Installed Building Products, Inc.

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. 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. 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. Earlier today, we issued a press release on our financial results, 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 federal securities laws. 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. Please refer to our SEC filings for cautionary statements and risk factors. We undertake 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 refers to certain non-GAAP and adjusted financial measures on this call. 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. 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.

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. Our fourth quarter results capped off another record year of revenue and profitability for IVP, supported by organic growth across our residential and markets. Our record financial performance in 2024 is a reflection of the talent, commitment, and focus of IBP's employees across the country. We continue to invest in attractive growth opportunities and return capital to shareholders with strong operating cash flow generated in 2024. During the year, we invested approximately $87 million in acquisitions and allocated a combined $230 million toward dividends and share repurchases. 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. 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. The success of our growth strategies, combined with our disciplined approach to capital allocation, have created significant value for our shareholders. 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 IBP, thank you. 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. 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. Additionally, our deep customer relationships, local market knowledge, and the ability to align our pricing with the value we offer our customers were key to our 2024 single-family sales results. our multifamily installation sales growth remained resilient during 24 with apparent operational benefits of our centralized service-oriented model combined with complimentary product diversification efforts. On the 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. On the same branch basis, 2024 commercial sales in our installation segment improved modestly from the prior year period. 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. During 2024, we continued to fill out our geographic footprint through the acquisition of nine businesses with combined annual revenue of over $100 million. 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, 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. Although deal timing 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. 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. 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. 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. 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 the broader installation and other building product installation business. So with this overview, I'd like to turn the call over to Michael to provide more detail on our fourth quarter and full year financial results.

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the fourth quarter increased 4% to a fourth quarter record of $750 million, compared to $721 million for the same period last year. The increase in sales during the quarter reflected growth across all end markets and sales from IBP's recent acquisitions. Same-brand sales growth was 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. Price mix growth during the fourth quarter offset a less than 1% decrease in job volumes relative to the fourth quarter last year. With respect to profit margins in the fourth quarter, our business achieved adjusted gross margin of 33.6%, down from 34.1% in the prior year period. 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. Adjusted selling and administrative expense as a percent of fourth quarter sales was 18.1%, down from 18.3% in the prior year period, due to lower administrative expenses as a percent of 2024 fourth quarter sales. Adjusted EBITDA for the 2024 fourth quarter increased to a fourth quarter record of $132 million, reflecting an adjusted EBITDA margin of 17.6%. For the 12 months ending December 31, 2024, same-branch incremental EBITDA margins were approximately 14%. 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%. Adjusted net income increased to $81 million, or $2.88 per diluted share. Although we do not provide comprehensive financial guidance, 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. Also, we expect an effective tax rate of 25 to 27% for the full year ending December 31st, 2025. Now, let's look at our liquidity position, balance sheet, and capital requirements in more detail. For the 12 months ended December 31st, 2024, we generated $340 million in cash flow from operations in line with the prior year period. 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. The term loan repricing has more favorable financial terms compared to our previous term loans. and will save the company over $1 million in estimated cash interest expense annually. The term loan expires in March 2031, and we have no significant debt maturities until 2028. At December 31st, 2024, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.08 times compared to 1.01 times at December 31st, 2023. which is well below our stated target of two times. With our strong liquidity position and modest financial leverage, we continue to prioritize expanding the business through acquisition and returning capital to shareholders. 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. The Board of Directors authorized a new stock buyback program, which expands our share repurchase capacity to $500 million, up from $300 million in the previous program. The new authorization replaces the previous program and is in effect through March 1st, 2026. IBP's Board of Directors approved the first quarter dividend of 37 cents per share, which is payable on March 31st, 2025, to stockholders of record on March 15th, 2025. 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 $1.70 per share annual variable dividend, which is a 6% increase over the variable dividend we paid last year. 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. The variable dividend will be paid concurrent with the regular quarterly dividend on March 31st, 2025 to stockholders of record on March 15th, 2025. 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.

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.

