Installed Building Products, Inc. (NYSE:IBP) Q4 2022 Earnings Call Transcript

Installed Building Products, Inc. (NYSE:IBP) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Greetings. Welcome to Installed Building Products Fiscal 2022 Fourth Quarter Financial Results Conference Call. Please note, this conference is being recorded. I’ll now turn the conference over to Darren Hicks, Managing Director of Investor Relations. Thank you. You may begin.

Darren Hicks: Good morning, and welcome to Installed Building Products fourth quarter 2022 conference call. Earlier today, we issued a press release on the financial results for the fourth 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 include statements about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects. These forward-looking statements are based on management’s current expectations and involve risks and uncertainties. Any forward-looking statements made by management during this call is not a guarantee of future performance and actual results may differ materially as a result of various factors, including, without limitation, the potential adverse impact of the ongoing COVID-19 pandemic, general economic and industry conditions, rising home prices, inflation and interest rates, the material price and supply environment, the timing of increases in our selling prices and the factors discussed in the Risk Factors section of the company’s annual report on Form 10-K as may be updated from time to time in our SEC filings.

Any forward-looking statement speaks only as of the date hereof. The company undertakes no duty or obligation to update any forward-looking statements as a result of new information or future events, except as required by federal securities laws. In addition, management uses certain non-GAAP performance measures on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, adjusted gross profit, adjusted gross profit margin and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company’s earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on 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.

Jeffrey 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 achieved another year of record net revenue, net income and adjusted EBITDA. For 2022, consolidated net revenue increased 36% to $2.7 billion. Net income increased 93% to $7.74 per diluted share and adjusted EBITDA increased 54% to $439 million. Throughout the year, we focused on supporting our residential and commercial customers during a very complex operated environment, including navigating continued supply chain challenges and aligning our selling prices with the value we offer customers.

The record 2022 results also extend our history of revenue, net income and adjusted EBITDA growth to eight consecutive years every year since IBP became a public company in 2014. I am extremely pleased that our strong performance during 2022 allowed us to continue pursuing our growth-focused capital allocation strategy. We returned a record amount of capital to shareholders in 2022 by investing $138 million to repurchase 1.5 million shares of our common stock and distributing $63 million in cash dividends. In addition, we completed eight acquisitions representing approximately $109 million of annual revenue during 2022. We believe we can continue to pursue our growth-focused capital allocation strategy throughout the economic cycle, and we remain focused on creating value for our shareholders.

Beyond the record results, our role in creating a sustainable future through installing products that promote energy efficiency is an important component of how we define success. During 2022, we published our second annual ESG report outlining the progress we have made along our ESG journey. Employee turnover remained significantly below industry averages, which we believe is a direct result of the investments made in our employee programs since 2017. Since our inception, we have worked hard to promote a culture of doing what’s right, and we believe we can continue to make a positive impact in the lives of our employees and the communities in which we operate. Our success in 2022 is also a reflection of the resiliency of our business model, our competitive position within key geographies and end markets, the strength of our balance sheet and experience of dedication of our senior leaders and employees throughout the company.

Since our IPO in 2014, net revenue, adjusted EBITDA and net income have grown at compound annual growth rates of over 20%, 33% and 40% respective. During this period, we have completed almost 80 acquisitions, expanding our footprint across the US and diversifying our revenue to additional end markets and product categories. This track record of performance is a direct result of our over 10,000 hardworking employees across the country. To everyone at IBP, thank you for your commitment and a tough job always done well. With this overview, let’s look into our 2022 full year end market performance in more detail. 2022 was another excellent year of residential sales growth. Within our installation segment, we experienced a 29% increase in residential same brand sales from the prior year, which was driven by a 29% increase in single family same branch sales and a 31% increase in multifamily same branch revenue.

By comparison, total US residential housing completions increased by 4% in 2022. While total housing completions growth continued to improve both sequentially and year-over-year during the fourth quarter, we believe US housing completions remain affected by extended residential construction cycle times. Compared to the same period last year, price mix improved 23% in 2022. Consistent with the inflationary trends in the construction industry and the increasing demand for our services, our pricing efforts and relatively stable product mix contributed to the largest annual increase in price mix we’ve achieved since becoming a public company. We continue to make any necessary adjustments to align our pricing with the value we offer our customers.

