Q3 2024 Installed Building Products Inc Earnings Call
As we look to the future the long term view on demand for our installed service is unchanged. We believe long term trends across our residential and commercial end markets are favorable as builders work to meet demand through the increased supply of houses apartments and commercial structures.
Looking at our third quarter sales performance I am encouraged by consolidated sales growth of nearly 8% and same branch growth of 5%.
In our largest end market single family sales growth was supported by a growing proportion of sales from national production builders in the quarter.
Additionally, our deep customer relationships local market knowledge, and an ability to align our pricing with the value. We offer our customers were key to our third quarter single family sales results.
Our multi family installation sales growth continued to be resilient with your parent operational benefits of our centralized service oriented model on a same branch basis multifamily sales in our installation segment increased over 2%, we continue to see geographic and end market expansion opportunities in multifamily.
With an ability to sell Ibp's installation services in markets, where we historically have not had meaningful participation.
Strong quarterly same branch sales growth in our commercial end market reflects positive growth in both the light and heavy commercial markets profitability. During the third quarter continued to reflect our strategic priority to apply our local market expertise to efficiently complete the most operationally and financially attractive jobs for our local business. This.
Contributed to achieving all time record quarterly diluted net income per share and adjusted EBITDA in the third quarter.
Acquisitions continue to be our top priority as we consider all of our options for capital allocation.
Despite our growth over the years, we believe a meaningful opportunity still exists for us to expand our geographic presence and diversify the mix of building products, we install across our National branch network.
During the 2020 for third quarter and in October we completed the following acquisitions, an Illinois based residential and commercial installer of building products, serving key markets in the Midwest with annual revenue of approximately $20 million and our specialty distributor focused on supply and installation and related accessories and machinery to residential and <unk>.
<unk> end markets with annual revenue of over $22 million.
To date, we have acquired over $73 million of annual revenue.
To date, we have acquired over $73 million of annual revenue. Based on our current acquisition pipeline, we expect more deals to be completed before year-end. In addition, although deal timing is hard to predict, our current outlook for acquisition opportunities in 2025 is strong.
And our current acquisition pipeline, we expect more deals to be completed before year end. In addition, although deal timing is hard to predict our current outlook for acquisition opportunities in 2025 strong.
Based on the U S census Bureau single family starts year to date through September 2024 have increased by 10%. We believe the current pace of starts growth supports a healthy demand environment for our single family installation services in the near future. Additionally.
Based on the U.S. Census Bureau, single-family starts year-to-date through September 2024 have increased by 10 percent. We believe the current pace of starts growth supports a healthy demand environment for our single-family installation services in the near future.
Additionally, beyond the typical demand drivers we continue to believe the United States government incentives and planned mandates towards more stringent energy efficiency standards in new and existing single family homes will be favorable for our business.
Additionally, beyond the typical demand drivers, we continue to believe the United States government incentives and planned mandates toward more stringent energy efficiency standards in new and existing single-family homes will be favorable for our business.
Our strong customer relationships experienced leadership team national scale and diverse product categories across multiple end markets are advantages when navigating the ebbs and flows of demand related to the U S construction market through.
Our strong customer relationships, experienced leadership team, national scale, and diverse product categories across multiple end markets are advantages when navigating the ebbs and flows of demand related to the U.S. construction market.
Through the prevailing market dish if conditions, we remain focused on profitability and effective capital allocation to drive earnings growth and value for our shareholders. I am proud of our team's continued success and commitment to doing an excellent job for our customers to everyone. At IBP. Thank you I remain excited by the prospects ahead for IDP and the broader.
Through the prevailing market conditions, we remain focused on profitability and effective capital allocation to drive earnings growth and value for our shareholders.
I'm proud of our team's continued success and commitment to doing an excellent job for our customers.
To everyone at IBP, thank you. I remain excited by the prospects ahead for IBP and the broader installation and other building product installation business.
Nation and other building product installation business. So with this overview I'd like to turn the call over to Michael to provide more detail on our third quarter financial results. Thank you, Jeff and good morning, everyone consolidated net revenue for the third quarter increased 8% to an all time record of $761 million compared to $707 million for the.
So with this overview, I'd like to turn the call over to Michael to provide more detail on our third quarter financial results. Thank you, Jeff, and good morning everyone. Consolidated net revenue for the third quarter increased 8% to an all-time record of $761 million.
compared to $707 million for the same period last year. The increase in sales during the quarter reflected growth across all our end markets and sales from IBP's recent acquisitions.
Same period last year the increase in sales during the quarter reflected growth across all our end markets and sales from Ibp's recent acquisition.
Our residential same brand installation sales increased approximately 5% during the third quarter.
Our residential same-brand installation sales increased approximately 5% during the third quarter.
Although the components behind our price mix and volume disclosure at several moving parts that are difficult to forecast. The quantified we continue to experience top line improvement from a two 7% increase in price mix during the third quarter. We also experienced a two 6% increase in job volumes relative to the third quarter last year.
Although the components behind our price mix and volume disclosure have several moving parts that are difficult to forecast and quantify, we continue to experience top-line improvement from a 2.7% increase in price mix during the third quarter. We also experienced a 2.6% increase in job volumes relative to the third quarter last year.
With respect to profit margins in the third quarter, our business achieved adjusted gross margin of 33, 8% down from 34, 3% in the prior year period, the margin reductions during the quarter were primarily due to a greater proportion of our single family sales shifting to production builders as well as higher growth in non <unk>.
With respect to profit margins in the third quarter, our business achieved adjusted gross margin of 33.8 percent.
down from 34.3% in the prior year period. The margin reductions during the quarter were primarily due to a greater proportion of our single-family sales shifting to production builders, as well as higher growth in non-insulation product sales relative to a year ago.
<unk> product sales relative to a year ago.
Adjusted selling and administrative expense.
Adjusted selling and administrative expense
As a percent of third quarter sales was 18, 5% due primarily to higher insurance expense facility and warehouse lease expense and initial startup costs related to building out our internal accessory sourcing efforts from the prior year period administrative expenses as a percent of third quarter sales in the third quarter of 2024 were flat with the <unk>.
