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 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 install 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 filing 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 gap and adjusted financial measures on this call. You can find a reconciliation of such non gap measures to the nearest gap 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 nice longer 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 end markets. Our record financial performance in 2024 is a reflection of the talent, commitment and focus of IVP'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 the 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 37 cents per share in $1.70 per share respectively. These actions reflect the board's confidence in our financial position and ability to support the 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 IVP, 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 multi family installation sales growth remained resilient during 24 with the parent operational benefits of our centralized service oriented model. Combined with complementary product diversification efforts on a same branch basis, multi family sales and our installation segment increased over 6% in 2024. We continue to see strategic growth opportunities to geographic and product expansion in our multi family end market long term. On a 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 prioritize 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 to 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 installation related accessories to residential 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, multi family and commercial installer of fiberglass and spray foam installation with annual revenue of over $12 million. Although deal timing is hard to predict, our current outlook for acquisition opportunities in 2025 is strong and we expect to acquire at least $100 million of annual revenue this year. Based on the US 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 4th quarter and full year financial results.

Thank you, Jeff and good morning everyone. Consolidated net revenue for the 4th quarter increased 4% to a 4th 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 IDP's recent acquisition. Same brand sales growth is up 1% for the 4th quarter. Although the components behind our price mix and volume disclosure have several moving parts that are difficult to forecast to quantify, we continue to experience top line improvement from a .2% increase in price mix during the 4th quarter. Price mix growth during the 4th quarter offset a less than 1% decrease in job volumes relative to the 4th quarter last year. With respect to profit margins in the 4th quarter, our business achieved adjusted gross margin of .6% down from .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 4th quarter sales was .1% down from .3% in the prior year period due to lower administrative expenses as a percent of 2024 4th quarter sales. Adjusted EBITDA for the 2024 4th quarter increased to a 4th quarter record of $132 million, reflecting an adjusted EBITDA margin of 17.6%. For the 12 months ending December 31st, 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 1st 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 4th 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 loan 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 2 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 4th 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 a $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 one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two 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 handsets before pressing the star key. One moment, please, while we poll for questions. Our first question comes from Keith Hughes with the Truze 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 the IBP view of those markets?

Keith,

this is Michael.

So, you know, 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 multi-family side, that we will continue to outperform the market opportunity. That being said, on the multi-family 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 for that multi-family units under construction to come in line. And just from a macro perspective, we believe that's a 20 to 25% decline in the units under construction. Now, again, I have to re-emphasize that we have performed better than the overall market. We believe we will continue to perform better than the overall market. We continue to actually, within the multi-family segment for us, benefit, continue to benefit from price mix, which has been very encouraging and has been indicative of an incredible job that our field team has done there. So, again, we think it's going to be challenging for the first half, probably going a little bit into the third quarter of this year, but we do expect to perform better than the relative overall market. On the single-family side, I would say that we like, it seems like other companies and investors are certainly less optimistic about the growth rates for single-family in 2025. As we all know, we've gotten off to a fairly slow spring selling season, and there is a lot of inventory, spec inventory on the ground, something we're all aware of. As we look over the entire year, if we get low to mid, I would say probably low single-family starts growth this year, we think that's a good case scenario, quite frankly. The public builders that we track, their average estimated sales increase for the year, these are the ones that are our customers and that we waited for their sales with us, would imply about a 3% full year sales increase. That seems like, consistent with what a lot of people's expectations are. I would say, though, that starts comps are difficult in the first half of this year relative to last year. The start stumbers were weighted more heavily, single-family this is now, were weighted more heavily towards the first half of the year. 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 the full year basis. 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. That's sort of how we're looking at the year. Hopefully that answered your question.

Yeah, it's very comprehensive. There's one other one you kind of mentioned price mix has been a is a positive for a long time. What's your view, at least to begin the year on what price mix is going to do in your business?

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. 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. The price mix benefits that we're seeing are really just carry over price mix benefits from prior periods. 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 touching on following up on Keith's question about multifam. I was curious about if you could elaborate a little bit more on the growth plans to 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 from a mixed perspective into those multifamily jobs that we are getting into. 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 not quite a teen in terms of our kind of competitive. penetration into the IPP footprint. Now, that doesn't mean we aren't already kind of matured on multifamily through at certain locations, certain branches, but there's plenty of geography that can 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 kind of an expansion of that, let's say division or initiative such that it could expand your multifamily presence by like, let's say 50% over a period of years? Is there any kind of like general sort of target that you have for that business?

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 penetration they do make when they enter one of these new markets.

Yeah, I mean, you know, we are, as you, as I think you know, and as we've talked about a lot, I mean, you know, 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 actually was was 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 front this quarter, whether it be incentive comp or some of the other things that have impacted you in prior quarters on the line.

