Installed Building Products, Inc. Q1 FY2024 Earnings Call

Good day, everyone, and welcome to the Installed Building Products Fiscal 2024 First Quarter Financial Results Conference Call. Please note that today's call is being recorded, and I will be available if you need any assistance. It is now my pleasure to turn the conference over to Darren Hicks, Managing Director of Investor Relations. Please go ahead.

Good morning, and welcome to Installed Building Products First Quarter 2024 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the first quarter, which can be found in the Investor Relations section of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management's current expectations and beliefs. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those described today. Please refer to the cautionary statements and risk factors in our SEC filings, including our annual report on Form 10-K. We undertake no duty or obligation to update any forward-looking statement as a result of new information or future events, except as required by federal securities laws. In addition, management refers to certain non-GAAP and adjusted financial measures on this call. You can find a reconciliation of such measures to the nearest GAAP equivalent in the company's earnings release and additional reconciliation for EBITDA and adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our Investor Relations section of our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer; and joined by Jason Niswonger, our Chief Administrative and Sustainability Officer. I will now turn the call over to Jeff.

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 first quarter sales results reflected fundamental improvements in our single-family end market relative to the last 12 months and the continuation of healthy sales growth in our multi-family end market. We believe our customers are committed to meeting new construction home ownership demand by continuing to build new single-family homes in the current macroeconomic backdrop. We expect our multi-family backlog to keep branches in core geographic markets busy despite ongoing headwinds related to multi-family unit starts. Longer term, we believe opportunities in our multi-family and commercial end markets remain attractive. I'm encouraged by the positive same branch sales growth we achieved in our single-family end market. The 2% year-over-year increase during the quarter was the first same branch increase since the 2022 fourth quarter. Single-family sales growth was supported by a growing proportion of sales from national production builders in the quarter. Our deep customer relationships, local market knowledge and an ability to align our pricing with the value we offer our customers were key to our first quarter single-family sales results. Our multi-family installation sales growth continued to be resilient with the apparent operational benefits of our centralized services-oriented model. On a same branch basis, multi-family sales in our installation segment increased 13%. In addition, across our branches, there continues to be an opportunity to sell IBP's installation services in markets that historically have not served multi-family customers. Strong profitability during the quarter continued to reflect our strategic priority to use our expertise to efficiently complete the most operationally and financially attractive jobs for our local business. We achieved record first quarter net profit margin and adjusted EBITDA margin for the 3 months ended March 31, 2024. I'm proud of our team's continued success, commitment to excellence and ability to consistently meet the needs of our customers. To everyone at IBP, thank you for your commitment, your hard work and a tough job always done well. Acquisitions continue to be our top priority as we consider all of our options for capital allocation. Despite our growth over the years, we believe a meaningful opportunity still exists for us to expand our geographic presence and diversify the mix of building products we install across our national branch network. During the 2024 first quarter and in April, we completed the following acquisitions: a Delaware-based installer of fireplaces into new single-family construction projects with annual revenue of approximately $5 million; and a North Carolina-based residential installer of insulation and complementary building products with annual revenue of over $6 million. Overall, while existing home inventories have increased from recent lows in 2022 based on average months of supply, the new single-family housing construction market remains healthy as newly constructed homes are effectively meeting the needs of a typical homebuyer. Additionally, the volume of multi-family units under construction continues to be near historically high levels, which is supportive of our installation business. We believe we are well-positioned for another year of strong operational and financial performance in 2024 as we continue to focus on profitability and effective capital allocation to drive earnings growth. Based on the U.S. Census Bureau, single-family starts year-to-date through March 2024 have increased by 27%, which we believe bodes well for future demand for our services. Additionally, there are a number of supportive dynamics for our industry that may help demand for our business grow longer term. Specifically in April, the U.S. Department of Housing and Urban Development announced the adoption of energy efficiency standards for the construction of U.S. housing and urban development and U.S. Department of Agriculture Financed Housing. FHA-insured single-family and multi-family projects will be required to comply with the new generally more stringent energy efficiency standards. This requirement will become effective in 2025. We believe these new standards will be favorable for the environment as well as demand for our business. We intend to continue to focus on that which we can control, leveraging our strong customer relationships, experienced leadership team, national scale and diverse product categories across multiple end markets to help the company navigate through any future changes in the U.S. housing and construction market. I'm proud of our success thus far and continue to be excited by the prospects ahead for IBP and the broader insulation and other product installation business. So with this overview, I'd like to turn the call over to Michael to provide more detail on our first quarter financial results.

