Q4 2024 Installed Building Products Inc Earnings Call
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Steven Scully: Greetings and welcome to the installed building products fiscal 2024 fourth quarter financial results conference call. At this time all participants are in a listen-only mode.
Steven Scully: A brief 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.
Steven Scully: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darren Hicks, Vice President of Investor Relations. Thank you, sir. You may begin. Good morning, and welcome to Installed Building Products' fourth quarter and fiscal year 2024 earnings conference call.
Steven Scully: These forward-looking statements are based on management's current beliefs and expectations and are subject to factors that could cause actual results to differ materially from those described today.
Steven Scully: Please refer to our SEC filings for cautionary statements and risk factors.
Steven Scully: You can find a reconciliation of such non-GAAP measures to the nearest GAAP equivalent in the company's earnings release and investor presentation, both of which are available in the investor relations section of our website.
Speaker Change: This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer, and Michael Miller, our Chief Financial Officer, and we are also joined by Jason Neiswanger, our Chief Administrative and Sustainability Officer. Jeff, I will now turn the call over to you.
Jeff Edwards: Thanks, Darren, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights and then turn the call over to Michael, who will discuss our financial results and capital position in more detail before we take your questions.
Jeff Edwards: Our fourth quarter results capped off another record year of revenue and profitability for IBP.
Supported by organic growth across our residential and markets.
Jeff Edwards: Our record financial performance in 2024 is a reflection of the talent, commitment, and focus of IBP's employees across the country.
Jeff Edwards: We continue to invest in attractive growth opportunities and return capital to shareholders with strong operating cash flow generated in 2024.
Jeff Edwards: During the year, we invested approximately $87 million in acquisitions and allocated a combined $230 million toward dividends and share repurchases.
Jeff Edwards: I'm pleased to report that for the first quarter of 2025, our Board of Directors approved a 6% increase to both our regular quarterly cash dividend and an annual variable dividend to $0.37 per share and $1.70 per share, respectively.
Jeff Edwards: These actions reflect the board's confidence in our financial position and ability to support a strategy of returning capital to our shareholders over the long term.
Jeff Edwards: The success of our growth strategies combined with our disciplined approach to capital allocation have created significant value for our shareholders.
Jeff Edwards: Again, the credit for our accomplishments goes to the hardworking men and women across our more than 250 branches throughout the United States and those who support them from our office in Columbus, Ohio. To everyone at IDP, thank you.
Jeff Edwards: As we continue to focus on profitable growth and maximizing returns for our shareholders, we remain committed to doing the right thing for our employees, customers, and communities.
Jeff Edwards: Looking at our full year sales performance in 2024, our consolidated sales growth of nearly 6% and same branch growth of approximately 4% drove another year of record results. In our largest end market, single family sales growth was supported by a diverse mix of local, regional, and national builders.
Jeff Edwards: 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 2024 single family sales results.
Jeff Edwards: Our multifamily installation sales growth remained resilient during 2024 with apparent operational benefits of our centralized service-oriented model, combined with complementary product diversification efforts.
Jeff Edwards: On a same-branch basis, multifamily sales in our installation segment increased over 6% in 2024. We continue to see strategic growth opportunities through geographic and product expansion in our multifamily end market long-term.
Jeff Edwards: Net income and EBITDA growth in 2024 reflected our pursuit of the most operationally and financially attractive jobs across the country. Across our network of branches, we prioritized profitable growth, which contributed to achieving an all-time annual record for diluted net income per share and adjusted EBITDA in 2024.
Jeff Edwards: During the fourth quarter of 2024, we completed three acquisitions, including a Midwest-based specialty distributor focused on supplying insulation and related accessories to residential and commercial end markets with annual revenue of over $22 million.
Jeff Edwards: A North Carolina-based installer of multiple building products to new residential homes and commercial buildings with annual revenue of over $17 million. And a Texas-based single-family, multifamily, and commercial installer of fiberglass and spray foam insulation with annual revenue of over $12 million.
Jeff Edwards: Although deal tightening is hard to predict, our current outlet for acquisition opportunities in 2025 is strong and we expect to acquire at least $100 million of annual revenue this year.
Jeff Edwards: Based on the U.S. Census Bureau, single-family starts in 2024 were up 7%. Looking into 2025, we believe the demand environment for our single-family installation services will be relatively stable compared to 2024.