Thank you. At this time, we will be conducting a question and answer session. 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. We ask that analysts limit themselves to one question and a follow up so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Our first question comes from Keith Hughes with True Securities. Please proceed with your question.

Thank you. As you look into the new year, what are you expecting in terms of multi-family, single-family work? What's kind of the IVP view of those markets?

Keith, this is Michael. So our perspective is fairly consistent with what it's been for 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. That being said, on the multifamily front, I think we can all acknowledge that the units under construction currently today, so in essence the backlog, continues to still be highly elevated relative to the current starts environment and we believe that it will take at least six months at the current pace of Starts and completions or that multifamily units under construction to come in line and just from a macro perspective We believe that's a 20 to 25 percent decline in the units under construction now and Again, I have to reemphasize that we have performed better than the overall market. We believe we will continue to perform better than the overall market. We continue to actually, within the multifamily segment for us, 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. So, again, we think it's going to be challenging for the first half, probably going a little bit into the third quarter. of, uh, of this year, but we do expect to perform better than the relative overall market on the single family side. You know, I would say that we like, you know, it seems like other companies and investors are certainly less optimistic about, um, you know, the growth rates for single family in 2025, as we all know, we've gotten off to a fairly slow spring selling season and, uh, There is a lot of inventory, spec inventory on the ground, something we're all aware of. You know, as we look over the entire year, I mean, if we get low to mid, I would say probably low single family starts growth this year, you know, we think that's a good case scenario, quite frankly. You know, the public builders that we track, You know, their average estimated sales increase for the year, these are the ones that are our customers, and then we weighted for their sales with us, would imply about a 3% full year sales increase. 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. relative to last year, you know, the starts 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 in the first half and then picking up in the second half. And then on a full year basis, and again, I'm talking about the industry, not necessarily us, on the full year basis, maybe we get through the year flat to up a couple of points. So that's sort of how we're looking at the year. Hopefully that answered your question.

Yeah, it was 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 at the beginning of the year, on what price mix is going to do in your business?

Again, I think everybody's well aware of this, but clearly we're in a very benign inflationary environment. at least right at the moment. 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 carryover price-mix benefits from prior periods. It is a 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. Sure.

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

Yeah, thanks a lot, guys.

Appreciate the color so far. Just following up on Keith's question about multifam, just was curious about if you could elaborate a little bit more on the growth plans that you have. I know that CQ plays an important role in that multifamily performance, and my understanding is that CQ is 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.

Stephen, hi, this is Jeff. As you well know, because you were just with those guys, we think a lot about, obviously very highly about CQ's ability to continue to penetrate At this point in time, there's plenty of white space as it relates to our branch locations where they're not participating. 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. Obviously, there's a lot of opportunity there, but again, we're really just kind of We're certainly not in the infancy, but we're probably a toddler or, you know, not quite a teen in terms of our kind of penetration into the IVP footprint. Now, that doesn't mean we aren't already, you know, kind of matured on model family at certain locations and certain branches, but there's plenty of geography that we continue to grow and work relationships.

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, let's say, division or initiative such that it could expand your multifamily presence by, let's say, 50% over a period of years? Is there any kind of general sort of target that you have for that business?

It's clearly not 50%, but it's probably 10 or more major markets which is not insignificant when you think about that, even as it relates to our overall multifamily volume. Normally because of the share that they end up taking and the penetrations they do make when they enter one of these new markets.

Yeah, I mean, we are, as I think you know and as we've talked about a lot, our multifamily sales are roughly 16% of total revenue. And, you know, there's definitely significant opportunity for them, as Jeff was just saying, to expand into other big markets. But I think one of the most – 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. 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.

