Greetings and welcome to Installed Building Products Third Quarter 2024 Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Darren Hicks. Thank you. You may begin.

Good morning and welcome to Installed Building Products Third Quarter 2024 Earnings 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 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. IBP delivered record third quarter revenue and profitability supported by organic growth across all of our end markets. Our record quarterly results highlight the talent, commitment and focus of IBP's employees across the country who provide our customers with reliable, high-quality building product installation services. I want to mention that late September and early October has been a very difficult time for many people, including numerous IBP employees who were affected by the two hurricanes that hit the Southeast and the Mid-Atlantic regions of the United States. Our thoughts go out to those who have managed through the destruction and a big thank you goes out to everyone who rallied together and shared resources to support our employees and help restore operations. As we look to the future, the long-term view on demand for our installed service is unchanged. We believe long-term trends across our residential and commercial end markets are favorable as builders work to meet demand through the increased supply of houses, apartments and commercial structures. Looking at our third quarter sales performance, I am encouraged by consolidated sales growth of nearly 8% and same branch growth of 5%. In our largest end market, single-family sales growth was supported by a growing proportion of sales from national production builders in the quarter. Additionally, 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 third quarter single-family sales results. Our multifamily installation sales growth continued to be resilient with the apparent operational benefits of our centralized service-oriented model. On a same-branch basis, multifamily sales in our Installation segment increased over 2%. We continue to see geographic and end market expansion opportunities in multifamily with an ability to sell IBP's installation services in markets where we historically have not had meaningful participation. Strong quarterly same-branch sales growth in our commercial end market reflects positive growth in both the light and heavy commercial markets. Profitability during the third 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. This contributed to achieving all-time record quarterly diluted net income per share and adjusted EBITDA in the third quarter. 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 third quarter and in October, we completed the following acquisitions: an Illinois-based residential and commercial installer of building products serving key markets in the Midwest with annual revenue of approximately $20 million and a specialty distributor focused on supplying insulation and related accessories and machinery to residential and commercial end markets with annual revenue of over $22 million. To date, we have acquired over $73 million of annual revenue. Based on our current acquisition pipeline, we expect more deals to be completed before year-end. In addition, although deal timing is hard to predict, our current outlook for acquisition opportunities in 2025 is strong. Based on the U.S. Census Bureau, single-family starts year-to-date through September 2024 have increased by 10%. We believe the current pace of starts growth supports a healthy demand environment for our single-family installation services in the near future. Additionally, beyond the typical demand drivers, we continue to believe the United States government incentives and planned mandates toward more stringent energy efficiency standards in new and existing single-family homes will be favorable for our business. Our strong customer relationships, experienced leadership team, national scale and diverse product categories across multiple end markets are advantages when navigating the ebbs and flows of demand related to the U.S. construction market. Through the prevailing market conditions, we remain focused on profitability and effective capital allocation to drive earnings growth and value for our shareholders. I'm proud of our team's continued success and commitment to doing an excellent job for our customers. To everyone at IBP, thank you. I remain excited by the prospects ahead for IBP and the broader installation and other building product installation business. So with this overview, I'd like to turn the call over to Michael to provide more detail on our third quarter financial results.

