Installed Building Products, Inc. Q2 FY2024 Earnings Call

Greetings, and welcome to Installed Building Products Fiscal 2024 Second Quarter Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darren Hicks, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Installed Building Products' second quarter 2024 earnings conference call. Earlier today, we issued a press release on our financial results for the second 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. 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. During the second quarter, we began the process of winding down the operations of a single branch that installed non-core building products into newly constructed commercial structures. We believe that excluding the financial results of this branch from our typical income statement metrics is useful in understanding and evaluating the results of our ongoing operations, as it is non-core. As such, all income statement figures mentioned on this call exclude the aforementioned branch results and are thus net of dispositions. Our second quarter sales results continue to reflect fundamental improvements in our single-family end market, relative to the last 12 months and good sales growth in our multi-family end market. We believe our customers are committed to meeting new construction homeownership 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 in the near term, despite ongoing industry headwinds as it relates to multi-family unit starts. Longer term, we believe opportunities in our multi-family end markets remain attractive. I'm encouraged by the positive same-branch sales growth we achieved in our single-family end market. The nearly 8% year-over-year increase during the quarter was the strongest increase in same-branch sales since the fourth quarter of 2022. 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 ability to align our pricing with the value we offer our customers were key to our second quarter single-family sales results. Our multi-family installation sales growth continued to be resilient with the apparent operational benefits of our centralized, service-oriented model. On a same branch basis, multi-family sales in our Installation segment increased 5%. In addition, across our branches, there continues to be an opportunity to sell IBP's installation services in our markets that historically have not served multi-family customers. The sales growth results for our commercial installation segment reflect different dynamics in the two submarkets that make up our commercial end market. The heavy commercial market continues to experience healthy growth, while our light commercial market continues to experience some headwinds as the light commercial construction cycle tends to lag single-family construction activity. Excluding dispositions, commercial sales growth was modestly positive in the quarter. Strong profitability during the second quarter continued to reflect our strategic priority to apply our local market expertise to efficiently complete the most operationally and financially attractive jobs for our local business. As a result, our second quarter adjusted EBITDA margin expanded to 18.5%. 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 meaningful opportunities still exist for us to expand our geographic presence and diversify the mix of building products we install across our national branch network. During the 2024 second quarter and in July, we completed the following acquisitions: a North Carolina-based installer of insulation and other diversified building products serving single-family and multi-family customers with annual revenue over $6 million. An Oklahoma-based installer of insulation and a Massachusetts-based installer of gutters with combined annual revenue of approximately $14 million, and an Illinois-based installer of a diversified set of building products with annual revenue of approximately $20 million. To date, we have acquired over $50 million of annual revenue, and we expect 2024 to be another favorable year of acquisition growth. 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 and value for our shareholders. Based on the U.S. Census Bureau, single-family starts year-to-date through June '24 have increased by 16%. We believe the current pace of starts growth supports a healthy market environment for our single-family installation services. Additionally, beyond the typical demand drivers, we believe the United States government incentives and planned mandates towards more stringent energy efficiency standards in new and existing single-family homes will be favorable for our business. We intend to continue to focus on what 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. construction market. 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. I remain excited by the prospects ahead for IBP in the broader insulation and other product installation business. So, with this review, I'd like to turn the call over to Michael to provide more detail on our second quarter financial results.