Jeff Edwards: Housing affordability continues to be a challenge for some potential buyers, and while there exists some uncertainty surrounding the regulatory environment, immigration and trade, recent economic growth and employment data has been healthy, and we believe the long-term view on demand for our installed services remains positive.
Jeff Edwards: Operating conditions will inevitably change, but we remain steadfast in our effort to deliver a high level of service with a focus on realizing operational and financial improvements in 2025 and beyond.
Jeff Edwards: 2024 was a record year financially, and I remain encouraged by the resilience of our employees and excited by the prospects ahead for IDP and their broader installation and other building product installation business.
Jeff Edwards: So with this overview, I'd like to turn the call over to Michael to provide more detail on our fourth quarter and full year financial results.
Michael Miller: Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the fourth quarter increased 4 percent to a fourth quarter record of $750 million, compared to $721 million for the same period last year.
Michael Miller: The increase in sales during the quarter reflected growth across all end markets and sales from IVP's recent acquisitions.
Michael Miller: The same brand sales growth is up 1% for the fourth quarter. 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 1.2% increase in price mix during the fourth quarter.
Michael Miller: Price mixed growth during the fourth quarter offset a less than one percent decrease in job volumes relative to the fourth quarter last year.
Michael Miller: With respect to profit margins in the fourth quarter, our business achieved adjusted gross margin of 33.6 percent, down from 34.1 percent in the prior year period.
Michael Miller: The margin headwind during the quarter was primarily due to higher sales growth in our lower gross margin other segment which includes our distribution and manufacturing operations. This was partially offset by improved gross margin in the complementary products we install.
Michael Miller: Adjusted selling and administrative expense as a percent of fourth quarter sales was 18.1 percent, down from 18.3 percent in the prior year period due to lower administrative expenses as a percent of 2024 fourth quarter sales.
Michael Miller: Adjusted EBITDA for the 2024 fourth quarter increased to a fourth quarter record of $132 million, reflecting an adjusted EBITDA margin of 17.6%.
Michael Miller: For the 12 months ending December 31st, 2024, Zane Branch incremental EBITDA margins were approximately 14 percent.
Michael Miller: 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.
Michael Miller: Adjusted net income increased to $81 million, or $2.88 per diluted share. Although we do not provide comprehensive financial guidance,
Michael Miller: Based on recent acquisitions, we expect first quarter 2025 amortization expense of approximately $10 million and full year 2025 expense of approximately $39 million. We would expect these estimates to change with any acquisitions we close in future periods.
Michael Miller: Also, we expect an effective tax rate of 25 to 27 percent for the full year ending December 31st, 2025.
Michael Miller: Now, let's look at our liquidity position, balance sheet, and capital requirements in more detail.
Michael Miller: For the 12 months ended December 31st, 2024, we generated $340 million in cash flow from operations in line with the prior year period.
Michael Miller: Our fourth quarter net interest expense was $9 million, compared to $8 million in the prior year period. The increase was primarily driven by fees associated with the successful refinancing of our $500 million term loan B facility, which was completed in November.
Michael Miller: The term loan repricing has more favorable financial terms compared to our previous term loan And will save the company over 1 million dollars in estimated cash interest expense annually
Michael Miller: The term loan expires in March 2031 and we have no significant debt maturities until 2028
Michael Miller: At December 31st, 2024, we had a net debt-to-trailing 12-month adjusted EBITDA leverage ratio of 1.08 times.
Michael Miller: compared to 1.01 times at December 31st, 2023, which is well below our stated target of two times.
Michael Miller: With our strong liquidity position and modest financial leverage, we continue to prioritize expanding the business through acquisition and returning capital to shareholders.
Michael Miller: During the 2024 fourth quarter, IBP repurchased 383,000 shares of its common stock, bringing the total value of our share repurchases for 2024 to $145 million.
Michael Miller: The new authorization replaces the previous program and is in effect through March 1st, 2026.
Michael Miller: IVP's Board of Directors approved the first quarter dividend of $0.37 per share, which is payable on March 31, 2025, to stockholders of record on March 15, 2025.
Michael Miller: The first quarter dividend represents a 6% increase over the prior year period also as a part of our established Dividend policy today. We announced that our board has declared a dollar 70 per share
Michael Miller: Annual Variable Dividend, which is a 6% increase over the Variable Dividend we paid last year.