As a percent of third quarter sales was eighteen and a half percent, due primarily to higher insurance expense, facility and warehouse lease expense, and initial startup costs related to building out our internal accessory sourcing efforts from the prior year period.
Administrative expenses as a percent of third quarter sales in the third quarter of 2024 were flat with the second quarter of 2024.
Second quarter of 2024 <unk>.
Adjusted EBITDA for the 2024 third quarter increased to an all time record of $132 million, reflecting an adjusted EBITDA margin of 17, 4%.
Adjusted EBITDA for the 2024 third quarter increased to an all-time record of 132 million dollars, reflecting an adjusted EBITDA margin of 17.4 percent.
For the nine months ended September 32024, same branch incremental EBITDA margins were 20% incremental EBITDA margins can be highly variable from quarter to quarter, but we continue to target full year long term same branch incremental adjusted EBITDA margins in the range of 20% to 25%.
For the nine months ended September 30th, 2024, same branch incremental EBITDA margins were 20%. Incremental EBITDA margins can be highly variable from quarter to quarter, but we continue to target full-year, long-term, same branch, incremental adjusted EBITDA margins.
in the range of 20 to 25 percent.
Adjusted net income increased to $80 million or $2 85 per diluted share.
Adjusted net income increased to $80 million, or $2.85 per diluted share.
Although we do not provide comprehensive financial guidance based on recent acquisitions, we expect fourth quarter 2020 for amortization expense of approximately $10 million and full year 2025 expense of approximately $37 million.
Although we do not provide comprehensive financial guidance based on recent acquisitions, we expect fourth quarter 2024 amortization expense of approximately $10 million and full year 2025 expense of approximately $37 million.
We would expect these estimates to change with any acquisitions, we closed in future periods.
We would expect these estimates to change with any acquisitions we close in future periods.
Also we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31 2024.
Also, we continue to expect an effective tax rate of 25 to 27 percent for the full year ending December 31st, 2024.
Now, let's look at our liquidity position and balance sheet and capital requirements in more detail.
Now let's look at our liquidity position, balance sheet, and capital requirements in more detail.
For the nine months ended September 32024, we generated $265 million in cash flow from operations compared to $251 million in the prior year period.
For the nine months ended September 30th, 2024, we generated 265 million dollars in cash flow from operations.
compared to $251 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income.
The year over year increase in operating cash flow was primarily associated with higher net income.
Our third quarter net interest expense decreased to $8 million from $10 million in the prior year period.
Our third quarter net interest expense decreased to $8 million from $10 million in the prior year period.
Merrily due to lower cash interest expense following the completion of the term loan refinancing in the first quarter of 2024, and a greater amount of interest income from higher balances of cash and cash equivalents relative to the year ago period.
primarily due to lower cash interest expense following the completion of the term loan refinancing in the first quarter of 2024 and a greater amount of interest income from higher balances of cash and cash equivalents relative to the year ago period.
At September 32024, we had a net debt to trailing 12 month adjusted EBITDA leverage ratio of <unk> 94 times compared to one one time.
At September 30th, 2024, we had a net debt-to-trailing 12-month adjusted EBITDA leverage ratio of 0.94 times, compared to 1.1 times at September 30th, 2023, which is well below our stated target of 2 times.
September 32023, which is well below our stated target of two times.
At September 32024, we had $342 million and working capital, excluding cash and cash equivalents capital expenditures and total incurred finance leases for the three months ended September 32024 were approximately $25 million.
At September 30th, 2024, we had $342 million in working capital, excluding cash and cash equivalents.
Speaker Change: Goodbye, which was approximately 3% of revenue roughly in line with the same period last year.
With our strong liquidity position and modest financial leverage we continue to prioritize expanding the business through acquisition and returning capital to shareholders.
Speaker Change: During the 2024 third quarter IBP repurchased a 100000 shares of its common stock in a privately negotiated transaction at a total cost of $21 million, bringing.
Speaker Change: Bringing our repurchases for the first nine months of the year to $66 million at.
Speaker Change: At September 32024, the company had approximately $234 million available under its stock repurchase program.
Speaker Change: Ibp's Board of directors approved a fourth quarter dividend <unk> 35 per share, which is payable on December 31, 2024 to stockholders of record on December 15 2024.
Speaker Change: Fourth quarter dividend represents a 6% increase over the prior year period.
Jeff: With this overbuilt overview I will now turn the call back to Jeff for closing remarks.
Jeff: Thanks, Michael I would like to conclude our prepared remarks by once again thanking IBP employees for their hard work 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.
Speaker Change: Thank you.
Speaker Change: At this time, we'll be conducting a question and answer session.
Speaker Change: If you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: We ask that you please limit to one question and one follow up.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Speaker Change: Hi, first question comes from Stephen Kim with Evercore ISI. Please proceed with your question.
Stephen Kim: Yeah. Thanks, very much guys I appreciate the I appreciate all the information thus far.
Speaker Change: If you could I think you mentioned that a mark some of the margin factors.
Speaker Change: You cited.
Speaker Change: Yeah, I think you cited four of them this quarter market share by large builders non installation sales start up expenses from internal distribution and higher insurance I was wondering if you could give us some general sense of the size of the impacts.
Speaker Change: Particularly the first the first three.
Speaker Change: And could you elaborate a little bit on what those startup expenses were for the internal distribution.
Speaker Change: Sure.
Michael: This is Michael so.
Michael: We did see and as we've talked about multiple times on the calls that both higher rates of growth from production builders as well as higher rates of growth from the other products.
Speaker Change: Definitely have an impact on gross margin so during the quarter.
Speaker Change: <unk> built our business grew at twice the rate of.
Speaker Change: Of growth of regional and local builders.
Speaker Change: <unk> in the market or had in the quarter excuse me.
Speaker Change: And it was actually the same for installation so both fiberglass and spray foam.
