Installed Building Products, Inc. Q3 FY2025 Earnings Call

Greetings, and welcome to the Installed Building Products' Third Quarter 2025 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Darren Hicks, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and welcome to Installed Building Products' Third Quarter 2025 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 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 statements 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 will 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 in more detail before we take your questions. With another quarter of record sales and profitability, 2025 has been another very encouraging year for IBP. Our national network of branches continues to execute at a high level, delivering reliable installation services to large, medium and small homebuilders and commercial developers. While local market dynamics can vary greatly across the country, our results highlight the benefit of IBP's scale, product and end market diversity and the trust we place in our branches to make the right operating decisions for their respective markets. Although the 10-year U.S. treasury rate has come down since our second quarter call in August, homeownership remains incredibly expensive for most people, which we believe will remain the biggest challenge for our customers selling new homes in the near term. Still, we are confident in the long-term fundamentals of the U.S. housing construction industry, and we remain focused on growing earnings and cash flow while diligently deploying capital to shareholders. Through the 9 months ended September 30, 2025, we paid nearly $78 million in cash dividends and repurchased approximately $135 million of our common stock, returning nearly $213 million of capital back to our shareholders. In October, we published our 2025 ESG report, highlighting IBP's continued efforts to support environmental sustainability, employee well-being and community engagement in pursuit of a more sustainable and equitable future. Since our inaugural ESG report was published in 2021, we have made steady progress reducing our carbon footprint. We believe our efforts today are laying the foundation for a stronger, more sustainable future for our employees and people representing all communities. Looking at our third quarter sales performance, consolidated sales increased 2% and same-branch sales were roughly flat. In our largest end market, same-branch new single-family installation sales were down 2%, while adjusting to the pace of residential housing and commercial building construction in local markets, our branches did a tremendous job growing complementary product sales by a double-digit percentage relative to the same period last year. Third quarter installation sales in our multifamily end market were down 7% on a same branch basis. But looking ahead, several markets are stabilizing and showing improvement. As of the end of September, contract backlogs at key branches have grown year-over-year, and we have secured jobs in geographic markets in which we previously had little or no presence. Third quarter commercial sales in our installation segment increased 12% on a same branch basis from the prior year period. Our heavy commercial end market continued to be the dominant driver of sales growth in this end market, which more than offset weakness in our light commercial end market. Based on the growth in our heavy commercial contract backlogs, we believe heavy commercial sales and profitability are poised to remain healthy beyond 2025. During the 9 months ended September 30, 2025, cash flow from operating activities increased 16% to $307 million, which primarily reflected improvements in working capital management. Year-to-date, we have acquired nearly $60 million in annual sales. We remain disciplined in our approach to find well-run businesses that would make strategic sense, support attractive returns on invested capital and fit well culturally. Our core residential installation end market remains highly fragmented with considerable opportunity for consolidation. During the 2025 third quarter, we acquired a North Carolina manufacturer of cellulose-based insulation for homes, hydromulch for erosion control and composite materials used in industrial applications with an annual revenue of $20 million. In addition, in October and November, we acquired a business with a value-added wholesale glass design and fabrication division and a retail sales and installation operation, primarily serving residential customers throughout the Southeastern United States and annual sales of approximately $12 million, an installer of drywall and metal stud framing across a balanced mix of commercial and residential end markets throughout Wisconsin with annual sales of approximately $4 million and an installer of insulation in the single-family, multifamily and commercial structures across South Dakota, North Dakota, Wyoming and Nebraska with annual sales of approximately $3 million. Single-family starts year-to-date through August 2025 have decreased by 5% from the prior year, while multifamily starts are up 15% for the same period. Looking into 2026, as is typically the case, the new residential construction outlook will be influenced by consumer confidence and buyer activity during the spring home selling season. However, with persistent challenges from housing affordability, we are expecting residential housing starts to be flat compared to 2025, a level that is above the 5-year average from 2017 to 2021. For individuals and families with housing affordability concerns or shifting lifestyle preferences, newly constructed multifamily housing helps meet the needs of growing markets. Over the long term, we continue to believe that the volume growth in 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 remain flexible in navigating any potential near-term challenges. Our national scale, strong customer relationships, experienced leadership team and sales across product categories and end markets create a solid platform for IBP to serve our customers and meet their operational efficiency goals. Although broader macroeconomic uncertainty influences prevailing market conditions in our industry and in many others, we remain focused on profitability and effective capital allocation to drive earnings growth and value for our shareholders. I am 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 the fundamentals of our industry, 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 third quarter financial results.