Michael Miller: The 2025 variable dividend amount was based on the cash flow generated by our operations with consideration for planned cash obligations, acquisitions, and other factors as determined by the board.
Michael Miller: The variable dividend will be paid concurrent with the regular quarterly dividend on March 31, 2025 to stockholders of record on March 15, 2025.
Michael Miller: We are committed to continuing to grow the company while returning excess capital to shareholders through our dividend policy and opportunistic share repurchases
Michael Miller: 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 and commitment to our company. Our success over the years is made possible because of you. Operator, let's open up the call for questions.
Speaker Change: Thank you. At this time, we will be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Michael Miller: We ask that analysts limit themselves to one question and a follow-up so that others may have an opportunity to ask questions.
One moment, please, while we poll for questions.
Speaker Change: Our first question comes from Keith Hughes with True Securities. Please proceed with your question.
Thank you.
Keith Hughes: As you look into the new year, what are you expecting in terms of multi-family, single-family work? What's the IBP view of those markets?
Keith Hughes: Okay, this is Michael. So, you know, our perspective is fairly consistent with what it's been for
Keith Hughes: The past couple of quarters, in the sense that we do believe, and I think our results have demonstrated this on the multifamily side, that we will continue to outperform the market opportunity.
Keith Hughes: That being said, on the multifamily front, I think we can all acknowledge that the units under construction currently
Keith Hughes: today, so in essence the backlog continues to still be highly elevated relative to the current STARS environment.
Keith Hughes: and we believe that it will take at least six months at the current pace of starts and completions for that multifamily units under construction to come in line.
Keith Hughes: And just from a macro perspective, we believe that's a 20 to 25 percent decline in the units under construction.
Keith Hughes: Again, I have to re-emphasize that we have performed better than the overall market. We believe we will continue to perform better than the overall market.
Keith Hughes: We continue to actually within the multifamily segment for us benefit continue to benefit from price mix which has been very encouraging and has been Indicative of an incredible job that our field team has done there
of this year.
Keith Hughes: It seems like other companies and investors are certainly less optimistic about the growth rates for single-family in 2025.
Keith Hughes: As we all know, we've gotten off to a fairly slow spring selling season, and there is a lot of inventory, spec inventory on the ground, something we're all aware of.
Keith Hughes: You know, as we look over the entire year, I mean, if we get
Keith Hughes: Low to mid I would say probably low single-family starts growth this year You know, we think that's that's a good case scenario quite frankly You know the public builders that we track
Keith Hughes: you know, their average estimated sales increase for the year. These are the ones that are our customers, and then we waited for their sales with us.
would imply that a 3% full-year sales increase.
Keith Hughes: You know that seems like you know consistent with what a lot of people's expectations are I would say though that you know starts comps
are difficult in the first half of this year.
Keith Hughes: relative to last year, you know, the start numbers were weighted more heavily, single-family this is now, were weighted more heavily towards the first half of the year, so I think it's realistic to assume that we're going to have negative single-family start comps.
Speaker Change: So that's sort of how we're looking at the year. Hopefully that answered your question. Yeah, that's very comprehensive. There's one other one you kind of mentioned, price mix. It's been positive for a long time. What's your view, at least to begin the year, on what price mix is going to do in your business?
Speaker Change: Again, I think everybody is well aware of this, but clearly we're in a very benign inflationary environment.
At least right at the moment
Speaker Change: and I'm sure we'll talk ultimately about the potential tariff situation and what that means. But at least for now, it's a pretty benign environment, and the price-mix benefits that we're seeing are really just...
Speaker Change: carryover price mix benefits from prior periods. You know it is a you know it's a relatively soft environment and that creates a relatively benign pricing environment not just for us but for our suppliers as well.
Okay, thank you, sir.
Thank you. Thank you.
Speaker Change: Our next question comes from Stephen Kim with Evercore ISI. Please proceed with your question.
Stephen Kim: Yeah, thanks a lot guys. I appreciate the color so far.
Speaker Change: Just touching on, following up on Keith's question about multi-fam, just was curious about if you could elaborate a little bit more on the growth plans that you have. I know that that CQ plays an important role in that multi-family performance and my understanding is that
Speaker Change: Nsiki was seeking to expand into new markets. I was wondering if you could talk about the growth opportunities that you see in multifamily and how much of an expansion, give us some sense for how much of an expansion we could see in the multifamily segment or your performance in multifamily as a result of that.