Within our commercial business, same branch sales increased 7% in 2022, driven by light commercial project growth, which more closely aligns with residential activity. With respect to heavy commercial, bidding activity and project bid acceptance rates remain steady in the fourth quarter relative to third quarter and we are focused on improving our operational efficiency while pursuing projects with favourable economics. We continued to expand our business through acquisitions, prioritizing profitable growth through targeting well-run companies that install insulation and other complementary building products. During the 2022 fourth quarter, we completed three acquisitions, including the North Carolina and South Carolina installer of fiberglass insulation, spray home insulation and cutters into new residential projects with annual revenue of approximately $21 million, a Pennsylvania installer of spray foam and fiber glass insulation into residential commercial projects that also applies fire proofing and waterproofing to commercial structures with annual revenue of approximately $10 million and a Montana installer of fiber glass and spray foam insulation into residential and commercial projects with annual revenue of approximately $5 million.

Throughout 2022, we completed eight acquisitions representing approximately $109 million of annual revenues, surpassing our $100 million acquired revenue target. Earlier this month, we acquired four state insulation, a residential insulation installer servicing Virginia, Maryland, West Virginia and Delaware, with the annual revenue of approximately $4 million. Looking ahead, our acquisition pipeline remains robust and includes opportunities across multiple geographies, products and end markets. As a result, we expect to acquire at least $100 million of revenue once again in 2023. While 2023 will present market challenges, there are also many opportunities. The backlog in our growing multifamily business is longer than one year, while the national backlog of single family homes is coming down, the number of units under construction continues to be at a historically high level, according to US census bureau.

We anticipate solid financial improvement in our heavy commercial vehicle business and strong execution in our repair and remodel business, helps drive growth of nearly 50% in Q4 2022, with incentives from the Inflation Reduction Act of 2022 likely to support demand this year. So with this overview, I’d like to turn the call over to Michael to provide more detail on our fourth quarter financial results.

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Michael Miller: Thank you, Jeff and good morning, everyone. Consolidated net revenue for the fourth quarter increased to a fourth quarter record of $686 million compared to $534 million for the same period last year. The 29% year-over-year improvement in sales during the quarter was mainly driven by an improvement in price mix and the revenue contribution from recent acquisitions. Our installation segment revenue increased 23% to $641 million, driven by strong growth across IBP’s residential new construction market. The other segment revenue, which includes IBP’s manufacturing and distribution operations, increased to $48 million from $12 million, driven by strong operating results as well as the December 2021 acquisition of AMD Distribution and the April 2022 acquisition of Central Aluminum.

On the same branch basis, installation revenue improved 20% from the prior year quarter, driven by single family, same branch sales growth of 18%. Multifamily same brand sales increased 37%. Our 2022 fourth quarter residential same brand sales growth was 21% above the prior year quarter, while same branch commercial sales increased 13% in the 2022 fourth quarter. Adjusted gross profit margin improved 240 basis points year-over-year to 31.7% in the fourth quarter, which benefited from strong price mix growth during the quarter. It is important to highlight that our segments have different gross profit profiles. During the 2022 fourth quarter, our installation segment’s gross margin was 34% compared to the other segment gross margin of 24%. We believe it is relevant to note the segment impact on our reported gross profit margin, since our other segment includes our more recent acquisitions in the distribution business.

The acquisition of AMD Distribution had a limited impact on the prior year fourth quarter as the deal closed in December 2021. The other segment’s impact to gross margin in the 2022 fourth quarter was about 70 basis points. year-over-year improvements in selling and administrative expense relative to sales during the fourth quarter reflects our ability to leverage administrative costs and higher operating expense leverage at the distribution businesses. On a GAAP basis, our fourth quarter net income per diluted share of $2.42 increased 144% from the prior year quarter and our adjusted net income per diluted share improved 71% to $2.43 per deluded share. During the 2022 fourth quarter, we realized a $15 million gain on acquisition earnouts, primarily due to the incentive structure of certain acquisitions completed in 2022.

