Installed Building Products, Inc. Q3 FY2020 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Installed Building Products Fiscal 2020 Third Quarter Financial Results Conference Call. The call is being recorded.

Good morning, and welcome to Installed Building Products' Third Quarter 2020 Conference Call. Earlier today, we issued a press release on our financial results for the third quarter, which can be found in the Investor Relations section on our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include statements with respect to the housing market and the commercial market; industry conditions; our financial and business model; our efforts to manage material inflation; our ability to increase selling prices; the demand for our services and product offerings; the impact of the COVID-19 crisis on our business and end markets; expansion of our national footprint, products and end markets; our expectations for our end markets, including our large commercial business and multifamily; our ability to strengthen our market position; our ability to pursue and integrate value-enhancing acquisitions; our diversification efforts; our growth rates and ability to improve sales and profitability; the impact of the COVID-19 crisis on our financial results; and expectations for demand for our services and our earnings in 2020 and 2021. Forward-looking statements may generally be identified by the use of words such as anticipate, believe, expect, intend, plan and will or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially from those expressed in or suggested by the forward-looking statements due to various factors, including, without limitation, the duration, effect and severity of the COVID-19 crisis; the adverse impact of the COVID-19 crisis on our business and financial results; the economy and the markets we serve; general economic and industry conditions, the material price environment and the timing of increases in our selling prices; and the factors discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2019, as the same may be updated in subsequent filings with the Securities and Exchange Commission. Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties may come up from time to time, and it is impossible for the company to predict these events or their effects. The company has no obligation and does not intend to update any forward-looking statements after the date hereof, except as required by federal securities laws. In addition, management uses certain non-GAAP performance measures on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share, adjusted gross profit, adjusted gross profit margin and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer. I will now turn the call over to Jeff.

