Installed Building Products, Inc. (NYSE:IBP) Q3 2023 Earnings Call Transcript

Installed Building Products, Inc. (NYSE:IBP) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Greetings, and welcome to Installed Building Products Fiscal 2023 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Darren Hicks. Thank you. You may begin.

Darren Hicks: Good morning, and welcome to Installed Building Products Third Quarter 2023 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the third quarter, which can be found in the Investor Relations section of our website. On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management’s current expectations and beliefs. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those described today. Please refer to the cautionary statements and risk factors in our SEC filings, including our most recent 10-Q and annual report on Form 10-K.

We undertake no duty or obligation to update any forward-looking statements as a result of new information of future events, except as required by federal securities laws. In addition, management refers to certain non-GAAP or adjusted financial measures on this call. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company’s earnings release and additional reconciliation for EBITDA and adjusted EBITDA for earlier fiscal periods in our investor presentation, which are available on the Investor Relations section of our website. This morning’s conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer; and joined by Jason Niswonger, our Chief Administrative and Sustainability Officer.

I will now turn the call over to Jeff.

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. IBP produced another solid quarter of operating and financial results, achieving all-time and third quarter record results on several profitability and cash flow generation metrics during a volatile economic backdrop for residential and commercial construction activity. Consolidated revenue comparisons were challenging given the over 40% growth achieved in the prior year period, but our end market, product and geographic diversity helped to offset softer single-family installation activity.

Despite top line headwinds, we achieved record third quarter net income, earnings per share and operating cash flow in 2023. Our multifamily end market continues to stand out and exemplify the benefits of employing a centralized service-oriented operation across our branches. On a same branch basis, multifamily sales in our installation segment increased 28%, with growth driven by continued success selling IBP’s installation services in markets that historically have not served multifamily customers. As a result, we were able to partially offset softer single-family installation same-branch sales, which were down 12%. In August, we published our third annual ESG report. In addition to presenting our sustainability achievements and advancements, we highlight the critical position, insulation installers hold and contributing to energy efficiency in homes and other buildings.

Our business is in a unique position to benefit both our shareholders and the broader global environment that surrounds us. IDP has experienced tremendous success as a public company. And while a path has not always been straightforward, the dedication and consistency of our team members, have been the key to navigating an increasingly complex economic, social and business environment. To everyone at IBP thank you for your commitment, your hard work and a tough job always done well. We continue to expand our product offering and geographic presence through acquisitions and have acquired 8 companies so far this year with combined annual revenue of over $58 million. We expect to acquire at least $100 million of annual revenue each year. However, acquisition timing is unpredictable and certain acquisitions may change from their intended closing dates within a given calendar year.

During the 2023 third quarter and in October, we completed three acquisitions, including a Virginia-based installer of shower, shelving and mirror products as well as fireplaces into new and existing residential and commercial construction projects with annual revenue of approximately $6 million. A North Carolina-based installer of fiberglass, spray foam, cellulose insulation and fireplaces to residential customers with annual revenue of approximately $2 million and a North Dakota base stall of fiberglass and spray foam insulation to multifamily, residential and commercial customers with annual revenue of approximately $2 million. Overall, the residential housing market continues to be resilient as relatively low existing home inventory levels have led to a higher percentage of new construction home sales despite broader housing affordability challenges, which has been exacerbated by the rapid rise in interest rates this year.

Still, we are encouraged that the publicly traded homebuilders that have reported financial results in the last 2 weeks have showed a combined year-over-year new order volume growth rate of roughly 40%. While these orders will take time to impact our revenue, single-family housing starts, which impact our business sooner than orders have been trending positively in the third quarter. As for the multifamily end market, our project backlog remained stable at historically high levels with activity extending beyond 1 year. We believe we are well positioned to report another year of strong operational and financial performance in 2023 as we continue to focus on profitability and effective capital allocation to drive growth. Longer term, we believe that housing demand will continue to grow and the insulation installation industry is well positioned to benefit from demand driven by government legislation including the Inflation Reduction Act of 2022 in the bipartisan infrastructure law, which are intended to improve energy efficiency in residential homes.