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the third quarter increased 8% to an all-time record of $761 million compared to $707 million for the same period last year. The increase in sales during the quarter reflected growth across all our end markets and sales from IBP's recent acquisitions. Our residential same-branch installation sales increased approximately 5% during the third 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 2.7% increase in price/mix during the third quarter. We also experienced a 2.6% increase in job volumes relative to the third quarter last year. With respect to profit margins in the third quarter, our business achieved adjusted gross margin of 33.8%, down from 34.3% in the prior-year period. The margin reductions during the quarter were primarily due to a greater proportion of our single-family sales shifting to production builders as well as higher growth in non-insulation product sales relative to a year ago. Adjusted selling and administrative expense as a percent of third quarter sales was 18.5% due primarily to higher insurance expense, facility and warehouse lease expense, and initial start-up costs related to building out our internal accessory sourcing efforts from the prior-year period. Administrative expenses as a percent of third quarter sales in the third quarter of 2024 were flat with the second quarter of 2024. Adjusted EBITDA for the 2024 third quarter increased to an all-time record of $132 million, reflecting an adjusted EBITDA margin of 17.4%. For the 9 months ended September 30, 2024, same-branch incremental EBITDA margins were 20%. Incremental EBITDA margins can be highly variable from quarter to quarter, but we continue to target full year long-term same-branch incremental adjusted EBITDA margins in the range of 20% to 25%. Adjusted net income increased to $80 million or $2.85 per diluted share. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect fourth quarter 2024 amortization expense of approximately $10 million and full year 2025 expense of approximately $37 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 9 months ended September 30, 2024, we generated $265 million in cash flow from operations compared to $251 million in the prior-year period. The year-over-year increase in operating cash flow was primarily associated with higher net income. Our third quarter net interest expense decreased to $8 million from $10 million in the prior-year period primarily due to lower cash interest expense following the completion of the term loan refinancing in the first quarter of 2024 and a greater amount of interest income from higher balances of cash and cash equivalents relative to the year-ago period. At September 30, 2024, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 0.94x compared to 1.1x at September 30, 2023, which is well below our stated target of 2x. At September 30, 2024, we had $342 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the three months ended September 30, 2024, were approximately $25 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 prioritize expanding the business through acquisition and returning capital to shareholders. During the 2024 third quarter, IBP repurchased 100,000 shares of its common stock in a privately negotiated transaction at a total cost of $21 million, bringing our repurchases for the first 9 months of the year to $66 million. At September 30, 2024, the company had approximately $234 million available under its stock repurchase program. IBP's Board of Directors approved a fourth quarter dividend of $0.35 per share, which is payable on December 31, 2024, to stockholders of record on December 15, 2024. The fourth 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 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.

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

Yeah, thanks very much guys. Appreciate all the information thus far. If you could. I think you mentioned that some of the margin factors that you cited, yes, I think you cited 4 of them this quarter, market share by large builders, non-insulation sales, start-up expenses from internal distribution and higher insurance. I was wondering if you could give us some general sense of the size of the impacts, particularly the first 3. And could you elaborate a little bit on what those start-up expenses were for the internal distribution?

Sure, this is Michael. We've observed that the growth rates from production builders and other products significantly influence our gross margin. During the quarter, the production builder segment expanded at twice the rate compared to regional and local builders. Insulation products, including both fiberglass and spray foam, experienced similar growth dynamics, with other products growing at double the rate of insulation. Notably, insulation growth was affected by a decline in spray foam revenue during the quarter. The growth rate for fiberglass revenue was comparable to that of other products. While all our end products showed growth, spray foam was the exception with a mid-single-digit decline. This decline is noteworthy because spray foam, along with fiberglass, is one of our highest-margin offerings. The decrease in spray foam pricing contributed to a nearly 100 basis point adverse effect on gross margin, which translated to a $1 million to $1.5 million impact on EBITDA. Additionally, we incurred start-up expenses associated with enhancing our internal sourcing capabilities to improve product distribution and reduce reliance on external purchasing from distributors like Home Depot and Lowe's, which we estimated at around $1 million for the quarter. Furthermore, as Jeff mentioned in his remarks, we experienced disruptions from hurricanes in September and October. While all our employees are safe, some suffered significant losses at home, resulting in a loss of workdays in those affected markets. We estimate that the revenue impact from the hurricanes in September was approximately $2 million, with a slightly lesser effect of under $1 million on EBITDA.

That's very helpful. It seems like these factors will likely continue into the fourth quarter. If I'm mistaken, please correct me, but it didn't seem like anything you described was limited to just the third quarter, including the insurance. My next question shifts to discussing the impact of the election. We have been wondering if a Trump administration might not prioritize energy efficiency initiatives and new construction, which could lead to an energy rollback. Another of his focuses has been labor, particularly deportation. I'm interested in your thoughts on how a Trump presidency and possible executive actions could affect either your labor base or plans for stricter energy codes in 2025.

