Installed Building Products - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue of $684.8M modestly beat Wall Street consensus (+$6.8M, +1.0%), but EPS and EBITDA fell short; GAAP EPS $1.64 vs $2.20 consensus, Adjusted EPS $2.08 vs $2.20, EBITDA $96.7M vs $107.6M*.
• Margins compressed on higher vehicle insurance, depreciation, administrative wages and facility costs; gross margin 32.7% (-110 bps YoY), Adjusted EBITDA margin 15.0% (-190 bps YoY).
• Management reiterated M&A focus (target ≥$100M acquired revenue in 2025) and announced $0.37 Q2 dividend; returned $91.1M to shareholders in Q1 via repurchases and dividends.
• Heavy commercial strength (up >14%) and data center wins offset weakness in light commercial and housing-affordability headwinds; SG&A optimization underway with targeted ≥$15M savings beginning Q3.

What Went Well and What Went Wrong

What Went Well

• Heavy commercial momentum: “That business was up over 14% in the quarter…very strong, solid backlogs and bidding…wins in the rapidly growing data center construction industry”.
• Cash generation: Operating cash flow rose 9% YoY to $92.1M on working-capital management; leverage remains low at 1.17x net debt/TTM Adjusted EBITDA.
• Capital returns and disciplined sourcing: $34.3M repurchases, $56.8M dividends; >90% domestic sourcing limits tariff disruption (estimated $10–$20M impact ≈1% of cost of sales).

What Went Wrong

• Margin pressure: Gross margin fell to 32.7% (-110 bps YoY) from higher fleet insurance/depreciation and mix (spray foam/distribution); Adjusted EBITDA margin down to 15.0%.
• Volume headwinds and weather: Same-branch sales -4.2%; one less selling day (~$10–$12M lost revenue) and severe weather (~$10–$20M), with recovery spread across Q2–Q3.
• Light commercial weakness persists; management expects it to remain the weakest end market through 2025 despite heavy commercial strength.

Transcript

Operator (participant)

Greetings and welcome to the Installed Building Products First Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Darren Hicks, Vice President of Investor Relations. Please go ahead.

Darren Hicks (VP of Investor Relations)

Good morning and welcome to Installed Building Products First Quarter 2025 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the first quarter, which can be found in the investor relations section of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of 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, and 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.

Jeff Edwards (Chairman and CEO)

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 solid first quarter financial results reflecting our focus on maintaining a high level of installation service for our customers across the U.S.. Our core home building customers continued to navigate industry-wide housing affordability challenges in a slower than expected spring selling season. Still, we continue to play our integral role in making homes and buildings as energy efficient and efficiently constructed as possible. We expect housing demand to remain connected to changes in affordability and the macroeconomic backdrop this year.

In the current environment, we are competing from a strong financial position, and our home building customers are operating from a position of health as well, which helps in navigating market uncertainty. Longer term, our view on demand for our installed service is unchanged. We believe long-term trends across our residential, commercial, and markets are favorable as builders work to meet demand through the increased supply of houses, apartments, and commercial structures. IBP's business model remains consistent and centered around geographic end product and end market growth with a disciplined approach to capital allocation. Throughout our business, we believe that less than 10% of the diverse products we buy and install are sourced outside of the U.S.. We are working with our suppliers to reduce any potential tariff impacts. At present, we do not anticipate meaningful disruptions to our business.

Our business continues to generate strong operating cash flow, and we remain committed to investing in growth and prudently returning capital to shareholders throughout economic cycles. During the first quarter, we continued to grow through acquisition, paid nearly $57 million in cash dividends, or $2.07 per diluted share, and repurchased approximately $34 million of our common stock. As we pursue initiatives focused on achieving profitable growth and maximizing returns for our shareholders, we remain committed to doing the right thing for our employees, customers, and communities. Looking at our first quarter sales performance, consolidated sales decreased 1%, and same branch growth was down 4%. In our largest end market, new single-family installation sales were down relative to the same period last year, partially due to one less selling day and unusually difficult weather, which impacted our ability to complete jobs during the quarter.

On a same branch basis, multi-family sales in our installation segment decreased 5%, following a strong year-over-year comparison of a 13% increase in the first quarter of last year. We continue to see strategic growth opportunities as our centralized service-oriented model continues to partner with our existing branch network to broaden our geographic footprint and product offering in the multi-family end market. On a same branch basis, first quarter commercial sales in our installation segment declined modestly from the prior year. Strong same branch sales growth within our heavy commercial business was offset by a decrease in sales from our light commercial markets. The strength in our heavy commercial end market was driven in part by successfully winning jobs in the rapidly growing data center construction industry. Based on our current backlog, we expect growth in heavy commercial sales to continue throughout this year.