Okay, great. Helpful. And then secondly, your SG&A 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, I know everybody kind of glumps selling expense and G&A expense together, but we kind of think of them very separately. So because selling expense really just tracks 4.7 to 4.8% of revenue. So the G&A side, actually, we felt pretty good about getting a little bit more leverage than not only last year, but last quarter. And, you know, we expect that G&A, as we talked to the last quarter, you know, it generally speaking rises with overall inflation, not necessarily the inflation rate. of the products that we install, so that we would expect to see that G&A, 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 a quarter. And that, in essence, you know, so fourth quarter G&A flows through almost directly to first quarter G&A. even though you end up obviously having lower seasonally sales in the first quarter of the year.

Our next question comes from Michael with JP Morgan. Please proceed with your question.

Hi, good morning. This is Alex Isaac on for Mike. Thanks for taking my question and congrats on the quarter. Regarding M&A, how would you characterize the pipeline and opportunities set in front of you today versus six to 12 months ago?

I'd say.

I mean, there continues to be plenty of opportunities in that regard. Pipeline, I think, is as good as it's been. You know, a lot of times people assume, too, when things get a little rockier or the outlook might not be as good, that that somehow generates more opportunity. That's not really been our experience. You know, most of the businesses that we're buying are typically mom-and-pop-owned businesses. which could be a decent-sized business, but, you know, a privately owned private individual selling the business, and typically they are for sale when their, you know, situation in life makes them want to be for sale, i.e. retirement.

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 25?

Yeah. As I'm sure you know, there was an announced price increase by three of the four manufacturers that did not meet well and sit well with the market. Clearly, I think this is out there and known, too, that there's supplies a little more free-flowing than it's been historically. As we know and we're all seeing, the builders aren't feeling frustrated. you know, as happy as they maybe should be at this time of the year. So, I mean, 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 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 does today or did in the last 45 days.

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, 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 that we take from the manufacturers. Sometimes it's a little delayed, but ultimately we always get there.

Our next question comes from Susan McClary with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning, Sue.

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. 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?

Yeah, Sue, thanks for asking that question. So just sort of the level set, the other segment that we disclose is our are our distribution and manufacturing operations. It's still a relatively small component, but it structurally has lower gross margins than the install business. It has very good OPEX leverage, but it has lower gross margins. Just in general, those gross margins can be 700 to 800 basis points lower than the install gross margin. So that other segment grew at sort of a low team's rate in the quarter, whereas the install segment grew around 4% or so. So because you had a higher rate of growth in that lower gross margin business, it weighed on overall gross margins by about 30 to 40 basis points. Fortunately, we did have, as you pointed out, the complementary products or the other products that we install, like shower doors, showering mirrors, and gutters, they actually grew at a rate faster than insulation, overall insulation sales, so that's spray foam and fiberglass, and they had a fairly solid improvement in gross margin. So that was an offset to the other segment sales growth. So in essence, to kind of fundamentally answer your question, and as I think everybody on the call knows this, our highest margin products are insulation, right? And when you see higher rates of growth in lower margin products, right, that obviously impacts the gross margin. But then, fortunately, we had the offsetting benefits of improving gross margin in the other products. And I 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.

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 today 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?

Yeah, Sue, that's a great question. I would say, first, 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. 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 in the third quarter, but as I think has been well discussed, clearly a lot of the production builders did towards the back half of the year and then even going into this year kind of slow down their pace of starts and construction because of the softness and the, you know, kind of spec inventory on the ground. So, you know, when I think about kind of surprised 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. 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 than last year. And just as a reference point, average sales per day is anywhere between 10 to 12 million dollars so that will negatively impact you know first quarter revenue relative to last year we estimate that in January and February from the fires and the storms that it negatively impacted revenue of about 20 million now what we don't know is is how much of that we will make up in the month of March. As you know, we will work Saturdays to make up for lost time. But where we're uncertain as to how much we're going to be able to make up is that many construction sites across a very large component of new home construction in 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. 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 work itself out or normalize more as we get through even a little bit of the second quarter of 25, if that makes any sense.

Our next question comes from Mike Dahl with RBC Capital Markets. Please proceed with your question.