Thank you, Jeff, and good morning, everyone. As Jeff noted earlier, all income statement references in my comments are net of dispositions. Consolidated net revenue for the second quarter increased 8% to $740 million compared to $687 million for the same period last year. The increase in sales during the quarter was driven by growth in our new and existing residential markets. Our single-family same branch sales increased 8%, while our multi-family same branch sales increased 5% during the second quarter. Although the components behind our price/mix and volume disclosure have several moving parts that are difficult to forecast and quantify, we continue to experience top line improvement from a 6.4% increase in price/mix during the second quarter, which more than offset modestly lighter job volumes, down 1.4% relative to the second quarter last year. Our business achieved strong results in the second quarter, as measured by an adjusted gross margin of 34.9%, adjusted net profit margin of 11.6% and adjusted EBITDA margin of 18.5%. Adjusted selling and administrative expense as a percent of second quarter sales was 18.3% due to higher variable compensation related to higher gross profit and EBITDA performance from the prior year period. Within that result, administrative expenses, excluding variable compensation, in the second quarter of 2024 were flat with the first quarter of 2024. Adjusted EBITDA for the 2024 second quarter increased 11.3% to a record $136.6 million, and adjusted EBITDA margin improved to 18.5% compared to 17.9% 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 second quarter, total same-branch incremental adjusted EBITDA margin was 29%. Adjusted net income per diluted share improved 14.5% to $3.02 per share. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect third quarter 2024 amortization expense of approximately $10 million, and full year 2024 expense of approximately $42 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 six months ended June 30, 2024, we generated $164 million in cash flow from operations compared to $138 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. Our second quarter net interest expense decreased to $8.2 million from $9.8 million in the prior year period, primarily due to a greater amount of interest income from higher interest rates on higher balances of cash and cash equivalents relative to the year-ago period. At June 30, 2024, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 0.97x compared to 1.32x at June 30, 2023, which is well below our stated target of 2x. At June 30, 2024, we had $355 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the three months ended June 30, 2024 were approximately $22 million combined, which was approximately 3% of revenue, roughly in line with 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. During the 2024 second quarter, IBP repurchased 215,000 shares of its common stock at a total cost of $46 million. At June 30, 2024, the company had over $250 million available under its stock repurchase program. IBP's Board of Directors approved the third quarter dividend of $0.35 per share, which is payable on September 30, 2024, to stockholders of record on September 15, 2024. The third 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 you. Operator, let's open up the call for questions.

Your first question comes from Stephen Kim with Evercore ISI. Please go ahead.

Thanks very much, guys. Thanks for all the color. But as usual, we have additional questions. I guess my first one was, if you could speak to any verticals that maybe slowed a little bit in the quarter that's worth calling out or maybe missed your internal projections, any verticals? And then broadly, when we think about fiberglass, curious if you could talk about how the price pass-through is going. My sense is, it's going well, but wanted to get your sense and then also, what you think the potential is for a third increase this year?

Stephen, good morning. This is Michael. So, on the first part of that question relative to the verticals, I would say that all lines of business, all end markets, performed very much in line with our expectations. But as we had highlighted in previous quarters, clearly, the weakest part of the business right now is the light commercial business, which naturally cycles behind single-family development. So, we would expect, as we go into the latter half of this year and early part of next year, given the strength that we've seen in single-family that, that business would start to recover. But I would say that across the board, the business performed as expected from a revenue perspective and actually performed better than we expected from a gross margin perspective. I don't know if you want to talk to that.

Yes. Stephen, this is Jeff. In terms of material, material tightness and pricing, it is still a very tight market. We expect it to continue to stay that way probably through the end of the year. Obviously, it's an environment in which manufacturers have been able to realize price and it's one in which where we try to at least make up the ground that we need to make up. I can speculate as to whether there's a third one or not; it's a little late in the year, I suppose. So maybe I won't speculate.

Okay. Great. That's fine. I guess, Mike, you talked a little bit about the incentive compensation. I assume that was maybe weighing a little bit on the incremental organic EBITDA margin. Wondering if there was anything else maybe to call out because that came in a little lower than we were expecting. And then, with respect to the HUD mandate on single-family, the Energy Code HUD mandate, which is coming next year. I guess, I'm just curious to hear if you could address that and your thoughts around that. We've been getting questions as to whether or not we might see FHFA follow on. And there's been also questioning around whether or not all of this just may disappear, maybe due to the Chevron ruling. I don't know what the word is, but you know what I mean by the Chevron case. And then, the potential for us that a Republican suite may just undo all this. So, just curious if you could talk about the HUD mandate broadly.

We understand that the process is ongoing and while there may be some delays in implementation, it's hard to predict changes due to shifts in the political landscape. However, our customers are aligned and making progress towards implementing these changes, which ultimately benefits builders since the tax credit available will cover the costs of adhering to the '21 Energy Code. We believe this tax incentive will remain intact and beneficial not only for builders but also for homeowners. Thus, regardless of political outcomes, the economic rationale will likely encourage more builders to comply with the '21 Energy Code. Regarding your question on margins, our adjusted gross margin and adjusted EBITDA margin are both net of any dispositions, and from our perspective, we are performing well. The increase in selling and administrative costs relative to revenue is largely due to variable compensation. Looking at the last three quarters, this measure has remained consistent as a percentage of revenue. Excluding variable compensation, general and administrative expenses have remained stable over the past few quarters.

