Installed Building Products Inc. Q1 2023 Earnings Call
For the same period last year.
We continue to target full year long term incremental adjusted EBITDA margins in the range of 20% to 25%.
For the 2023 first quarter, our effective tax rate was approximately 26, 8% and we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31 2023.
Now, let's look at our liquidity balance sheet and capital requirements in more detail.
Our business model continues to generate strong operating cash flow for the three months ended March 31 2023.
We generated $74 million in cash flow from operations compared to $48 million in the prior year period.
The year over year increase in operating cash flow was primarily associated with higher net income and lower net working capital requirements.
Through interest rate swap agreements, we have fixed the interest rate on $400 million of our existing variable rate debt until December 2028, limiting our interest rate exposure in.
In addition, we have no significant debt maturities until 2028.
Our first quarter net interest expense.
<unk> to $9 7 million from $10 $6 billion in the prior year period, as we were able to earn a higher interest rate on cash and cash equivalents invested throughout the quarter.
At March 31, 2023, we had a net debt to adjusted trailing 12 month EBITDA leverage ratio of one four times compared to 146 times at December 31, 2022, which is well below our stated target of two times.
At March 31, 2023, we had $328 million and working capital, excluding cash and cash equivalents and investments.
Capital expenditures in total incurred finance leases for the three months ended March 31, 2023 were approximately $16 million combined which was two 4% of revenue compared to one 9% for the same period last year.
With our strong liquidity position and modest financial leverage we continue to expand the business through acquisition and return capital to shareholders.
<unk> Board of directors approved a second quarter dividend of 33 per share which is payable on June 32023.
Holders of record on June 15, 2023.
We are committed to continuing to grow the company, while returning excess capital to shareholders through cash dividend payments and Opportunistically repurchasing our shares.
With this overview I will now turn the call back to Jeff for closing remarks.
Thanks, Michael I'd like to conclude our prepared remarks by once again thanking IBP employees for their hard work dedication and commitment to our company. Our success over the years is made possible because of all of you.
Operator, let's open up the call for questions.
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One moment, please while we poll for questions.
Yeah.
Okay.
Our first question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone and congrats on a good quarter.
Great. Thank you.
And my first question is you've.
<unk> had very impressive gross margins coming into this year as you think about some of the dynamics that are going on around inflation relative to volumes, how should we be thinking about your ability to sustain some of this improvement and any other broader trends that you can share with us there.
So this is Michael I mean on the in place in front and I think we were talked a lot about this in the fourth quarter call well, we believe we're in a more normalized.
Inflationary environment right now really the supply chain disruptions that we experienced.
In two.
Pointing to have really completely abated at this point.
So that's creating a much more benign inflationary environment.
In terms of the progress that we made on gross margin that we feel very good about.
Our continued focus on price.
Over volume.
Obviously as we saw in the first quarter results that benefits the gross margin so.
It's important for us to be able to maintain the progress that we've made on gross margin.
And we will continue to value price over volume.
Okay, that's very helpful.
And then following up.
Have you heard anything.
Or what are you hearing from your private builder customers, how does that compare to what we're seeing from the larger publics in there and any thoughts on the dynamics that we could expect from the mix shift as we go through this year and we see some of the movements across both residential and nonresidential.
Yes. So this is a similar story to what happened in the fourth quarter is that we saw higher growth rates from their regional and local builders than we did from.
The publics are the big National builders.
We expect that that trend is going to reverse as we go through particularly the back half of the year because we believe that the public builders are you now in a very very strong financial position, probably the best financial condition they'd been in since they've been public.
And I think it's been very clear if you.
Follow the builders in both I would say privately and publicly I think theres been.
On the big public builders front, a strong commitment to pivot towards a higher percentage of spec inventory and they clearly have the capital and balance sheet to do that we would say that a lot of the regional and local builders are not in that same position.
So again as we go through the back half of the year, we think that we will see a higher percentage of spec inventory coming on and that will be driven a lot by the production builders, which will then sort of change that mix shift if you will more towards <unk>.
Production builders and you might remember that the impact that that has on our disclosures is it increases volumes.
But it's a headwind to price and mix.
Okay. Thank you for all the color and good luck. Thank.
Thank you.
Yes.
Our next question comes from Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
Maybe just a follow up on the mix standpoint.
Could you just help us quantify maybe from the price.
Price mix like what was the mix impact and what was more of a true.
Like for like price.
In the quarter.