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the first quarter increased 5% to $693 million compared to $659 million for the same period last year. The increase in sales during the quarter was driven by growth in our residential and commercial end markets within our installation segment. Our single-family same branch sales increased 2%, and our multi-family same branch sales increased 13% during the first quarter. Although the components behind our price/mix and volume disclosure have several moving parts that are difficult to forecast and quantify, the results this quarter reflect our continued strategy of focusing on capturing the value of our installed services over job value. During the first quarter, price/mix increased 3.8%, while volumes decreased 1.4%. Our business achieved record results in the first quarter as measured by adjusted net profit margin, which was 10.1% and adjusted EBITDA margin, which was 16.9%. Our adjusted gross margin improved 200 basis points year-over-year to 33.9% in the first quarter as a result of pricing stability and improved operating cost efficiencies. Adjusted selling and administrative expense as a percent of first quarter sales was up 110 basis points to 19% due to higher variable compensation related to higher gross profit and EBITDA performance from the prior year period. Administrative expenses in the first quarter of 2024 were unchanged from the fourth quarter of 2023. Adjusted EBITDA for the 2024 first quarter increased 12% to a first quarter record of $117 million, and adjusted EBITDA margin reached a first quarter record of 16.9% compared to 15.9% for the same period last year. We continue to target full year long-term same-branch incremental adjusted EBITDA margins in the range of 20% to 25%. For the 2024 first quarter, the total same branch incremental adjusted EBITDA margin of 50% was substantially above our target range. Adjusted net income per diluted share improved 15% to $2.47. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect second quarter 2024 amortization expense of approximately $10.3 million and full year 2024 expense of approximately $41.3 million. We would expect these estimates to change with any acquisitions we close in future periods. Also, we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31, 2024. Now let's look at our liquidity position, balance sheet and capital requirements in more detail. For the 3 months ended March 31, 2024, we generated $85 million in cash flow from operations compared to $74 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income and effective management of working capital. In March, we successfully completed the repricing of our $500 million Term Loan B facility. Our new term loan has more favorable financial terms compared to our previous term loan, while extending the expiration date to 2031. The new term loan expiration date further staggers the repayment timing of our long-term debt, and we have no significant debt maturities until 2028. Furthermore, through interest rate swap agreements, we have fixed the interest rate on $400 million of our existing variable rate debt until December 2028, limiting our interest rate exposure. Our first quarter net interest expense increased to $11.9 million from $9.7 million in the prior year period. The $11.9 million in net interest expense includes a $4.1 million nonrecurring write-off of capitalized loan costs related to the Term Loan B facility repricing and a greater amount of interest income from higher interest rates and higher balances of cash and cash equivalents relative to the year-ago period. At March 31, 2024, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 0.97x compared to 1.42x at March 31, 2023, which is well below our stated target of 2x. At March 31, 2024, we had $340 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 3 months ended March 31, 2024, were approximately $23 million combined, which was approximately 3% of revenue compared to 2% for the same period last year. With our strong liquidity position and modest financial leverage, we continue to expand the business through acquisition and return capital to shareholders. IBP's Board of Directors approved the second quarter dividend of $0.35 per share, which is payable on June 30, 2024, to stockholders of record on June 15, 2024. The second quarter dividend represents a 6% increase over the prior year period. 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, dedication and commitment to our company. Our success over the years is made possible because of all of you. Operator, let's open up the call for questions.

And we'll take our first question today from Michael Rehaut with JPMorgan.

I wanted to start with the encouraging trends in single-family residential. As you mentioned in your prepared remarks, turning positive for the first time in 4 quarters. How do you see that trending for the rest of the year? Obviously, there's some pretty good starts data that you referenced. And just kind of curious also on the mix between large builders and small builders, if you're seeing any difference there in terms of your customer set? And lastly, if you could kind of also hit on backlogs for multi-family, how do you view that in terms of the health maybe as you look out for the rest of the year?