Speaker Change: As you well know because you were just with those guys, we think a lot about, you know, obviously very highly about CQs.
ability to continue to penetrate.
Speaker Change: At this point in time, there's plenty of white space as it relates to Arbor Amps locations where they're not participating.
Speaker Change: The second thing that they're able to do is to continue to sell other products, so from a mixed perspective, into those multifamily jobs that we are getting into. So they've been, even just recently, within the last 12 months, very active in Texas.
Speaker Change: Obviously, there's a lot of opportunity there, but again, we're really just kind of
Speaker Change: We're certainly not in the infancy, but we're probably a toddler or not quite a teen in terms of our penetration into the IBP footprint.
Speaker Change: That doesn't mean we aren't already kind of matured model family at certain locations and certain branches, but there's plenty of geography that can continue to grow.
and work relationships.
Speaker Change: Yeah, just to kind of dimensionalize that a little bit more, Jeff, I mean, do you think that it's possible that we could see, you know, kind of an expansion of that, of that
Speaker Change: Let's say division or initiative such that it could expand your multifamily presence by like let's say 50% over a period of years. Is there any kind of like general sort of target that you have for that business?
Speaker Change: Yeah, I mean, you know, we are, as you, as I think you know, and as we've talked about a lot, I mean...
Speaker Change: One of the things that we've really been able to benefit with the kind of CQ model, if you will, is that we notice when they go into a market, even if we're already doing multifamily work there, they're able to significantly increase our market share of that work and then the penetration of the other products.
Speaker Change: So, you know, as a consequence, I think, on a relative basis, once we're fully implemented with the CQ strategy, which is going to take years, just to be very clear, you know, I think in essence we will become over-indexed to multifamily, but in a very high-quality manner.
Yeah.
Speaker Change: Okay, great. Helpful. And then secondly, your SGA was fine, but it was a little higher than we were expecting. I'm just wondering if there was anything worth calling out on the SG&A front this quarter, whether it be incentive comp or some of the other things that have impacted you in prior quarters on the SG&A line.
No, quite honestly, I mean...
Speaker Change: I know everybody kind of lumps selling expense and G&A expense together, but we kind of think of them very separately.
Speaker Change: So the GNA side, actually, we felt pretty good about getting a little bit more leverage than not only last year, but last quarter. And we expect that GNA, as we talked to the last quarter,
Speaker Change: You know, it, generally speaking, rises with overall inflation, not necessarily the inflation of the products that we install.
so that we would expect to see that GNA
Speaker Change: you know, increases onto that 3% to 5% rate in a given year on a full year basis. But, you know, right now, G&A on a quarterly basis is running, you know, $105 to $110 million.
Speaker Change: a quarter. And that, in essence, you know, so fourth quarter DNA flows through almost directly to first quarter DNA, even though you end up obviously having lower seasonally cells in the first quarter of the year.
Speaker Change: Our next question comes from Michael with J.P. Morgan. Please proceed with your question.
Ah, let's see.
I mean our
There continues to be plenty of...
Speaker Change: opportunities in that regard. Pipeline, I think, is as good as it's been.
Speaker Change: You know, a lot of times, people assume, too, when things get a little rockier, or, you know, the outlook might not be as good, that that somehow generates more opportunity. That's not really been our experience.
Speaker Change: You know, most of the businesses that we're buying are typically up.
Speaker Change: Mom and Pop owned, which could be a decent sized business, but a privately owned, private individual selling the business and typically they are for sale when their situation in life makes them want to be for sale, i.e. retirement.
Speaker Change: That sounds great, appreciate the answer. And then also on fiberglass supply, how did you see that trending and what do you see price cost in 2025?
Speaker Change: As I'm sure you know, there was an announced price increase by three of the four manufacturers that did not
Speaker Change: And clearly, I think this is out there and known to that there's supplies a little more free flowing than it's been historically. So, you know, and as we as we know, and we're all seeing the builders aren't feeling, you know, as happy as they maybe should be at this time of the year. So.
Thank you.
Speaker Change: We'll see, right, I guess. It probably depends on what the second half of the year looks like. I know there's, at least I saw no recent conversations, I think even at IBS by one of the manufacturers around potentially a spring increase, but...
Speaker Change: I don't know that the market is going to look a lot different in terms of that being successful a month or two from now than it certainly did today or did in the last 45 days.