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the third quarter increased 2% to a record of $778 million compared to $761 million for the same period last year. Same-branch sales for the Installation segment were flat for the third quarter as a 12% increase in commercial same-branch sales more than offset a 3% 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 reported a 1.5% increase in price/mix during the third quarter. This result was offset by a 4.8% decrease in job volumes relative to the third quarter last year. It is important to note that our heavy commercial end market and the other segment results are not included in the price/mix volume disclosures. Our heavy commercial same-branch sales growth exceeded 30% during the 2025 third quarter, including the heavy commercial installation sales. Price/mix increased 4.4%, while job volume decreased 4.5% during the 2025 third quarter. With respect to profit margins in the third quarter, our business achieved adjusted gross margin of 34%, an increase from 33.8% in the prior year period. The year-over-year increase in margin during the quarter was in part related to a shift in customer, product and geographic mix. Adjusted selling and administrative expenses were stable relative to the 2024 third quarter. As a percent of third quarter sales, adjusted selling and administrative expenses decreased to 18.2% compared to 18.5% in the prior year period. Adjusted EBITDA for the 2025 third quarter increased to a record $140 million, reflecting an adjusted EBITDA margin of 18% and adjusted net income increased to $86 million or $3.18 per diluted share. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect fourth quarter 2025 amortization expense of approximately $10 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 expenditures in more detail. For the 9 months ended September 30, 2025, we generated $307 million in cash flow from operations. The 16% year-over-year increase in operating cash flow was primarily associated with improvements in working capital management. Our third quarter net interest expense was $7 million compared to $8 million for the 2024 third quarter as lower interest income from investments was offset by lower cash interest expense on outstanding debt. At September 30, 2025, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.09x compared to 1x at September 30, 2024. This remains well below our stated target of 2x. At September 30, 2025, we had $330 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 3 months ended September 30, 2025 were approximately $20 million combined, which was approximately 3% of revenue. This is higher than usual as we accelerated vehicle purchases in advance of expected price increases. With our strong liquidity position and modest financial leverage, we continue to prioritize allocating capital to achieve the best returns while distributing excess cash to shareholders. During the 2025 third quarter, IBP repurchased 200,000 shares of its common stock at a total cost of $51 million and 700,000 shares at a total cost of $135 million during the 9 months ended September 30, 2025. At September 30, 2025, the company had approximately $365 million available under its stock repurchase program. As previously announced, IBP's Board of Directors approved the fourth quarter dividend of $0.37 per share, which is payable on December 31, 2025, to shareholders of record on December 15, 2025. 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.

First question comes from Stephen Kim with Evercore ISI.

This is Aatish Shah on for Steve. I just want to touch on how you see backlogs for multifamily and commercial. And do you still see a multifamily rebound in 1Q? And then on the commercial side, are you seeing any delays there? Any color there would be helpful.

So this is Michael. On the multifamily side, as we discussed in the first and second quarters, we anticipated ongoing challenges for the remainder of the year, which we experienced in the third quarter. However, our team has excelled and outperformed compared to the market, and we believe they will continue this trend. As Jeff noted in his prepared comments, we are witnessing backlog growth in certain markets and are gaining presence in new markets. Thus, our multifamily strategy remains strong as we strategically capture market share, not only in insulation but also in complementary products. As everyone on this call is likely aware, multifamily starts have performed fairly well this year. Due to the time lag between the start and installation phases in the multifamily sector, we do not expect to see benefits from that growth or our share gains until 2026, and those will likely be more prominent in the latter half of 2026 rather than the beginning. A lot depends on the trades that precede us. Nonetheless, we continue to observe robust bidding activity and are pleasantly surprised to see decent multifamily development in areas like Florida, which is generally known as a weaker residential market. We feel optimistic about that situation. Regarding the commercial side, as we discussed in previous quarters, the heavy commercial segment has performed exceptionally well and has compensated for ongoing weaknesses in the light commercial business. Nonetheless, the light commercial sector is starting to show some improvement, partly because the comparisons are becoming easier due to its prolonged downturn. We have significantly more visibility into the heavy commercial sector than the light commercial one. We are confident that the heavy commercial division will keep delivering strong results, but it remains uncertain when the light commercial sector will show positive growth, which will largely depend on the improvement in the single-family market.