Sure, Mike. This is Michael. Thanks for the question. Yes, we feel optimistic about the improvement in single-family housing. The trend has been consistently better throughout the last quarter and into the current one, especially among production builders. We believe that most of the growth in single-family homes this year will come from production builders, and we are already witnessing this in our overall revenue. It's important to note that public builders reporting their first-quarter results have seen their backlogs rise by 16% to 17%, with order increases over 30%. Historically, we could depend on backlog and orders as reliable indicators of demand from these builders, but due to the trend towards more speculative inventory from them, which doesn’t reflect in these numbers, we see even greater potential than anticipated. This is supported by the data from the Census Bureau over the last three months. As Jeff mentioned, single-family construction starts have risen by 27% in the first quarter. This is a clear indication that we can expect continued positive momentum in single-family housing throughout the year. Also, as we discussed last quarter, one of the initial steps in the installation process is insulation, followed by other products later during the homebuilding cycle, and this has certainly been reflected in our revenue. We experienced substantial growth in both fiberglass insulation and overall insulation products during this quarter, with that growth further accelerating into the second quarter. The other products did underperform this quarter as expected, but we anticipate stronger performance from them in the latter half of the year. Regarding multi-family housing, we believe the market will present challenges in 2025. Multi-family units under construction remain at a high level. However, we were pleased with our sales growth in multi-family during this quarter. Our backlogs are strong, and we see significant opportunities to increase our market share, especially in core single-family markets where we are less established in multi-family. Our team is effectively pursuing those chances for both insulation and other products to enhance our offerings in multi-family projects. Overall, we're confident about our position. While we recognize the challenges in the multi-family sector, we believe our established initiatives will help us navigate these difficulties, particularly as we move into 2025. Fortunately, the outlook for single-family housing is robust, representing 60% of our total revenue, which gives us a solid foundation for confidence.

Right. That makes a lot of sense, and I appreciate the detailed answer, Michael. Secondly, your price/mix remains positive. You mentioned this quarter and perhaps the expectation over the next few quarters for larger production builders to really drive the single-family residential business, which you have pointed out can sometimes be a headwind to mix and also slightly impact gross margins, all else being equal. This quarter, the gross margins were very solid, effectively holding around 34% for four consecutive quarters. I would like to hear your thoughts on the price/mix and gross margin aspects. Are these positive gross margins sustainable? How might a larger portion of production builders impact the price/mix? I would appreciate any insights you can share over the next couple of quarters as these trends unfold.

Yes, we are aligned in our view that the growth in the production builder business will continue at a rate significantly higher than other markets we serve. This may pose a headwind for price/mix but will also contribute to volume, effectively balancing each other out. As previously mentioned, this work typically has a lower gross margin, which we anticipate will exert pressure on gross margin over time. However, it does provide a solid EBITDA contribution margin in the range of 20% to 25% for incremental growth. We are pleased to see the anticipated performance in single-family revenue, especially with production builders, starting with insulation and followed by other products later this year. We are also optimistic about the performance of the multi-family business. Although our disclosed metric for commercial sales growth on a same branch basis was slightly down this quarter, this decline is primarily due to our light commercial business, which we had previously indicated would be weak. We expect this weakness to continue throughout the year. However, our heavy commercial business is doing well in terms of revenue growth and margin performance. Overall, the business is operating as we expected, and we feel very good about that.

Our next question will come from Stephen Kim with Evercore ISI.

Yes. Just as a cleanup to what Mike just asked about the production builders. One question I had is, do you have a preference generally between builders' spec production versus their build-to-order production?

That's a great question. And I mean, obviously, they all need to be insulated and insulated to the same code, depending upon the code in their market. But a very nice thing about spec inventory is the consistency associated with it, so that you have a very level production schedule, whereas build-to-order sometimes has a lot of variability in it. And the smoothness of the spec building really helps balance out demand and the labor as we're provided into the job site. So all things being equal, we would probably lean more towards spec, but it's all good business. And clearly, it's a business we want to go after. I don't know if you want to add anything to that.

Yes. I would just say that despite the increase in interest rates or changes in sentiment from the Fed, things have been encouraging. There was a brief slowdown in traffic, but conversations with the production builders indicate that the current traffic count is being viewed more positively. I hadn't planned to mention that in response to the first question, but the reality is that it has been consistently improving, which is beneficial for our planning in terms of building.