Thanks, Jason, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights on the quarter and then turn the call over to Michael Miller, IBP's CFO, who will discuss our results and capital position in more detail before we take your questions. 2020 is shaping up to be a record year, reflecting the success of our business model, the positive fundamentals underway across many of our end markets and the dedication, hard work and resiliency of our employees. IBP's strong operating and financial performance is encouraging given the unprecedented economic and social effects that COVID-19 pandemic has caused throughout 2020. I'm also excited by the long-term opportunities within our residential and commercial markets as a result of our ongoing geographic end market and end product diversification strategies. As an organization, we remain focused on supporting our employees, customers and suppliers across the country, while ensuring our business is well positioned to withstand the impacts of the COVID-19 crisis as well as other natural disasters and business disruptions that occur from time to time. Across our national footprint, our branches continue to follow federal, state and local requirements in response to COVID-19, and I am pleased to report all IBP branches remained open during the quarter. In addition, the two hurricanes that made landfall in our Gulf Coast markets during the third quarter did not have a noticeable impact on our sales and profitability. Overall, our record third quarter financial results continue to highlight the strength of our business plan, the power of our financial model and our core operating values focused on supporting our employees and customers. I'll use my time today to review these items and why we believe IBP is extremely well positioned for the current market environment, as well as the long-term opportunities we have to create sustained growth and value for our shareholders. Revenues during the third quarter were up over 6% and year-to-date are up over 9%. When I look back at our business over a long period, I'm encouraged that our 2020 third quarter revenue is higher than what our full year revenue was prior to our 2014 IPO. We believe this success is a direct result of our focus on strong U.S. housing markets, our sales of complementary building products and our greater presence and participation within the multifamily and large commercial construction end markets. IBP's current geographic footprint continues to provide us access to nearly 70% of total residential permits compared to approximately 50% six years ago. During the quarter, single-family completions in the U.S. increased 2.6%. Analyzing market data and our results, we believe the lag between starts and completions has increased as a result of the COVID-19 pandemic, due in part to labor and material shortages impacting other construction trades within the industry and a delay in homebuilding returning to full production following the COVID disruptions earlier this year. We believe these timing factors have impacted the comparability of our sales to the rate of completions in just one quarter. Typically, we see our largest volume of insulation installations during the third and fourth quarters of the year. In the 2020 third quarter, we benefited from a higher mix of complementary product sales, which are typically installed later in the production cycle than insulation, further indicating a longer production cycle and the conversion of industry backlog to completions. While we anticipate a return to normalcy in the coming quarters, the increased lag between starts and completions and the dramatically increased order volumes from our builder customers will have a more meaningful impact on our business in 2021. During the quarter, multifamily growth remained strong and helped drive a 1.6% increase in same-branch residential sales. Given the timing of completions and when we perform our install work, we believe it is useful to analyze our performance over multiple quarters. Looking over the nine-month period ended September 30, 2020, residential same-branch sales have grown 4.4% compared to an increase in total completions of 2.2%. The higher mix of complementary building products, combined with a higher mix of multifamily sales, also impacted both price/mix and gross margin during the quarter compared to the 2020 second quarter. However, on a year-over-year basis, the benefits of our pricing strategies, combined with higher total sales volume, helped drive a 160 basis point increase in our adjusted gross profit margin. Recently, a material price increase effective January 2021 was announced for our fiberglass insulation materials. This increase is in line with our expectations for an increase early in 2021. With our availability of labor and our strong position with our customers and suppliers, we believe we are all well positioned to navigate the deflationary environment next year. We believe single-family industry dynamics remain strong and support the continued demand for our services. According to the U.S. Census Bureau, single-family starts in September were up over 20%, and single-family homes under construction increased to the highest level since December of 2007. We also believe we are well positioned for continued multifamily growth as a result of our suburban market focus and the success of our expanded multifamily sales strategy. As you can see, our residential markets have quickly rebounded from the COVID-19 pandemic, and market trends remained favorable. As we highlighted in last quarter's call, COVID-related safety protocols on large commercial construction sites continue to affect our operations. This has slowed the timing of our work and disrupted schedules as we adhere to requirements of managing the number of trades on the job site each day. While we expect to see this continue into the foreseeable future, we are encouraged by the relative strength in the end market. Our commercial backlog at September 30 was up 5% compared to the prior year, and our total pipeline and bid activity within the large commercial market has remained stable over the past three months. Based on the long lead time nature of our projects, we believe this will benefit our large commercial end markets in the second half of 2021. We believe our solid pipeline and growing presence within the large commercial end market will help us navigate any near-term softness. Long-term fundamentals are expected to remain intact, and diversifying our end market exposure continues to be an important component of our growth strategy. In addition, we are opportunistically pursuing additional commercial acquisition opportunities that increase our scale competitiveness. After briefly pausing our acquisition closings at the early stages of the COVID-19 crisis, our acquisition strategy has started to accelerate. In August, we acquired Storm Master Gutters, a New Jersey-based provider of gutter installation and repair services to residential and multifamily customers with annual revenue of approximately $20 million. We also acquired the North Charleston, South Carolina and Pooler, Georgia branches from Energy One America in August. These branches provide spray foam, fiberglass and air barrier installation services to residential, multifamily and commercial customers with combined annual revenue of approximately $22 million. So far in the fourth quarter, we have made two additional acquisitions, both in the Pacific Northwest. They include a provider of insulation, waterproofing and fire-stopping installation services to commercial and multifamily customers with annual revenue of approximately $26 million and an installer of specialty coatings for fire protection, insulation and acoustics in commercial and industrial applications with annual revenue of approximately $10 million. To date, we have acquired eight installers with approximately $94 million of revenue compared to six installers with approximately $36 million of revenue at this time last year. As you can see, 2020 is shaping up to be another strong year of acquisition growth. Our acquisition pipeline remains robust, and we continue to actively pursue acquisitions of well-run residential, multifamily and commercial installers that support our geographic product and end market diversification strategies. Before I turn the call over to Michael, I want to highlight the record profits we are achieving. Record quarterly sales, strong gross margin and controlled operating expenses continued to produce record profits. Our same-branch incremental adjusted EBITDA margin was over 100% for the second consecutive quarter and helped drive an 18% increase in third quarter adjusted EBITDA. In addition, our trailing 12-month adjusted EBITDA margin has expanded to 14.5% from 12.6% for the same period last year, a result of lapping the impact of the material inflation environment in 2018 and our subsequent pricing strategy. So to conclude my prepared remarks, I'm extremely pleased with how our team has responded to the unique challenges that have occurred throughout the year. Our continued success reflects the power of our business model, the experience of our management team, the long-standing customer relationships we have developed, and the strength of our balance sheet and operating cash flow. We believe that we will achieve record results in 2020. And given current market trends, 2021 is expected to be another strong year for IBP. As always, I'd like to thank our installers who are hard at work every day, representing IBP and serving our customers. On behalf of the entire leadership team, we recognize your efforts, and I want to personally thank you for your dedication. With this overview, I'd like to turn the call over to Michael to provide more details on our third quarter results.