Speaker Change: Combined relative to the other products. The other products grew at twice the rate that insulation grew at now interestingly the installation growth rate was impacted by a decline actually in spray foam revenue in the quarter.
Speaker Change: The rate of growth of fiberglass revenue was pretty similar to the other products in fact, all of our end products. So our growth in the quarter, obviously, some higher than others.
Speaker Change: With the exception of spray foam, which saw a mid single digit decline in the quarter.
Speaker Change: That decline because as you know because we've talked about it before I mean spray foam along with fiberglass is one of our highest.
Speaker Change: Margin product lines.
Speaker Change: The decline in weakness, if you will and spray foam.
Speaker Change: Pricing had about less than a 100 basis point impact.
Speaker Change: <unk> gross margin and consequently would've had an impact of anywhere between one to one $5 million on.
Speaker Change: EBITDA.
Speaker Change: In terms of the other.
Speaker Change: Other impacts in the quarter.
Speaker Change: Start up expenses associated with our internal sourcing. So this is we're getting more.
Speaker Change: Facilities for us to be able to internally distribute product to gain efficiencies in terms of that into prevent us from doing more.
Speaker Change: Purchases outside of our normal purchasing network, meaning going too.
Speaker Change: Either distribution outside of distribution or say home depot or Lowe's.
Speaker Change: There were adding facilities for that and those cost we estimated in the quarter to probably be around $1 million as well.
Speaker Change: We also one of the things that Jeff had mentioned in his prepared remarks.
Speaker Change: We did have an impact.
Speaker Change: From the Hurricanes, both in September and October Thankfully all of our employees are safe.
Speaker Change: They some of our employees. Unfortunately, you had some fairly significant.
Speaker Change: Losses with their home and property, but again, everyone is safe, but we did lose quite a few days of work in those markets, we estimated that the impact.
Speaker Change: From a revenue perspective in September was probably about $2 million.
Speaker Change: And it had probably a little bit less than $1 million impact on EBITDA from the from the Hurricanes.
Speaker Change: Got you and that's very very helpful and it sounds like these are factors that are probably going to extend.
Speaker Change: Into the fourth quarter.
Speaker Change: Correct me, if I'm wrong, but it didn't sound like anything you. Just described was something that are.
Speaker Change: Necessarily was just isolated to the third quarter, including the insurance.
Speaker Change: <unk>.
Speaker Change: I guess I guess my and my next question would really kind of be just to.
Speaker Change: To shift gears, then and talk about the impact of the election, one of the things that you don't.
Speaker Change: Well that we've been wondering about is that perhaps Trump Trump administration is not going to be as interested in pursuing some of the energy efficiency initiatives in new construction and that that might actually result in an energy roll back. Another one of his priorities has also been labor.
Speaker Change: Her well deportation, what's curious if you could comment on what you think maybe.
Speaker Change: Maybe a trump presidency and actions executive actions might what what kind of impact that might have on either your your labor base.
Speaker Change: Or your or the.
Speaker Change: The the plans for a.
Speaker Change: Building to tighter energy codes in 2025.
Speaker Change: This is Jeff So I guess first on the energy code.
Speaker Change: <unk>, we've never bank well, one we don't know what he will do obviously, but we've never really even internally banked on the idea that the.
Speaker Change: The most recent.
Speaker Change: Legislation that's been passed.
Speaker Change: It was a couple of years out any been any way the Fannie Freddie based.
Speaker Change: Energy improvement so internally just as we have for decades, I think we're banking on the normal kind of gradual both at the local and sometimes a state wide basis adoption of just the normal stricter.
Speaker Change: Progressive energy codes, not the kind of supercharged.
Speaker Change: Information that none of US has really been banking on so thats I think where we are in regards to the codes I think from a labor perspective.
Speaker Change: I think for the last 30 years, we've been able to.
Speaker Change: Hire and train a workforce that gets the job done for us I think under pretty much any circumstances.
Speaker Change: It'll be business as usual <unk> said this before even during the great.
Speaker Change: Great recession, we had to hire people and train people. So thats just the nature of this business.
Speaker Change: Unlike any other construction business, even though we've done well in terms of improving our retention rates as compared to the market as compared to the industry. It's still a high turnover business. So I think it's probably a business as usual.
Speaker Change: Go forward basis.
Michael: Yeah, and I think yeah. This is Michael I think sums.
Speaker Change: To note relative to the energy code aspect is I mean, as I think pretty much everyone. On this call knows one Owens Corning announced their earnings. They also announcing an expansion and they're at Kansas City facility and that is not predicated on.
Speaker Change: I believe they said that it was not predicated on any of the increased energy codes that we've been talking about relative to Fannie and Freddie. It's just that we're all seeing good demand and as the shift in starts normalizes between single family and multifamily that creates more demand for fiber glass. So.
Speaker Change: We saw that as very.
Speaker Change: Good solid endorsement for the industry as a whole absolutely.
Speaker Change: Oh.
Speaker Change: Our next question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Speaker Change: Thank you good morning, everyone.
Speaker Change: Good morning.
Speaker Change: My first question is on the mix within the business, we saw volume versus price mix really come in very closely in line with each other this quarter for the first time and in a very long time, probably what does that say about operating conditions on the ground does it suggest that we're closer to some normalization with that.
Speaker Change: And do you think that those two will stay closer as you look out from here is that something that we should be anticipating as we think about the next several quarters or years.
Speaker Change: Yeah, I would think of it in terms of years not in terms of quarters, because as you know.
Speaker Change: Theres just a lot of volatility in a way that just the makeup of the way that we disclose the volume and the price mix and there are so many puts and takes into that.
Speaker Change: That it is difficult to say for certain whats going to happen quarter to quarter, but I think on a full year basis, and particularly as we look at 25.
Speaker Change: Wed like to see more <unk>.
Speaker Change: Normalization between the two I would say, though that we think some of the trends that we're continuing to see that.
Speaker Change: That we saw in the third quarter and that we will continue to see in the fourth quarter are really.
Speaker Change: More elevated towards volumes being higher than price mix.