This is Jeff. Regarding the energy code question, we have never relied on the possibility of upcoming legislation, specifically the Fannie and Freddie related energy improvements, which are still a couple of years away. For decades, our approach has been to anticipate the usual gradual adoption of stricter progressive energy codes at both local and sometimes statewide levels, rather than the more aggressive changes that we are not counting on. This reflects our current stance on the codes. From a labor perspective, we’ve successfully hired and trained a workforce for the past 30 years, regardless of the circumstances. It has always been business as usual, even during the Great Recession when we continued to hire and train staff. While our retention rates have improved compared to the market and industry standards, turnover remains high in this sector. Therefore, I believe it will continue to be business as usual moving forward.

Yes. This is Michael. I want to highlight that regarding the energy code aspect, as most on this call are aware, when Owens Corning shared their earnings, they also announced an expansion of their Kansas City facility. They mentioned that this expansion is not based on the increased energy codes we've discussed in relation to Fannie and Freddie. It’s simply a reflection of strong demand. As the shift in starts balances out between single-family and multifamily homes, it results in greater demand for fiberglass. We view this as a positive endorsement for the industry overall.

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

Thank you. Good morning, everyone. My first question is on the mix within the business. We saw volume versus price/mix really come in very closely in line with each other this quarter for the first time in a very long time, probably. What does that say about operating conditions on the ground? Does it suggest that we're closer to some normalization with that? And do you think that those two will stay closer as you look out from here? Is that something that we should be anticipating as we think about the next several quarters or years?

I believe it's more appropriate to consider this over the long term rather than in quarterly terms, given the volatility in our disclosure of volume and price/mix. The factors influencing this make it challenging to predict quarter-to-quarter outcomes. However, for the full year, especially looking ahead to 2025, we anticipate a greater normalization between the two. We are observing trends, particularly from the third quarter into the fourth quarter, indicating that volumes are outpacing price/mix. We’re in an environment of stable inflation, and we're seeing strong growth from production builders and in the single-family segment. Preliminary surveys from builders indicate that single-family starts in October increased by 10% to 14%, which we consider very positive. Multifamily appears to be stabilizing in its rate of decline, and we're noticing an increase in bidding activity in that sector. Our centralized CQ team, responsible for about 40% of our multifamily business, is successfully diversifying the products they’re bidding on, beyond just insulation. We are optimistic about our trajectory into 2025, with single-family prospects looking good and multifamily showing signs of stabilization. Although multifamily will continue to face challenges in the fourth quarter and the early part of next year, we are confident in our long-term capacity to grow market share and deliver significant value through our services.

Okay. That's helpful. And then turning to G&A. I know you mentioned this a little bit in the prior question, but just as we do look out, can you talk about the ability to leverage those costs over time?

Yes, volume is certainly beneficial. General and administrative expenses are relatively stable; they tend to increase with inflation. When examining SG&A as a percentage of revenue from the second quarter to the third quarter, they are mostly consistent, showing a slight improvement in the third quarter. We did incur some additional costs related to insurance and start-up expenses associated with our internal sourcing strategy, which, as previously mentioned, are costs that will persist. If we look at the third quarter of last year, our adjusted selling and administrative expense percentage was among the lowest we've seen in quite some time. Over the last four quarters, our current position aligns well with our performance over the previous quarters. We are quite satisfied with our gross margin, especially considering the challenges we faced with spray foam and notable obstacles in both the production builder sector and growth in other products. It is indeed impressive that our gross margin remained stable in light of these three significant factors, reflecting the team's excellent effort to minimize margin loss during the quarter.

Yes. No, the gross margin was very impressive.

Our next question is from Michael Rehaut with JPMorgan. Please proceed with your question.

Hi, thanks. Good morning. I appreciate your time and commend you on the quarter. I wanted to revisit your comments about your satisfaction with gross margins. Looking back over the past two or three years, in 2022, your gross margins were at 31%. They ranged between 30% and 31% from 2020 to 2022. However, starting in 2023, it seems there has been a shift toward the high 33% range, with the last five or six quarters consistently above that figure. Meanwhile, SG&A has increased slightly, averaging in the mid-18% range over the past four quarters, compared to 16% to 17% previously. Can you explain what changes have taken place in the business? Are we now settling into a high 33% gross margin and mid-18% SG&A structure? Do you believe this is a permanent change, or are there factors that could impact these metrics over the next 12 to 24 months?