Thank you, Jeff, and good morning, everyone. Net sales for the third quarter increased to a quarterly record of $420.5 million compared to $396.4 million for the same period last year. The 6.1% year-over-year improvement in sales was mainly driven by a slight increase in price/mix, growth in our multifamily end market, growth in other complementary products, and the contribution from our recent acquisitions. On a same-branch basis, net revenue improved 1.7% from the prior year quarter. Multifamily sales increased 36.6%, contributing to a 6.2% increase in total residential sales during the third quarter. Sales in our large commercial construction business increased 2%, and total commercial sales increased 2.7% in the third quarter. It is important to note that sales from our large commercial construction business are not included in the volume and price/mix metrics we disclosed. Profitability remained very strong during the quarter. Adjusted gross profit margin was 31.4% for the 2020 third quarter. The 160 basis point increase over the prior year period primarily reflects the volume benefits of our product diversification strategies and installation pricing strategies. Administrative expenses as a percent of third quarter sales were 13.9%, consistent with the prior year period. Adjusted SG&A as a percent of third quarter sales improved 20 basis points from the prior year period and improved 90 basis points from the 2020 second quarter. The improvements in SG&A are primarily due to higher sales, leveraging cost and the benefits of gross profit improvement over the prior year quarter. On a GAAP basis, our third quarter net income increased 32.4% from the prior year quarter to a record $28.1 million or $0.95 per diluted share. Our adjusted net income improved 20.9% to $35.9 million or $1.21 per diluted share compared to $29.7 million or $0.99 per diluted share in the prior year quarter. During the 2020 third quarter, we recorded $7 million of amortization expense compared to $6.2 million for the same period last year as a result of our acquisition strategy. This noncash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Based on our acquisitions completed to date, we expect fourth quarter 2020 amortization expense of approximately $6.8 million and full-year expense of approximately $27.2 million. This figure will, of course, change with any subsequent acquisitions. For the 2020 third quarter, our effective tax rate was approximately 25.8%, and we continue to expect a full-year effective tax rate of 25% to 27% for 2020. Adjusted EBITDA for the third quarter of 2020 improved to a record $66.2 million, representing an increase of 18.4% from $55.9 million in the prior year. Same-branch incremental adjusted EBITDA margins were 120.3% for the third quarter as a result of our higher sales and operating leverage. Adjusted EBITDA as a percent of net revenue increased 160 basis points from the prior year period to 15.7%. Now let's look at our liquidity, balance sheet and capital requirements in more detail. Our business model continues to generate strong operating cash flows. For the nine months ended September 30, 2020, we generated $143.3 million in cash flow from operations compared to $106.5 million in the prior year period, an increase of 35%. Operating cash flow during the three months ended September 30, 2020, included a one-time $17.8 million charge to terminate certain interest rate swaps associated with our debt. This change will result in lower cash interest expense in future quarters. Our asset-light business model does not require a significant amount of capital expenditures, and our primary capital requirement is to fund working capital needs. At September 30, 2020, we had $144.5 million in working capital, excluding $268.7 million of cash and short-term investments. Capital expenditures at September 30, 2020, were $25.5 million, while total incurred finance leases were $0.9 million. Capital expenditures and finance capital leases as a percent of revenue were 2.2% at September 30, 2020, compared to 3.6% at September 30, 2019. At September 30, 2020, we had total cash and short-term investments of $268.7 million compared to $215.9 million at December 31, 2019. Total debt at September 30, 2020, was $573.4 million compared to $575.5 million at December 31, 2019. Considering cash and short-term investments at September 30, 2020, our net total debt was approximately $305 million compared to $360 million at December 31, 2019. We currently have approximately $45 million of remaining availability under our stock repurchase program. In response to the pandemic, we suspended the program and did not make any repurchases in the second or third quarter this year. Given the current state of our business and our markets, our program is no longer suspended effective November 9, 2020. The funding of acquisitions continues to be the priority for our capital allocation, and we will pursue share repurchases opportunistically. We believe we have considerable financial flexibility as we have nothing drawn on our $200 million revolving line of credit, strong cash position, staggered debt maturities and limited financial covenants. In addition, with no significant debt maturities until 2025 and strong liquidity, we have considerable financial resources to withstand the economic impacts of the COVID-19 crisis while still investing in our long-term growth opportunities. With that, 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, dedication and commitment to our company during this very challenging period. Our success over the years, and more recently, wouldn't be possible if it wasn't for you. And our thanks goes out to you for a tough job always done well. Operator, let's open up the call for questions.

Our first question comes from Adam Baumgarten with Crédit Suisse.

This is actually Marius for Adam. Your acquisition pace has picked up nicely after the shutdown. And I'm just wondering if you've seen any change in the multiples or in valuation levels, especially in the commercial space.

This is Jeff Edwards. No, not particularly, really. I mean the pace is as much a function of us actually kind of parking those deals for a period of time as it is, kind of with us, moving towards a different cadence, per se. I think we're kind of on the same path we usually are in that way. Haven't really seen much of a difference, frankly, in the multiples or really in even the deal flow. And on the commercial side of things, they're not markedly different than the deals that we've looked at on the residential side, maybe potentially a little more attractive from a pricing and multiple perspective, but not particularly so.