Mike, it's Steve Kim. Just a follow-up. I think last quarter you had suggested that we might see the multifamily business rebound as early as 1Q. I think you had said at that time that maybe you were seeing the comps sort of accelerate or something. And so just wondering, did anything change to sort of push that back? You're now sort of saying maybe back half of the year. So just not to nitpick too much, but just want to make sure we don't miss something that you're trying to communicate about what you're seeing with respect to your backlog timing.

No, it's just being cautious. And also, as you know, we are influenced significantly in terms of our ability to do install work based upon the trades that come before us. So it's really the ability of the trades that come before us to get their work done so we can get there. And while we're not seeing across the board project delays, there have been in certain select markets some project delays. One of the issues potentially could become for the trades that come before us is we're all expecting because of the starts numbers and what's happened from a completions perspective and the significant decline in multifamily completions is that if there is a significant inflection, which the starts numbers would indicate, you can start to have elongated cycle times on the multifamily side. So we're just trying to factor some of that potential into our thought process as it relates to 2026.

Got it. Do you guys anticipate that if there were to be any elongation in cycle times like you just described, that would be more on the labor side? Or would be more on the product availability side? I assume labor.

Yes, it is definitely about labor. To clarify, I'm not referring to our ability to find labor or source materials. However, I do believe that some of the earlier trades, like framers and foundation workers, may face some challenges from a labor perspective.

Got you. Last one for me is you talked about margins benefiting from mix. I think you said product geographic and customer. Can you talk a little bit about the geographic? Was there a noticeable relative strength or weakness across any geographies worth calling out?

Yes, we certainly gained from our historical presence in the top half of the country, which has performed relatively better than the bottom half. The decline we are observing in the single-family market, or the lack of growth, is primarily due to entry-level challenges. We are witnessing solid results from the semi-custom, custom, regional, and local builder segments, which, as is well known, are more concentrated in the top half of the country in terms of overall revenue. To provide some regional insight, based on census regions rather than our business management approach, the Midwest and Northeast account for about 30% of our new residential installation sales for both single-family and multifamily. In the last quarter, sales in these regions for single-family and multifamily were up by low single digits. The South, our largest region, constitutes roughly 45% of residential sales and remained flat for the quarter. The West region, which represents about 20% of our residential sales, saw a slight decline in the low single digits. Thus, there is varying performance across regions, and our significant market share in the Midwest and Northeast is certainly advantageous. Additionally, I want to note that our teams in the South and West have performed remarkably well despite the challenges and market conditions they face. We are incredibly proud of our field team and local management for their ability to navigate through this tough market environment.

Next question, Michael Rehaut with JPMorgan.

First, I just wanted to get a sense, you highlighted in terms of your end market demand kind of benefiting perhaps from price point and geographic exposure. I don't know if it's possible to try and triangulate. You had a competitor yesterday talk about their end markets down low double digits. Given your different mix based on customer, based on geography, I'm just trying to get a sense of whether or not you feel like that's down double digits is kind of the right framework for your set of exposures. And if you're able to kind of triangulate what your end markets, what your markets did or have been doing this year or during the third quarter even if you feel like you've outperformed that mark?