IBP’s strong customer relationships, experienced leadership team, national scale and diverse product categories across multiple end markets will help the company navigate future changes in the U.S. housing market. I am proud of our continued success and excited by the prospects ahead for IBP and the broader insulation and other products installation business. Before I turn the call over to Michael, I want to say thank you to Jay Elliott, IBP’s Chief Operating Officer, who will be retiring at the end of the year. Jay has been a valuable member of IBP’s leadership team over the past 20 years and his keen ability to resolve operational challenges combined with his industry knowledge, has benefited IBP on countless occasions. While Jay will act as a close adviser to the company after this year, on behalf of IBP, I want to thank Jay for his commitment and wish him and his family the very best in his retirement.

IBP is fortunate to have a deep bench of experienced talent, and we have tapped current Regional President, Brad Wheeler, to be Jay’s successor. Brad has served as one of IBP’s regional presidents since 2015 and has been the President of our heavy commercial focused business, Alpha, since 2022. Brad is an exceptional leader, and I look forward to his continued contributions to IBP. So with this overview, I’d like to turn the call over to Michael to provide more detail on our third quarter financial results.

Michael Miller: Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the third quarter decreased modestly to $706 million compared to $719 million for the same period last year. The decrease in sales during the quarter was driven by lower single-family sales, partially offset by higher multifamily and commercial sales within our installation segment. As we evaluate our performance on a year-over-year basis, the exceptional growth our company experienced last year, set difficult comparisons for this year but also rising interest rates and changes in residential construction and industry activity have been headwinds to our revenue opportunity in 2023. According to the U.S. Census Bureau, in the third quarter of 2023, the housing units under construction or the sales pipeline for our installation services showed single-family units were down 16% year-over-year, while our single-family same branch sales were down 12%.

In the multifamily end market, industry units under construction were up 14%, while our multifamily same branch sales were up 28%. Although the calculations behind our price mix and volume disclosure have several moving parts that are difficult to forecast and quantify, the results this quarter reflect our strategy of focusing on the value of our installed services over Jobin. During the third quarter, price/mix increased 3.5%, while volumes decreased 10.8%, in part due to the continued impact of multifamily and light commercial activity relative to our single-family end market. Our profitability-centered strategy led us to achieve record results in the third quarter as measured by adjusted gross profit margin, adjusted net income margin and adjusted EBITDA margin.

Our adjusted gross margin improved 350 basis points year-over-year to 34.3% in the third quarter as a result of pricing stability and improved operating cost efficiencies. Adjusted selling and administrative expense as a percent of third quarter sales was up 200 basis points to 17.7% due to higher variable compensation related to higher gross profit and EBITDA performance from the prior year period. Adjusted net income per diluted share improved 11% to $2.79, representing an all-time record margin of 11.2%. Adjusted EBITDA for the 2023 third quarter increased 8.6% to a record $131 million, and adjusted EBITDA margin reached a record 18.5% compared to 16.7% for the same period last year. During the third quarter, our same-branch adjusted EBITDA growth was positive, while our same-branch sales were lower than the prior year.

This very strong result rendered the calculation of our same-branch incremental margin meaningless during the third quarter, but we continue to target full year long-term incremental adjusted EBITDA margins in the range of 20% to 25%. For the first 9 months of 2023, total incremental adjusted EBITDA margins were 45%, substantially above our target range. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect fourth quarter 2023 amortization expense of approximately $11 million and full year 2023 expense of approximately $44 million. We would expect these estimates to change with any acquisitions we closed in future periods. Also, we continue to expect an effective tax rate of 25% to 27% for the full year ended December 31, 2023.

Now let’s look at our liquidity position, balance sheet and capital requirements in more detail. The 3 months ended September 30, 2023, we generated $112 million in cash flow from operations compared to $99 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income and was an all-time quarterly record. Despite the recent rising interest rate environment, in August, we reduced the borrowing cost on a portion of our debt by 25 basis points through repricing approximately $492.5 million of our existing term loan. Furthermore, through interest rate swap agreements, we have fixed the interest rate on $400 million of our existing variable rate debt until 2028, limiting our interest rate exposure.

We have no significant debt maturities until 2028. Our third quarter net interest expense decreased to $9.7 million from $10.7 million in the prior year period due to the term loan repricing and the higher rate of interest we earned on cash and cash equivalents invested throughout the quarter. At September 30, 2023, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.1x compared to 1.5x at December 31, 2022, which is well below our stated target of 2x. At September 30, 2023, we had $335 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 9 months ended September 30, 2023, were approximately $49 million combined, which was approximately 2% of revenue, roughly in line with the same period last year.