All right. Also, in the past, you mentioned that you expected the September insulation price increase realization to be higher than the historical realization, closer to 75%. I was just wondering if that turned out to be the case. And what's the implication for next year's price increase?

I think the statement made by us and others about the September increase being quite sticky and difficult is still likely true. This relates to the September increase, and as you know, there is a January price increase on the horizon. I'll let Jeff address the January increase if needed, but I'll take it on. We'll see how that develops, but the material market remains tight. Owens Corning is in a better position to increase supply, although the current situation reflects a good housing market and some tightness in material supply. This tightness stems from manufacturers reducing production and running down inventories during the early stages of COVID, which has created a lag in returning to full capacity and rebuilding inventories. The issue now is a supply challenge rather than a capacity constraint, and it should improve in the first and second quarters of next year. We're fortunate as a company to partner with all four manufacturers, especially Owens Corning, which has the most supply to offer. This lengthy response addresses both the January price increase and the current material supply conditions.

Our next question comes from the line of Ken Zener with KeyBanc.

I have a few questions. There is very strong operating leverage, which is positive. Regarding your discussion about price increases and tight supply, while this isn’t necessarily a problem, your EBIT leverage is quite strong. However, it appears that the majority of the gains were in gross margin rather than in SG&A. Could you discuss the factors contributing to the benefits in gross margin? I suspect part of it relates to pricing, but insulation prices haven't increased significantly. It seems that price increases did not have a large impact on your revenue. I understand that gutter costs were lower in this quarter, but can you explain what contributed to such strong organic EBIT growth linked to gross margin expansion?

In the quarter, we experienced some general and administrative leverage of about 20 basis points. In fact, G&A was lower in the third quarter compared to the second quarter. We're pleased with how we are managing the G&A side. Regarding gross margin expansion, we have been very satisfied with the progress this year. As we mentioned in the first and second quarters, the pricing actions we implemented in 2019 were fully realized in the second quarter, which is why we expected price/mix to stabilize in the quarter after those price increases. This assessment was made as of September. We also discussed the pricing and demand dynamics for 2021 earlier. However, it all seems to align consistently. Additionally, during the second quarter call, we indicated that price/mix would average in the mid-single digits for the full year. Currently, year-to-date, price/mix stands at around 5.5%. Therefore, we are witnessing the year and the quarter develop in line with our previous discussions.

Good. I want to ensure that the key issue for you compared to some competitors is that you’ve managed to grow, focusing on incremental EBIT. Considering the price increases you’ve mentioned and acknowledging your explanation during Q2 '20, how do you perceive your pricing inputs compared to what you plan to ask from your customers in FY '21? If we’re looking at the 8% increase, with typically half of that coming through - it may vary slightly - how do we plan to prevent the margin degradation we experienced in late '18 and '19, where it took you some time to regain pricing power? Jeff, you emphasized the importance of maintaining good customer relationships. The change occurred rapidly, essentially a step function, primarily due to the industry capacity being put on allocation, especially in Louisville. How do you intend to handle the price increases anticipated in FY '21 differently than the situation in FY '19 to avoid margin degradation? And Michael, since you've indicated the target for incremental EBIT in the mid-20 range, what will be different this time?

I still believe in our strategy, although it was a challenging time for us due to others' perceptions of how we managed the situation. Ultimately, we were able to grow our sales and gain market share more rapidly than our competitors and returned to a stable position by March. That said, after receiving criticism for our approach, we will make some adjustments to avoid any decline while still aiming to end up in a similar spot. It hasn't been easy, especially since the announced price increases are significantly lower overall than those from the prior period. I understand that if not all of these increases materialize, it's reasonable for our customers to hold us accountable. The timing going into January allowed us to prepare our builders in advance. While there were expectations for a more regular cadence in price increases, the January hike was somewhat out of sync. I anticipate that we will only have up to two price increases this year, and I'm hopeful they will be more manageable, allowing us to stay proactive.

The current environment is very different from that of late 2018 and early 2019. Back then, we faced numerous price increases in quick succession and didn’t have as much time to implement these price hikes as we do now. Importantly, new home sales have increased by 17% year-to-date, with a 30% rise in September. The demand we are facing heading into 2021 presents a significant opportunity. Consequently, it’s much easier to collaborate with our builders who are focused on completing homes quickly to address any additional costs we may incur.

Right. Right. Now the other side of this, since we're focused on the resi side, is the commercial experience come at degradation of margins you had in almost at the exact same time as you organically opened up new branches, loaded on fixed costs and did not have the sales realization. It certainly seems like you're focused on the northwest this quarter, in commercial areas, which we outlined recently in a report. But what is your strategy? I know you had conversations with the Board about how aggressive that organic growth was. What is your comfort looking into '21 that your acquisitions and/or organic growth in commercial are not going to contribute to a margin degradation as well.