Well, as we said in the answer to the previous question, clearly we benefited from the regions and our exposure to certain regions that have performed well relative to the overall market. I would say that we have been very successful with our customers, particularly the regional and local semi-custom custom homebuilders in our markets to work with them to provide for us a very solid base from a revenue perspective. And we feel very good about our ability to continue to do that. I mean, no doubt, there are headwinds and pressures, particularly as it relates to the entry-level market. But our team is doing an excellent job of focusing on the right customers in the right markets and working to make sure that we offset the challenges that the current market environment is providing.

Okay. So in other words, better markets, but any type of sense of what your markets or how they did during the quarter relative to what you were able to do?

Yes. I would say that, although not in every single market, the team's performance has exceeded the market opportunity available to them. They achieved this last quarter and again this quarter. Looking ahead to the fourth quarter, we feel confident in their ability to maintain this upward trend. However, we are aware that the single-family entry-level market, particularly in the southern regions of the country, continues to face challenges. While we haven't yet seen a turnaround in that market, we are optimistic that the spring selling season will be more favorable next year compared to this year.

And this is Jason. I would add to that, we've also seen very strong performance in our other complementary products. So the sales growth is not just housing demand focused, it's the strength that we've had in growing those sales organically.

It is a really important point, and we continue to improve the margin on those products. However, they are still significantly lower than insulation. As we have mentioned in previous quarters, when the sales rate of complementary products exceeds the sales rate in insulation, it negatively impacts gross margin. Nevertheless, we are making tremendous progress in both sales and margin, as Jason highlighted.

I appreciate that point. It leads me to my second question about pricing, price mix, and gross margin. You achieved another modestly positive price/mix this quarter, which is a positive surprise considering some previous concerns about pricing. It might also reflect a more stable demand backdrop. Could you provide insight into what insulation pricing did during the quarter? What portion of the price/mix was due to price changes versus mix changes? Additionally, how does this affect your outlook for the coming quarters? You've maintained a margin level around 34%, at the high end of the 32% to 34% range, for about a year and a half; can you sustain that?

Yes, there are two components to your question. Regarding price and mix growth, much of it came from the mix. Our sales growth with regional local custom builders outpaced that of production builders, which is evident from their Q3 results. Given our strong market share with production builders—who typically focus on entry-level homes—our sales closely align with theirs. Therefore, the benefit we experienced on the residential side from a price/mix perspective derived from the stronger performance of regional local and custom builders, who have a significantly higher average selling price than entry-level homes. Moreover, the higher building and energy codes in the upper half of the country, where we also see more basement markets, necessitate better insulation, contributing to a greater average project cost. Thus, all the factors relating to regional benefits contributed positively to price/mix growth. On the gross margin aspect of your question, there are several factors influencing gross margin, both positive and negative. While complementary products experienced a margin improvement of about 100 basis points, they still maintain lower gross margins compared to insulation. The quicker growth rate in complementary products presents a headwind to gross margins. Additionally, our other segment, which encompasses distribution and manufacturing, typically has lower gross margins but also showed solid growth this quarter, further impacting overall gross margins. Collectively, this resulted in a 60 basis point headwind to gross margin, yet we more than compensated for this with a 100 basis point benefit from the outstanding performance of the heavy commercial business. These two effects balanced out, allowing us to remain at the upper end of the 34% adjusted gross margin. However, we anticipate that the 100 basis point benefit from the heavy commercial business won't continue into the fourth quarter this year. This expectation is not due to a decline in performance but rather because their gross margin had already been elevated by the fourth quarter of last year. Even so, we are confident that we will maintain adjusted gross margins in the 32% to 34% range for the full year.

Next question, Susan Maklari with Goldman Sachs.

My first question is following up on the gross margin comment, Michael. It seems like part of this is that you're doing a good job at being able to preserve the core margin that you're realizing on your installation of insulation even with the pressures that are coming through across the different regions and types of builders. Can you talk about how those conversations are going and how you're able to leverage the value add and perhaps the growth in the ancillary products that Jason mentioned in there to preserve that core margin?