Yes. Yes, I get that sense as well about your grade scale, gauging the market conditions. But one question about the spec allowing you to have greater consistency and smoothness and all that. I'm curious as to whether or not that reflects itself or is included in the way you sort of bid on jobs or sort of negotiate with the largest spec production builders? Would it be fair to think that maybe the benefit that you get from there is something that finds its way into your pricing conversations and that maybe you try to split the difference and basically, it's a win-win? Is that a way to think about it? Or is this something that really doesn't enter into the pricing conversation?

No, it really doesn't enter into the pricing conversation. It's more about the overall production schedules they provide us regarding their expectations and timelines. However, that's not a guarantee; it's just an expectation that helps us plan. We would then bid based on that information. I would say that we target certain builders in specific markets, focusing on those with the right subdivisions and products that we believe will sell at a solid pace to keep us busy and active with them. It's a combination of various factors, but it doesn't really influence the overall pricing structure, to be honest.

The second question is about code changes. You mentioned the recent USDA actions migrating to a 2021 code by next year. Could you provide some insight into the potential revenue benefits on a per home basis? I understand that your homes are built to various standards and there is a lot of diversity. However, do you have an average idea of what this might represent? Do you think it falls in the 10% range once the changes take effect? Additionally, do you believe that moving to a 2024 code would provide further benefits, or would it be similar to the 2021 code?

Yes. We expect that any transition to 2024 will not differ significantly from 2021. To address the first part of your question, we agree with your observation regarding the national landscape and our estimates concerning various codes that different municipalities are adopting. There is some balancing due to builders in certain areas using the 2009 code while actually constructing according to the 2021 code. This makes the estimation somewhat nuanced. We believe that our single-family insulation revenue could see a low double-digit benefit, around 10%, if the entire country adopts the 2021 code. However, since some are already building to the 2021 standards, there would be no additional benefit in those areas. In markets still adhering to the 2009 code, the potential benefit could exceed 20%.

Our next question will come from Trey Grooms with Stephens.

Maybe could you talk a little bit about the thoughts on recent price increases we've seen from manufacturers, how that's going so far as far as timing and looking at the price cost, should that drive it higher in 2Q or could it take a little longer to flow through?

Yes, as you know, all four manufacturers have announced price increases. However, one of them has delayed the announcement, both in terms of the amount and timing. It's possible that others may follow suit. The market is still quite tight in terms of supply. Additionally, a plant in Texas is set to come online soon, which should provide some relief. However, to suggest that there will suddenly be a free flow of material and that there won't be support for this increase would likely be inaccurate.

We and others will obviously have to react to the price increase.

Sure. Okay. And then, Jeff, maybe if you could update us on your capital allocation? I mean, in the quarter, you did a few deals. So you've raised the dividend, no buybacks in the quarter, but can you talk about maybe the M&A pipeline and with no buyback in the quarter, maybe how you're kind of balancing those three kind of uses of cash, if you could?

Yes. I don't often say this, but I believe the pipeline is strong. However, we've mentioned before that there's no consistent pattern to these matters, and sometimes they progress slowly or even fail during the diligence process. We've encountered a few deals over the past six to eight months that didn't materialize. It's disappointing, especially after dedicating a lot of time to them and feeling like we were nearing completion, but there are certainly still plenty of opportunities available. This includes what we refer to as regular deals, such as fiberglass installers that we are interested in acquiring, as well as opportunities in our other products and even in some related areas that we want to explore further.

And just out of curiosity, when they don't get there, is that generally due to valuation expectations kind of being out of whack or is there other reasons?

Usually other reasons. Because I'm saying these deals are down the road even from an LOI perspective, and there's something that we don't want to inherit, let's just say, whether it's a business practice or something else.

And it could be financial performance.

Yes. Got it. Okay. So no real change to the pipeline and the outlook here for deals?

No. And I think we are looking a little harder at some adjacencies, we think makes sense.

Okay. Any color you want to give us on that?

Probably not at this point. When we close on one, you can read about it.

Our next question will come from Susan Maklari with Goldman Sachs.

My first question is going back to the gross margin. Michael, you mentioned that we will see a ramp in some of those other products as we move through the year. As you look at the backlog and you think about if that's going to come through the business, from insulation to some of those other products, what does that imply in terms of that gross margin performance? And then also any implications as we think about the light commercial getting a bit weaker and the heavy commercial perhaps staying fairly healthy?