We are cautious about the short-term impacts on the commercial business. Jeff mentioned that new COVID protocols are extending construction times. However, we are still experiencing a steady volume of bidding in that sector, which we believe will benefit the first half of 2021. The heavy construction business represents only about 10% of our overall operations. While we may see a slowdown in growth or even some declines in that area, we expect that to be more than balanced out by positive trends in single-family and multifamily sectors, which have been strong performers. Our organic sales growth in multifamily for the third quarter was nearly 35%, and year-to-date, it stands at 37%. We are confident that the ongoing benefits from residential markets will counter any temporary weaknesses in the commercial sector. We believe in our long-term strategy to diversify our end markets towards commercial, which is why we continue to pursue acquisitions in this space.

Our next question comes from the line of Trey Grooms with Stephens.

I would like some clarification on how the flow-through works. We've observed strong performance in starts, and the orders and backlogs on the residential side are impressive. There's notable strength in both single-family and multifamily sectors. However, single-family volume decreased this quarter. Considering the known delays, could you share your thoughts on when you expect that sector to improve, given that demand clearly exists?

You're absolutely right; there is significant demand. However, the discrepancy between new home sales and starts is remarkable, with many sold homes not yet started. Our new home sales year-to-date are up 17%, and in September, homes sold but not started increased by 49% compared to the previous year, which is astonishing. There is a considerable amount of pent-up demand that builders are striving to fulfill. However, the construction industry cannot increase its capacity by 30% to meet this demand. We anticipate an extended cycle through 2021 and 2022 as we work through this demand. We believe that typical seasonality may be less pronounced in 2021 due to these factors, which positions the industry for constructive growth. Nonetheless, there are definitely longer than usual delays. Most building products are installed after houses have been framed and closed, so we cannot proceed with our installations until those homes are completed. We cannot control the timeline for finishing the houses, but we maintain that it’s not a matter of whether we will do this work, but rather when it will happen.

Yes, I understand. The extended construction times you mentioned and the labor constraints are significant factors. Additionally, some products, like insulation, are currently in short supply. While 2021 does present a strong demand environment and you have a positive outlook, given these challenges, how do you view the potential for growth based on starts, orders, and backlog? Specifically, looking ahead to 2021, do you think mid-single-digit growth is achievable for the industry, or might that be too low?

Yes, definitely mid-singles for sure.

I think it's probably higher than that.

Yes, I think you can get to high single digits.

Yes, absolutely, maybe not 100%.

Yes, for sure. The important aspect to note is that particularly in the insulation sector, they essentially stopped producing during COVID and are now working to rebuild their inventories. As Jeff mentioned earlier, OC has announced additional capacity coming online in the second quarter, which is significant, with a large back-line being added. Additionally, with the capacity expansions from both JM and Knauf, we are confident that, although it will take more time and require additional resources to manage materials and move them through the system effectively, we will be able to support our customers well with the expected growth. The timing might be affected by all the trades that come before us.

It's a question we often receive regarding your ability to scale, especially considering the tightness in labor trades. However, it's reassuring to know that for the labor you are targeting, it seems unlikely that you will face issues with scaling to meet the demand next year.

No, we have the ability to flex.

It really comes down to the time it takes for us to train one of our installers to be proficient compared to how long it takes a carpenter or a mason to reach proficiency, as the time frames are quite different.

Yes. Ours is much shorter.

Okay. That makes sense. My last question is about your return to the M&A activity. As we consider the pipeline, I know you briefly mentioned that valuations don’t seem to be changing significantly. In terms of M&A, do you see any notable differences or appetite right now that would influence whether you pursue residential or commercial acquisitions? Is there anything currently altering that dynamic?

No, I don't really think so. I mentioned earlier that most of these were queued up prior to March. I guess one could say that we're still making sure we cross our Ts and dot our Is in relation to the commercial side of things, as others have asked. But other than that, we're focused on ensuring the backlog looks good for the businesses we're buying in their respective markets and providing services that we believe will be beneficial for us in both the short term and the long term, so that would be the only change, per se.

Our next question comes from the line of Stephen Kim with Evercore ISI.

Yes. So far today, you've discussed several points that indicate we should expect delays in the upcoming quarters. You've previously mentioned implementing gradual price increases. Today, you're addressing longer cycle times with builders and increased lead times from insulation manufacturers. You indicated that these delays might extend into the second quarter of next year and will be exacerbated by your enhanced range of complementary products. Considering these factors that generally suggest delays, are there any elements that might counterbalance this and allow for quicker pricing actions this time compared to the past? Is there anything that could facilitate faster pricing realization?