I just want to emphasize that the 2021 Code was not created randomly; it was established for environmental benefits and energy savings. It's well known that insulation, in terms of its impact on home energy costs and its environmental effects, is probably one of the most effective measures to address these issues, ranking highly in effectiveness.

Okay, great. Thanks very much, guys. Perfect.

Next question, Adam Baumgarten with Zelman & Associates. Please go ahead.

Hi, guys, thanks for taking my questions. First, on multi-family, just kind of how we think about the back half of the year. It's decelerated a bit, but still positive. Maybe, do you expect positive same-store sales growth in multi-family in the back half at this point?

We do not provide guidance, but I can share some insights regarding the multi-family sector. Our backlogs remain significantly high. In terms of units under construction compared to new starts, single-family homes are currently at around seven to eight months, which aligns with long-term trends prior to COVID. Cycle times in single-family construction have largely normalized, with slight improvements above the usual standards. For the multi-family market, as many on this call likely know, the backlog remains elevated, with a typical timeframe of about 20 to 23 months for starts; we are currently seeing around 28 to 29 months. This indicates that the number of units under construction needs to decrease by approximately 25% to 30% to return to normal levels, which poses a significant challenge for both the industry and us. Despite this, we are optimistic about our ability to capture market share and enhance the cross-selling of our multi-family products. However, the substantial adjustment in construction units will affect our multi-family sales. Interestingly, we now believe that the normalization of units under construction may occur sooner than we anticipated just a few months ago. This could lead to a stabilization phase sooner than expected, allowing us to focus on increasing our market share and achieving revenue growth in multi-family through those gains rather than relying on overall market growth. While I understand I haven’t directly answered your question, I think there’s a good chance that if the multi-family units under construction total between 600,000 and 700,000 completions for the year, we could reach that normalized range of 20 to 23 months, ultimately providing a stable operating environment for multi-family construction.

Okay. Got it. Now, that's helpful. And then just on the disposition, maybe just a little more color on what that non-core product line was. And then if we think about the rest of your footprint, any other opportunities or plans for additional dispositions?

Absolutely not. All of our other branches are performing to our expectations or even exceeding our expectations. This was a one-off deal that obviously, in hindsight, we wish we hadn't done. It is a non-core product. We really don't install it in any of our locations and it was into the commercial and multi-family vertical. And the good news is, it's behind us now.

Okay. Thank you.

Next question, Michael Rehaut with JPMorgan. Please go ahead.

Hi, thanks. Good morning, everyone. I wanted to start with the gross margins. You have been averaging around 34% over the last four or five quarters, which is significantly above your longer-term goal of 30% to 32%. It seems like you are consistently exceeding that target. A quarter or two ago, you hinted at the possibility of continued strength in this metric, perhaps maintaining these levels through the end of the year. While you're not providing specific guidance, you indicated that there are no immediate factors likely to reduce this figure significantly in the near term. I'm curious if you still believe this 34% level can be sustained. I know you've mentioned potential negative mix effects that could impact this metric, but do you have any insights about the next few quarters? What might lead to a decrease, or are you feeling more confident that this level can be maintained in the near to medium term?

Yes, thanks for that question. What I would say around gross margin is that adjusted gross margin in the quarter, net of dispositions, was 34.9%. So let's just call it 35%. And you're right, in the previous quarters, we've been running around 34%. So we certainly don't expect it to go above the 35%. But to say for the near term, and really for the back half of the year, where it should be more in the 32% to 34% range as opposed to the 30% to 32%, I think, is reasonable. We have had in the quarter mix headwinds as we've talked on multiple quarters about the impact of the growth in production builder business. I would say that we've been doing an excellent job improving the efficiency of completing jobs for the production builders, which has been helping gross margin improvement as it relates there. We had very strong growth with the production builders in the quarter. Our sales to the production builders was up approximately 20% in the quarter with production builders and about 5% with regional and local builders, which is actually consistent with what we've been talking about, that the regional and local guys were going to have a good year, but nothing in comparison to what the production builders had and that the vast majority of the growth in starts would be coming from their production builders, and we're certainly seeing that play out. But I think it's reasonable to assume that for the near to medium term that there is certainly going above the 35% is probably not likely, but staying in a 32% to 34% range for the near to medium term is reasonable.