Yes, that's a great question. The other products have lower gross margins compared to insulation. We observed a positive improvement in the gross margin of these other products during the first quarter, but insulation performed even better. This improvement contributed positively to the overall gross margin for the quarter. Looking ahead, we anticipate that as the year progresses and more other products are installed in homes we've already insulated, this may impact gross margin negatively. However, we see significant potential for growth in the single-family sector throughout 2024, and it's essential to balance the growth of insulation with that of other products. As long as we continue to see strong growth in single-family insulation relative to other products, it will be more about the other products catching up and affecting gross margin slightly. We are optimistic about the insulation business's ability to maintain solid growth in the single-family market. As for the commercial side, while the light commercial business has good margins, we believe the ongoing improvements in the heavy commercial sector will help counterbalance the challenges faced by the light commercial sector from a gross margin standpoint.

Okay. That's great color. And then maybe when we also think about the conditions on the ground, the move to the production builders and the spec building in there, what does that imply in terms of SG&A and your ability to leverage some of that overhead cost?

Yes, that's a good question. I mean we do get much better selling leverage and G&A leverage from the volume from the production builders, which is why even though the gross margin is tighter, we feel good about the EBITDA margin contribution. So we should get more OpEx leverage. As we pointed out in our prepared remarks, the first quarter G&A expense was basically exactly as much as it was in fourth quarter of '23. And that's the way that G&A runs, especially when the business is continuing to perform. There's no reason to reduce G&A say at the branch level, when it is continuing to perform even though where the first quarter is always our lowest seasonal quarter in the year.

Our next question will come from Ken Zener with Seaport Research Partners.

I'd like to take a moment to discuss your business growth prospects in relation to your business mix. When we look at established versus developed markets, I'm curious about your perspective on established markets compared to developed markets. If starts are up by 5% or 10%, I'm particularly interested in how your non-insulation penetration is affecting the baseline of starts. You clearly have significant potential for growth in several smaller categories that are distinct from insulation. Do you typically see a 20% increase in starts from that penetration, or could you outline that a bit more as you continue to concentrate on the M&A category?

Well, Ken, it really depends on the market and the products we're installing. We don't simply transition from an insulation-only market to installing all other products overnight. In the slide you're referring to, we have twice the sales per permit in established markets compared to developing ones. Several factors contribute to this. It's not just about higher penetration of the end products; we also see that greater penetration leads to significantly higher market share in that area. Consequently, this increases the revenue per permit in those individual markets. There are many variables at play here. If we consider adding one or two other products to a market, it takes time to build up the market share, and it's uncommon for us to have the same market share in insulation as we do in other products. A lot of factors influence this situation. However, over time, this could potentially contribute an additional 5%, 10%, or 20% revenue to the overall brand.

Well, theoretically, it is possible to have the same share in those products and in some markets, we perform in those products other than insulation. But I guess the other comment I'd make is when you closed out your question, Ken, you said as an M&A strategy, I would say this is as much of an organic strategy, probably more than it is an M&A strategy in a lot of ways.

When it's an M&A strategy, it's a real small tuck-in acquisition that then grows the organic operations not always, but a lot of times.

All right. Appreciate that. And then I know you touched on fiberglass price trends a little bit. But with volume recovery, can you talk about the potential upside, downside related to tight supply and how you feel you're mitigating potential risks of having to go to third-party supplier channels if volume increases? Again, we don't have any margin surprises?

Yes, we have learned many lessons from the past couple of years regarding the tightness of materials and the stress it placed on the organization. We have made significant improvements in our operational efficiency concerning material management and ordering, and we are collaborating closely with our suppliers to ensure we are as efficient as possible in acquiring the materials we need. We are confident in our ability to manage this process. While conditions may remain tight and potentially tighten further, especially as single-family projects increase, we believe that our investments in personnel and procedures have enhanced our ability to avoid having to rely on alternative sources for materials, particularly fiberglass.

It doesn't mean there aren't hiccups.

Right, of course.

To Michael's point, I guess a combination of Jeff Hyer and actually Brad Wheeler, our COO, who was not at the time our COO were kind of managing this ball, and we've added a wingman and so neither one of them now are having to handle it. We've got to guide full time, kind of playing traffic cop as it relates to fiberglass.

Could you perhaps be a little more specific? I realize if there's a secret sauce, you don't want to give it away. But from the outside, if supply is tight, you just could get it? Or is it that you're bidding more in line with your known supply? Could you expand a little bit?