Yes. I think there are two key points. First, we have been granted more time between the announcement and the implementation of price increases. Second, and most importantly, there is significant underlying strength, especially in the single-family housing market, and builders are eager to complete houses. It's important to note that the insulation we install represents about 2% of construction costs, yet it is a critical step in progressing the project, passing inspections, and finishing the house. We believe that by collaborating with the right customers who recognize the value of our services and assisting them in maintaining or even improving the pace of house completion, we can engage with customers who are willing to pay a fair price for the services we provide.

And three, the size of the increases, which I mentioned earlier, being smaller than what was announced the last time. And I guess four would be the rigor at which we will make sure we're out there getting it because we don't really want to go through the criticisms again, frankly.

Okay. Well, I think at the end of the day, you handled those criticisms just fine. But okay, we'll take the full hit here.

Yes, I will continue to follow the strategy. However, due to our significant sales growth compared to others, we are focused on restoring our margins where they should be. We aim to accomplish this without delaying the process this time.

Our next question comes from the line of Seldon Clarke with Deutsche Bank.

I just want to make sure I understand the relationship here between starts and volumes and completion. So you started the quarter with same branch sales, up 6% in July. Completions seemed to accelerate throughout the quarter. But obviously, Europe sales growth rate decelerated. So I know you talked about post completion, complementary products driving some of that delta. But could you just give us a sense how underlying installation maybe trended in the quarter? And would the same dynamic imply that your 4Q same branch sales rate would then exceed completions data? Or is there something I'm missing there?

We believe, as Jeff mentioned in his prepared remarks, it makes more sense to analyze performance over a longer period rather than focusing on individual quarters. He pointed out that our residential same brand sales growth for the year-to-date was 4.4%, compared to total completions growth at only 2.2%. This growth has certainly been supported by our strong multifamily same branch sales. However, we have noticed a significant lag, particularly with the 49% increase in homes sold that have not yet been started. From our viewpoint, it’s more useful to examine these metrics on an annual basis rather than quarter-to-quarter. Lagging starts, especially with a 90-day delay, is not an accurate metric given the current situation. Similarly, completions also do not fully represent our performance. We prefer to assess our progress in terms of annual growth, margins, customer service, and the overall expansion of the business.

You shouldn't interpret that as there being any significant change in market share within insulation that would raise concerns. Based on that, if you have been lagging for nine months this year, or just one quarter, you would anticipate some recovery in the following quarter.

It's really going to depend on where the builders are in getting the houses ready for us to do our work, and that's going to vary from market to market. I'm trying hard not to provide guidance, and I apologize for that. It truly depends on how quickly we're able to prepare the homes for our work. As we mentioned earlier, given the current market dynamics, it looks like we will experience a much smoother seasonal year than usual in 2021.

Okay. What about the question on insulation market share? Did that align more closely with your expectations?

Yes.

Our next question comes from the line of Justin Speer with Zelman & Associates.

I just wanted to follow up on Seldon's question, if I could. Is there any chance that you could break out the single-family growth trends through the third quarter into October?

You mean like each month in the quarter? And then... Yes. Just trying to get a sense for like the nature of seeing pressure there. It was, I think, a little bit of a surprise. I'm just trying to understand if that's just how the nature of the timing of maybe this improvement that we're all looking for? And I guess the bigger question, I know you touched on it just the growth potential and the industry growth potential given some of the broader supplier constraints. I guess folks are just trying to get a sense for what the market will allow as we look into the fourth quarter into next year? Yes. Regarding the third quarter, our same branch growth in single-family homes was just under negative 3%, which aligns with our discussion from the second quarter where starts dropped by 17%. We anticipated a temporary slowdown that would be counterbalanced by growth in multifamily sectors, which is why same branch sales increased by almost 2% last quarter. Looking ahead to the fourth quarter and future volumes, it really depends on how quickly builders can prepare the houses for us to begin our installation work. We are aware that volume is on the way, and we're getting ready for it, but we can't influence the other trades that precede us. As Jeff mentioned earlier, it takes framers and masons longer to catch up than it does for us. The industry’s capacity to ramp up isn't limited by our company’s capacity to grow; we have consistently demonstrated our ability to expand. The delays come from the trades before us that control our capability to respond to demand. As Jeff pointed out in response to previous questions, we could see the industry grow by a high single digit percentage, potentially even reaching 10%. We believe that is feasible given our current position. Unlike 2010 and 2011, we’re not starting from such a low baseline, but achieving this will require time, and it won’t occur immediately. The recent surprising order growth has almost seemed instantaneous. The entire construction industry is rebounding, not just the insulation sector, recovering from what felt like near shutdowns, particularly from a supply perspective, during March and April. Builders are also facing difficulties in obtaining permits to initiate construction. The disruptions caused by COVID have been significant. Combined with the 17% drop in starts during the second quarter, everyone is now trying to recover and secure products from manufacturers who had reduced inventories due to ceased operations. We are indeed in an unprecedented situation, but everyone is striving to meet the demand, although it will take some time. However, we expect 2021 to be a very strong year.