We continue to believe that a gross margin in the range of 32% to 34% is sustainable. Over the past five quarters, the adjusted gross margin has averaged 34%, indicating we have been consistently near the upper end of that range. While there will be some fluctuations from quarter to quarter, we are confident in maintaining this range for the full year. As for the adjusted SG&A percentage, it will fluctuate each quarter due to seasonal impacts in the business. Increased volume will help improve our leverage on SG&A costs over time. However, the inflation in cost of goods sold occurred rapidly during 2021 and 2022. Since SG&A expenses lag behind, it takes longer for changes to reflect in our financials. For instance, with a three-year lease, any rent increases won't impact us until the lease is up for renewal. This delay is also seen in the wages of our administrative staff, both at the branches and corporate office, as it takes time for labor inflation to be fully realized in our financials. Currently, the run rate for G&A costs remains stable, and we expect that as we move into 2025, focusing on G&A rather than variable selling expenses, we should typically see a 3% to 5% inflation rate. Additionally, acquisitions will contribute to G&A as they bring their own costs.

Thank you for that answer, Michael. I want to explore the gross margin further. You've consistently been at the upper end of the 32% to 34% range for the last several quarters. This quarter, you achieved 33.8% despite challenges from production builders, non-insulation sales, and other factors, maintaining that higher end. I'm curious about what specific factors may be contributing to this stability that you believe may not be reliable in the coming years. As production and non-insulation growth increases, do you anticipate a shift towards the middle of that range? I would appreciate your insights on how you've managed to sustain this higher margin.

Yes, I would say, and this aligns with what we've been stating for several quarters, that the reason we provide a gross margin range of 32% to 34% is due to the higher level of sales from production builders, which we believe is a trend that will continue. However, in October, we experienced a similar rate of sales growth from production builders as we did from regional and local builders, which we were pleased to see. Over time, the growth of other products and the production builder business will inevitably exert pressure on gross margin. It's our responsibility to ensure that as we manage this, we also enhance the margins of other products and perform efficiently for the production builders to maximize value from those sales. I believe this is a continuous effort for us. We are a company highly focused on gross margin and EBITDA dollars. The team has excelled in their performance, and I am confident they will maintain that standard.

Our next question comes from Adam Baumgarten with Zelman & Associates. Please proceed with your question.

Hey guys, good morning. Just on spray foam, can you remind us what percentage of revenue that accounts for? And also how much of a headwind pricing was in spray foam to overall price mix?

So spray foam is about 10% of overall revenue. And we estimate that it impacted gross margin less than 100 basis points.

Okay. Got it.

But more than the decline from second quarter to third quarter in adjusted gross margin.

Okay. And that should stick with the business probably for the next few quarters, right?

Yes.

Okay. Got it. And then just on multifamily, that's been decelerating a bit. I think you made the comment that it's stabilizing. Do you expect that to turn negative either in the fourth quarter or even in the first half of '25? I know you said that it could still be a headwind over that time frame.

Yes. I mean, it's definitely going to be a headwind. And the comment about the stabilization was really more as it relates to starts. And as you know, the start to install on multifamily is much greater than the start to install on single-family. So even with starts stabilizing and maybe even coming up a little to a more kind of normalized level, it's going to take a while before we feel the impact of that. So it's definitely going to be over the next couple of quarters, more a negative than a positive. Although I would say that our team, CQ, which we've talked about a lot, they represent about 40% of our multifamily revenue, are doing an incredible job of keeping their backlogs up and really maintaining their pace of sales. So we feel good that we will continue to perform better than what the overall market opportunity would present itself in multifamily.

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

This is Maggie on behalf of Phil. I wanted to explore your demand outlook based on customer type. It appears that production builders are experiencing much faster growth compared to your more regional builders, although there is still growth among the regional builders. However, with rates having increased over the past month, it seems the regional builders have less flexibility regarding options like rate buydowns, which the production builders might be capitalizing on. Could you share what you are hearing from the different customer types about the demand outlook?