Speaker Change: We continue to be in a benign inflationary environment and we're continuing to see good growth from the.
Speaker Change: And builders and on the single family side.
Speaker Change: Some of the preliminary survey information from the builders that we've seen suggests that October single family starts were up anywhere between 10% to 14%, which we think is very solid we feel that multifamily is stabilizing.
Speaker Change: In terms of the rate of decline.
Speaker Change: And we are seeing bidding picking up in the multifamily side.
Speaker Change: Our CQ team, which we've talked about before that's centralized for about 40% of our multifamily business.
Speaker Change: We're continuing to see very good bidding, they're doing an incredible job of.
Speaker Change: Diversifying the products that they're successfully winning bids on in terms of the other products not just installation so.
Speaker Change: We feel we feel very encouraged about sort of you know where we're headed as we go into 25 from a single family and a stabilization in multifamily I mean, clearly multifamily has continued its going to continue to be a headwind in the fourth quarter and into the first half of next year.
Speaker Change: But we feel confident about our long term ability and multifamily to continue to gain market share and really provide incredible value for the services we provide.
Speaker Change: Okay. That's helpful and then turning to G&A I know you mentioned this a little bit in the prior question, but just as we do look out can you talk about the ability to leverage those costs over time.
Speaker Change: Yes volume obviously helps.
Speaker Change: If you.
Speaker Change: <unk> is.
Speaker Change:
Speaker Change: It's somewhat of a stagnant if you will I mean, it grows with inflation, but I mean, if you look at excuse me.
Speaker Change: Relative.
Speaker Change: As a percentage.
Speaker Change: SG&A as a percentage of revenue from second quarter to third quarter. They were basically in line a little bit better in the third quarter, we did have.
Speaker Change: Some additional expenses that we talked about both on the insurance side.
Speaker Change: You know as well as some of the startup costs associated with the internal sourcing strategy, which I think as we pointed out in the previous question is our cost that we will continue to be there.
Speaker Change: I would say that if you look.
Speaker Change: In the third quarter of last year.
Speaker Change: Our.
Speaker Change: Adjusted selling and administrative expense percentage was one of the lowest we've had in a while and if you look over the past four quarters.
Speaker Change: Where we are now is pretty much in line with where we've been for the past one now.
Speaker Change: Five quarters, I guess about four quarters, but so so yes.
Speaker Change: You know, we're very pleased on the gross margin front quite frankly, given the headwind that we had with.
Speaker Change: Spray foam.
Speaker Change: And the real significant headwinds that we had with both the production builder business and the other products growth growing as well as they did.
Speaker Change: Quite honestly that the gross margin held up as well as it did given those three factors was very impressive it was a great job from the from the team to make sure that that happened and that we didn't lose.
Speaker Change: Too much margin given those three things happening in the quarter.
Speaker Change: Yes, no. The gross margin was very impressive well done to everybody there and thank you for the color good luck with everything.
Speaker Change: So.
Speaker Change: Yeah.
Speaker Change: Our next question is from Michael Rehaut with Jpmorgan. Please proceed with your question.
Speaker Change: Hi, Thanks, Good morning, Thanks for taking my questions.
Speaker Change: Nice job on the quarter.
Speaker Change: Wanted to first kind of revisit you've kind of mentioned how pleased you've been with gross margins in.
Speaker Change: You know I guess when you look at over the last two or three years.
Speaker Change: From 'twenty to 'twenty two.
Speaker Change: You know you had gross margins of 31%.
Speaker Change: You know they were kind of at $30 to 31% from 2020 to 22 and then.
Speaker Change: From 'twenty to 'twenty three on a kind of taken a structural shift almost looks like.
Speaker Change: And to the high 33% range.
Speaker Change: Last five six quarters, you've been above that number.
Speaker Change: At the same time, the SG&A is also popped up a little bit.
Speaker Change: And you're looking at mid teens for the last four quarters as well.
Speaker Change: And for that you were doing 16, 17% or a little under 18%.
Speaker Change: Could you kind of walk through.
Speaker Change: What's changed in the business, how we structurally now just looking at you.
Speaker Change: Calling about high 33% and then in the mid <unk>.
Speaker Change: 18% SG&A.
Speaker Change: My alarm.
Speaker Change: Allow that you see.
Speaker Change: We like that part of a structural change.
Speaker Change: Or are there any kind of.
Speaker Change: Factors that might allow for reversion in either of those metrics.
Speaker Change: Over the next you know.
Speaker Change: 12 months to 24 months.
Speaker Change: Yes, I mean, we continue to feel and I get that this is a wide range, but we continue to feel that sort of that 32% to 34% gross margin.
Speaker Change: Is consistent and if you look and you.
Speaker Change: Pointed this out over the past five quarters. The adjusted gross margin has averaged 34% right. So we've been bumping around that high end of the 32 to 34.
Speaker Change: There will be puts and takes quarter to quarter, but you know that 30 to 32% to 34% on a full year basis range, we're very comfortable.
Speaker Change: That we can maintain that.
Speaker Change: That makes sense.
Speaker Change: In terms of the adjusted <unk>.
Speaker Change: The SG&A percentage.
Speaker Change: It will vary quarter to quarter, just because of some seasonality in the business and the more volume we have.
Speaker Change: Better leverage we obviously get on SG&A.
Speaker Change: We would expect that over time, we would be able to improve that leverage I would say, though that what happened really in 'twenty, three and it's still happening happening to some extent in 'twenty four is that all of the.
Speaker Change: All of the inflation in cost of goods sold happened very quickly during the 'twenty one 'twenty two time frame.
Speaker Change: SG&A expenses, because they are lagging both up and down.
Speaker Change: It takes time for them to filter through so things like rent expense right. If you have a three year lease you're committed to that to that expense and then when it renews and rates are much higher than you experienced the higher rental rates and thats true of all facility costs quite frankly.
Speaker Change: It is true that our G&A employees. So our administrative employees that are at the branch and also at the corporate office. It took time for the inflation in that labor component to fully work its way through.