We don't see anything different from what we had anticipated regarding the recent slowdown in the market. We were simply aligning with what builders indicated about their sales dropping significantly. This trend began in the second or third week of March and continued until around July when sales began to recover and catch up to the previous year. We believe the pace we've discussed remains consistent with that period in terms of orders, which will influence when homes are started and how they come in. This aligns with our predictions for the third and fourth quarters.

That makes sense. I guess the other side of this is that in this kind of environment, you might see trade ramp up to achieve high single-digit to low double-digit growth as an industry in the upcoming quarters. You have a history of gaining market share by stacking on other products and services while also capturing share within the core insulation segment. Do you think that the nature of those share gains will continue along the lines of historical trends, or is there anything that might change that dynamic when you consider price, cost, and your margin profile going forward?

No. We are going to continue to execute on the strategy that we've been working on, and we think that it will continue to pay off in terms of greater penetration of the other product sales.

Yes, so no change. We feel good about it.

Excellent. And then the one other question I had on the top line. I know the multifamily side, just incredible growth there. Just any commentary you can give us there in terms of visibility and maybe backlog in your low-rise multifamily business? How that's shaping up on a year-over-year basis?

Yes. The backlog in that business is up about 22% at the end of the quarter. So we continue to feel very good about the penetration there. Obviously, we're getting tougher and tougher comps in that business, right, given the growth that we've seen. So the year-to-date 37% same branch sales growth that we've seen, that's really hard to replicate, right, when you're comping this real good strength. But we feel very good about our ability to continue to kind of broaden our geographical reach with the multifamily business.

And then on the cost side of the ledger, just any onetime tailwinds from less travel entertainment costs, anything like that, that you're seeing year-to-date and maybe a year-over-year benefit into the third quarter that maybe don't repeat as we look ahead?

Yes, that's a great question. As it relates from the sort of the second quarter to the third quarter, I mean, the two things that we kind of talked about in the second quarter were fuel and travel and entertainment that were obviously impacted by COVID. Really coming from the second quarter into third quarter, there was really no benefit there. But if you look at the third quarter of '19 versus the third quarter of '20, there's definitely a benefit of a little over $1.1 million from both of those. About 70% of that was from fuel and about 30%, 35% of that was from travel and entertainment. So we hope we want to spend more money on travel and entertainment because it means that we can go to conferences. Our team can do regional meetings. And we think it means a lot for the economy completely opening. So we will be happy to start spending that money again when we can.

It makes sense. Looking at the big picture, there are many moving parts and a lot of complexity in this landscape. Considering your backlog, including the nonresidential side, and the extended lead times as well as fluctuations in costs and supplier pricing, do you believe you can achieve the normalized incremental margin profile you target? As you look ahead to next year, do you think that's attainable, or could it be influenced by these changing factors?

No. We feel very confident about the 20% to 25% incremental margins that we've discussed for the full year of 2021. If the year unfolds as expected and we experience a positive volume environment throughout 2021, it certainly boosts our confidence in achieving that 20% to 25% incremental margin range.

Yes, this is Jeff. I just wanted to add that while the constraints have been highlighted in some of the questions during this call as a negative, we believe they actually position us well for a longer period on a favorable playing field for executing our strategy. We are pleased that we have these backlogs which we can only work through at a maximum of about 10% per year. This situation provides a solid foundation for our strategy to succeed.

Next question comes from the line of Josh Large with Truist Securities.

This is Josh on for Keith Hughes. Just one quick question on the kind of monthly progression you saw and what you're seeing in October.

Sure, we have been asked to provide more data than usual about future trends due to the COVID environment. While we won't continue this indefinitely, I can say that for October, sales increased by about 7% when adjusted for days. It’s important to consider the days adjusted data because last October had 23 selling days, whereas this October has 22. On a same-branch basis, sales showed a slight increase as well, again on a days adjusted basis. We believe that October, along with September, reflected the trends we had discussed earlier regarding the anticipated softness, although this softness was less than expected given the significant decline in starts during the second quarter. Overall, we feel positive about the demand environment heading into 2021, and we might see a reduction in seasonality in our business moving forward.

Okay. And then just last one on the commercial side. You guys had good growth when it's kind of been a market hit more so by the pandemic. Could you just kind of provide some details on what you were seeing maybe in terms of light commercial, heavy commercial? Were there any kind of outliers that grew or didn't grow that drove the results?

