we're always going to move labor around so you know how we use the Florida example of that campus slow and things are percolating in Orlando it could be multifamily volume or something like that were obviously going to move labor to Orlando and make sure that were you know more.
And satisfying our customers and then obviously that plays well for us in the future we're able to use our ERP system for that so we're constantly monitoring that we do that even today, we're looking at productivity and productivity by branch. So it's kind of just part of our general playbook as a company now if there was a.
To the point earlier about the about the start and stop if we think there's a small air pocket there or we can give up our product productive labor for a very short air pocket maybe not.
But if things were to show anything for multiple weeks or something like that and again, we get the we get the leading indicators. If you think about bidding and things like that from our ERP system. We can move pretty quickly. That's the that's the beauty of the model and how we operate and even thinking about we talk about labor, but the other thing is you know I remember from the <unk>.
Recession and stuff you know you don't sign long term leases you don't have large facilities you optimize your footprint across the country. Those types of thing and that is part of our model. That's part of what we've changed in the business.
So we're ready very quickly if things show something in one market compared to another.
Okay, great. Thanks, a lot best of luck.
Thank you.
Our next question comes from the line of Jeff Stevenson with loop capital markets. Please proceed with your question.
Hi, Thanks for taking my questions today, and congrats on a nice quarter.
Thank you to partner with another quarter of elevated gross margin expansion as we continue to benefit from strong volume and pricing gains, but but moving forward. How should we think about the cadence of gross margin as you start to lap tougher pricing comps from last year's increases.
Yeah. So this is Rob is as I've said, we don't we don't guide quarterly on on margins, but as you look at how things are going to roll if youre looking at our EBITDA margins throughout next year.
Volumes coming down on the residential side the back half of the year I would expect margins. The first half of the year to be a little bit stronger. In addition, we think we think price is going to be stronger than the first half of the year. So so and I would think about the cadence of EBITDA margins through the year I think about the first half being a little stronger than the second half.
Okay great.
It sounds like your M&A pipeline is active right now and last year, you made five bolt on residential acquisitions and I'm wondering if you're expecting more opportunities this year, especially since the integration is largely complete.
Yeah, Jeff. This is Robert So you hit on it right in the last year, we had purposefully decided to focus on the successful integration of D I, which the team did a great job of accomplishing and did you not only see the successful integration of di you saw the tremendous operating improvement in those margins in the <unk> business and our <unk>.
Specialty distribution business of Robert F B and D I and it became part of <unk> and all the benefits that became part of that as well so really happy with what happened in 2022, and really how that diversifies our business for the future and we think you will see the value of that here in 2023 and going forward as well and to your original.
Yeah. The pipeline is busy you saw a nice acquisition, we saw and we completed in January of <unk> $62 million on the residential installation side of the business and we would say that we're really active right now on.
On the M&A activity given.
Given the IBM done given what where we're actively working today and really.
As you know M&A has become a core competency for us and the great thing about our model now and that diversification is we have this multiple avenues for growth across residential commercial and industrial and we're pretty active in all areas. So we're super excited about the M&A.
Activity right now and what you can expect to see from us here in the future.
Great to hear thank you.
Our next question comes from the line of Trey Grooms with Stephens Inc. Please proceed with your question.
Hey, good morning, Thanks for taking my question.
The 35% that is commercial and industrial so youre expecting low to mid single digit revenue growth there.
So that's the route.
The year end it sounds like you've got pretty good visibility there can you parse out what you're expecting between maybe the lighter side of commercial that follows residential.
Versus the heavier industrial side as you kind of look through.
The visibility you have currently.
Yes.
Trade is Robert So I'll try to give you some indications there are rival Rob will add on.
So pretty strong on both.
We talked we talked on the call. Let me start on the <unk> side of the business. All the residential branches can do that work and Theyre doing a really good job of executing upon that growth and I mentioned on the call I think we talked to you about this last year at Investor Day. We had this view for park proprietary lead generation tool that really brings together leads from across the country.
He knows to the branches.
And they're doing a really nice job of bidding knows which so think about it this way.
More leads and more projects, winning more projects and so that's kind of the cadence of what's happening there. So light commercial was benefiting from that and that approach, which we built here over the past couple of years and then mechanical just as we think about the backlog the projects that rebidding. The practice that we see we expect that to be strong this year, another year of nice growth and probably stronger.
We're in the back half of 2023, which we think will will play to this diversified market and at least the first five business and end markets that we serve we think that model is going to play really well here in 2023, the way it works coming online.
And how that flows through the year.
Okay, perfect and I'm, sorry, if I missed this but on sticking with kind of that the EMR business. There you know in the Lumpiness that you talked about kind of hitting the volume.
On the distribution side and in the most recent quarter is that you know with the visibility you have there again is is that we.
We expected to negatively impact the distribution volume in the coming quarters, as well or is that pretty much behind you for now.
Yes, we would we would say nothing for the full year here Trey.
Trey as we look at it we can always likes that there could be lumpiness quarter to quarter or something like that but do we think about the full year. We don't we don't have concerns from that perspective.
Cycles for that business tend to be less steep than what we see on the resi side. So over the long term you know the the rises in depths will be less but you know in the short term you do see the quarter over quarter.
Sometimes.
Right, Okay, well, thank you very much for taking the questions. Good luck.
Thank you Jay.
Yeah.
And our next question comes from the line of Dan Oppenheim with Credit Suisse. Please proceed with your question.
Thanks, very much appreciated the comments you've made there in the light commercial and what you're doing from the survey from the residential branches and just wondering what you see in terms of the potential for.
Some offset there and I guess can that helped on the margin side by keeping those in the residential branches sort of active even if the single families slow in terms of keeping those decrementals are down to the having less impact there as we go through the air pocket here I'm just curious about that.
Yeah, Dan This is Robert so you've got it exactly right and that's why we built the diversified model and the multiple avenues for growth Thats why we built the model that we have so you hit on it right. There is residential branches can do that light commercial work and so it gives them the chance to build that backlog. So it makes for a smoother volumes. If you will keeps the keeps them.
Labor busy and by the way that's good margin work also in the light commercial side. So it's part of the strength of this model that we've built and the diversification that we build and then you know hearing US talk about two key themes here right multiple avenues for growth and while we believe we can outperform in any environment.
Great. Thank you.
Okay.
Yes.
And we have reached the end of the question and answer session I will now turn the call back over to Robert for closing remarks.
Yeah. Thank you for joining us today, we look forward to talking with you in May as we report our Q1 results. Thank you.
Okay.
And this concludes today's conference and you may disconnect your lines at this time.
Can you for your participation.
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