Yes, Sue, I want to emphasize that it's the field team responsible for this, and they are doing an outstanding job. I believe everyone here acknowledges their impressive performance. However, these discussions are definitely challenging at the moment, especially at the entry level. The truth is, we offer an installed solution, not just labor or materials. We are solving problems for builders, and they truly value what we provide. This has been an ongoing narrative for us, reflecting the team's capability to maintain that standard. As we've mentioned in previous discussions, the benefits of a softer market are evident in the adoption of our complementary products, and we're witnessing that. The team is meeting our expectations. We are confident that our incentive compensation systems are structured to promote outperformance in tough markets since a significant part of our branch managers' pay is linked to their location's profitability. Essentially, nearly every employee at IBP has their compensation partially based on profitability, which we believe fosters superior performance in challenging conditions.

Yes. Okay. And then turning to SG&A. It seems like you're also doing a nice job at controlling those costs in this kind of an environment. Can you talk about the progress that you're making on the reductions that you had mentioned earlier this year and anything else that's flowing through there that we should be aware of?

Yes. Thanks for that question, Sue. Definitely we're making very good progress. We still have progress to make. I mean, to a large extent, the efforts that the whole team is making to control the G&A that we can control is, to a large extent, being offset, unfortunately, by some of the things that aren't immediately under our control like insurance, and that's insurance at all levels. But the team is really working very hard to lower G&A expenses. And our objective is that we will offset the natural inflation in some aspects of G&A and some of the headwinds that we're experiencing on the insurance side of G&A with the savings that we're continuing to experience on the G&A side. But it's really, at this point, an opportunity for us to maintain the growth or to use our belt tightening, if you will, to offset some of the costs that we don't directly or immediately control.

Next question, Phil Ng with Jefferies.

Congrats on a really impressive quarter. I guess, Michael, that was really helpful color when you shared with us just now on your trends in the Southeast and the West, which was actually very stable, clearly outpacing the market handily. Was there a big pivot this year in terms of your go-to-market strategy to kind of lean harder in some of these custom and regional builders? Or you've always been generally a little higher there just because it does feel like the team's really outperformed here.

Yes, I think that's a fair assessment. Our team has recognized the potential challenges in the market while working with entry-level builders and has seen this as an opportunity to collaborate more closely with other customers in those areas to counteract anticipated difficulties. The team has performed exceptionally well in this regard. However, it's important to note that certain states remain quite weak. For example, Florida has continued to struggle, although we are noticing some promising developments in the multifamily sector there. Texas, our second largest state, also shows areas of weakness, but we believe our team is effectively addressing this by adjusting the customer mix and cross-selling additional products. Moreover, Texas has been a successful market for us in the multifamily segment. Our centralized multifamily operation, which accounts for about 40% to 45% of our multifamily revenue, has excelled in Texas, helping us gain significant market share in a profitable manner.

Okay. Super. And Michael, I think what you just said earlier, October trends, November sound pretty good, and you're still outperforming pretty handily. One, did I hear you correctly? And I know you don't give guidance. Part of this question is just most of your peers have seen and expect demand to really soften in the back half and perhaps these declines moderate going into next year. Your trends have been very different from everyone else. So I'm just really curious, is that decline to come? Or this is potentially the trough, especially as we go into next year, perhaps rates coming in, the consumer getting a little better kind of back on the mend. Just want to better appreciate some of the nuances as it relates to your portfolio.

Thank you, Phil, for pointing out that we do not offer guidance. My response should not be considered guidance but rather an analysis of available information to help clarify our expectations for the fourth quarter. As many on the call are aware, approximately 55% to 60% of our total revenue originates from new single-family construction. Within that, about 27% to 30% of our revenue is attributed to public builders. The forecasts these builders have given for the fourth quarter indicate a projected decline in sales, which we have found to closely align with our own sales to them. Their numbers indicate a combined sales drop of approximately high single digits, reflecting a decline that is about 400 to 500 basis points greater than the typical seasonal dip from the third to fourth quarter, a time which generally sees lower revenue across the building products sector. We anticipate that this projected revenue challenge will similarly affect our business in that area. In summary, we expect the fourth quarter to bring certain pressures, and we do not foresee a positive turnaround in multifamily completions during this period. However, based on the trends we've observed and our performance over the last two quarters, we are confident that our team will outperform the overall market scenario, despite the forthcoming challenges in new residential construction. Nonetheless, we have strong confidence in our heavy commercial business, which is helping to mitigate some of the residential construction difficulties we are facing.