Hi, this is Chris from Mike. I just wanted to get your guys' thoughts on competitive dynamics and what you're currently seeing today. One of your competitors cited some weaker markets where they're seeing price concessions. Is that something that you're seeing at all, and what's your expectation this year around competition and any risk of price givebacks? Should we see builders be more aggressive with supplier conversations?

I mean, of course, in a not as robust, a little more of a slack environment in that regard, it's a little tougher to maintain pricing than it is otherwise. Having done this for 30 years, it's not new, I think, to anybody and to most everybody on the team. So you do what you 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.

usually works out okay 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 and And let's just be clear. I mean, the environment is, it's just not growing at a rate that we all expected. 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, you know, tampered down or whatever, this is not a dire situation by any means, right? I mean, it's still a healthy environment. You know, we still feel extremely constructive about the medium and long-term demand for new construction in this country.

Thirty 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 in the beginning, and then price is completely out the window thereafter. And it's never about price. in the room from a pricing perspective even have the conversation but after that it's everything else you do as a as a contractor or a subcontractor that gets you the job wins you the job and keeps the job yeah understood appreciate that

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 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?

Not significant, no. But, I mean, clearly when you lose, you know, if you're in a negative sales environment, right, that creates, particularly if it's a shorter-term, say, six-month negative sales environment, your decrementals are larger than your incrementals because you're not adjusting your – you know, lagging variable costs, which are primarily general administrative costs. So, you know, that $105 to $110 million of G&A 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 volumes, right? 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, call it 20%, 25%, and it's going to take at least 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.

Our next question comes from Phil with Jefferies. Please proceed with your question.

Hey, guys. 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 in my whole appreciation, the G&A 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 competitor is calling 100 basis points of margin compression, you know, a combination of carrying more labor costs, maybe pockets of competition. Like, how do you kind of see EBITDA margins kind of playing out for you over the course of the year?

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 and our expectation that the softness is not here to stay, so to speak, that we will, you know, hopefully we'll see in the back half, particularly in single family and the stabilization on multifamily, you know, things improving. You know, 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. It does have a tendency for, you know, hopefully a short period of time to, you know, put pressure on EBITDA margins. You know, it's just the reality of the numbers and the situation. But we as a company are working very hard, and the incentive systems for – Jeff Edwards, all the way down to every single branch manager, our incentives are structured such that we want to improve EBITDA. That's really the primary focus of the company, and we're going to be working very hard to do that.

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 EBITDA? you know, buying back your stock, returning cash back to shareholders. And it sounds like pipeline's still pretty good. Are you seeing anything that's larger out there, Jeff? And is there any appetite for you to kind of pivot a little bit from your current wheelhouse where you've been kind of pursuing these attractive bolt-ons, but maybe looking at something that's a little different, maybe something that's a little larger?

I mean, we'll always favor M&A over anything else. 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 not a one-trick pony in that regard. So we can do kind of pieces and parts of everything as it relates to capital allocation. We are seeing some larger deals. I'd say they're currently in the wheelhouse. We're not at all adverse to the idea of necessarily getting out of the wheelhouse and looking at, you know, maybe some adjacent deals. maybe not industries, but adjacencies in terms of acquisitions, they would need to make. I don't think they're going to be far afield and crazy, but they would need to have some strategic relationship to kind of our core business.

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... 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.

Our next question comes from Trey Grooms of Stevenson. Please proceed with your question.

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 that were kind of expected to continue into this quarter. Just wondering what you're seeing on that side and then giving your outlook for sort of better demand, I suppose, in the second half, just to generalize it a bit. Should we expect positive price costs in the second half of this year? Thanks.

So, yeah, I'm glad you asked the question about spray film 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. What I would say is that that is kind of trending through the first quarter, but pricing there is starting to stabilize. and because there have been price increases, manufactured price increases. So you're seeing stabilization come there, and we would expect to see, you know, spray foam not creating sort of a negative gross margin 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 single-family market does, as I think there are a lot of expectations around this, 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.

Okay, that's super helpful. And then lastly, just on cost, 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?