Speaker Change: Yeah, I would say, this is Michael, I would say that if there is another announced price increase and it gets more traction than this last one,
Speaker Change: We believe the way that happens is because there's a stronger demand environment than maybe some of us think exists today, and that's constructive for us. So we have historically always been able to pass on price.
Speaker Change: that we take from the manufacturers. Sometimes it's a little delayed, but ultimately we always get there.
Thank you. Thank you.
Speaker Change: Our next question comes from Susan McClary with Goldman Sachs. Please proceed with your question.
Thank you. Good morning everyone.
Susan Mcclary: My first question is on the gross margins. Michael, you mentioned in your commentary that there were some headwinds from the distribution and the manufacturing ops, and it sounds like you had some offsets there from your complementary products. Can you just talk a bit more about the dynamics that are coming through across the various areas of the business and how we should be thinking about that as we look to the year ahead, given the environment that we're in?
Yes, thanks for asking that question.
Susan Mcclary: Just sort of to level set, the other segment that we disclose are our distribution and manufacturing operations. It's still a relatively small component, but it structurally has lower gross margins.
Susan Mcclary: So that other segment grew at sort of a low team's rate in the quarter, whereas the install segment grew at around 4% or so. So because you had a higher rate of growth in that lower gross margin business.
Susan Mcclary: It weighed on overall gross margins by about 30 to 40 basis points.
Fortunately, we did have
Speaker Change: As you pointed out, the complimentary products are the other products that we install, like shower doors, opening mirrors, and gutters.
Speaker Change: They actually grew at a rate faster than insulation, overall insulation cells, so that's spray foam and fiberglass.
Speaker Change: And they had a fairly solid improvement in gross margin. So that was an offset to the other segment, sales growth. So
Speaker Change: higher rates of growth in lower margin products, right, that obviously impacts the gross margin.
Speaker Change: But then, fortunately, we had the offsetting benefits of improving gross margin in the other products. And I should note that some of that improvement in the complementary products gross margin did come from the efforts we're doing on the multifamily side to cross sell those other products into multifamily.
Speaker Change: Okay, that's helpful, Collar. And then, you know, understanding that the big public builders are under pressure and they're trying to work through that spec inventory, but can you talk a bit about what you're hearing from some of your private builder customers, some of the activity at the higher end of the market, anything that's different there or notable, and anything across the various geographies that is worth noting, especially maybe with the weather to start this year?
Yes, that's a great question. I would say...
first
Speaker Change: We were a little surprised but pleased in the fourth quarter that we actually saw better growth out of the regional and local kind of custom builders.
Speaker Change: that we did out of the production builders, and I think...
That's...
you know, and I should say surprised.
relative to where we were sitting.
Speaker Change: starts in construction because of the softness and the, you know, kind of spec inventory on the ground. So, you know, when I think about it, it's kind of a surprise that was from like three, four months ago, or I guess longer now.
But we've been very encouraged about how resilient.
the regional and local builder has been.
Speaker Change: In terms of the weather and the fires, as I think, again, everyone here on the call is aware, is that the first quarter of this year has one less selling day.
Speaker Change: than last year. And just as a reference point, our average sales per day is anywhere between 10 to $12 million. So that will negatively impact, you know, first quarter revenue relative to last year.
Speaker Change: We estimate that in January and February, from the fires and the storms,
Speaker Change: Now, what we don't know is how much of that we will make up in the month of March.
As you know, we will work.
Speaker Change: but where we're uncertain as to how much we're going to be able to make up.
Speaker Change: In the southern part of the country, I mean, basically construction stopped for, you know, an extended period of time just given the weather situation there.
Speaker Change: So we actually think that that's going to cause what would normally maybe you could catch up in a March It's probably going to
If that makes any sense
Speaker Change: Our next question comes from Mike Dahl with RBC Capital Markets. Please proceed with your question.
Mike Dahl: of Price Giveback, should we see builders be more aggressive with supplier conversations?
I mean, of course in a
Billy
Mike Dahl: not as robust, a little more of a slack environment in that regard, it's a little...
It's tougher to maintain pricing than it is otherwise.
Mike Dahl: You know, having done this for 30 years, it's not new, I think, to anybody and to most everybody on the team. So, you know, you do what you've got to do. You try to differentiate yourself on service. You've typically got long-term relationships with your builders. You deal with one another fairly, and it usually works out okay.
