Installed Building Products, Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to the Installed Building Products Second Quarter 2025 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. Thank you, sir. You may begin.

Good morning, and welcome to Installed Building Products Second Quarter 2025 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 federal securities laws. These forward-looking statements are based on management's current beliefs and expectations and are subject to factors that could cause actual results to differ materially from those described today. Please refer to our SEC filings for cautionary statements and risk factors. 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 non-GAAP measures to the nearest GAAP equivalent in the company's earnings release and investor presentation, both of which are available in the Investor Relations section of our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; Michael Miller, our Chief Financial Officer; and we are also joined by Jason Niswonger, our Chief Administrative and Sustainability Officer. Jeff, I'll now turn the call over to you.

Thanks, Darren, and good morning to everyone joining us today. 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 continues to deliver strong financial results, demonstrating the high-value installation services we provide our homebuilding customers. Our market positioning and focus on service is especially valuable as many homebuilders rely on relationships with experienced partners to navigate today's evolving market dynamics. While we expect housing affordability to remain a challenge over the near term, we are confident in the long-term fundamentals of the U.S. housing industry and the effectiveness of our growth-focused capital allocation strategy. We are focused on growing earnings and cash flow through geographic expansion and end product and end market diversification. We will continue to explore opportunities for operational improvements and remain disciplined with capital allocation. Through the first half of 2025, we paid nearly $68 million in cash dividends or $2.44 per diluted share and repurchased approximately $84 million of our common stock. As we pursue profitable growth while maximizing returns for our shareholders, we remain committed to doing the right thing for our employees, customers, and communities. Looking at our second quarter sales performance, consolidated sales increased 3% and same-branch sales grew 1%. In our largest end market, same-branch new single-family installation sales were roughly flat compared to a nearly 10% decline in U.S. single-family completions relative to the same period last year. Our relative performance is encouraging and reflects a tremendous effort from employees at branches across the nation as well as at support group. Sales in our multifamily end market held up well on a relative basis with backlogs at key branches showing growth on a year-over-year basis. According to the U.S. Census Bureau, we have seen double-digit multifamily starts growth in the 2025 second quarter relative to the same period last year. This is the first time we have witnessed double-digit multifamily starts growth in nearly two years and the first time observing two consecutive quarters of positive starts growth since the first quarter of 2023. While this data is subject to revisions, the conclusion that the market is improving is consistent with the multifamily activity we are seeing in several markets in which we compete. On a same-branch basis, second-quarter commercial sales in our Installation segment increased 9% from the prior year period. Our heavy commercial activity continued to be the dominant driver of sales growth in this end market. Based on the growth in our heavy commercial backlog, we believe sales are poised to remain healthy beyond 2025. During the six months ended June 30, 2025, cash flow from operating activities increased 11% to $182 million, which primarily reflected effective management of working capital. The pace of acquisitions has slowed this year relative to prior years, but we remain disciplined in our approach to find well-run businesses that will support attractive returns on invested capital, make strategic sense, and fit well culturally. Our core residential installation end market remains highly fragmented with considerable opportunity for consolidation. As previously announced, during the 2025 second quarter, we acquired a Wisconsin-based installer of spray foam and air barrier products in the commercial end market with annual revenue of nearly $4 million. To date, we have acquired over $10 million of annual revenue, and we continue to work toward acquiring over $100 million in annual revenue. Based on the U.S. Census Bureau, single-family starts year-to-date through June 2025 have decreased by 7%. With the current interest rate environment and related housing affordability challenges expected to persist, we