It's more encouraging than we expected considering the current rate environment. There has been volatility in traffic and demand for builders. I believe having the election behind us and resolving the uncertainty related to it will be beneficial. We'll see how rates evolve over the next three to six months. I also agree that production builders have significantly more flexibility to offer rate buydowns compared to regional and local builders. While the latter can do it, they tend not to the same extent as production builders. Thus, the operating environment remains similar to what we experienced in the first half of this year, favoring production builders, who are actively working to gain market share.

Got it. That's helpful. And then the outperformance in multifamily or I guess, continued positive performance and you've talked about opportunities for expansion in multifamily, is that more organically? Or are you seeing M&A opportunities in that space? And then are you talking about geographic expansion or actually increasing penetration of other products for those end markets?

Yes, that's...

Both, from products and geographic expansion.

Yes. It's not acquisition related. It's really organic geographic expansion and other products. Yes.

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

Hey, good morning everyone. So you're not facing any inflation right now on fiberglass or I guess, no new pricing actions from insulation suppliers right now. But kind of thinking maybe higher level and a little longer term, as we think about the supply-demand picture for '25, I mean there's going to be some puts and takes, I understand, but do you think the dynamics are at play that will lend itself to a more kind of inflationary environment? Or how are you looking at it maybe, again, from just a high level?

This is Jeff. Supply remains constrained despite the recent additions in capacity. As Michael noted earlier, the situation with Owens Corning indicates that these capacity increases are unlikely to lead to a free-flowing market for several years. Therefore, supply will continue to be tight. Additionally, we are taking steps to avoid finding ourselves in previous situations where material shortages made it difficult to meet urgent purchasing needs. This proactive approach will be beneficial. I believe the market will remain healthy, with rising prices. Looking ahead to the next few years, other manufacturers are also considering capacity increases, but this will be a lengthy process. New builds take about three years or more, and adding a line to an existing facility typically takes around 24 to 36 months, as highlighted by Owens Corning.

Yes, that all makes sense. I wanted to follow up, Michael, on a comment you made. I apologize if you already explained it in detail, but you mentioned that the trends from the third quarter should carry into the fourth. I believe you were referring to how volume is performing better than price mix. Could you elaborate on that? Are you suggesting we might see a similar situation moving forward, or should we be prepared for a potential deceleration in the price mix, or perhaps stabilization or growth in volume? Can you provide a bit more clarity on that comment?

Yes. It was really more related to kind of '25 and all of '25 in that if the trends that we're seeing now continue, that is higher sales from the production builders, lower multifamily sales and higher other product sales that we would expect volume to be greater than price mix.

Our next question is from Keith Hughes with Truist Securities. Please proceed with your question.

Can you hear me now? Okay. Sorry about that. I'm not sure what happened. Let me go back to my question. If we look at price versus cost, specifically on fiberglass, how has that been running third, fourth quarter? Is it a health hindrance at this point?

I would say it's fairly neutral. I would say maybe slightly negative, but neutral to slightly negative.

Is that something that's going to continue through the winter months?

Yes. I would say that the third quarter reflected the negative aspect of the price cost there. So yes, it would continue, but it's similar to what we experienced in the third quarter.

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

Thank you for taking my questions. My first question is a follow-up on the spray foam pricing dynamic. Can you explain how the pricing developed throughout the quarter and if the exit rate in October is indicative of similar impacts in the fourth quarter? Did the pricing decline during the quarter in such a way that the impact in the fourth quarter will be greater than what we experienced in the third quarter?

Yes, we'll still have a similar impact in the fourth quarter.

Okay. And similar question on the distribution investments as you think about kind of ramping those. I know they're going to continue, but in terms of order of magnitude, thinking about 4Q or into '25, is it similar order of magnitude? Or is there going to be an incremental ramp there?

It won't be a significant incremental ramp, but it will slowly increase as we continue to add more points where we can gain efficiencies in this internal sourcing. So it will be lifting G&A. But at the same time, we should be getting benefit from a cost of goods sold perspective because we're gaining, again, benefit from sourcing internally as opposed to externally sourcing some of the materials that we need.