Next question, Mike Dahl with RBC Capital Markets.

Just want to follow up on that last point and just to make sure we're understanding. When you talk about the high single-digit decline, are you talking about their delivery guides or something else? Because I think the starts commentary has been pointing to more significant declines in starts, understanding that you guys have some differences in lag timing, right? I just want to make sure we're understanding what you're saying. And then could you give us any insight into then on the private side, are those customers of yours seeing a significantly different trend than what you just articulated for the public? Or are they kind of starting to follow suit into your…

My comment about Publix was more about closings compared to starts. These are two different aspects, as we know. Regarding custom, semi-custom, and regional and local builders, I would say the overall commentary is generally flat. They are not seeing significant changes, and this can vary from market to market. However, to provide a broader perspective, the market is flat; it’s not deteriorating, but it’s also not improving.

Okay, understood. That's helpful. Now, regarding the gross margin dynamic, I appreciate the details provided, especially as you are now comparing against the step-up. When considering the year-on-year effects for the fourth quarter, you've mentioned some of the factors related to the mix. Could you clarify a bit more about the fourth quarter? Specifically, we know there isn't a 100 basis point tailwind, and there are some headwinds as well. How do these headwinds compare to what you mentioned regarding the dynamics in the third quarter?

Yes, we expect to face gross margin challenges, even though our businesses are performing well and improving their margins. The initial low gross margin creates some headwinds. We anticipate this trend to continue into the fourth quarter, with our distribution manufacturing segment growing at a higher rate than the insulation business. Consequently, we believe these headwinds will persist. Additionally, we do not foresee significant incremental gross margin benefit from the heavy commercial business in the fourth quarter. For reference, last year’s fourth quarter adjusted gross margin was 33.6%, which still falls within our full-year target range of 32% to 34%.

Next question, Jeffrey Stevenson with Loop Capital Markets.

Congrats on the strong results. So I wanted to dive deeper into the double-digit growth in complementary products, which is great to see. Would you call out any products that are outperforming? And is most of the strength in better single-family markets such as the Midwest?

That's part of it. However, it's important to note that the heavy commercial business primarily fits into the complementary product category. These products are definitely contributing to growth. We are also observing improvements in the residential construction area, particularly regarding margins. Overall, we are pleased with the progress the team has made. Specifically addressing your question, I wouldn't single out any particular complementary product as outperforming the others. The growth narrative is consistent across the board, with the exception that the heavy commercial business is significantly boosting the growth that Jason mentioned.

Okay. Understood, Michael. There's been significant discussion about the superior performance of regional and local builders compared to the national public builders. As you evaluate your backlog going forward, do you anticipate those favorable mix trends to persist, particularly considering the current softness in the entry-level price point?

Yes. We would expect that to be the case until the entry-level inflects. And we're hoping that, that happens in the spring selling season.

Next question, Keith Hughes with Truist Securities.

Just to level set on the commercial, about $135 million in revenues in the quarter. What is the split right now between heavy and light?

So on the install side, which is just slightly different than from the total IBP perspective, on the install side heavy commercial is around 11% of revenue and the light commercial is like 7.5% of revenue.

What distinguishes light from commercial? Is it based on job size, product, or another definition?

I mean the simplest way is that light commercial is framed construction and heavy commercial is steel and concrete.

Okay. If we consider the long-term growth rate, I believe you want to expand further in this market. What do you think has a larger total addressable market that you could tap into?

Heavy commercial without a doubt. I mean our market share in heavy commercial is, in the markets that we're in, it's great. But because we have so much geography that is open to us. And now that we have so much confidence in the team, and the team is working so well that we see a lot of opportunity there on an acquisition opportunity and then also potentially on a de novo basis, but that's going to be very selective.