believe a larger than previously expected decline in single-family housing starts is likely this year. Still, over the long term, we continue to believe that our business is supported by a fundamental undersupply of residential housing and the gradual adoption of advanced building codes for the purpose of improved energy efficiency across the U.S. We believe IBP continues to operate from a position of strength as we take advantage of opportunities and navigate any challenges in the second half of the year. Our strong customer relationships, experienced leadership team, national scale, and diverse product categories across multiple end markets create a solid platform for IBP to perform well through the ebbs and flows of demand related to the U.S. construction market. Although macroeconomic uncertainty influences prevailing market conditions in our industry and many others, 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 encouraged by our competitive positioning, and I'm optimistic about the prospects ahead for IBP and the broader insulation and complementary building product installation business. So with this overview, 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. Consolidated net revenue for the second quarter increased 3% to a second-quarter record of $760 million compared to $738 million for the same period last year. Same-branch sales for the Installation segment increased 1% for the second quarter with a 9% increase in commercial same-branch sales partially offset by a single-digit decline in residential same-branch sales. Although the components behind our price/mix and volume disclosure have several moving parts that are difficult to forecast and quantify, we achieved a 0.8% increase in price/mix during the second quarter. This result was offset by a 1.1% decrease in job volumes relative to the second quarter last year. It is important to note that the results of our heavy commercial end market are not included in the price/mix volume disclosures. With respect to profit margins, in the second quarter, our business achieved adjusted gross margin of 34.2%, an increase from 34.1% in the prior year period and up from 32.7% in the 2025 first quarter. The year-over-year increase in margin during the quarter was in part related to a shift in customer and product mix. Adjusted selling and administrative expense as a percent of second quarter sales was 18.8% compared to 18.5% in the prior year period. The increase was due primarily to higher administrative wages and higher facility costs. Of the $7 million increase in adjusted selling and administrative expense, approximately $3 million was due to acquisitions. Adjusted EBITDA for the 2025 second quarter increased to $134 million, reflecting an adjusted EBITDA margin of 17.6%, and adjusted net income increased to $81 million or $2.95 per diluted share. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect third-quarter 2025 amortization expense of approximately $10 million and full year 2025 expense of approximately $40 million. We would expect these estimates to change with any acquisitions we complete in future periods. Also, we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31, 2025. Now let's look at our liquidity position, balance sheet, and capital requirements in more detail. For the six months ended June 30, 2025, we generated $182 million in cash flow from operations compared to $164 million in the prior year period. The year-over-year increase in operating cash flow was purely associated with improvements in working capital, which more than offset lower year-to-date net income. Our second-quarter net interest expense was $8 million for both the 2025 and 2024 second quarters, as lower interest income from investments was offset by lower cash interest expense on outstanding debt. At June 30, 2025, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.15x compared to 1x at June 30, 2024, which remains well below our stated target of 2x. At June 30, 2025, we had $356 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the three months ended June 30, 2025, were approximately $16 million combined, which was approximately 2% of revenue. With our strong liquidity position and modest financial leverage, we continue to prioritize allocating capital to achieve the best returns on capital and distributing excess cash to shareholders. During the 2025 second quarter, IBP repurchased 300,000 shares of its common stock at a total cost of $49 million and 500,000 shares at a total cost of $84 million during the six months ended June 30, 2025. At June 30, 2025, the company had approximately $417 million available under its stock repurchase program. IBP's Board of Directors approved the third-quarter dividend of $0.37 per share, which is payable on September 30, 2025, to stockholders of record on September 15, 2025. 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 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.