Our light commercial business outperformed our heavy commercial business. As Jeff mentioned earlier, our total commercial business increased by 2.7%, while the heavy commercial sector grew by just 2%. We're cautious about heavy commercial, which represents only 10% of our overall revenue. However, we believe it's fundamentally strong for the long term. We've discussed before our low market share, the sectors we're in, and the investments we've made in opening new locations that are becoming operational. The bidding volume in this sector has remained stable, but we have noticed a slight slowdown in finalizing bids and projects due to the uncertainty from COVID and the elections. These factors have created a tougher environment, but we are optimistic about our ability to navigate through it given what we're observing. It’s worth noting that last year, our heavy commercial business had a very strong third quarter, making it a tough comparison for this year.

Our next question comes from the line of Phil Ng with Jefferies.

Both you and your competitor mentioned seasonal trends. Will that enable you to better close the gap between starts and completions compared to historical levels? Additionally, could you provide more details about your potential to achieve high single-digit growth in 2021? Help us understand the opportunity for scaling up. Would this be more weighted towards the latter half of the year, or could you reach that target earlier?

Yes. I think so the latter part of your question, really, what we're talking about scaling up or sizing up of whether it's 10% or high single digits, we're thinking of that more as the industry, the construction industry. And it was more in that context necessarily than providing any guidance relative to what we expect sales to be in '21. Jeffrey Edwards: And we have been able to grow faster than ultimately what we say the rest of the industry is able to grow. Absolutely. I believe the ability to reduce the gap between starts and completions is not an issue with our internal business processes since we can adapt as we've shown in the past. It’s primarily an industry-wide issue, focusing on getting houses closed and ready for us to install. In relation to your question, if we experience less seasonality and a more stable situation instead of the usual seasonal patterns during the winter, you are correct. This could effectively narrow the gap between starts and completions, which would be beneficial for the entire industry. It helps keep people employed, eliminates the need to adjust the labor force, and allows manufacturers to maintain a more consistent production schedule rather than fluctuating with the typical seasonal changes in the business. So, while we can't forecast the weather or the future, we believe this sets up the entire industry for a positive 2021.

Your first question definitely impacts the second one. It's akin to the analogy of a pig and a python. This year, the pig entered the python three months earlier than usual. Spring selling season was disrupted and shortened, but we are gradually recovering from that, although we're still three months out of sync. This will affect when we can be in the houses and how long it takes to construct them. Additionally, this situation will lead to a different season where there will be more work than can be managed effectively.

Next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is, you've mentioned in your comments that you saw some nice growth in the complementary products this quarter. Can you talk a little bit about that and maybe how we should be thinking about it on a going-forward basis, especially maybe with the lags that you are seeing?

We've discussed the growth of other products extensively. As noted in the second quarter, insulation saw stronger growth compared to other products, but that changed in the third quarter. It's encouraging to see not only a slight increase in growth for other products but also a better margin performance compared to insulation. While the margin profile of these products is still lower than that of insulation, we are seeing improvements in margins as we scale up production. We are optimistic about our ongoing strategy, especially given the current environment where there is high volume demand and builders are looking to reduce the number of installers for these additional products. This has been a focus for us for quite some time, and we are confident that it remains the right approach.

Okay. Great. And then my last question is just you mentioned that the suspension that you'd had around buybacks is no longer in effect that you guys can kind of go out there and start to repurchase stock. Can you talk about your appetite to do that? And any color there?

Yes, we have mentioned in our prepared remarks. We'll be opportunistic about it. However, our top capital priority remains M&A, and we will continue to focus on that, especially for geographic expansion with residential installation deals, considering the current environment. So there is really no change, but we felt it was important to inform the market that if an opportunity arises, we will consider share repurchases.

Next question comes from the line of Ryan Gilbert, BTIG.

Just, I guess, expanding on the complementary product question, it sounded like it was a bit of a headwind or a contributor to price/mix flattening out in the third quarter. And I'm just wondering if we should kind of be thinking about that expanded mix of other complementary products, maybe limiting on some of the price/mix growth that we've seen in prior years as we look out to the fourth quarter and 2021. Is that the right way to think about it?

Yes, we have discussed that extensively. One factor that we expect to contribute positively to price and mix is the anticipated increase in prices for insulation. For the full year, we have maintained a mid-single-digit growth in price/mix year-over-year, which we mentioned in the second quarter. Year-to-date, that trend continues. We do face some challenges due to the growth of other products with lower price points, but we remain optimistic about the pricing conditions for insulation as we approach the end of 2021.

And we have no further questions on the phone line. I'll turn the call over back to you, sir.

Thank you for your questions, and I look forward to our next quarterly call. Thanks.

Thank you.

That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.