Great. That's very helpful. Appreciate that. I guess second question, maybe just around the M&A backdrop. You've kind of highlighted doing about $50 million in annualized revenue so far year-to-date. Last year, you kind of missed the $100 million target by a little bit. How would you characterize the pipeline and the opportunity set in front of you today maybe versus six or 12 months ago? I think if I recall right, you kind of reiterated the $100 million of outlook for this year. But what would you say the odds are of maybe exceeding that? And is the M&A kind of outlook or pipeline increasing, decreasing, staying the same? Any kind of change in how you're thinking about what you might do this year or next year?

Yes, this is Jeff. I know we often describe our pipeline as robust, but we also acknowledge that it can be unpredictable. However, compared to six or twelve months ago, historically speaking, we currently have one of the strongest pipelines we've ever seen. If a larger deal worth over $30 million that fell through at the end of last year had gone through, it would have contributed significantly to our results, likely pushing us past the $100 million mark. Looking ahead, we are very optimistic about the prospects in the pipeline and the deals that are already signed under LOI. The outcome really hinges on timing. If you assess everything over a rolling period rather than fixed calendar days, we believe we can still achieve our targets.

Yes. Great. Thanks so much.

Next question, Mike Dahl with RBC Capital Markets. Please go ahead.

Hi. Thanks for taking my questions. Just on the price mix in the quarter. I know there's a lot of moving pieces, and it's hard to be too specific, but can you give us a ballpark sense of kind of the composition of true price versus the moving pieces on mix?

We definitely got price in the quarter. And given the acceleration in single-family same branch revenue being higher than multi-family same branch revenue, just when factoring in those two components, the way that our price/mix is determined, I would say that we got more price than we did mix because of the higher growth rate from single-family.

Okay, helpful. Regarding the disposed branch, it appears there were significant issues, including negative net revenue and a substantial negative adjusted EBITDA. You referred to this as the process of winding down and mentioned it is now behind you. Could you elaborate on why the results were under such pressure, as this had a considerable effect on the overall company results? Additionally, will there be any lingering impacts in the second half? Any extra insight you can provide would be appreciated.

Yes, we anticipate that operations will be completely wound down by the beginning of next year. However, going forward, this will have an immaterial impact on our results. The reason the adjustments were significant this quarter is that we decided to dispose of the location and address all existing issues. This branch is entirely non-core to our business and has never been profitable.

I'm hesitant to even it a branch. I mean, really, it's product line.

Yes, former branch, so...but more than that, I think it's really product line in which we don't really participate. Exactly. And quite frankly, we've done over 200 acquisitions. This is the first time this has happened. I think that's a pretty darn good track record.

Yes. Just to follow up quickly, since it's excluded from EBITDA but not from gross margin and SG&A, does that mean your adjusted gross margin and SG&A would have been higher otherwise? If you could provide some insight on whether that contributed to your SG&A being higher than expected, was there more of the cost included in that? Any details on that breakdown would be appreciated.

We aimed to present the information clearly, particularly in the tables showing the adjustments. As mentioned earlier, the adjusted gross margin for the quarter, excluding disposals, would have been 34.9%. This adjustment had a negative impact on essentially all lines of the income statement.

Next question, Reuben Garner with Benchmark Company. Please go ahead.

Thank you. Good morning, guys.

Good morning.

So, sorry to harp on this, but just a clarification on the commercial front. Is the run rate of revenue and profit loss that's being stripped out in the second quarter the right way to think about on a go-forward basis, meaning it added $7 million EBITDA to take that business out? Was it losing that much money on a quarterly basis?

It lost that much money in the second quarter, yes. And it is commercial. So, our same branch commercial revenue, excluding the disposition, was basically flat in the quarter and not negative.

Okay. And then, you guys typically compare your volume performance to kind of the completions environment for the two end markets. You guys are not quite national yet. There's some MSAs that you're not in. Is there anything geographical that you would call out that may lead to differences between your performance and the completions environment broadly?