Mike Dahl: Yeah, I mean, I would say it's always a competitive environment and, you know, from our perspective and, you know, we've talked a lot about this because it's the way we run the business, is that we are always going to favor working with the customers that pass a fair price over volume.
and that will continue to be the case.
Mike Dahl: And let's just be clear, I mean, the environment is, it's just not growing at a rate that we all expected.
Mike Dahl: So it's kind of softer, but that doesn't mean we're seeing substantial decline in the market, right? So, I mean, I think that while people's confidence have been...
This is not a dire situation by any means, right?
a healthy environment.
Mike Dahl: and we still feel extremely constructive about the medium and long term demand for new construction in this country.
Speaker Change: 30 years ago I was with a gentleman who was a sales trainer for Owens Corning and he said it's always 100% about price and that's true to get in the beginning and then price is completely out the window thereafter.
Speaker Change: And it's never about price, if you understand what I'm saying. You've got to be in the room from a pricing perspective, even have the conversation. But after that, it's everything else you do as a contractor or a subcontractor that gets you the job, wins you the job, and keeps the job.
I just appreciate that.
Speaker Change: And then just on multifamily, are you guys expecting any sort of outsized margin headwinds once those declines start impacting your business? I know you guys said it was a price mix tailwind for...
Speaker Change: For you guys this quarter, but just when we think about that normalization Assuming there's a price mix headwind, but is there also a margin headwind associated with that?
Speaker Change: Not significant, no. But, I mean, clearly, when you lose, you know, if you're in a negative sales environment, right, that
Speaker Change: in a quarter that we had discussed in the previous question, you know, that doesn't really adjust very significantly if you have declines in violence.
Speaker Change: So you do have decremental margins associated with that. But I want to reiterate on the multifamily side, while we do believe that units under construction need to come down.
Speaker Change: You know, call it 20-25% and it's going to take at least six months, six more months of that to happen. We firmly believe, as we have demonstrated over the past year, quite frankly, and the last four quarters, that we will perform better than the overall market.
Speaker Change: Our next question comes from Phil with Jeffrey's. Please proceed with your question.
Phil: Hey guys, I appreciate all the great color. In a pretty choppy environment, guys, last year's margins have been quite steady and certainly stepped up nicely in 2023. In this okay but not great environment, and then Michael, I appreciate.
Phil: The GNA piece that you called out, is this an environment that you can manage EBITDA margins pretty flat or you could see some compression? Your biggest competitors calling call a hundred basis points of margin compression, you know combination of
Phil: How do you see EBITDA margins playing out for you over the course of the year?
Phil: Yeah, so I mean, as you know, we don't provide guidance, but I mean, clearly, based on the answer to all of the previous questions.
Phil: is not here to stay, so to speak, that we will, you know, hopefully we'll see the back half, particularly on single family and the stabilization on multi-family, you know, things improving.
Phil: Generally speaking, you're not going to make substantial cuts, particularly to G&A, although you will manage it, right? It's not as if we're not going to manage our expenses.
Phil: It does have a tendency for, you know, hopefully a short period of time to put pressure on EBITDA margins.
Phil: You know that it's just the reality of the numbers in the situation
Phil: But we, as a company, are working very hard, and the incentive systems for, from Jeff Edwards all the way down to every single branch manager, our incentives are structured such that we want to improve EBITDA.
Phil: And, you know, that's really the primary focus of the company, and we're going to be working very hard to do that.
Speaker Change: Super. I guess a question for Jeff. In this environment and cash flow is still pretty strong, how do you kind of balance between M&A versus
Umm...
and we'll always favor M&A over anything else.
Speaker Change: So, in terms of capital allocation, but as you know, I mean, our free cash flow and the cash on the balance sheet is such that we're doing, you know, one out of one trick pony in that regard, so we can do
Speaker Change: kind of pieces and parts of all of everything as it relates to capital allocation. We are seeing some
larger deals. I'd say they're currently in the wheelhouse.
Speaker Change: We're not at all adverse to the idea of necessarily getting out of the wheelhouse and looking at, you know, maybe some adjacent...
Speaker Change: And as you know, Phil, I mean, for us to do something a little bit different, it's not like we're going to go out and buy a billion dollar company, right? It's kind of maybe...