Speaker Change: The P&L quite frankly so.
Speaker Change: The run rate dollar value of run rate or sort of G&A, where we are right now.
Speaker Change: <unk> is fairly consistent and we would expect that as we go through 'twenty five.
Speaker Change: And I'm focused primarily on G&A and not on selling expenses because they are much more variable to revenue.
Speaker Change: We would think that they would be typically based solely on a typical 3% to 5% sort of inflation rate of course acquisitions come with their own G&A and they add G&A when we do those deals.
Speaker Change: Alright, I appreciate that answer Michael I mean, maybe just kind of.
Speaker Change: Further kind of delving into the to the gross margin. Obviously, you just mentioned last several quarters, you've been right at the high end of that 32% to 34% range. This.
Speaker Change: This quarter 33, eight despite you know negative mix from production builders from non installation sales from other items and you're still kind of at that higher end. So.
Speaker Change: I'm just kind of curious.
Speaker Change: <unk>.
Speaker Change: Again, there are certain factors maybe that are.
Speaker Change: You know keeping you at that higher end.
Speaker Change: That are in place today that maybe you feel you can bank on.
Speaker Change: Over the next couple of years.
Speaker Change: Is it just as we see more gray.
Speaker Change: Greater growth in production and not installation, if that's going to push it let's say more towards the middle of that range.
Speaker Change: Just any thoughts in terms of why you've been able to sustain at that higher end.
Speaker Change: Yes.
Speaker Change: I would say and this is consistent with what we've been saying.
Speaker Change: For the past several quarters is that the reason we gave the range of 32 to 34 on the gross margin is that yes.
Speaker Change: Level of production to themselves, which we think is something that a trend that is going to continue although I would say that in October we had similar sales rate growth from the production builders as we did from the.
Speaker Change: The regional and local builders. So we're good glad to see that quite frankly.
Speaker Change: But clearly over time the growth of the other products and that production builder business will put pressure on gross margin, it's up to our team to work and strive to make sure that when we're doing that work that we're lifting up the other.
Speaker Change: <unk> margins and that we're doing.
Speaker Change: The best job for the production builders in a most efficient as possible. So that we can get the most value out of.
Speaker Change: Those sales as well so I mean, I think it's something that we will continuously work on.
Speaker Change: We are.
Speaker Change: Highly gross margin focused and EBITDA dollar focused company.
Speaker Change: And the team has done an excellent job of performing and I think they will continue to do that.
Speaker Change: Our next question comes from Adam Baumgarten with Zelman and Associates. Please proceed with your question.
Adam Baumgarten: Hey, guys. Good morning, just on spray foam can you remind us what percentage of revenue that accounts for and also how much of a headwind pricing was in spray foam to overall price mix.
Speaker Change: So it's a great funds about 10% of overall revenue.
Speaker Change: And you know.
Speaker Change: We estimate that it impacted gross margin less than a 100 basis points.
Speaker Change: Okay, but I think more than the decline from second quarter to third quarter and adjusted gross margin.
Speaker Change: Okay and that should stick with business probably for the next few quarters right.
Speaker Change: Yes.
Speaker Change: Okay got it and then just on multifamily.
Speaker Change: Been decelerating a bit I think you made the comment that it's stabilizing do you expect that to turn negative either in the fourth quarter or even in the first half of 'twenty. Five I know you said that it could still be a headwind over that timeframe.
Speaker Change: Yes, I mean, it's definitely going to be a headwind and the comment about the stabilization was really more as it relates to starts and as you know the start to install on multifamily is much greater than the start to install on single family.
Speaker Change: So even with starts stabilizing and maybe even coming up a little to a more kind of normalized level, it's going to take a while before we feel the impact of that so it's definitely going to be.
Speaker Change: Over the next couple of quarters more negative than a positive although I would say that our team CQ, which we've talked about a lot.
Speaker Change: Represent about 40% of our multifamily revenue are doing an incredible job of keeping their backlogs up and.
Speaker Change: Really maintaining there.
Speaker Change: Pace of sales. So we feel good that we will continue to perform better than what the overall market opportunity would present itself in multifamily.
Speaker Change: Okay got it good to hear best of luck.
Speaker Change: Thanks.
Speaker Change: Our next question comes from Phil <unk> with Jefferies. Please proceed with your question.
Speaker Change: Hey, guys. This is maggie on for Phil.
Speaker Change: I wanted to dig into your demand outlook by customer type.
Speaker Change: It sounds like production builders are growing a lot faster than your more regional local but.
Speaker Change: So youre still seeing growth in the regional builders.
Speaker Change: But with with rates ticking up.
Speaker Change: The last month or so I think those regionals have less.
Speaker Change: Leverage things like rate buy downs that maybe it's a production builders are benefiting from.
Speaker Change: So maybe if you could just talk about what you're hearing from your.
Speaker Change: A different customer types.
Speaker Change: On the demand outlook there.
Speaker Change: It's more encouraging than we would expect given you're absolutely right what happened.
Speaker Change: In the rate environment, I do think that.
Speaker Change: You know that there has been.
Speaker Change: Volatility in.
Speaker Change: In.
Speaker Change: Traffic and demand perspective.
Speaker Change: For the builders and.
Speaker Change: I think obviously you know I don't know, but I do think that having the election behind us and taking out the uncertainty associated with the election.
Speaker Change: <unk> is going to help and we'll see where rates go.
Speaker Change: Over the next.
Speaker Change: Three to six months, but I would also agree with or we would agree with your statement that there's a lot more flexibility among the production builders to do rate buy downs than than the regional and local builder, it's not to say that they don't do it but they certainly don't do it to the extent that the production builders do so I think it continues to.
Speaker Change: Similar to the environment that we had in the first half of this year, where the current operating environment continues to favor production builders and the production builders are leaning into continuing to gain market share.
Speaker Change: Got it that's helpful.
Speaker Change: And then Oh.
Speaker Change: Good morning.
Speaker Change: In multifamily our I guess continued positive performance.