Yes. As we've mentioned many times, we aim to appropriately value our services and align that with the right amount of volume. This requires understanding our supply and focusing on serving our top priority customers. It's about recognizing where our supply will be and determining the volume of work we want to pursue. However, I want to emphasize that supply is not limiting our bidding activity or our ability to secure the jobs we are interested in.

It's an important clarification.

Our next question will come from Mike Dahl with RBC Capital Markets.

Can I go back to the mix dynamic a little bit? And I just want to be clear, because I understand the narrative and expectation for the production builder mix. But quite frankly, if we look at the starts growth on the single-family side, it's not all that different than what the public builders are recording. So it does seem like the privates are actually holding their own better than a lot of people might have thought. So in your quarter and what was reflected in the gross margin in the quarter, were you already seeing a meaningful shift towards production builders or that's something that you're still trying to talk about as kind of a prospective? Haven't seen it yet, but keep in mind, we still do expect this through the year and into the next year.

Yes, there are two parts to that answer. We observed a shift towards production builders in January, and this trend is ongoing. We believe that while the 27% increase in starts during the first quarter reflects builders' backlogs and orders, the starts also account for speculative building, which is not evident in backlogs or orders. Therefore, the production builders, particularly those with a high level of speculative building, are likely seeing stronger start numbers than what is reported, as the specifications primarily appear in permits, starts, completions, and sales at the end. From our viewpoint, the backlog and order data from builders somewhat understate the actual starts being generated at this time due to speculative inventory. However, we do not want to downplay the importance of regional and local builders, who are still building at a good pace, albeit not accelerating as quickly as production builders.

Okay. I understand. It looks like the private builders might be faring a little better. That’s not necessarily a bad thing, especially regarding margins, but we want to ensure we’re on the same page. Regarding the multi-family situation, units under construction have recently shown a negative trend. If we analyze the relationship between starts and completions, it appears that units under construction could remain steady into the fourth quarter and drop by about 20% to 30%. I recognize there's a lag in this data, but in terms of setting expectations, when you consider the challenges for next year, what kind of environment are you anticipating as a baseline for how much of a headwind that could present?

I believe the macro environment will present significant challenges, similar to what you are suggesting. We expect multi-family permits and starts to return to historical trends this year, and they already are, although the average for multi-family permits in the first quarter has been about 430, which is arguably above trend. Looking ahead to the first part of 2025, particularly the first quarter, we anticipate some carryover from units currently under construction. The entire industry will likely experience a market in 2025 that resembles the multi-family landscape from the decade before COVID. This scenario is actually quite favorable for us. While it requires adjustment from the market, we are optimistic because it coincides with a positive trend in single-family housing. Single-family constitutes our largest end market at 60%, compared to multi-family's 15% to 17%. We are confident that the strength in single-family housing will help counterbalance the challenges in the multi-family sector. Furthermore, as we mentioned earlier, we expect to perform well above the market average by increasing our market share in multi-family, especially through cross-selling additional products.

Our next question will come from Jeffrey Stevenson with Loop Capital.

Congrats on the nice quarter. So Mike, you talked about opportunities for multifamily share gains in 2025 from expanding your successful centralized model from your CQ insulation acquisition in key IBP markets. How long will it take to get this centralized model for things like bidding labor and payments across your branch footprint and do you have a long runway?

We do have a pretty long runway. There are plenty of our markets that don't use CQ or have the benefit of CQ that already have great relationships and multi-family market. So we would never put that model into those markets. We would like them to continue to be kind of independent, if you will, of the CQ model, so to speak. But the team at CQ has identified markets that have great opportunity for them where we have strong single-family market share and lower weak multi-family market share, and they're working on performing on that strategy each and every day, and they're making incremental progress every single month on expanding their sort of bidding and managing network within that identified portion of our footprint.

It's really important that if we consider a smaller acquisition in the market where we currently don't have a presence, it focuses on the growth of the branch and relies heavily on labor. One individual with extensive experience in our organization points out that success depends on having the right workforce. If work is available, labor can be secured; however, securing work also necessitates obtaining labor. This process takes some time, but that is the strategy we are pursuing with CQ in those markets.

Okay. Great. No, that's good color. And then I was wondering if you could talk about the opportunity with spray foam over the coming years given the long-term industry demand tailwinds from changes in building codes and then on top of that, the tight fiberglass supply environment?