Yes, really impressive results here in a challenging environment. Lots of things we could potentially ask, but I guess you alluded to customer and product mix improving. You said it's not due to heavy commercial because it's not included, I think, in there. But just wanted to get a little bit more detail on what kind of mix improvement you're seeing, like kind of which end markets, what kind of customer change are we seeing, that kind of thing?

Thank you for the question, Stephen. There are two main points regarding the mix. Firstly, regional and local builders have shown better performance compared to large national public builders during the quarter, similar to what we observed in the first quarter. However, performance across all single-family business segments improved significantly compared to the first quarter of last year, partly due to the weather challenges we faced earlier this year that we managed to overcome and recover from faster than anticipated in the second quarter. This was definitely a positive factor. Our sales growth with regional and local builders, driven by their higher average job prices, positively impacted the price/mix disclosure. Additionally, we experienced solid growth in complementary products and have seen significant gross margin improvements in these areas. Although the margins remain lower than insulation, the gross margin for other products improved by 100 basis points during the quarter.

And just to follow up on that complementary product margin improvement. What do you attribute that to? Or was it, again, an issue of certain products within the complementary category that did particularly well, and those happen to be the ones that have higher margins than others? Just help us understand a little bit about what's going on within that.

There was a notable improvement across the board. It's important to acknowledge that there will always be fluctuations, especially when analyzing just one quarter. The team has been dedicated to enhancing margins, particularly in light of the ongoing challenges in the single-family sector, as well as anticipated ongoing weaknesses in multifamily through 2025. As we have discussed in previous quarters, this has led them to concentrate on the opportunities presented by complementary products. From their perspective, they aim to align those margins as closely as possible with insulation margins. Additionally, CQ is performing exceptionally well; they manage about 45% of our multifamily revenue and have increased the uptake of complementary products in that space at strong margins. Multiple factors have aligned to support the team's impressive performance this quarter.

Our next question comes from Michael Rehaut with JPMorgan.

This is as on for Alex Isaac on for Michael today. Congrats on the quarter. I wanted to ask about fiberglass and how price and supply trended in 2Q and then how you see that going on through the back half and potentially affecting price cost going forward?

This is Michael again. We consistently collaborate with both our customers and suppliers regarding all our materials, including fiberglass. Effective management of our pricing and costs is essential. Owens Corning has indicated that there has not been significant price deflation in the fiberglass market. We maintain that the overall environment for the products we buy domestically will remain relatively stable. While the impact from tariffs in the first half of the year has been minimal, we do not anticipate a significant effect in the third quarter. However, we believe there could be an impact in the fourth quarter, possibly around $5 million related to the tariffs. We will certainly work with our customers and suppliers to mitigate any effects that the tariffs might cause, but we recognize that this presents a challenge as we approach the fourth quarter of this year.

And then on the follow-up, I want to ask about single-family and multifamily volumes. And you mentioned that there might be some downside to the single-family, but I want to ask in 2Q, what sort of drove the outperformance of IBP against the overall market? And how do you see that trending throughout the rest of the year?

Yes. So this is Michael again. And I would say that, first and foremost, we have to thank and compliment our field team; they did an incredible job of performing in what is a very challenging environment in both single-family and multifamily. What I'll do is just sort of call out some states and the states that I'm going to call out are all larger states for us where we have greater than $10 million of revenue a quarter. So we had mid- to high single-digit growth in the Carolinas, so both North and South Carolina, Virginia, Texas, Tennessee, Ohio, Indiana, and Minnesota. So what you're seeing there is we're really benefiting from our historical strength in our Midwestern markets and upper Midwestern markets. The large states for us that were sort of flattish in the quarter were California, Georgia, Washington, and New Jersey. Really, the big exception for us from a performance perspective on a statewide basis was Florida. I think everybody knows that Florida, both from a single-family and multifamily perspective, is really struggling right now. And I think most people on the call realize that while we have a very large presence in Florida, our market share there is not what it should be, and we've talked about that before. I guess, perversely to some extent, our lower than what we should have market share benefited us given the fact that Florida was so negative during the quarter.

Yes. So let's say our share is exactly where we wanted it to be. Not maybe too much.

Exactly. Florida is a good state, but we were particularly impressed with the team's efforts in Texas, considering the challenges in some Texas markets. The team performed exceptionally well, and we are very proud of their accomplishments.

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

I would like to follow up on the exceptional performance in the quarter. I appreciate the insights about different regions. This outperformance is significant compared to any metrics available for our competitors or suppliers. I would like more details beyond just regional execution, specifically regarding the impact of weather and timing issues, and perhaps a breakdown of complementary growth versus installation growth. Understanding these factors would help clarify the reasons behind such a strong performance compared to the market.

Yes. As I mentioned earlier, we experienced good growth, which was actually better than we expected from the regional and local builders. This growth continued through July, which turned out to be a solid month for us. The new residential sector, combining single-family and multifamily, saw a slight increase, essentially flat. In contrast, the new commercial sector, which includes both light and heavy commercial business, experienced a significant rise in the high teens. Our team continues to perform well. While we anticipate facing more challenges in the single-family and multifamily markets as the year progresses, we are confident that our team will still perform better than the overall market. This was evidenced in the second quarter, where regional and local builders showed mid-single-digit growth for us. For context, the larger public builders account for about 30% of our total new single-family revenue, which is approximately 60% of our overall revenue. Therefore, the strong performance from regional and local builders contributed positively to our relative success compared to the overall market.

That's helpful. On the topic of forward-looking insights, I understand you don't provide guidance, but considering your remarks about the lag starts or accelerating declines and increasing market pressures, the July commentary is certainly useful. Can you share any additional information regarding your outlook for the remainder of the year in your markets and how you anticipate your performance will quantitatively compare?