We do not expect to realize similar gains on future acquisitions. During the 2022 and 2021 fourth quarters, we recorded amortization expenses of $10 million related to the acquisition of new businesses. This non-cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Based on recent acquisitions, we expect first quarter 2023 amortization expense of approximately $11.2 million and full year ’23 expense of approximately $42.5 million. We would expect these estimates to change with any acquisitions we closed in future periods. Adjusted EBITDA for the fourth quarter of 2022 improved 54% to a fourth quarter record of $115 million. Adjusted EBITDA as percent of net revenue was 16.8% for the 2022 fourth quarter, a 280 basis point improvement from the same period last year.

Same branch incremental adjusted EBITDA margin was 33.6% for the fourth quarter, compared to 6.2% for the same period last year. We continue to target full year long-term incremental EBITDA margins in the range of 20% to 25%. For the 2022 fourth quarter, our effective tax rate was approximately 25.9% and we expect an effective tax rate of 25% to 27% for the full year ending December 31, 2023. Now let’s look at our liquidity balance sheets and capital requirements in more detail. Our business model continues to generate strong operating cash flow. For the 12 months ended December 31, 2022, we generated $278 million in cash flow from operations compared to $138 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income, lower networking capital requirement and proceeds from the termination of interest rate swap agreements for the 2022 t full year.

Through interest rate swap agreements, we fix the interest rate on $400 million of our existing variable rate debt until December 2028, limiting our interest rate exposure and we have no significant debt maturities until 2028. At December 31, 2022, we had a net debt adjusted annual EBITDA leverage ratio of 1.46 times, compared to 1.87 times at December 31, 2021, which is well below our stated target of two times. At December 31, 2022, we had $327 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the year end December 31, 2022 were $48 million combined, which was 1.8% of revenue compared to 2% for the same period last year. With our strong liquidity position and modest financial leverage, we continue to invest in our accurate position strategy and return capital to shareholders.

During 2022, we returned approximately $200 million to shareholders through dividends and share repurchases. IBP repurchased 1.5 million shares of its common stock at a total cost of $138 million during 2022, which includes nearly 300,000 shares repurchased during the 2022 fourth quarter at a total cost of $25 million, including commissions. Our board of directors recently authorized a new stock repurchase program that allows for the repurchase of up to $200 million of our outstanding common stock. The new repurchase program replaces the previous program and is in effect through March 01, 2024. Today, we announced that IBP’s board of directors approved the first quarter dividend of $0.33 per share, representing a 5% increase to our most recent dividend payout.

The first quarter dividend is payable on March 31, 2023 to stockholders of record on March 15, 2023. Also as part of our established dividend policy, today we announced that our board has declared a $0.90 per share annual variable dividend in line with the variable dividend we paid last year. The 2023 variable dividend amount was based on the cash flow generated by our operations, with consideration for planned and expected cash obligations, acquisitions and other factors as determined by the board. The variable dividend will be paid concurrent with a regular quarterly dividend on March 31, 2023 to stockholders of record on March 15, 2023. We are committed to continuing to grow the company while returning excess capital to shareholders through our dividend policy and opportunistic share repurchases.

With this overview, I will now turn the call back to Jeff for closing remarks.

Jeffrey 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: Our first question is from Stephen Kim with Evercore ISI. Please proceed.

Stephen Kim: Yeah, thanks very much, guys and thanks for all the color, but I do have some additional questions. I guess the first one was that your price mix, looks like it improved sequentially. You had mentioned, I think that your annual mix was stable. Was curious, was there a mix impact in the 4Q sequential move as you went from 3Q to 4Q and on the other side, volumes were weaker than we expected and so I’m kind of curious, if we should expect volumes to be a headwind again to sales as we head into 1Q ’23?

Michael Miller: Hi, this is Michael Miller. Good morning, everybody. Thanks for being on the call. So on the price mix question, we did have certainly more than we’ve had through the rest of –through the first three quarters of this year, a mixed benefit, and that mixed benefit was a combination of both higher growth rates from our regional and local builders and also higher growth rates of spray foam, which has a higher average job cost than fiber cost does. So we did see some mix benefit, but most of the price mix improvement in the quarter and through the year was price driven. On the volume side, we will always value price over volume. but I would say that the quarterly comparison of our volume metric disclosures compared to completions is not always going to perfectly align.