With our strong liquidity position, asset-light business model and modest financial leverage, we continue to focus on expanding through acquisition and returning capital to shareholders. Our acquisition pipeline remains robust and our goal of acquiring $100 million of annual revenue each year is unchanged. However, as Jeff mentioned, the timing of acquisitions can move forward or backward from plan, which may influence our ability to close a specific annual revenue amount worth of deals in a given calendar year. We currently expect that certain acquisition targets may be delayed to the first quarter, which would result in our acquired revenue for 2023 being below $100 million. IBP’s Board of Directors approved the fourth quarter dividend of $0.33 per share, which is payable on December 31, 2023, stockholders of record on December 15, 2023.

The fourth quarter dividend represents a 5% increase over the prior year period. With this overview, I will now turn the call back to Jeff for closing remarks.

Jeff Edwards: Thanks, Michael. I’d like to conclude our prepared remarks by once again thanking IBP employees for their hard work, dedication and commitment to our company. Our success over the years is made possible because of all of you. Operator, let’s open up the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Reuben Garner with Benchmark Company. Please proceed with your question.

Reuben Garner: Thank you. Good morning, everybody.

Michael Miller: Hi, Reuben.

Reuben Garner: Wondering if you could talk about your mix between some of the bigger production builders and some of the smaller ones, I think it’s been a pretty consistent concern from folks that the smaller builders may struggle a little bit in the near-term with the rate environment. I think so anyway, I’ll just I’ll leave it there.

Michael Miller: Yes, Reuben. This is Michael. As we have said in previous quarterly calls this year, we do expect that the production builders will continue to gain share. And I think you are starting to see that in some of the forward-looking metrics like orders, where they are starting to gain share that really hasn’t translated yet to us from an install perspective. We still saw in the third quarter a higher rate of growth, if you will, within the regional and local builders than we did with the production builders in terms of their percentage of overall revenue. But we feel very good about our share and mix with the production builders and still firmly believe that in 2024, particularly, you will see, again, their share of closings continue to increase and they will continue to gain share.

I mean quite frankly, as I think everybody on this call probably appreciates the current operating environment within single-family is heavily weighted towards production builders just in terms of their access to capital, their ability to access subcontractors and their very clearly stated commitment to continue to gain share and improve affordability of the existing new construction product that they are building.

Reuben Garner: And then a question about the M&A strategy, a couple of deals or a few deals this quarter, correct me if I am wrong, but a couple of categories I think are listed now that maybe I didn’t see before the hardware fireplaces, are these kind of new growth initiatives at like the blinds category has been one in the past. Are these kind of areas that you’re building off of to expand your M&A opportunity in the future?

Jeff Edwards: Reuben, hi, this is Jeff. No, we have been in those product lines really a long time. So it’s not a new effort, it’s just – we haven’t really ever, I guess, specifically called them out in great detail, but it’s not part of a new strategy. I don’t know how many exact locations we have in fireplaces and hardware, but it’s more than a handful. I think the key is there is no change in the M&A strategy.

Reuben Garner: Okay, great. Congrats on the strong results guys and good luck through the rest of the year.

Jeff Edwards: Thank you.

Operator: Our next question comes from Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim: Yes, thanks very much guys. Congratulations on the good results again. First question I had related to your margins. You talked about the strength of the business overall. But I was wondering, was there a particular benefit that you experienced in maybe the multifamily side of your business from maybe projects that are a little larger, take – have a little bit more of a lead in terms of – in other words, you are quoting them earlier than you might for single-family jobs that boosted your margin a little bit this quarter?

Michael Miller: This is Michael. We have been performing – our team has been performing extremely well on the multifamily side. And I think they are really highlighting their performance is highlighting our focus on the value of our installed services, the profitability of our installed services. And I say over volume, even though the multifamily volume has been very strong, obviously, and we’re – the team has just done an excellent job executing there. But we continue to focus on that. There’s definitely been benefit there. But I would say we are experiencing an almost normalization on the gross profit side, given this is across pretty much all categories, both end markets and end products. We’re benefiting from a stable pricing environment, the complete realization of the pricing actions that we had taken in ‘22.