I'm glad you asked that question because it's important and we've tried to stress that looking at our same branch revenue in relation to completions in any single quarter is not as impactful or useful as examining it over a longer timeframe. For the first half of the year, our same branch sales grew around 4.7%, which we can round to 5%. In contrast, single-family completions were only up about 1%. This difference of approximately 400 basis points, or mid-single digits, aligns with what we've always said about being a mid-single-digit number above completions. As for multi-family, we have seen strong growth in same branch multi-family sales over several quarters. However, given the current dynamics regarding multi-family units under construction, there may be a temporary disconnect between our multi-family same branch sales growth and multi-family completions until the market normalizes at a more sustainable level. We anticipate this normalization to occur possibly by late this year or more likely in the first quarter of next year.

And if I could just sneak in a quick follow-up there, guys. The multi-family impact to mix on a go-forward basis as single-family recovers and multi-family fades. Can you just remind us how that plays out?

It makes the mix component weaker. It's a headwind to the mix because a single-family job can be a 10th of or even a hundredth of what a multi-family job is.

Great. Thanks, guys. Good luck going forward.

Thank you.

Next question, Ken Zener with Seaport Research Partners. Please go ahead.

Good morning, everybody.

Good morning, Ken.

Just a couple of questions here. Given the strength of growth from the large builders and your, I guess, record gross margin adjusted. Can you talk to why that is not a drag, as that happened in the beginning of the pandemic, given your exposure to certain customers, it seems to be somewhat counterintuitive. Can you talk to why that is playing out that way?

Our field team is doing an incredible job of managing production and making sure they're aligning the value of our services with our customers. And, to be honest with you, that gets reflected then in variable compensation, and they're getting rewarded for continuing to do that.

Going back to the time when you had increased gross margin exposure, you mentioned SG&A leverage. However, regarding pricing structure, Jeff, you indicated that after considering prices, it seems that large builders gain leverage. Still, there are really only a couple of companies dominating the service and installation space. Does this imply that your pricing discipline, meaning your margins, is sustainable? If there aren't many bids for customers to choose from, it appears to indicate a notable shift this quarter, especially with the growth and your stronger gross margins as a result.

Well, this is Michael. I'll start, and Jeff can finish. There are many factors affecting gross margin. Although we experience strong growth with the large public builders, who are our biggest customers, they represent a relatively small portion of our total revenue. However, our team has done an excellent job of aligning pricing with costs and maximizing efficiency in the field, which works to our advantage. That said, at the local level, there isn't just a couple of contractors competing for work; it's still a very competitive landscape. Both established builders, regardless of whether they are public, regional, or local, have options, and we all need to stand out through our service.

All right.

I believe I understand the question. However, I want to emphasize that we are rewarded for our performance. While it may seem a bit unclear, I have observed that some of the larger builders genuinely advocate for this with their teams, perhaps more so than others. This sometimes places us in competitive scenarios where price is the sole focus. Nonetheless, many large builders in some of our key markets prioritize ensuring projects are insulated and pass inspections promptly to maintain their volume.

Understood. You mentioned that it could be interpreted that you achieved more in price than in mix, as this is reported somewhat differently compared to one of your competitors. Does this imply that my calculations suggest price was positive while mix may have been negative? Can you provide some insights on the positive and negative aspects of that component?

Both price and mix were positive. My point was that there was more impact from price than from mix, but both were solid.

Next question, Phil Ng with Jefferies. Please go ahead.

Hi, guys. Your commentary on going forward still sounds pretty upbeat. Certainly, housing starts have been a little choppier in the last few months with rates staying a bit more elevated. Now, certainly, we're talking about potential rate cuts. So, I'm just curious, what are you hearing from your customers? Are they managing their business any differently? Are you seeing any slowdown in quoting activity at all?

We're still very busy. I mean, I think it's clear that the growth rate in starts is coming down. The publics that have reported so far, I think their orders are up like 5%, 6%. So, still growth, but not the kind of growth that we were seeing earlier in the year. So, I mean, honestly, a mid-single-digit single-family growth environment is extremely healthy for us and for the industry. And if we continue a multi-year path in that kind of a market, we feel very good about our ability to perform. Clearly, there are significant headwinds as we talked about earlier, relative to multi-family. But if we do get to a stabilized level, based on the current starts, say early '25 as opposed to even back half of '25, we think that creates a more stable operating environment for us and for the industry. And on the multi-family side, again, really allows us to focus on what we're doing very well is gaining market share, not just with insulation, but also with the other products.