Speaker Change: Twice our average deal size, but still something that's exceedingly manageable for us and gives us time to really conservatively understand that business better before we make a Conservative push into it if we were going to do something like that
Speaker Change: Our next question comes from Trey Grooms of Stevenson. Please proceed with your question.
Speaker Change: Hey, good morning guys. This is Ethan on for Trey. Thanks for taking my question. I just wanted to elaborate on spray foam a little bit. So you previously called out spray foam trends.
Speaker Change: that we're kind of expected to continue into this quarter. Just wondering what you're seeing on that side and then giving your outlook for, you know, sort of better demand, I suppose, in the second half, just to generalize it a bit. Should we expect, you know, positive price costs in the second half of this year? Thanks.
Speaker Change: So, yeah, I'm glad you asked the question about spray foam because it was, it continued to be a headwind in the fourth quarter as we had discussed that it would in the third quarter. So, it was kind of a negative to gross margin, call it anywhere between.
10 to 20 basis points.
Speaker Change: What I would say is that that is kind of trending through.
the first quarter, but pricing there is starting to stabilize.
Speaker Change: And because there have been price increases, manufactured price increases. So you're seeing stabilization come there and we would expect to see spray foam not creating sort of a negative gross margin.
Speaker Change: impact as we go into the back half of the year. You know, again, we don't provide guidance, you know, but I would say price mix
Assuming, of course, that the
Speaker Change: Single-family market, you know, does as I think, you know, there are a lot of expectations Around us are in the back half accelerates and improves And multifamily stabilizes we would expect to have better price mix in the first half than we do in the first half
Speaker Change: Okay, that's super helpful. And then lastly, just on costs, you know, you spoke a little bit about sort of benign cost inflation, but can you walk us through the sort of puts and takes you're seeing on the cost front, you know, particularly in labor?
Speaker Change: You know there are you know puts and takes to that, but it's a it's a you know stable inflationary environment
Speaker Change: As I said to an answer in an earlier call, selling expense consistently runs 4.7 to 4.8% of revenue. I mean, obviously that changes quarter to quarter, but if you look historically, that's been a pretty decent historical average. And then G&A...
Speaker Change: A little bit disconnected from cost of goods sold in this perspective because, you know, those costs tend to rise
Speaker Change: with Overall Inflation as we were saying earlier, so you know if we look on a full year basis to have
Speaker Change: DNA go up three to five percent on an annual basis, that would make sense.
However, that would be before we take any expense management.
Speaker Change: initiatives into consideration. I will say while we're clearly focused on expense management, particularly on the G&A side, this year it takes a while for the benefit of that expense management to flow through the P&L.
Speaker Change: Our next question comes from Ken Zenner with KeyBank Capital Markets. Please proceed with your question.
Good morning, everybody.
Good morning, again.
Speaker Change: Jeff, Michael, for some reason it seems like you guys drank a disclosure serum this morning so I think everybody appreciates that.
Thank you.
Speaker Change: I appreciate your comments around the cycle but not being that bad I'd agree with you it's not like 2010 but inventory is high that's something that you've called out Michael you said you know could pass in six months if you could
Speaker Change: Give us kind of like some concept around why you have six months and while you're doing that
Speaker Change: Given your national footprint versus much more regional builders, if you could expand on regional comments that affect that second half expectations, think Florida, right? Central Florida, Southwest, Texas, not that bad. Midwest, very strong. That's the first question. Thank you.
Speaker Change: So the six-month comment was really all around multifamily and trying to contextualize what we think is going on in the macro multifamily environment.
Speaker Change: And one of the ways that we contextualize or look at that is to look at multi-family units under construction relative to the current start space and to normalize the units under construction.
Speaker Change: relative to the current starts level, which, by the way, we do believe
Speaker Change: has bottomed out and we believe that, and this is counter to what I think most other people believe.
Speaker Change: We believe that the current rate of, call it $3.30, $3.50 or so, is probably fight. And that given the current demand for housing should probably, will bump up to a higher level as we go towards the back half of the year. Again, that's a little bit counter to what most people think.
the current completions rate and the current starts rate.
Speaker Change: And that would mean a decline in the units under construction and therefore the macro opportunity for the industry to come down 20% plus.
Speaker Change: And then in terms of I think you're the second part of your question was really going more towards single-family versus multi-family. Correct. And I would say that
Speaker Change: Yes, I mean Texas and Florida are a little weak right now, the Midwest and Northeast.