The way that we sort of look at the volume growth is on a full year basis, volumes grew 5.5%, whereas completions grew about 3.7%. So we feel good about where we are in terms of the number of jobs that we’re doing, but as I said, we will always value price over volume.

Stephen Kim: Okay. That’s fine. Helpful for that, helpful. Thanks for that, and so, the second question I had related to — relates to some comments you made last quarter, I think you said that you would be quick to take any necessary staffing actions in order to protect — in order to protect your incremental margin. So, was curious as to whether any of those kinds of actions was a contributor to the strong incrementals this quarter, or was it really just — or was that not really something that you found necessary to do?

Jeffrey Edwards: Wasn’t necessarily — this. Jeff Edwards by the way. So no, that would not even close. So still busy, still healthy environment for us out there. Sales grew 20% during the quarter, so.

Stephen Kim: Right. Great. No, that’s — it’s obviously great to hear and then last one for me is just that the builders have recently been talking somewhat excitedly about a pretty significant pickup in January and continuing into February. The Toll Brothers, folks just basically said that their most recent week was the strongest they’ve seen all year, despite the start — the pick-up back up in rates, and so I was just curious if you could talk a little bit about to what degree that is, if you’re sensing any of that in your conversations and negotiations with your builder customers?

Jeffrey Edwards: Yeah, we’re — this is Jeff again. We’re hearing the same kind of positive news, which is certainly good news and so, as we all know, we’re working through a backlog, but at the same time to the extent that there are as what has been referred to as green shoots by a numbers of you folks and others, and hearing it directly from builders. I think we feel certainly a lot more positive about it than you would have based on their commentary within the last 45 days. Obviously, it’s still very early in the year, very early in the spring summer season, but the very constructive commentary that we’re hearing, particularly from the private builders is very encouraging.

Stephen Kim: Okay, that’s really helpful. Thanks so much, guys.

Operator: Our next question is from Michael Rehaut with JPMorgan. Please proceed.

Michael Rehaut: Hi, thanks, it’s my Michael Rehaut. Appreciated. First, I’d love to hear your thoughts kind of more broadly on 2023. Obviously, there’s a lot of uncertainties still out there and movement, but, obviously, we’ve seen the sharp declines in housing starts over the last several months, and any kind of broad thoughts in terms of how you’re thinking about the market, from a completion standpoint in 2023, how it might impact your business would be helpful?

Michael Miller: This is Michael. No doubt. Everyone on this call knows that permits and starts have been down, pretty significantly over the past couple of months. We do believe that, particularly as the comps get easier, there will be some relative stabilization there. As we all also know that the homes under construction to the backlog, both single family continues to be strong on a relative basis. Multifamily is that, a very high level. Clearly, we have to get the multifamily completions number growing and bring that backlog down because it’s not a very healthy situation where it is right now, but we believe that over the course of ’23, there will be improvement on the multifamily completions front, which is important for us because we really made a concerted effort to grow our market share on the multifamily side, which is now 13% of our total revenue.

So, we feel very good about the opportunity there in ’23. On the single family side, the backlog is starting to slowly come down, given the permits and starts environment and the order numbers that the public builders have disclosed. There should be for the industry some impact for that as we go into the back half of the second quarter as well as probably the third quarter of this year but as we were talking in the in the previous question to the extent that we have a solid spring selling season, which there are a lot of indications that that’ll be the case, the cadence of completions versus permits and starts to be such that you’re not going to see, assuming a strong spring selling season, you’re not going to see that much of a delta or decline in our opinion on single family completions because builders in many conversations that we’ve had with both public and private builders, they are getting ready for this pickup in order and sales activity so that they can quickly start getting homestead.

A lot of the front end trades are not nearly as busy right now and I think they’re everyone is ready to go that they unlike, say during that I’m sorry for maybe to go in a little bit deep on your question, but unlike say the great recession, which lasted as long as it did and you have significant contraction in capacity within the industry, we are not seeing that happen right now. What we’re seeing is that the industry itself is basically staying size up because we’re all anticipating that this slowdown or pause is not going to be extended and that as we go through the rest of this year, we’ll get back to a more normal cadence.