I would say that, you know, and I'll break it down again from sort of an income statement perspective. If you look at cost of goods sold, which is material, and the install labor, you know, it's pretty benign. And... you know, there are, you know, puts and takes to that, but it's a, it's a, you know, stable inflationary environment. As I said to an answer in an earlier call, you know, 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, you know, pretty decent historical average. And then G and A, A little bit disconnected from cost of goods sold in this perspective because, you know, those costs tend to rise with overall inflation, as we were saying earlier. So, you know, if we look on a full-year basis to have G&A go up 3% to 5% on an annual basis, that would make sense. However, that would be before we take any expense management 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.

Our next question comes from Ken Zinner with KeyBank Capital Markets. Please proceed with your question.

Good morning, everybody. Morning, Ken.

Yeah, Michael, for some reason, it seems like you guys drank a disclosure serum this morning. So I think everybody appreciates that. 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, it could pass in six months. If you could give us kind of like some concept around why you have six months. And while you're doing that, 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.

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. And one of the ways that we contextualize or look at that is to look at multifamily units under construction relative to the current start space and to normalize the units under construction relative to the current starts level, which, by the way, we do believe has bottomed out. And we believe that, and this is counter to, I think, what most other people believe, we believe that the current rate of call it $3.30, $3.50 or so is probably right. And that given the current demand for housing should probably, will bump up to a higher level as we go towards the back of half of the year. Again, that's a little bit counter to what most people think. So if you look at, though, the units under construction, again, relative to the current completions rate and the current starts rate, we estimate that assuming completions stay at their current level, starts stay at their current level, that it would take roughly six months or so to normalize the units under construction and that would mean a decline in the units under construction, and therefore the macro opportunity for the industry to come down 20% plus. And then in terms of, I think the second part of your question was really going more towards single family versus multifamily. Correct. And I would say that, yes, I mean, Texas and Florida are a little weak right now. The Midwest and Northeast, are surprisingly strong on a relative basis. Although, as we all know, I mean, Texas and Florida are 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 from a revenue perspective. Our team there does an incredible job. And, you know, while we might see softness in both those, you know, big markets for us, long-term, they are great housing markets.

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, 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.

No, it's single family.

So, okay. And then, I appreciate that. 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. Spring selling season is slow. Are they telling you just to come back like in a month or six weeks to see where, you know, if those homes are selling and what their future bid contracts will look like? Because it's, it's kind of an air pocket, right? I mean, the volume is going to be fine over time. It's just, it's been clearing out this inventory that they think is good amid first time buyers wanting quick move at homes. Yep. that has some risk to it. I mean, it's that dynamic of the bad markets that people are trying to understand. Thank you very much.

Yeah. I'm sorry, Kimber. 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 where they might have too much inventory given the current demand environment. So it really is, um, I don't think you can just say a broad brush and say, well, Dallas is over inventory and, you know, 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.

Our next question comes from Kirk Enger with DA Davidson. Please proceed with your question.

Great, thanks, and good morning. 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 dragon here in 2024. Would you expect the margin impact to be kind of similar or maybe even magnified a little bit? Thank you.

This is Jeff. Actually, I think we're making really pretty good measured progress in that regard. It obviously takes time. Certainly don't expect it to be margin drag. Part of the effort was to make sure that we were not in times of tight supply buying as much out of distribution and a knee-jerk reaction. I think we've been successful in that regard. It certainly helped that supply has loosened a bit and that there's not a problem with not being able to get this SKU or that SKU. So again, we continue to kind of leverage the logistics 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 business also. So I actually feel really good about that progress.

Yeah, just if this is not a 100% correlation, but 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. 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.

Got it. And maybe just to kind of follow up there in terms of 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 timeframe?

I think the three to five is the right answer.

Okay. The only thing that might make it extend is if for some reason the markets continue to remain 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

There are no further questions at this time. I would now like to turn the floor back over to Jeff Edwards for closing comments.

I just want to thank all of you for your questions. I look forward to our next quarterly call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.