Our next question is from Jeffrey Stevenson with Loop Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions today. So commercial organic sales increased 6% after experiencing year-over-year market declines last quarter. I was wondering if this was primarily due to a challenging comparison from last year's second quarter, or if there was any sequential improvement in commercial demand. Additionally, could you discuss whether there have been any negative impacts from project delays in either your light or heavy commercial businesses?

As we've mentioned in previous calls, we had been facing challenges with the performance of our heavy commercial business. However, we've managed to get it back to a point where both gross margin and EBITDA performance are satisfactory again. Consequently, we've authorized them to begin boosting revenue at these higher margin levels, and you can see the benefits of that. The growth in commercial was mainly driven by the heavy commercial sector. The light commercial side, as we've discussed in earlier quarters, remains weak, and we anticipate that will continue for the remainder of this year. We do expect the light commercial business to improve significantly in the second half of next year, but it may still be somewhat sluggish in the first half. The heavy commercial business deserves recognition for the outstanding job the team has done in enhancing and now growing that segment at a good pace, while also meeting our profit expectations. We're genuinely pleased with the team's progress, especially considering how quickly they have turned things around from where it was before.

No, that's great to hear. And industry supply constraints have been brought up quite a bit here on the fiberglass side. Did it have any negative impact at all on your volume growth in the third quarter? And then can you talk about how you're positioned from an inventory perspective into the fourth quarter, given the ongoing supply constraints you're seeing?

Yes. Even though we mentioned that supply was tight, it didn't lead to any jobs being left incomplete due to material shortages. I didn't mean to suggest that. So, I don't really believe it had an impact in that respect.

And from an inventory perspective, I think this internal sourcing that we're doing is helping.

Yes.

We're doing a much better job of managing inventory internally and making sure that the right material gets to the right branches, which is helping alleviate the pressure that we would normally experience in an extremely tight environment like this.

Our next question comes from Reuben Garner with The Benchmark Company. Please proceed with your question.

Thank you. Good morning, everyone. I have a couple of clarifications. Michael, you mentioned normalization when talking about volume and price mix. I understand how your reporting and the multifamily segment can significantly impact results, positively or negatively. Is there a possibility that the price/mix could turn negative in the next 12 months as we adapt demand between single-family and multifamily? Could you clarify the normalization comment? That would be helpful.

Yes. As you know, a challenge to price and mix is the decline in multifamily projects and the increase in production builders and other products. We observe this trend and believe it will persist in the fourth quarter and throughout the first half of 2025. Consequently, this will significantly impact price and mix negatively.

Okay. I haven't seen any price increases announced from manufacturers for fiberglass in early '25, at least not in the U.S. Can you discuss this? It's been a while since we observed such a situation, and that might change. If a price increase is not announced for January, could you share your conversations with customers and how you manage other inflationary pressures during negotiations? I understand you're pricing a job rather than just the material, but could you explain how that might look in that scenario?

Yes. So this is Jeff. So I have little doubt that the manufacturers will, in fact, seek a price increase. They typically don't announce any earlier than about 6 weeks from when the effective date and that's even slid at this point, sometimes. But over the last number of price increases where it was delayed even more, slightly more than that. But generally speaking, call it, 6 weeks. So we're not yet past the time frame that wouldn't and couldn't result in an early next year price increase, not just the announcement, but even taking effect. So that's what I suspect. It's still a healthy housing environment despite it being choppy at times and choppy in certain places. And so I anticipate that we'll be having conversations with builders and that is the backdrop, right, that we'd be facing material price increases potentially from the manufacturers and other inflationary pressures. And so then it's our job to work with our good customers and builders to come to a satisfactory solution for everybody.

But this is what we do every day, every week, every month, every year.

Our next question comes from Kurt Yinger with D.A. Davidson. Please proceed with your question.

Great, thanks. And good morning everyone. Just one for me. A lot of discussion, obviously, on gross margin and SG&A, but I wanted to kind of bring it back to EBITDA incrementals. And I was just curious what kind of external variables, internal focus areas you think will be kind of most important as you hopefully go out and deliver against kind of the long-term targets, maybe putting demand aside?