Speaker Change: are surprisingly strong on a relative basis. Although, as we all know, I mean, Texas and Florida are...
Speaker Change: a pretty big percentage of the overall new home construction market. Fundamentally, though, we believe those markets are very strong. As I think everyone on this call knows, Texas is our largest state.
Speaker Change: From a revenue perspective, our team there does an incredible job, and while we might see softness in both those big markets for us, long term, they are great housing markets.
Speaker Change: Right. And I think what people are struggling with is it's less about the volume, right? And I understand your comments around the six months were for multi-family, but like,
Speaker Change: There's a lot of single-family inventory for sale. We're seeing weakness, which is pressuring margins, certainly for the public builders more right now. But we're trying to toggle between, like, you know, what are the build – your comments around second-half improvement are more tied to multi-family, it sounds like.
Bye. Bye. Bye. Bye.
Okay, and Ben, I appreciate that.
Speaker Change: Where builders are running higher inventory? This is like, you guys probably have better insight, right, than almost anybody in the country. Where the builders have too much inventory?
Speaker Change: if those homes are selling and what their future bid contracts will look like because it's kind of an air pocket, right? I mean, the volume is gonna be fine over time. It's just, it's been clearing out this inventory that they think is good amid.
Speaker Change: first-time buyers wanting quick move-in homes, yet that has some risk to it. I mean it's that dynamic in the bad markets that people are trying to understand.
Thank you very much.
Speaker Change: Yeah, I'm sorry Kevin. I'm not going to give you a real Specific answer there because quite frankly it really it varies not just city to city but subdivision to subdivision in terms of
Speaker Change: where they might have too much inventory given the current demand environment. So, it really is... I don't think you can just say a broad brush and say, well, Dallas is over-inventoryed and, you know...
Speaker Change: The Mid-Atlantic is under inventory, right? I think it really is customer by customer, you know, subdivision by subdivision as to whether or not they have too much spec sitting on the ground.
Speaker Change: Our next question comes from Kirk Hanger with D.A. Davidson. Please proceed with your question.
Great, thanks and good morning.
Kirk Hanger: Just one, I was hoping you could kind of update us on the build-out of internal distribution capabilities, kind of expansion plans in 2025 and, you know, that has been kind of a margin dragging here in 2024. Would you expect...
Speaker Change: The margin impact to be kind of similar or maybe even magnified a little bit. Thank you
This is Jeff.
It obviously takes time.
Certainly don't expect it to be
Speaker Change: Margin drag, you know, we are you know, part of the effort was to make sure that we were
Speaker Change: I think we've been successful in that regard. It's certainly helped the supply has loosened a bit and that there's not a problem with, you know, not being able to get this skew or that skew.
Speaker Change: So, again, we continue to kind of leverage the logistic side of things, the little business we bought in that regard, and we continue to expand our distribution footprint, which is really both from an internal perspective and ultimately will lead to third-party.
Speaker Change: you know, business also. So, I actually feel really good about that progress.
Yeah, just if, um, well, this is not...
Speaker Change: say 100% correlation, but you know, the internal distribution, if you will, last year was around $9 million, and in essence it doubled this year to around $18 million. So we have a long way to go, but we've made great progress there. The team's doing a really, really good job there.
Speaker Change: But it does, as we talked in the last quarterly call, it does add G&A because we are adding facilities and we are adding people. But it is definitely benefiting, starting to benefit gross margins slightly.
Speaker Change: Got it and maybe just to kind of follow up there in terms of
Speaker Change: The comment around measured progress, is this something we should think of as, you know, a three to five year kind of build out to get to where you ultimately want to be, or would it extend?
you know meaningfully beyond that kind of time frame.
I think the 3 to 5 is the right answer.
Speaker Change: The only thing that might make it extend is if, for some reason, the markets continue to remain.
Speaker Change: flat but honestly this is a way for us to as we roll this out we do get benefit over time and you know it helps us improve margins so in a you know let's just say a five-year flat environment for for demand from our end markets it's a good way for us to help margin
Okay, that'll make sense. Thank you.
Speaker Change: There are no further questions at this time. I would now like to turn the floor back over to Jeff Edwards for closing comments.
Jeff Edwards: I just want to thank all of you for your questions and I look forward to our next quarterly call. Thank you.
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