And what's stopping really accelerating the acquisition activity there? It seems like a great business for you. Just seems like we would see more deals or maybe that’s to come. What's kind of your view of the pacing, I guess, is my question.

This is Jeff, Keith. So I would say, honestly, unlike what we would say about our residential business, I think the potential for organic growth by us following customers and developers and general contractors that we have relationships actually, in this case, outweigh maybe even some of the commercial acquisition activity. It's not to say that it isn't there, but I wouldn't be surprised if we don't end up moving more on the organic side than we do on the acquisition side in that part of the business. Not to downplay that there aren't opportunities. It's just I think that may happen organically.

Final thing. It lends itself to organic growth, what dynamic of it lends itself to organic growth more than, say, your residential insulation is?

I don't want to imply that our residential customers are more loyal than they actually are, as we actively engage with them because of the quality of the work we provide. However, I believe there may be fewer contractors capable of offering the same services we do in the commercial sector, particularly when it comes to bundling those services. Furthermore, we will have the opportunity to follow developers and builders into larger metropolitan areas where we currently do not have a significant presence in the commercial market.

Collin Verron with Deutsche Bank.

I just want to start on price cost a little bit. I appreciate all the color around the moving pieces of mix on gross margin. But any color as to how price cost is tracking and more specifically within the residential insulation business and the commercial insulation business?

Well, I mean, I think on the commercial side, there's definitely a difference between the light commercial and the heavy commercial. As we've talked about, the light commercial business has been weak for multiple quarters at this point. So obviously that can lead to some pricing pressure. I would say on the single-family side, really where there's pricing pressure, and we would expect it to continue until the market inflects positively is it's more regional in nature and more at the entry level that we've been talking about. I would say at the custom, semi-custom our top half of the country, while obviously it's a competitive environment, the competitive challenges are not as significant as they are in the parts of the market that are softer. I mean it's a logical supply and demand sort of response. But at the same time, our team is doing an excellent job of working hard to maintain price and provide for the builder a high level of service that they will value and pay a fair price for. We are constantly working to be more efficient for our builder customers and to provide them as much value as possible. But there is a fair balance between what we get paid for and the installed solution that we provide.

That's helpful color. And I just want to touch on the distribution and manufacturing side. I know it's a small piece of your business, but the growth is really strong in the quarter and contributed to growth at an outsized pace relative to its size. I guess just any color as to sort of what's going on there and sort of the trajectory of that business as you look out a little bit further?

Yes. It's important to note that part of the growth in that other segment stems from our internal distribution efforts, which we've discussed extensively. This effort is now yielding results, and you can see the significant growth in intercompany sales in our segment disclosures. We estimate that year-to-date and for the quarter, these internal distribution initiatives contributed nearly 50 basis points to our gross margin.

We're just executing on the plan that we've talked about for multiple… years. So the benefits there are coming to fruition. We still have a lot of work to do, but the team is working really well together, and we finally have gotten, I think, a wide acceptance among the branches to support the effort of internal distribution.

It feels like we were looking at a force and then the light was turned on and you're more like a Zebra relative to the regional customer mix. So first question. For customer mix…

Is that good or bad?

It is what it is. So for customer mix, generally speaking, I think you talked about even the public is about 30%. Can you talk to the dollar generally, Michael, I know you've disclosed a lot today, so I don't want to press you. But what is generally like kind of the dollar spread between like that public, which I think people understandably characterized you guys as, as opposed to the 70% that's actually going to that private, more custom bucket since it's the majority? And then can you describe the demand dynamics of those builders buyers? So if it's custom, it's not going to be as tied to affordability entry, it's going to be more non-spec, et cetera?

Yes, that last part of your comment or question there, Ken, is definitely accurate. I would say that the average job price for the regional and local builder because of the type of product that they're building, and I'm not talking on a per square foot installed basis, I'm just talking about the average job price, right? So because of the type of product that they're building because they're generally speaking, going to have a basement, which adds another level of work for us to insulate, those average job prices are multiples of what the average job price is for an entry-level home.