Speaker Change: And you've talked about opportunities for expansion and multifamily is that more organically or are you seeing any opportunities in that space.
Speaker Change: And then are you, taking now geographic expansion or actually increasing penetration of other products for those end markets.
Speaker Change: Yes.
Speaker Change: Yes, the other products and geographic expansion, it's not acquisition related it's really organic.
Speaker Change: Geographic expansion and other product here.
Speaker Change: Okay, great. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Our next question is from Trey Grooms with Stephens. Please proceed with your question.
Trey Grooms: Hey, good morning, everyone.
Speaker Change: So.
Speaker Change: So you are not facing any inflation right now on fiber glass or I guess, no new pricing actions from.
Speaker Change: Insulation suppliers right now but.
Speaker Change: Kind of thinking maybe higher level and a little longer term as we.
Speaker Change: Think about the supply demand picture for 25, I mean, theres going to be some puts and takes I understand but do you think the dynamics are at play that will lend itself to a more kind of inflationary environment or how are you looking at it may be again from a high level.
Jeff: This is Jeff.
Jeff: Supply continues to be tight despite recent.
Speaker Change: The ads.
Speaker Change: And I honestly.
Speaker Change: I mentioned earlier I think it is good news from Owens Corning quite frankly, all of these capacity adds that we're talking about are not probably going to make it by any means a free flow market for a number of years in our bid. So it'll continue to be tight in that regard.
Speaker Change: As Michael also mentioned, we're doing things to not get in the same position we've been in sometimes with material was tight historically in terms of.
Speaker Change: Dave will satisfy internally.
Speaker Change: More emergency like purchase.
Speaker Change: Purchase needs so that part will be good, but I think it'll be a healthy environment I think it'll be a rising price environment and.
Speaker Change: Kind of where do we see it for the next number of years I think there's other manufacturers even looking at capacity adds but.
Speaker Change: That's a long process.
Speaker Change: Okay.
Speaker Change: Please newbuild is three years, plus alright, thats, adding a line into the existing facility its still in the neighborhood of 30 months.
Speaker Change: I'm, just quoting pointed out 24 to 36 months.
Speaker Change: Yep, Okay. Thanks for that.
Speaker Change: Since then.
Speaker Change: I did want to kind of circle back Michael to one comment you had in sorry.
Speaker Change: Sorry, if you dug in deeper than.
Speaker Change: I heard but.
Speaker Change: So you mentioned that the.
Speaker Change: Trends in the third quarter continued should continue into the fourth.
Speaker Change: I believe you were talking about how.
Speaker Change: Volume is better than price mix so could.
Speaker Change: Could you go into that a little bit deeper is that saying that you you kind of expect a very similar picture or is it more.
Speaker Change: Any thought of maybe a little more deceleration in the price mix at all from here or.
Speaker Change: Stabilization or growth in volume just how do we how do we kind of think about that comment a little more specifically if you could.
Speaker Change: Yeah. It was really more related to kind of 'twenty five and all of 'twenty five.
Speaker Change: And that if the trends that we're seeing now continue that is higher sales from their production builders lower multifamily sales.
Speaker Change: And higher other product sales that we would expect volume to be greater than price mix.
Speaker Change: Understood. Thanks for the clarity there that was helpful and let him talk to you soon.
Greg: Thanks, Greg Thank you.
Speaker Change: Our next question is from Keith Hughes with Truest Securities. Please proceed with your question.
Speaker Change: Either you're muted.
Speaker Change: Yeah.
Speaker Change: Keith Hughes argument over there yes.
Speaker Change: Yes.
Speaker Change: Okay, sorry about that I'm not sure that's okay I'll go back to my question.
Speaker Change: If we look at price versus cost was simply don't probably wise, how has that been running third quarter or is it a help in the rents at this point.
Speaker Change: Okay.
Speaker Change: I would say it's fairly neutral.
Speaker Change: You know I would say maybe slightly negative but.
Speaker Change: Neutral to slightly negative.
Speaker Change: It's not something that's going to continue through the winter months.
Speaker Change: Yes, I would say that the.
Speaker Change: The third quarter you know.
Speaker Change: Reflected.
Speaker Change: The negative.
Speaker Change: Aspect of the price cost there.
Speaker Change: So yes it would.
Speaker Change: But.
Speaker Change: And what we experienced in the third quarter.
Speaker Change: Got it thank you.
Speaker Change: Sure.
Speaker Change: Our next question comes from Mike Dahl with RBC capital markets. Please proceed with your question.
Speaker Change: Hi, Thanks for taking my questions.
Speaker Change: The first one is actually just to follow up on that can you talk us through kind of the cadence through the quarter of the spray.
Speaker Change: Pricing dynamic and given your your exit rate into kind of October.
Speaker Change: Is it still should we be thinking about similar impact in <unk> or or did it decline through the quarter such that the run rate impact in <unk>, it's still going to be a little bit greater than what you saw in <unk>.
Speaker Change: Yes, we will still have a similar impact in the fourth quarter.
Speaker Change: Okay.
Speaker Change: And similar question on the distribution investments as you think about kind of ramping those.
Speaker Change: I know theyre going to continue but in terms of order of magnitude thinking about <unk> or into 'twenty five.
Speaker Change: Is it similar order of magnitude or is there going to be an incremental ramp there.
Speaker Change: It won't be a significant incremental ramp, but it will slowly increase as we continue to add more.
Speaker Change: <unk>, where we can.
Speaker Change: Gain efficiencies in this internal sourcing so it will be lifting G&A, but at the same time.
Speaker Change: We should be getting benefit from our cost of goods cost of goods sold perspective because were gain.
Speaker Change: <unk> again benefit from.
Speaker Change: Sourcing internally as opposed to externally sourcing.
Speaker Change: Some of the materials that we need.
Speaker Change: Okay. Thank you.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Our next question is from Jeffrey Stevenson with loop capital markets. Please proceed with your question.
Speaker Change: Hi, Thanks for taking my question.