Yes, Mike This is Michael as you know, we don't really disclose that breakdown, but we did in our prepared remarks note that.
Both multifamily and light commercial which were very strong in the quarter.
Do help the price mix calculation, because the average job price is higher.
Higher for those projects than traditional single family that being said, we continue to get price or maintain price I should say that came over is very solid the carryover.
From the first quarter of last year.
Got it right. So I guess the follow up.
Bigger picture I know.
Exactly comparable house.
You will recall or your mix versus your peer, but you know kind of another quarter in which I think the volume might.
<unk> was lower than your larger peer and lower than the.
And the completions number the price was stronger I understand some of that is mix, but the optics would suggest that there's maybe a little trade off going on in Europe opening remarks kind of.
Referenced that a little about being selective on which job you take and what youre getting paid for and where the value is so could you just help us understand especially as the environment has changed a lot over the past handful of months, how youre evaluating that trade off where you think you are in terms of as we go through the year.
Or how you would track against.
Against the broader market that would be helpful.
Well I'd say a couple of things one.
We will always buy.
Your price over volume, United we've been consistent about that.
The day, we went public and that will continue through the course of this year I think it's difficult to make a comparison on a quarterly basis of our volumes to completions, particularly again, because it's just one quarter's worth of information from the census Bureau, but.
So.
Given the unprecedented level of the disconnect between completions and starts that's been going on I think the information from the census Bureau is in a bit of a catch up mode in terms of what's going to happen with completions.
And I'm talking really primarily about the single family side right now and we believe that that pretty.
Pretty much.
Across the board cycle times on single family had pretty much caught up to be normalized.
And that obviously brings forward.
Our estimation some of the decline in starts.
And that disconnect between starts sort of running around 800000, Incompletions runny that million, we think that that impact that the industry will see.
In terms of that delta or that disconnect will be felt sooner than what we may have expected, but at the same time, we're very encouraged by what we're seeing not only from our regional and local customers in terms of you know.
The spring selling season, but the public builders as well I mean Barry.
They're showing pretty solid.
Quarter over quarter increases in backlog.
Mid to high single digits, which is very encouraging from our perspective and I think it's interesting from the builders that have reported at least up to this point, which is most of them and what's interesting when you when we look at the backlogs and the order trends within the builders.
That does not include their speculative inventory so as a consequence right as they lean in more towards back which we believe.
Is it pretty common theme among the public builders that even that makes those numbers that we're looking at even more encouraging. So we feel you know.
Better about I would say you know the.
Trajectory.
Single family in the back half of the year than maybe we did when we had the fourth quarter call, but I would say that the softness and weakness that we're all expecting and single family.
It's probably going to be more concentrated in the second quarter.
That's very helpful. Thank you.
Sure.
Okay.
Our next question is from Phil Inc. With Jefferies. Please proceed with your question.
Hey, guys. This is Maggie on for Phil I guess, just digging into that a little more you talked about kind of a return to normal seasonality and you know sentiment has.
It really improved the last few months and if you can just talk about how your conversations with customers have changed on.
The last call.
Then.
Particularly how that relates to your outlook in the back half of this year.
Well I would say it's been I'm.
Very encouraging I think the spring selling season has turned out.
To be better than people had maybe a year ago, we're concerned about.
And.
I think there's it's clear that existing home inventory.
As you know not increasing to support the demand and I think it's also very clear that the market. The buyer has adjusted a much more rapidly the higher rate environment than what we had as our expectations and we believe that rates most likely stabilize.
At this point, we are very constructive for the consumer and the.
The desire to purchase a home so we're very constructive about the market not just back half of the year.
On the single family side.
And all of the information that the public builders, we put out.
Right quite a bit more optimistic than they were in third and fourth quarter.
In terms of where they thought it was headed.
Here for this year presenting itself right.
So we're encouraged by that and we're also encouraged by the fact that our site.
Cycle times have normalized.
Which means that when that work get started and you know what.
The foundation of support in the house is frame that work comes to US a lot faster because there arent the bottlenecks that had existed in 2022 to get the framing done as a foundation for it.
Okay great.
And then just on the commercial side.
All in all the the regional bank issue.
Which seem to be continuing on.
How are you thinking about that.
And.
Those essentially entire lending conditions on on your commercial customers and how that impacts your backlog.
Probably more into 2024.
I would say at this point, we have not seen any impact at all bidding activity has been consistent bid acceptance activity has been consistent we haven't seen any significant delay.