No, quite honestly, I mean, I know everybody kind of glum selling expense and G and a expense together, but we kind of think of them very separately. So, because selling expense really just tracks four to seven, four point seven to four point eight percent of revenue. So, the G and 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 and a, as we talked to the last quarter, you know, it generally speaking rises with overall inflation, not necessarily the inflation. Of the products that we install so that we would expect to see that G and a, you know, increases on so that three to five percent rate in a given year on a full year basis. But, you know, right now, G and a, on a quarterly basis is running a hundred and five to a hundred and ten million dollars. A quarter and that, in essence, you know, so fourth quarter G and a flows through almost directly to first quarter G and 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 my question. That's on the quarter regarding M and a. How would you characterize the pipeline and opportunities set in front of you today versus six to twelve months ago?

I'd say, I mean, our, there's 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 it, most of the businesses that we're buying are typically a mom and pop owned, which could be a decent sized business, but, you know, privately owned private individual selling the business. And typically they are for sale when they're, you know, situation in life makes them want to be for sale, i.e. retirement.

That sounds right. Appreciate the answer. And then also on fiber last supplied. How did you see that trending and what do you see price cost in twenty five?

As you, I'm sure you know, there's, there was an announced price increase that well, by three of the four manufacturers that did not meet well, sit well with the market. And clearly, I think this is out there and known to that there's supplies a little more free flowing than it's been historically. So, you know, as we, as we know, we're all seeing the builders aren't feeling, you know, as happy as they maybe should be at this time of the year. So. I mean, We'll see, right? I guess it's, it's 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 spring increase, but I don't know. I don't know that the market is going to look a lot different in terms of, you know, in terms of that being successful a month or two from now. And it certainly did does today or did in the last forty five 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 manufacturer. Sometimes it's a little delayed, but ultimately

we always get there.

So, I think

that's a good way to look at it. Our next question comes from Susan with Goldman Sachs. Please proceed with your question.

Thank you. Good morning.

Everyone. What

is it? My first question is on the gross margins. Michael, you mentioned in your commentary that there were some headwinds from the distribution and the manufacturing ops, and it sounds like you had some offsets there from your complimentary 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, thanks for asking that question. So just sort of the level set. The other segment that we disclose is our, or our distribution and manufacturing operations. It's still a relatively small component, but it structurally has lower gross margins. Then the install business, it has very good op ex leverage, but it has lower gross margins just in general. Those gross margins can be 7 to 800 basis points lower than the install gross margin. So that other segment grew at sort of a low teams 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 complimentary products or the other products that we install, like shower doors, open your 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 margins. 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 complimentary 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 color and then understanding that the big public builders are under pressure and they're trying to work through that spec inventory. But can you talk a bit about what you're hearing from some of your private builder customers? Some of the activity at the higher end of the market, anything that's different there are notable and anything across the various geographies that that is worth noting, especially maybe with the weather to start this year.

Yeah, that's a great question. I would say 1st. We were a little surprised, but pleased in the 4th quarter that we actually saw better growth out of the regional and local kind of custom builders. That we did other production builders, and I think that's, you know, and I should say surprised. Relative to where we were sitting in the 3rd 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 kind of spec inventory on the ground. So, you know, when I think about it's kind of surprised that was from like 3, 4 months ago, or I guess longer now. But we were, 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 is on the call is aware is that the 1st quarter of this year has 1 less selling day. Then last year, and just as a reference point, our average sales per day is anywhere between 10 to 12Million dollars. So that will negatively impact 1st 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 20Million. Now, what we don't know is how much of that we will make up in the month of March. As you know, we will work Saturdays to make up for lost time. The, 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 the southern part of the country? I mean, basically construction stopped for 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 2nd quarter of 25.

If that makes sense, our

next question comes from Mike doll with RBC capital markets. Please proceed with your question.

Hi, Chris on for Mike. I just want 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 where they're seeing price concessions. Is that something that you're seeing at all? And what's your expectation this year around competition? Any risk of price give back? 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. You know, having done this for 30 years, it's not new, I think, to anybody and to most everybody on the team. So, you know, you do what you got to do. You try to differentiate yourself on service. You typically got long term relationships with your builders. You deal with one another fairly and usually works out OK. Yeah,

I mean, I would say it's always a competitive environment. And, you know, from our perspective, and 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 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. 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. And, 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 Orleans Corning. And he said, it's always 100 percent about price. And that's true to get in the beginning. And then price is completely out the window thereafter. And it's never about price. If you don't understand what I'm saying, you got to be in the room from a pricing perspective, even have the conversation. But after that, it's everything else you do as a contractor or some contractor that gets you the job, wins you

the job

and

keeps the job.

Yeah, I just appreciate that. And then just on on multifamily, are you guys expecting any sort of outsized margin headwinds once those decline start? Impacting your business, I know you guys said it was a price mix tailwind for 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 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 and 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 violence. Right? So you do get have decremental margins associated with that, but I want to reiterate on the multifamily side. Well, we do believe that, you know, units under construction need to come down. You know, call it 2025% and it's going to take at least 6 months, 6 more months of that to to happen. We, we firmly believe as we have demonstrated over the past year, quite frankly, and last 4 quarters that we

will perform better than the overall market.