We aim to control growth in general and administrative expenses while maintaining gross margins around 32% to 34%. As mentioned earlier, we have been closer to 34% and are seeing positive volume gains and healthy sales growth. This is how we achieve the 20% to 25% range. Excluding recent disposals over the past nine months, we are at the lower end of our incremental target ranges but still within the range. Therefore, we remain optimistic that looking at 20% to 25% for the full year reflects the appropriate approach for incrementals from our organic same-branch business.

Our next question comes from Ken Zener with Seaport Research Partners. Please proceed with your question.

What a quarter. It seems like you've been exceptionally disclosure oriented this morning, Michael, I must say.

Is that good or bad?

No, I think it's exceptionally important at a time like this when we're having cross currents, right, on the macro related to rates, even though demand is there and it could be picking up and how inflation, i.e., gross margins are going to translate in that type of environment for a distributor installer, right? So I think it's exceptionally important. So I'm going to try going back at this gross margin question. It seemed to be the bulk of people's focus today. Your gross margins went down, 2016 into 2018, about 200 bps. That's about 29%, call it 150 bps, 29% to 28%. Can you walk us through at that time, what caused gross margin degradation? Because it seems like you're kind of happy, actually, 32% to 34%. You're at the high end right now, but it could be at 32% and you'd be okay with that. You wouldn't have any firearms. So could you just walk us through the last time you kind of saw that gross margin pressure exist in your business and if those are the factors that would be necessary, again?

Yes. Material was extremely tight due to the fire at the Knauf facility. It has been some time, and a lot has happened since then. Additionally, the Federal Reserve was raising rates, and the current environment with rate buydowns was not prevalent. This resulted in a tightening in the market. Manufacturers were, quite frankly, taking advantage of the tightness. It was a unique period where we had an extended time before we could align our pricing with our customers to reflect the cost increases we were experiencing. However, we eventually managed to reach alignment; it just took longer due to the unfortunate combination of a negative housing market and this catastrophic event occurring simultaneously.

Right. But tight supply exists today. Rates, the Fed...

Yes. But there's a difference, Ken, between a tight supply environment and an almost emergency supply environment, right? Because...

Right. No, I agree, I agree.

Yes. Because what happened when the Knauf plant went down is it caused tremendous panic buying. I would say that material is tight now, but there's not panic buying in the market at all. I mean, people might be a little more over inventoried than they normally would be, but that's been the case since '22, right?

Right.

The demand that the fiberglass guys are seeing right now is reflective of the demand in the market. And, in our opinion, there's nothing extraordinary or unusual about that relative to the overall market demand.

Excellent. Jeff, could you provide us with some regional insights? As you mentioned, the order rates for public builders have remained relatively flat year-over-year. Their inventory levels are mostly stable to increasing, with more completed specifications. Could you clarify what you mean by large production builders and what percentage of sales that represents, whether in units or dollars? Additionally, could you discuss the disparities we're noticing across different regions in the U.S.? For instance, Tampa differs from Orlando, and Dallas varies from Austin. Your insights on this would help us understand how these factors might affect your margins, or if they don’t have an impact, why that might be the case. Yes, Michael has covered a lot of that. However, I was quite taken aback by the last question and I am still amazed that Michael, who is only a few months younger than I am, can remember all that. To answer your question, we've discussed how larger production builders are gaining market share, particularly in the first-time homebuyer segment, with many of them operating nearly 100% on a speculative basis. We had a conversation about this yesterday, and it has several positive implications for us and for them. As you might expect, the performance in the Smile region is still better than what we observe in the Northeast and Central regions. Both of these regions tend to have a higher concentration of regional builders compared to Smile. That’s where we’ve noticed pressure geographically. We don’t anticipate this trend changing soon, especially considering the outlook on interest rates and the current market conditions.

Yes. As Jeff mentioned, right now, the starts for production builders or single-family homes are more significant than orders due to the shift towards spec homes. The percentage of spec homes among production builders is currently at its highest level ever, which does not reflect in orders but does appear in starts. We track all public builder data and analyze it against our markets and our sales to them. We believe that currently, starts are a better indicator of what will be built than backlog or orders.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

I'd just like to thank all of you for your questions and I look forward to our next quarterly call. Thank you.

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