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

Installed Building Products, Inc. (NYSE:IBP) Q4 2023 Earnings Call Transcript February 22, 2024

Installed Building Products, Inc. beats earnings expectations. Reported EPS is $2.72, expectations were $2.53. IBP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Darren Hicks: Good morning, and welcome to Installed Building Products Fourth 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 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 improved both sales and profitability in the fourth quarter, helping IBP achieve another year of record financial results including record revenue, net income and adjusted EBITDA. I’m proud of IBP’s performance in 2023, as installation sales growth in our multifamily and commercial end markets more than offset softer single-family sales growth throughout the year. Our installation teams worked efficiently to optimize the value we provide to our customers which with each completed job, driving record annual net profit and adjusted EBITDA margins in 2023.

The talent and commitment of our employees combined with the strength of our business model enabled the company to once again reach new heights in 2023. Throughout 2023, our acquisitions contributed positively to our financial results. We invested approximately $60 million in acquisitions while returning nearly $70 million to shareholders through dividends and share repurchases. I’m pleased to report that for the 2024 first quarter, our Board of Directors has approved an increase to our regular quarterly cash dividend by 6% and declared an annual variable dividend of $1.60 per share, representing a $0.70 per share increase over last year’s variable dividend. On February 12, 2024, we celebrated the 10th anniversary of our public offering by ringing the closing bell at the New York Stock Exchange, since our IPO in 2014, net revenue, net income and adjusted EBITDA have grown at compound annual growth rates of 21%, 37% and 31%, respectively.

During this period, we completed almost – almost 90 acquisitions, expanding our footprint across the United States in diversifying our revenue to additional end markets and product categories. As a result, IBP has transformed from a regional installer of insulation to one of the largest installer of building products in the country. The success of our growth strategies combined with our disciplined approach to capital allocation has created significant value for our shareholders. The credit for our accomplishments goes to the hard-working men and women across our roughly 250 branches throughout the United States and those who support them from our office in Columbus, Ohio. To everyone at IBP, thank you. As we continue to focus on profitable growth, we remain committed to doing the right thing for our employees, customers, communities and shareholders.

During 2023, we acquired eight companies with combined annual revenue of approximately $75 million, further expanding our product offering and geographic presence. 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 with any given calendar year. During the 2023 fourth quarter, we completed two acquisitions, including a North Dakota-based installer of fiberglass and spray foam insulation in multifamily, residential and commercial customers, with annual revenue of approximately $2 million and a Florida-based installer of diverse mix of building products to new residential construction projects in the Orlando market with annual revenue of approximately $16.5 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 relative to historical averages. Additionally, an elevated volume of multi-family units under construction continue to be supported by our installation business. We believe, we are well-positioned for another year of strong operational and financial performance in 2024, 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 has favorable opportunities ahead, including demand driven by 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 US housing market. I’m proud of our continued success and excited by the prospects ahead for IBP in the broader insulation and other product installation business. So with this overview, I’d like to turn the call over to Michael to provide more detail on our fourth quarter financial results.

Michael Miller: Thank you, Jeff, and good morning everyone. Consolidated net revenue for the fourth quarter increased 5% to $721 million compared to $687 million for the same period last year. The increase in sales during the quarter was driven by higher multifamily and commercial sales, which was partially offset by softer single-family sales within our Installation segment. As we evaluate our performance on a year-over-year basis, the exceptional growth our company experienced in 2022 set difficult comparisons this past year. Also, rising interest rates and the decrease in single-family housing units under construction were headwinds to our revenue opportunity in 2023. According to the US Census Bureau, in the fourth quarter of 2023, the housing units under construction, the sales pipeline for our installation services showed single-family units were down 12% year over year, while our single-family same-branch sales were down 7%.

And the multi-family end market, industry units under construction were up 8%, while our multifamily same-branch sales were up approximately 30%. We are pleased with our performance relative to the market opportunity. Our focus on efficiency and job optimization led us to achieve a record fourth quarter profitability, as measured by adjusted gross profit margin, adjusted net income margin and adjusted EBITDA margin. As the inflationary environment began to normalize in 2023, our ability to compete based on service and provide value to our customers, helped to support a 240 basis point improvement in adjusted gross profit margin at 34.1% in the fourth quarter relative to the same period last year. Adjusted selling and administrative expense, as a percent of fourth quarter sales was up 160 basis points to 18.3%, due primarily to higher insurance and variable compensation related to higher gross profit and EBITDA performance from the prior year period.

Despite a higher adjusted selling and administrative expense ratio in the fourth quarter, adjusted net income margin improved to 10.7% from 10.1% in the prior-year period. Adjusted EBITDA for the 2023 fourth quarter increased 11% to a fourth quarter record of $128 million and adjusted EBITDA margin reached a fourth quarter record of 17.8% compared to 16.8% for the same period last year. We continue to target full year long-term same-branch incremental adjusted EBITDA margins in the range of 20% to 25%. For the 2023 full year, total same-branch incremental adjusted EBITDA margins were substantially above our target range. Although we do not provide comprehensive financial guidance based on recent acquisitions, we expect first quarter 2024 amortization expense of approximately $10.5 million and full year 2024 expense of approximately $40.9 million.

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. Now let’s look at our liquidity position balance sheet and capital requirements in more detail. For the 12 months ended December 31, 2023, we generated $340 million in cash flow from operations, an all-time annual record compared to $278 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income and effective management of working capital. During the fourth quarter, interest rates increased year over year. But through interest rate swap agreements we have fixed the interest rate on $400 million of our existing variable-rate debt until December 2028, limiting our interest rate exposure.