Speaker Change: So commercial organic sales increased 6% after he saw year over year end market declines last quarter and just wondering was this more a function of a tough second quarter comp or did you see any sequential improvement in commercial demand and then can you talk as well about whether there's been any negative impact from project delays in either your lighter commercial or heavy.
Speaker Change: Commercial businesses.
Speaker Change: So as I think we mentioned on previous calls we were.
Speaker Change: We had been previously struggling with the performance of our heavy commercial business, but that we have kind of.
Speaker Change: Got it back to the point, where it's both gross margin and EBITDA performance is acceptable to us again and as a consequence, we've given them the green light to go ahead and start.
Speaker Change: Increasing revenue.
Speaker Change: At these higher margin levels and really what youre seeing is the benefit associated with that and it is really the growth in commercial was primarily driven by the heavy commercial business. The light commercial business is as we've talked in previous quarters continues to be soft.
Speaker Change: Soft.
Speaker Change: And we expect that to be the case as we go through.
Speaker Change: The rest of this year.
Speaker Change: <unk>.
Speaker Change: Certainly we would expect it to the light commercial business that is.
Speaker Change: Be on very good footing in the back half of next year, but it may continue to be a little weak in the first half of next year, but the heavy commercial business and we have to shout out to the team there.
Speaker Change: They've just done an outstanding job of breakup really improving that business and now starting to grow that business at a decent clip, but most importantly at profit our profit expectations for that business. So we feel really good about the team there and the progress that they've made in <unk>.
Speaker Change: Fairly short order given.
Speaker Change: The position that it had been in.
Speaker Change: No that's great to hear and industry supply constraints have been brought down quite a bit here on the fiberglass side did.
Speaker Change: Did it have any negative impact at all on your volume growth on the third quarter and then could you talk about how you are positioned from an inventory perspective into the fourth quarter given the ongoing.
Speaker Change: Supply constraints you're seeing.
Speaker Change: Despite our comments about the supply being tight.
Speaker Change: It wasn't to the point, where we jobs went on.
Speaker Change: Completed as a result of material shortages, so I didn't mean to imply that necessarily but so I don't really think it had an impact in that regard.
Speaker Change: And from an inventory perspective, I think this internal sourcing that we're doing is helping yes, we're doing a much better job of managing inventory internally and making sure that the right material gets to the right branches.
Speaker Change: Which is helping.
Speaker Change: Alleviate the pressure that we would normally experience and an extremely tight environment like this.
Speaker Change: Our next question is from Reuben Garner with the benchmark company. Please proceed with your question.
Speaker Change: Yes.
Speaker Change: Thanks, Good morning, guys.
Speaker Change: Hey, Rob.
Speaker Change: So.
Speaker Change: A couple of clarifications for me Michael I think you used the term normalization when discussing.
Speaker Change: Volume and price mix and I know the way you guys reported and the impact of multifamily.
Speaker Change: You know Ken can kind of have an outsized.
Speaker Change: Either benefit or hurt. It is there is the expectation that price mix may actually show up negative at some point over the next 12 months as we kind of normalized demand between single family and multifamily is that the normalization.
Speaker Change: And then if you could just clarify that that'd be helpful.
Speaker Change: Yeah as you know.
Speaker Change: What is sort of a headwind to price mix.
Speaker Change: Our last multifamily and more production builder and more other products right and we see that trend with that.
Speaker Change: We believe that trend will continue.
Speaker Change: In the fourth quarter and as we go through certainly the first half of 'twenty five.
Speaker Change: And as a consequence, there will be a large headwind to price mix.
Speaker Change: Okay, and then I don't believe we've heard or seen any price increases announced from the manufacturers yet for fiberglass and early 25 at least not in the in the U S.
Speaker Change: Can you just talk about that.
Speaker Change: You know remind us it's been a while.
Speaker Change: That's been the case, I think and maybe that will change, but if they were not to announce one for January can you just talk about your discussions with customers how Tao.
Speaker Change: Offsetting other inflationary pressures work.
Speaker Change: You know in your in your negotiations I know that your pricing a job and not necessarily just the material, but if you could kind of walk us through what that looked like in that scenario it would be helpful.
Speaker Change: Yes. So this is Jeff so I have little doubt.
Speaker Change: That the manufacturers will in fact CCAR.
Speaker Change: <unk> price increase.
Speaker Change: Typically.
Speaker Change: <unk> announced any earlier than about six weeks from when the effective date and Thats even slipped at this point, sometimes bill over the last number of price increases where it was delayed slightly more than that but generally speaking it call. It six weeks. So we're not yet passed the timeframe that wouldn't it couldnt resolved in an early next year.
Speaker Change: Price increase not just the announcement, but even taking effect.
Speaker Change: So that's what I suspect.
Speaker Change: It's still a healthy housing environment, despite it being choppy at times, a choppy in certain places.
Speaker Change: So I anticipate that we'll be having conversations with builders that as the backdrop.
Speaker Change: I think we'd be facing material price increases potentially from the manufacturers and.
Speaker Change: And other inflationary pressures.
Speaker Change: So then it's our job to work with the customer.
Speaker Change: Customers and builders to come to a satisfactory solution for everybody.
Speaker Change: But this is what we do.
Speaker Change: Every day every week every month every year so.
Speaker Change: Our next question is from Kurt Yinger with D. A Davidson. Please proceed with your question.
Speaker Change: Great. Thanks, and good morning, everyone. Just one for me a lot of discussion obviously on gross margin and SG&A, but I wanted to kind of bring it back to EBITDA Incrementals and was just curious.
Speaker Change: What kind of external variables internal focus areas, you think will be kind of most important as you hopefully go out and deliver against kind of the long term targets, maybe pulling demand aside.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: <unk> to be I mean, we want to limit growth in G&A and continue to maintain gross margins in that sort of 32% to 34%. Obviously, we've been closer as we talked earlier to the 34% and continue to see.
Speaker Change: Good good volume gains and good sales growth I mean that really is how you end up with the 20% to 25%.
Speaker Change: And you know ex the dispositions for the nine months.