And I was going to make that comment, too. I mean we're just, we're a little different than just the general multi-family market, as we said in our prepared remarks, both because we're not penetrated from a geographic perspective, everywhere that we are capable of doing multi-family work yet, and we continue, through one of our operations that has kind of built itself into bidding and quoting and managing machine for those branches, continues to really deliver a great pipeline of projects that we can bid on and hopefully get the work from.

Got you. And then, Michael, appreciate you don't guide per se, but I think earlier conversations in the year, perhaps mid-single-digit volume growth for your business organically. I think your comments were, seems plausible and achievable. Appreciating there's a lag in starts and completion cycle times and all that great stuff. Are you expecting volumes to kind of inflect? What kind of path do you see? Is that mid-single-digit framework still a good way to think about it for the full year?

Yes. If we just look at, say, single-family, so single-family volumes in the quarter were up mid-single digits.

Okay. But in terms of the broader framework, in terms of your demand overall, is that still a good way to think about the year? Or maybe some moderation, just given some of the drop that we've seen recently.

Yes. From a volume perspective, we anticipate facing challenges, especially in the light commercial business. We expect these challenges to persist throughout the latter half of this year, but the light commercial sector should be on much firmer ground by 2025.

Okay. Can you remind us like how much of your commercial business is light versus heavy, the splits?

Sure. So, roughly 10% of total revenue is light commercial and 7% is heavy commercial.

Okay. Appreciate the color guys.

Next question, Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Susan.

My first question is on the ancillary products. Can you talk a bit about how they performed in the quarter? And that's something that you've talked about increasingly coming through in the back half of this year. Are we still on track with that? And just how should we think about the implications that we'll have from a margin perspective as we think about the upcoming next several quarters?

Yes. The sales growth in the other products was fairly consistent with insulation, although insulation was slightly ahead. We expect that the other products may see higher growth as we progress. However, in terms of the residential aspect of our business—specifically single-family, multi-family, and new residential—we are making strides in improving the gross margin for those products. Although these margins are still significantly lower than insulation, we are making progress. This is one reason we believe that in the near to medium term, gross margins will likely remain stable, staying within the 32 to 34 range.

Okay. My follow-up is regarding the stock you purchased this quarter, which I believe is the largest repurchase since 2022. Can you explain the reasoning behind that decision? Also, how should we consider potential future share buybacks?

Yes, and we will continue to do it. We believe that as we continue to mature as a public company, and we continue to generate very strong free cash flow, that it gives us a lot of opportunities, if you will, from a capital allocation perspective, and we feel very confident that we can currently support an even accelerated M&A platform or pipeline of deals above our $100 million target, and at the same time, continue to repurchase shares on a more consistent basis.

Okay. Thank you, and good luck with everything.

Thank you.

Next question, Keith Hughes with Truist Securities. Please go ahead.

Thank you. Just some details on this branch you're getting out of. Are there going to be any appreciable asset sales that you would anticipate from this move to close it?

No, nothing significant. In fact, for the second half of the year, until it is completely disposed of, it will have an immaterial impact on results going forward.

And I assume that would include EBITDA, there is something about an unfavorable contract settlement in the language of the press release. Was that all taken care of in the quarter and there is no impact in the second half?

Correct. And that's the reason why the quarterly EBITDA contribution was so negative.

Okay. Can you tell us what product line this is, as you're getting out? I know it's non-core, but specifically what?

It's non-core.

Okay. Can you provide more details about your share repurchase discussions? I know some occurred during the quarter. Have you considered how much may be allocated for this beyond the dividend? How are you approaching this?

Yes. I mean, if you look over the past, say, five years, and from a capital allocation perspective, roughly 60% or almost $550 million went to acquisitions, and 20% or almost $200 million went to share repurchases. And then, about $160 million went to the dividend. So, I think, as we've said, the number one priority will continue to be M&A, then share repurchases, and then the dividend. And as we said in answer to a previous question, it's our belief that we will be more consistent in regular share repurchases on a go-forward basis.

Okay. Thank you.

I would like to turn the floor over to Jeff Edwards for closing remarks.

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

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