Delays or cancellations of projects in our backlog. So I would say for now we've not seen an impact but I think it's still for everyone is that theres, a big uncertainty out there does not knowing what if any impact there is going to be.
No.
I would say that from what we see and what we hear and what we read it feels like you know the fed is going to do.
Theyre going to be prudent, but at the same time they recognized.
The potential.
Four.
Did that tightening credit it has the potential to.
Weakened the economy more than they would probably like.
And I think theyre going to do what they can to make sure that that tightening is as small as possible.
But obviously I don't we don't know right versus just like everyone else. We're just you know basing that on everything we read in here.
Yeah of course.
Thanks for the color.
Mhm.
Okay.
Our next question comes from Adam Baumgarten with Zelman <unk> Associates. Please proceed with your question.
Hey, good morning, guys, just probably for Jeff higher, but how are you guys thinking about the prospects for additional price increases.
I have a last manufacturers.
This is Jeff Edwards.
So it's clearly a different environment than it has been for the last 30 months 36 months, which quite frankly took us all by surprise I think the whole COVID-19 kind of tightness in material and other things related to that but.
I still think it's a healthy market I mean, the industry is still.
Selling and producing at near capacity is not at capacity blowing hold time for tighter than that.
Batch at this point in time, but.
I don't know that its particularly inflationary period of time, but I don't think it is as of yet any in any way a deflationary period of time either.
Okay got it and then just on the multifamily backlogs I think you guys talked about that stretching out over a year or about a year.
Should we expect that to turn to our potential headwinds at some point next year in 2024.
David does it would be in the back half of 'twenty four I mean, the backlog is.
As Jeff pointed out in our prepared remarks is good.
Stretches beyond a year basically.
I would also add to it and say that although.
Instruction cycle times inside a single family has started to come back down there is still elongated in multifamily in my opinion.
Fairly.
Speedway, sorry myself, Ed we do constant on that front, we're doing constant check ins. If you will with the multifamily projects that were bid.
The multifamily projects that we have in our backlog to make sure did you see that everything continues to be on track.
And.
Right now everything seems to be working fine.
In fact, the cycle times are incredibly extensive.
Well, it's almost may.
It may sound a bit silly.
Because you can say well at carpenter as a carpenter, but that's not exactly.
<unk> is not exactly true there's a lot of times it is not the same.
Workforces the St pool of workers that are doing multifamily versus single family and.
And that is true most hubs, except for us except for us and a few others do.
Travel I would say a few others in our industry and there are some others that do it in other trades, but a lot of times. It's there are different.
I mean, if you just look at the you know using again the information from the census Bureau, I mean, if you look at.
Under construction units under construction in single family has come down from an average above 800000 to slightly below 700000, whereas multifamily has done the opposite to go from an average of slightly above 800000 to above 940000.
The fact that the under construction for most of my family is has like a 200000.
No more than 200000 unit Delta between single family is absolutely unprecedented.
Got it makes sense thanks, guys.
Sure.
Our next question comes from Joe <unk> with Deutsche Bank. Please proceed with your question.
Hey, Thanks for the question good morning.
Good morning, everyone.
Yeah.
Do you in an earlier response to a question talked about and others to the normalizing supply chain environment fighting fires on a branch basis can you talk about any early progress around filling in product and capability white spaces again sort of on a branch by branch basis, maybe even at a regional level.
Well I think as you know because we've talked a lot about this the other product sales are a key component of our strategy when sort of our core singles.
Single family insulation business is.
In a soft patch and thats continuing.
One of the things that we didn't mention when we were asked about the price mix as we definitely saw higher rates of growth in the other products during the quarter versus our core installations and that that is a headwind to price mix them. Obviously they were.
Multiple things that had a positive impact on price mix as well, but yes. Our branches are continuing to cross sell the other products and see that as a key component of the strategy.
Right right, that's great to hear.
The other question I had just quickly more of a technical question on the multifamily mix as a benefit.
If you could just maybe break this down simplistically the components of mix not looking for quantification, but help me understand if there was a lower amount of take per unit.
How does that actually.
And a higher mix benefit to the segment is it that maybe on a job basis for multifamily there's one job, but there are several units and some maybe that's how it shakes out.
Yeah. This is Jason Nice bar, that's exactly right. It is.
It's not calculated on a per unit basis. It is on a per job basis, whether it be multiple units being completed.
Got it makes sense, Jason Thanks, a lot for that take care guys.
Sure sure Youtube.
Our next question comes from Trey Grooms with Stephens. Please proceed with your question.