Yes. It's our belief that, particularly if the whole country doesn't effectively go to the '21 energy code that it will definitely mean greater penetration of spray foam. It's yet to fully be seen exactly what that will look like, whether it's a hybrid home, that's part fiberglass, part spray foam. We do think that fiberglass will continue to remain the dominant product for residential insulation. But we would definitely can see a pathway towards greater usage of spray foam. But to be clear, spray foam is the most technical thing that we install, and it requires the highest trained installers that we have, and it also requires fairly expensive equipment that is on a very long lead time. And as a consequence, you can't just flip the switch overnight and then convert things to spray foam. It is a transition and it takes time, which is why we think the way that the FHA, VA and potentially Fannie and Freddie coming in and requiring installed to the '21 energy code being pushed out, if you will, to probably '25, '26 is constructive because it gives the industry time to size up, if you will, for this new spray foam opportunity.

Our next question will come from Keith Hughes with Truist.

Just revisiting multi-family quickly. You've shared your perspective on the market, which has remained fairly stable in terms of units. The margins reported by your competitors in the multi-family sector have been exceptionally high due to the strong demand, and that is likely to decrease. Can you provide some estimates or guidance on how this might integrate into your future plans and what impact it could have on margins or EBITDA?

Yes. I mean, our team has done a great job of maintaining the margin profile within the work that we're bidding. I mean, clearly, as the market gets tighter, there'll continue to be some pressure there. But our team is doing an excellent job of really identifying the right jobs, the right opportunities and making sure that we get paid for the value that our services provide. I would say that there have been a couple of questions around this. We have consistently talked about full year adjusted gross margins in that 30% to 32% range. Admittedly, we have been consistently for multiple quarters above that level. But our thinking long-term relative to that 30% to 32% really is informed by, one, this growth in production builder business that we've been talking about, and that multi-family, again, as it goes back to a more normalized level of, call it, 300,000 to 400,000 units. There will probably be some level of pricing pressure there, but our team has done an excellent job of resisting that. And I think our performance in that business demonstrates their ability to be successful.

Our next question will come from Collin Verron with Jefferies.

This is actually Collin on for Phil. I just wanted to go to price/mix. It was strong in the quarter, especially with that mix headwind from the production builder side. I guess just with the manufacturers announcing the price increases, any color as to how those conversations have gone for you to your customer base going forward? Should we expect the contribution from pricing to really build in 2Q? Any color there as to how you're thinking about pricing going forward?

Yes. Reflecting on the quarter, it feels like it happened a while ago, but the market did experience significant price increases in the first quarter. Our team has successfully worked to align selling prices and installation prices with these material price hikes, which is reflected in our price/mix calculations. As Jeff mentioned, material availability remains tight. It's still early to predict the effects of the recently announced price increase, but we will collaborate with our customers to ensure a fair balance between increasing material costs and our installation pricing. We still anticipate positive pricing trends as the year progresses, although the mix aspect will have a downward influence on the price/mix due to the strong performance in multi-family sales growth this quarter, which is slowing compared to earlier rates. As the single-family production builder sector grows and takes over from multi-family, this will negatively affect the mix part of the price/mix calculation.

Our next question will come from Adam Baumgarten with Zelman & Associates.

You talked about residential same-branch growth accelerating year-to-date. Have you seen maybe on a monthly basis, positive year-over-year volumes in single-family at this point?

Yes. April was an unusual month because it had two additional selling days. However, even when accounting for those extra selling days, we were quite pleased with the growth in single-family sales during April.

Okay. Got it. And then just on the manufacturer price increases, we've got 2 effectively this year so far. Do you expect further increases maybe in the back half of the year at this point given the tightness?

If Jeff were in the room and able to answer, he would probably say something along the lines that they may not be able to help themselves. But there probably is inflationary pressures still. So is there a chance, yes, I think so.

Okay. Got it. And then just lastly for me. Just anything weather-wise that impacted the quarter negatively and maybe push some of the volume out into subsequent quarters?

Yes. I mean weather in January and February was a little challenging, but March was much better. So I would say nothing of significance that really moved by one way or another.

That will conclude today's question-and-answer session. I will now turn the call over to Jeff Edwards for any additional or closing remarks.

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

This does conclude today's program. Thank you for your participation. You may now disconnect.