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

Hey guys, appreciate all the great great color and a pretty choppy environment guys last years margins have been quite steady and certainly stepped up nicely in 2023. In this OK, but not great environment and in my goal appreciate. The G a piece that you called out is this an environment that you can manage even down margins pretty flat or you could see some compression your biggest competitors calling. Call 100 basis points of margin compression combination of. Carrying more labor costs, maybe pockets of competition like how do you kind of see even down 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 hopefully we'll see 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 and 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 put pressure on even down margin. You know, that's it's just the reality of the numbers in the situation, but we, as a company are working very hard and the incentive systems for from Jeff Edwards all the way down to every single branch manager. Our incentives are structured such that we want to improve even. And 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 still pretty strong. How do you kind of balance between them and a versus, you know, buying back your stock, returning cash back to shareholders? And it sounds like pipeline still pretty good. Are you seeing anything that's larger out there? Jeff? And is there any appetite for you? You kind of pivot a little bit from your current wheelhouse where you've been kind of pursuing these attractive bolt on. So maybe looking at something that's a little different, maybe something that's a little larger.

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

And as you know, 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 question to it. If we were going to

do something like that.

Our next question comes from Trey Grooms of Steven Singh. 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 cost in the second half of this year? Thanks.

So, yeah, but you ask the question about spray film, because it was, it continued to be a headwind in the 4th quarter as we had discussed that it would in the in the 3rd quarter. So. It was kind of a negative to gross margin anywhere between 10 to 20 basis points. What I would say is that that is kind of trending through. The 1st 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 in the year. You know, again, we don't provide guidance, 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 us are in the back half accelerates and improves and multifamily stabilizes. We would expect to have better price mix in the 1st half than we do in the 1st half.

Okay, that's that's super helpful. And then lastly, just on costs, 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, 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 it's pretty benign and. You know, there are puts and takes to that, but it's a it's a stable inflationary environment. As I said to an answer an earlier call selling expense consistently runs 4.7 to .8% of revenue. I mean, obviously that changes quarter to quarter, but if you look historically, that's been 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. A G and a go up 3 to 5% on an annual basis. That would make sense. However, that would be for be before we take any expense management. Initiatives into consideration, I will say, well, we're clearly focused on expense expense management, particularly on the G and a side. This year, it takes a while for the benefit of that expense management to flow through. The,

you know.

Our next question comes from Ken center with keeping 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, can pass in 6 months if you could. Give us kind of like some concept around why you have 6 months and while you're doing that. Given your national footprint verse much more regional builders, if you could expand on regional comments that affect that 2nd half expectations, think Florida, right? Central Florida, Southwest Texas. Not that bad Midwest. Very strong.

That's

the 1st question. Thank you.

So, the 6 months comment was really all around multifamily and trying to contextualize what we think is going on in the macro multifamily environment. And 1 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 is called 330 50 or so is probably fight and that given the current demand for housing should probably will bump up to a higher level. As we go towards the back of half of the year again, that's a little bit counter to what most people think. And 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 completion stay. You know, at their current level starts day at their current level. That it would take roughly 6 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 you're the 2nd part of your question was really going. More towards single family versus multi family.

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. Pretty big percentage of the overall new home construction market fundamentally though, we believe those markets are. 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 and both those 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 6 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 are on 2nd half improvement are more tied to multi family. It sounds like.

But no, it's more. Yeah, 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 6 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. And they think is good amid. First time buyers wanting quick move at homes yet. That has some risk to it. I mean, it's that dynamic in the bad markets that people are trying to understand. Thank you very much.

Yeah, I'm sorry, 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 subdivision in terms of. Where they might have too much inventory given the current demand environment. So it really is. I don't think you can just say a broad brush and say, well, Dallas is over inventory and. You know. The mid Atlantic is is under inventory, right? I think it really is. Customer by customer subdivision by subdivision as to whether or not they have too much

specs sitting on the ground.

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

Great thanks and good morning. Just when I was hoping you could kind of update us on the build out. 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 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. You know, we are part of the effort was to make sure that we were not in times of tight supply. Buying as much out of distribution in a knee jerk reaction. I think we've been successful in that regard. It certainly helped. The supply is loosened a bit and that there's not a problem with, you know, not being able to get this skew or that skew. So again, we continue to kind of leverage the logistics side of things. A little business we bought in that regard and we continue to expand our distribution footprint. Which is both really both for an internal from an internal perspective and ultimately will lead to third party. You know, business also, so I actually feel really good about that progress. Yeah, just

if this is

not

a 100% correlation, but, you know, 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 margin 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 meaningfully beyond that kind of time frame?

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 margin. So in a, you know, let's just say a five year flat environment for demand from our end markets, it's a good way for us to help margin.

Okay, that'll make sense. Thank you. Sure.

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.