Good morning. This is actually on for Trey Thanks for taking my question.
Sure.
First I know we've talked about it a lot these mixed.
Dynamics going on but I just wanted to clarify as we look out over the balance of the year. It sounds like there's cross currents on the one hand, it's a.
Price mix.
Headwind from production builders, but sounds like multifamily.
And again don't need exact numbers, but how do you think about those.
More powerful than the other and if I could.
Sneak one more in here.
So I mean on a full year basis, not talking to any specific quarter.
You know we would expect that.
You know there is continued benefit from them through the year on multifamily and light commercial.
And that will significantly oxheart helped to significantly offset any sort of volume declines that we experienced.
But as I said in the in answer to a previous question I mean, we do unlike what we talked about in the fourth quarter.
We do expect that because the cycle times in single family have normalized that the softness that we believe we will experience and not we but the industry will experience is going to be concentrated more in the second quarter and will improve as we go through the back half of the year.
Based on the information that we currently have both from our regional and local builder customers and from particularly the public builders. So.
We believe that if we look back at the year, while the price mix calculation will absolutely be benefited by.
Hi, how much higher growth rates in multifamily and light commercial debt.
They will begin to normalize, particularly as we go into 'twenty four back to more historical levels.
Picture question here.
<unk> selling season.
And I was hoping you could maybe compare and contrast, how the past housing cycle I guess call. It you know starting pre COVID-19 would compare to.
A new up cycle in housing clearly there was a lot of our supply chain constraints issues with material and labor and I guess you know ultra.
Called times get extended again, and we run into the same issues where.
Your ability to realize volume growth's going to be delayed from starch then than what it normally is.
No actually I think that I mean of course, it depends on what the growth rates look like and how quickly it comes but it starts which we would agree that starts are stabilizing and that we wouldnt expect significant declines from this point.
And we would expect increases maybe not you know.
Starts 25% from where they are today and be at the same level of industry capacity now again based on the answer that we had to a previous question I mean, the census Bureau information, particularly on a quarterly or monthly basis isn't a complete picture, but it certainly is directionally correct.
The consequence, we think there's plenty of room to grow from a starts perspective with the existing capacity in the industry and then that's not assuming that we even get growth within capacity now fiberglass you know as I think everybody knows is it's pretty tight right now.
And it leads to Jeff's answer on why we don't think it's necessarily a deflationary environment, but you know the reality is as the old building products right now.
Our experiencing some softness given the.
The significant decline in starts I mean, if you look at on a quarter over quarter basis for the public builders in the fourth quarter. They reported backlog that had declined over 20%.
Now what we find extremely encouraging is that there quarter over quarter first quarter backlogs are up mid to high single digits. So that's very encouraging and it kind of constructs or informs our view of being a little bit more positive about the back half of the year than we may have been.
But also that fourth quarter backlog that was down the highest that it's been down. This cycle is the work that we're working on in the second quarter.
So you know as I said to a previous they answer a previous question, we think that the softness in single family is going to be more concentrated in the second quarter than we had originally anticipated but that the recovery is actually better than we expected as we go into.
To the back half of this year.
Alright.
Lifecycle times Youll benefit from the volume in the upswing quicker.
Exactly and as we've said before we are not we are typically not and have never really been the bottleneck.
And Michael just to.
Hit it again I mean, one there's capacity inside currently of the capabilities of that.
The overall labor force contractor workforce had in addition to that I think we have been on record as before not knowing when we're not absolute experts, but there's probably 5% to 10% kind of capacity growth that we were able to achieve even through COVID-19 I think on a year over year, yes, absolutely.
Got it thanks, guys, that's really helpful and good luck with the rest of the year.
Thank you.
Our next question comes from Stephen Kim Evercore ISI. Please proceed with your question.
Yeah, Thanks, very much guys.
Just to clarify this multifamily accounting is one job just just from a clarity perspective.
Townhomes and Duplexes and things of that nature of those are attached single family. That's is that considered one job as well.
It wouldn't be an entire building would be considered one job. So if you're looking at a multi unit apartment complex there might be multiple trips each of those multiple chips will be a job.
Uh huh, Okay Gotcha that is helpful.
Okay alright, okay.
Okay second question I had relates to the 45 L B.
Energy Star opportunity. This is something that you know as.
You know I found intriguing that or we haven't heard you talk more view on your other competitor to talk more about but it would seem like that would be.
An open door for you to be able to extract a higher value per unit you know it seems like the the detail around.