Speaker Change: We're at the low end of our incremental target ranges, but still within the range. So.
Speaker Change: We feel continue to feel very good that on a full year basis looking at 20% to 25% is the right way to look at the Incrementals from the organic same branch.
Speaker Change: Business.
Speaker Change: Okay. Thank you.
Speaker Change: Sure.
Speaker Change: Our next question is from Ken Zenner with Seaport Research Partners. Please proceed with your question.
Ken Zenner: Good morning, everybody.
Speaker Change: Thanks, Jeff.
Speaker Change: What a quarter it seems like <unk> been exceptionally.
Speaker Change: Disclosure oriented this morning, Michael I must say.
Speaker Change: No.
Speaker Change: Is that good or bad.
Speaker Change: No I think it's exceptionally important at a time like this when we're having cross currents right on the macro related to rates, even though demand is there and it will be picking up and how inflation I E. Gross margins are going to translate in that type of environment for a distributor installer right. So I think it's exceptionally important.
Speaker Change: So I'm going to try and going back at this.
Speaker Change: Gross margin questions it seemed to be the bulk of peoples.
Speaker Change: Good day.
Speaker Change: Your gross margins went down 16.
Speaker Change: 2016, and mid 2018 about 200 bps.
Speaker Change: It's about 29%.
Speaker Change: 150, 49% to 28 can you walk us through at that time, what caused gross margin degradation.
Speaker Change: Because it seems like Youre kind of happy actually 32% to 34 Youre at the high end right now, but it could be at 32.
Speaker Change: And you'd be okay with that you wouldn't have been firearms. So could you just walk us through the last time, you kind of saw that gross margin pressure exists in your business and if those are the factors.
Speaker Change: Would it be necessary.
Speaker Change: Again, it was material is extremely tight because.
Speaker Change: You know there was the fire at the <unk> facility.
Speaker Change: Uh huh.
Speaker Change: Yes.
Speaker Change: Sorry, it's been a while a lot has happened since then and yes. A lot has happened since then and at the same time, the fed was raising rates right and the current.
Speaker Change: An environment where rate buy downs are very prevalent did not exist. So there was tightening in the market at the same time that there was increasing.
Speaker Change: The manufacturers quite frankly, we're taking advantage of the situation the tightness of the situation and.
Speaker Change: It was a.
Speaker Change: A unique period, where we had an extended period of time between when we could align our pricing with our customers with the cost increases that we were experiencing but over time, we were able to get there. It just took longer because of the unique.
Speaker Change: Unfortunate aspect of both our negative housing market and this catastrophic event happening at the same time.
Speaker Change: Alright, but tight supply exists today rates.
Speaker Change: But there's a difference between a tight supply environment.
Speaker Change: Almost emergency supply environment, right, because I agree I agree.
Speaker Change: Yeah, because what happens.
Speaker Change: Happened when the <unk> plant went down it caused tremendous panic buying I would say that material is tight now, but theres not panic buying in the market at all I mean people might be a little more over inventoried than they normally would be but that's been the case since 22 right. So right.
Speaker Change: The demand that the fiberglass guys are seeing right now is reflective of the demand in the market and they are in our opinion there is nothing extra ordinary or unusual about that relative to the overall market demand.
Speaker Change: Excellent.
Speaker Change: And then Jeff Mr. Edwards, if you could illuminate us with some regional commentary since you guys are talking about the public builders their order rates have been like.
Speaker Change: More flat year over year their inventory well generally flat to up has had a lot more.
Speaker Change: Completed specs so could you baseline.
Speaker Change: When you use the term large production builders what percent of sales that is.
Speaker Change: Units sales whatever you prefer.
Speaker Change: And then if you could kind of comment on the <unk>.
Speaker Change: Rising dispersion we're seeing.
Speaker Change: Amongst.
Speaker Change: The different regions.
Speaker Change: In the U S. Because tampa is different than Orlando, Dallas is different than ours, but if you wouldn't mind getting your.
Speaker Change: Thoughts into that bucket, so we could perhaps understand how that impacts your margins as you see them.
Speaker Change: And if not why not thank you, yes, Michael.
Speaker Change: Mike will sit on a lot of that but even before I do that I was.
Speaker Change: Relatively speechless on that last question I still am marveling at the fact that Michael is only a few months younger than I am and he could actually remember all of that [laughter].
Speaker Change:
Speaker Change: I think to answer you would talk a lot about the larger production builders taking share in a lot of first time homebuyer type product. The fact that they in some instances are nearly 100% spec we had a conversation around that yesterday, which is.
Speaker Change: Has a lot of good aspects really to it for us and for them.
Speaker Change: As you might guess.
Speaker Change: The smile per se still outperforms, what we would deem kind of our northeast region in our central region. In both cases those two regions are probably heavy heavy you are with the regional type builders and they are and then you are in the rest of the smile. So that's really where we've seen kind of pressure in terms of the geography.
Speaker Change: But and we don't see this trend necessarily abating anytime soon.
Speaker Change: Given what is expected I guess of rates and.
Speaker Change: Kind of given.
Speaker Change: And I think as Jeff pointed out I mean, right now starts for the production builders or starts for single family is more important than orders because of this shift towards.
Speaker Change: Spec homes right I mean, the percentage of spec homes for the production builders is I believe at the highest level, it's ever been and that does not show up in orders right.
Speaker Change: But it does show up and start so we've been while we track all of the public builder information.
Speaker Change: Rack it up against our markets track it up against.
Speaker Change: Our sales to them and everything.
Speaker Change: We do believe that right now starts as a better indicator of what's going to get built then their backlog or their orders.
Speaker Change: We have reached the end of the question and answer session I'd now like to turn the call back over to management for closing comments.
Speaker Change: I'd just like to thank all of you for your questions and I look forward to our next quarterly call. Thank you.
Speaker Change: Okay.
Speaker Change: This concludes today's conference you may disconnect your lines at this time.
Speaker Change: Thank you for your participation.
Speaker Change: Okay.