We have no significant debt maturities until 2028. Our fourth quarter net interest expense decreased to $7.8 million from $9.9 million in the prior-year period due to the term loan repricing in August 2023 and the higher rate of interest we earned on cash and cash equivalents invested throughout the quarter. At December 31, 2023, we had a net debt to adjusted annual EBITDA leverage ratio of one time compared to 1.5 times at December 31, 2022, which is well-below our stated target of two times. At December 31, 2023, we had $337 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the year ended December 31, 2023 were approximately $65 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 goal of acquiring $100 million of annual revenue each year is unchanged. IBP’s Board of Directors approved the first quarter dividend of $0.35 per share, which is payable on March 31, 2024 to stockholders of record on March 15, 2024. 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 $1.60 per share annual variable dividend of $0.70 per share increase over the variable dividend we paid last year. The 2024 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.

The variable dividend will be paid concurrent with the regular quarterly dividend on March 31, 2024 to stockholders of record on March 15, 2024. We are committed to continuing to grow the company while returning excess capital to shareholders through our dividend policy and opportunistic share repurchases. The Board of Directors authorized a new stock buyback program, which expands our repurchase capability to $300 million of our outstanding common stock, up from $200 million in the previous program. The new authorization replaces the previous program and is in effect through March 1, 2025. 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 the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Susan Maklari: Good morning, everyone, and congrats on a great quarter.

Jeff Edwards: Good morning. Thanks, Sue.

Susan Maklari: My first question is if we think about 2023, you saw some really nice price mix that came into the business despite all the headwinds that you had in there. As you think about the outlook for 2024, how you’re thinking about the setup there? Can you talk just generally to the different moving pieces and any thoughts on price specifically as the manufacturers perhaps look to offset some ongoing inflation?

Michael Miller: So this is Michael. Yeah. Our view really hasn’t changed very much as it relates to price mix going into 2024. If you take out the high inflationary period that we experienced in 2022. And really that was partially in 2021, 2022 and still catching up a little bit coming into 2023. We really have consistently run price mix and sort of a mid to low single-digit pace. And that’s consistent with our expectation of sort of a fairly benign inflationary environment across the products that we install. So there’s nothing that we see right now that would change that. I mean, material particularly fiberglass continues to be tight. And we believe that as we progress through the year in the back half of the year, the material might loosen up a little bit. But that also depends a lot on what happens with the single-family market which we currently feel very constructive about.

Jeff Edwards: Well, it’ll loosen up as a relative. As you know it’s we’re still not without even as recently as the third and fourth quarter last year, at times having to you know kind of go fend for ourselves based on how tight the market is. So it’s healthy in that regard.

Michael Miller: Yeah. The market feels very comfortable in terms of — I mean, things are tight things you know there’s always unique challenges. But given the backdrop that we see in single-family and what we’re hearing from not just the fiberglass suppliers but all of our suppliers we’re very encouraged.

Susan Maklari: Okay. All right. That’s helpful color. And then on turning to the incremental margin was obviously really impressive on last year as well, as you think about the operating conditions and the setup over not just even 2024, but just looking further out, what would you need to see to give you confidence to raise that range or to change where you think the business can fundamentally operate? And how do you think about the different puts and takes to that?

Michael Miller: Well, obviously, we performed well above our targeted incremental margins on this year. There was definitely some, I don’t want to say unique, but factors that contributed to that. I mean, if you look on an annual basis, over the course of the past couple of years, I mean both 2022 and 2023 were very solid incremental margin on same-branch incremental margin years for us and we feel very good going into 2024. And obviously, we don’t provide guidance, but we’re feeling good that we will continue to have above the top end of the range incremental margins when we look back this time next year.

Susan Maklari: Okay. All right. Thank you and good luck with everything.

Michael Miller: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Stephen Kim: Yeah. Thanks very much guys. Good results. I wanted to ask you a couple of longer-term questions if I could. On the commercial business was very strong had a nice year of growth here. You talked about a management change last quarter that you’d made there? And was wondering if you could give us a little bit of an update on that? And in particular how that positions the commercial side of your business for growth, as we look ahead and over the next couple of years, what we — is what we saw in 2023 kind of representative or is that sort of what kind of a one-off kind of a year that’s about that’s the kind of color I was looking for?

Michael Miller: Sure. Stephen, this is Michael. Thanks for that question. And we are extremely proud of what was accomplished in the heavy commercial business, particularly the heavy commercial business not just the overall commercial business. And this year, it really was a year to sort of stabilize that business and start bringing it back up to acceptable margin levels. I would say that it’s still not and at company margins, and we believe there’s still room for improvement. But just to give you a sense of the benefit we received from the heavy commercial business in the year and in the quarter, they actually added roughly 100 basis points in gross margin improvement to the overall business. So that while news is that the bad news is they came from such a low point [indiscernible] but we do not think that that’s transitory and that’s sustainable.

So that benefit will remain, we believe as we continue to go through 2024. Now we will not, we do not expect that we’ll see a strong sales growth and I think in the commercial business, particularly in heavy commercial business in 2024. But what we’re really managing towards in that business is maximum – continuing to maximize profitability and getting the margins up to closer to company averages and we would much rather have that than sales.

Jeff Edwards: This is Jeff. We made I mean just to be clear, we made a change in the leadership of that business line, not last year but the prior year. But these are long duration contracts and a lot of cases, at some of which we were suffering through kind of the hyperinflation in bid wouldn’t that wouldn’t allow us to improve kind of our pricing in that regard but it’s also just a change in the mentality to Michael’s point in terms of driving for profitability as opposed to sales, that the fact, that it’s been fixed doesn’t mean we’ll crawl back in our show as a matter of fact go. And I think we could go back to growing the business.