The quality of the install is very important for builders achieving that tax credit. So can you just talk a little bit about that change and whether or not you've tried to quantify in any way.
The positive impact that.
I mean, yes, it is definitely.
There is the potential for pretty significant impact.
Impact on our repair and remodel business and even on the new single family side as builders see the benefits and we educate them to the benefits of using <unk>.
Some of the new tax credits that are there.
I would say that though because the rules have been recently written I don't think the uptick in them you know the benefit if you will associated with that has been felt or realized yet we think that that's going to take.
Time, Fortunately because the you know the.
Programs are now quote unquote permanent it means that we can invest in the education and the education materials to really educate our builder and I'm not talking about the publics as much as the regional and locals as well as you know the existing homeowners to the benefits associated with it so.
That's.
There is gonna be they vary.
Solid benefit associated with that but it's not going to be felt immediately and it will come over time, well, it's clearly I mean you'd notice.
Not a major major part of our business, so even substantial growth within that it's not.
Incredibly impactful across the whole company, but in addition to that it's the <unk>.
Work is performed in a different way then.
Our kind of core new construction work and believe it or not installers.
Our different a lot of times the sales.
Prospect in the sales process is different so.
It is not you can't flip a light switch in terms of kind of converting a branch you might be doing a lot of multifamily and a lot of production builder works and immediately say youre going to start doing R&R work.
Unfortunately, it's a bad thing.
Right.
No go ahead, you said unfortunately something.
Yes, I would say fortunately, because our footprint I'm sorry.
We started in Columbus, Ohio, and we started acquiring businesses in adjacent markets, which tend to be heavier repair and remodel markets. We have had good repair and remodel business in the top half of the country.
And you know where we're.
We're working hard to make sure we do.
The energy benefits quite frankly.
To our customers in those markets.
Gotcha that's b.
We're looking forward to that.
Last question I had is on the heavy commercial I think you had said that it could be a potentially big tailwind, particularly later in the year, obviously, you've got a comps issue, which is going to make those year over year changes look pretty dramatic I would assume I guess my question is kind of coming through the comps do you think that by the end of the year, let's call it fourth quarter or something.
You could be running back at you know.
The levels you were running at in 2021, just sort of doing the stacked comp kind of a thing maybe.
All the way back by fourth quarter could we be flat to up versus <unk> 21.
Yeah, absolutely I mean in the heavy commercial business in.
The first quarter was up.
Yeah single digits, but it was up and as you know because we've talked a lot about this is we're really focusing on.
Operational improvements there not as much sales, but I would say that we're seeing very good bid activity and bid acceptance.
Okay, great. Thanks, very much guys.
Sure.
Our next question is from Carl Reichardt with BTG. Please proceed with your question. Thanks, Good morning, guys.
Just have one.
The fourth quarter, the builders were pounding on trades for concessions by first quarter, they're shrugging their shoulders about labor tightness and starting to raise base prices I mean, even for this business. The volatility expectations has been changed pretty dramatically. So I'm curious how that impacts your smaller peers and their interest in potentially doing.
M&A deals.
To manage through this volatility thinking they'd have to cut staff a quarter ago and now maybe business is much better can you talk a little bit about how that might impact valuations or interest from from your smaller peers on doing an M&A deal.
Yes sure.
Despite kind of the numbers in the news Might've said I don't know that any.
Any insulation contractors, all sudden saw a lot of weakness because of the backlog I think everybody remain pretty busy right straight through and just after having been involved in a couple of hundred deals.
Not the way they did.
They're not thinking about for the most part the big kind of macro sense of things I mean.
Their desire to sell their timing on the sale and a lot more to do with their kind of lifecycle of lifestyle desires and how old they are and how long they've been added or if they're frustrated and it may or may not I mean, there was a labor even the amount of work. So I don't think that it's really impactful.
And in fact, I would tell you that I think the spring selling season that they got it done I mean, if they were in fact worried it may have been encouraged to say hey at some point in time. This market is not going to be the way. It is now the spring selling season came back strong enough and quicker quickly enough.
Any sentiment that this is somehow going to be it.
Great recession or anything like that all over again is out the window and they're not be proper now based on you know.
Their business prospects to make different bit different decision about whether they would sell or not.
Okay that makes a lot of sense alright, thanks again.
Sure.
We have reached the end of our question and answer session I would now like to turn the floor back over to Jeff Edwards for closing comments.
Thank you for your questions and I'll look forward to our call next quarter. Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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Yeah.
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