Okay. I'm trying to clarify my question. Considering the differences mentioned, is it relevant for me to connect this to my second question? The census data, despite not being published right now, is quite inaccurate for the markets where public builders operate, particularly because many builders do not respond to the census. Do you believe the census data is more accurate in those non-Smile states compared to the starts and activity you have observed?

Boy, I think we would have to go back and look at the information over an extended period of time to see if the adjustments that they make to the information is greater in the Smile than it is in the top half of the country. Yes, I have no idea, and we've never really looked at that. I mean…

Yes. It's never been…

Yes. We sort of take it at face value for what it is. Obviously we don't run our business based upon what the Census Bureau is reporting, so.

Regarding that, I appreciate your comments about the census boundary definition. Considering that a significant portion of your business serves the nonpublic sector and that this mix leans towards a higher total take, I believe this is a crucial factor as we approach 2025, along with your cost management efforts. Is there a reason to expect that the foundation of your business could negatively impact next year? It appears that if your mix continues to focus on more promising markets with better job growth, we might still see some discrepancies compared to census data next year, mainly related to your product and regional mix. Would you agree that the variations we observed this year could carry over into next year?

We don't provide guidance, and it depends on market developments. Currently, the entry-level market is facing challenges, which creates a tough operating environment. Our customer and regional mix is contributing to our strong performance, but it's not the only factor. The team's efforts are driving our success, and we are excited about the business. When the entry-level market begins to improve, we are well-positioned to take advantage of that upward trend. We believe this will coincide with continued strong performance in the regional and local markets. This may put pressure on our pricing and product mix, as we anticipate growth in the entry-level market. Despite the lower job prices and reduced gross margins in that segment, the cost to serve is also lower, and the EBITDA contribution margins remain solid. We aren’t able to specify when the market will improve, but we hope it aligns with the spring selling season. Whenever it occurs, we are prepared to collaborate with our customers to seize the opportunities that arise.

Next question, Adam Baumgarten with Vertical Research Partners.

Just on the multifamily business, I know when things started to slow and you have a pretty unique business within that, you guys talked about sort of the white space geographically you had and some organic opportunities to expand there in a weak market. I guess any update there on how that's going, if you're starting to see some benefits from maybe a renewed effort to kind of go out of your core markets?

That is a great question, and I appreciate you asking it because, yes, we are making very good progress on that front. It's not translated into revenue yet, but it's translated into backlog. And the team is doing a really good job of, as Jeff said in his prepared remarks, going into new markets and opening up those new markets for multifamily. And we really believe we have a differentiated model/opportunity for the GCs on the multifamily side, and we'll continue to strategically and methodically pursue continued market share gains in multifamily. I mean, honestly, for us, the multifamily story, as we've talked before, it's a lot about us catching up from a market share perspective to where we should be because we really lagged behind in a lot of markets, particularly markets in the Smile, we lagged behind from a multifamily perspective because we were so focused on the strong single-family opportunity.

Next question, Reuben Garner with The Benchmark Company.

Congrats on another strong quarter. My question, and apologies if this has already been discussed, I had to hop on late, but just curious on the current M&A environment. I know you picked up a couple of kind of specialty product categories of late. But curious on what the environment is like for some of your smaller insulation peers and then also the likelihood that we could see something larger or maybe even in a different vertical in the near or medium future.

Great. This is Jeff, and I'm pleased you asked that question. The acquisition environment for smaller companies is similar to what we've experienced over the past two decades. As we've mentioned, the deals can be inconsistent. We have made efforts to pursue some additional bolt-on acquisitions, as you may have noticed. We are quite optimistic about several regular deals we currently have in the pipeline, both in size and quantity. Additionally, we are still exploring adjacent areas, with a serious interest in commercial roofing and other sectors where we can install products similar to those we already offer. Regarding Keith's question, I may have interpreted it more narrowly than intended, specifically referring to the products that IBP currently installs. We are confident in our ability to pursue what we excel at organically. While there are certainly other product lines that IBP does not currently handle, I view them more as adjacent opportunities in the heavy commercial sector, and we are very enthusiastic about our future prospects.

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

Thank you all for your questions. 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.