Yes, and thank you for emphasizing that we do not provide guidance. However, I would like to share that our perspective on the single-family market aligns closely with the commentary shared by other companies this quarter. We are seeing declines in single-family starts, which I believe are in the double digits, considering high single digits as well. It will become increasingly challenging on the starts front as we move into the second half of the year. Each quarter, we analyze our sales alongside public reports and consensus data. At the end of last year, our sales were projected to be up 3%. After the first quarter, forecasts indicated a decline of 3%, and after the second quarter, projections show that our sales in the second half are likely to decrease by at least 5%, which translates to mid-single digits. The reason I am sharing this information is that we anticipate significant challenges in the single-family market during the latter part of the year. On the multifamily side, we are very pleased with our progress. Starts are increasing, indicating a strong foundation for the multifamily sector. Our multifamily backlogs are growing, and bidding activity has risen. We feel positive about the outlook for multifamily in 2026. However, I must stress that we will encounter growing challenges in multifamily as we continue to address the units under construction in our existing backlog. This will consistently be a headwind for the second half of the year. Nonetheless, as has been the case for many years, our multifamily business is expected to outperform the overall market.

Our next question comes from Susan Maklari with Goldman Sachs.

Good morning, everyone. My first question is going back to the gross margin. I want to talk a bit about the strength that you saw there. I appreciate your comments on the complementary products and how those are adding. But it also seems like the core gross margin in there is holding on well despite all the pressures that are going on in housing. Can you talk a bit more about what you're seeing in there and how we should think about puts and takes over the coming quarters?

Yes, the improvement in gross margin from complementary products is certainly beneficial, but it's worth noting that their margin remains below that of insulation. Since insulation revenue remained flat this quarter while complementary products saw a high single-digit increase, the lower margin from these products puts some pressure on overall gross margin. This is primarily because a larger portion of sales is coming from lower-margin products, even though they have improved significantly compared to the previous quarter. I apologize for the complexity of that answer. Another factor impacting this quarter, as well as the last, is the heavy commercial business's performance. In fact, Alpha has been a significant positive contributor. The heavy commercial sector is doing exceptionally well in both revenue and margins. We previously mentioned that we anticipated the strong performance in heavy commercial would counterbalance the challenges in light commercial, and this quarter it has definitely exceeded our expectations. We believe this positive trend will continue in the second half of the year. Our heavy commercial team is doing an outstanding job, and there are favorable structural and industry fundamentals at play. As you know, there's ongoing discussion about the opportunities related to data centers. Our manufacturing and industrial backlogs have seen considerable growth, and we are actively pursuing these projects with satisfactory margins.

Okay. That's great color. And then you also noted in your remarks that the pace of acquisitions has slowed this year. Can you talk about the pipeline that you're seeing on deals and how we should think about your ability to hit that $100-plus million target for 2025?

Yes, this is Jeff. So I guess to even be more specific, I'd say the pace of closing deals has kind of fallen off, which, again, for reasons sometimes completely beyond our control. We've had a number of deals over the last 24 months, some of size that, for one reason or another, made it nearly to the finish line and either one didn't happen for a particular reason, and/or to have taken longer as we work through issues with that particular purchase. So we still feel good about our prospects, and we haven't been reporting this, and Michael can maybe even add detail. But we've done a number of smaller deals, too. What we're calling bolt-on deals that are not material enough probably individually to be sending out releases, et cetera. But it's really a look forward into getting more geography and more share into these other products covered by these bolt-on acquisitions. So I mean, we continue to feel good that there's a good pipeline out there. There's some big businesses we still think that are potentially going to be in the market, even in our core kind of insulation competency grouping. And we continue to look at other products and even other verticals to a degree and always will, really, I think. So it's just been kind of tough to get a few deals closed.

Our next question comes from Keith Hughes with Truist Securities.

This is Joe here on for Keith. Can you talk a little bit about heavy commercial and are there any signs of life for the light commercial side?

No. The short answer is no. The light commercial business continues to be weaker than we expected, and we believe that will continue through '25. We don't have the same visibility in the light commercial business that we do in the heavy commercial business. So we'll know better as we get towards the end of the year, what '26 is going to look like. But that continues to be the weakest part of our end markets by far at this point. But we felt very good in the quarter that the strength in heavy commercial offset that light commercial weakness.

Got you. I appreciate that. Going back to multifamily, when do you think that trend will start to impact results? I know you mentioned 2026. Should we view it that way?

Yes, I think it's 2026. I mean, depending upon how things go and the movement of projects kind of through the backlog, we might see a little bit of benefit towards the end of '25. But I really think it's more of a '26 story. And it may even not get positive until we get into the second or third quarter of '26. But we're very encouraged with the bidding activity, what's happening with the backlog. And as I mentioned earlier, the ability of CQ to really cross-sell the complementary products into the multifamily projects that we're working on.

Our next question comes from Collin Verron with Deutsche Bank.

It appears that part of the market outperformance is driven by geographic mix. However, within the outperforming geographies, are you gaining market share? Can you provide any insights into what those share gains might look like in the highlighted markets?

Certainly, in certain markets, we are gaining market share. However, our primary goal is for our customers to increase their share, and in turn, we gain share through their success. Our focus is on collaborating with the best customers in the marketplace, those we believe will achieve the most significant market share growth. As a business model or strategy, our objective has been to support these customers in growing their share rather than competing directly to take share away from others.

Understood. Okay. And I guess just following up on that then, like based on what your customers are doing from a market share perspective, I guess, how sustainable do you think these market share gains are, call it, over the next 12 months, just based on what you're hearing from them. 2Q seems very meaningful. So I'm just curious as to how sustainable some of those trends are.

It's difficult to provide a clear answer. However, we believe that both the single-family and multifamily markets are likely to face more challenges in the second half of the year. On the multifamily side, we anticipate a stronger outlook for 2026. There remains a significant level of uncertainty in the single-family sector, not only due to interest rates but also job market conditions. Affordability continues to be a pressing issue. As we engage with customers, there’s still uncertainty about what 2026 might hold. We expect these challenges to continue in the latter half of the year and understand they will affect us. Nonetheless, as we've shown this quarter, our team is well-equipped to navigate this tough environment effectively.

Our next question comes from Ken Zener with Seaport Research.

On gross margins, could you talk to the current quarter margins versus kind of your long-term targets, just the baseline? And can you address the current factors that you are thinking might abate or just a mix issue relative to that spread that we see today? And I'm trying to ask because the time to gross margins versus your long-term, I believe, is, right, you're highlighting large or private regional builders versus the public and that probably washes out when you think about operating leverage. But can you maybe give us some sense of how that spread plays into it in your answer?

You mean the difference between the publics and the regionals.

Right. Because if the public companies have a lower gross margin, do you achieve better selling, general and administrative expenses, as people are trying to understand that dynamic?

Well, I mean, we've talked about this on multiple quarters. The gross margin from the regional and local builders is higher. It's a higher average job price, but the cost to serve is higher, and that's reflected in higher SG&A. I mean if you look at the quarter, selling expense is exactly where we would have expected it to be at about 4.7%, which is what it was the second quarter last year. G&A was a little bit higher than we would have expected. But the growth in G&A from the first quarter of this year to the second quarter of this year was all driven by higher variable compensation, which is a direct result of the really strong results on EBITDA and profitability. So I think everybody knows that we have a highly variable compensation structure, particularly at the branch level. And for the branches that outperformed, they got paid for that outperformance.

Good. I asked you this last quarter, and it seems like you are now really focusing on it, but the private regional resilience compared to the public data appears to have been underappreciated. Based on the visibility we have from the public builders regarding the first half of '26, their year-end inventory units are down. Can you elaborate on what you are observing with the private or regional builders? We can only rely on the Census inventory data, and while I don't want to comment on the BLS, I'm not convinced it's as burdensome as it seems. It would be helpful to have some context here, especially since that segment represents over 70% of your business.

Yes. So I think what's important to note there is the regional and local builders have much higher market share in the top half of the country versus the bottom half of the country. And I think everyone on this call is well aware of the fact that the top half of the country right now on the single-family side and even the multifamily side is doing better, is performing better than the bottom half, and we have historically been overweight top half of the country. So one of the things and one of the reasons why we're performing as well as we are is just our geographic, historical geographic concentration in some of the markets that are just performing above the overall markets. Florida being even a great example of a we are definitely benefiting from our geographic footprint.

There are no further questions at this time. I would now like to turn the floor back over to Jeff Edwards for closing comments.

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. Thank you for your participation.