During the first quarter, cash flow from operating activities increased 9% to $92 million, which primarily reflected effective management of working capital. 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 2025 first quarter and in May of 2025, we completed the following acquisitions: a South Carolina based installer of a diverse mix of after-paint products, including closet shelving, shower doors, mirrors, primarily in the new residential end market with annual revenue of nearly $6 million, and 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 although deal time is hard to predict, we expect to acquire over $100 million in annual revenue in 2025. Based on the U.S. Census Bureau, single-family starts year-to-date through March 2025 have decreased by 6%. We continue to believe that our business is supported by a fundamental undersupply of residential housing and gradual building code adoption for the purpose of improved energy efficiency across the U.S.. 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. Although the uncertainty around tariffs, inflation, and consumer sentiment 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 optimistic about the prospects ahead for IBP and the broader insulation and other building product installation business. With this overview, I'd like to turn the call over to Michael to provide more detail on our first quarter financial results.

Michael Miller (CFO)

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the first quarter decreased 1% to $685 million, compared to $693 million for the same period last year. The modest decrease in sales during the quarter reflected single-digit declines across all our core end markets, partially offset by revenue from recent acquisitions. Same branch sales were down 4% for the first quarter. Although the components behind our price mix and volume disclosure have several moving parts that are difficult to forecast and quantify, we achieved a 1.5% increase in price mix during the first quarter. This result was offset by a 5.6% decrease in job volumes relative to the first quarter last year. With respect to profit margins in the first quarter, our business achieved an adjusted gross margin of 32.7%, down from 33.9% in the prior year period.

The margin headwind during the quarter was in part related to higher vehicle insurance and depreciation expense. Adjusted selling and administrative expense as a percent of first quarter sales was 20.1% compared to 19% in the prior year period. The increase was due primarily to lower sales and higher administrative wages and higher facility costs. Of the $6 million increase in adjusted selling and administrative expense, $4.4 million was due to acquisitions and startup expenses. Adjusted EBITDA for the 2025 first quarter decreased to $102 million, reflecting an adjusted EBITDA margin of 15%, and adjusted net income decreased to $58 million, or $2.08 per diluted share. Although we do not provide comprehensive financial guidance based on recent acquisitions, we expect second 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 close in future periods. Also, we continue to expect an effective tax rate of 25%-27% for the full year ending December 31st, 2025. Now, let's look at our liquidity position, balance sheet, and capital requirements in more detail. For the three months ended March 31st, 2025, we generated $92 million in cash flow from operations compared to $85 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with improvements in working capital, which more than offset lower net income. At March 31st, 2025, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.17x compared to 0.97x at March 31st, 2024, which remains well below our stated target of 2x.

At March 31st, 2025, we had $351 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the three months ended March 31st, 2025 were approximately $21 million combined, which was approximately 3% of revenue. 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 2025 first quarter, IBP repurchased 200,000 shares of its common stock at a total cost of $34 million. At March 31st, 2025, the company had approximately $466 million available under its stock repurchase program. IBP's board of directors approved the second quarter dividend of $0.37 per share, which is payable on June 30th, 2025, to stockholders of record on June 13th, 2025. The second quarter dividend represents a 6% increase over the prior year period.

With this overview, I will now turn the call back to Jeff for closing remarks.

Jeff Edwards (Chairman and CEO)

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.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Your first question comes from Steven Kim with Evercore ISI. Please go ahead.

Aatish Shah (Equity Research Analyst)

Hi, this is Aatish on for Steven. Thanks for taking the question. I just want to get an idea of how you're managing your labor force in this pressure demand environment.

Michael Miller (CFO)

Hi, this is Michael. Good morning. I think you really have to break it down into the various labor components in terms of the install labor versus the sales force and then the G&A labor. The install labor really fluctuates consistently with the volume of jobs. So our intention is really never to hold crews when it comes to the install labor. There is an exception to that statement, and it would be times like we had in the first quarter where you had both the California fires and some of the severe weather in the bottom half of the country. In those instances, you will hold labor because you know that it's a temporary situation. But when you're in a situation where there's a prolonged headwind relative to volume, you would then obviously adjust your install labor to meet that demand expectation.

As it relates to the sales force, I mean, generally speaking, you're not adjusting your sales force in terms of headcount unless it's a situation where you expect to have significant prolonged headwinds as it relates to volume. In terms of the G&A labor force, we are constantly looking to optimize and have the right headcount and right people doing the right things within G&A. I would say that clearly a focus of ours has been to make sure that we have optimization within the G&A ranks, and that's obviously something that we're continuing to focus on and will focus on and would expect to see some reductions in the G&A workforce as we're going forward here through the rest of the year.

Aatish Shah (Equity Research Analyst)

Great. Thank you. If I could just get one more follow-up. On the multi-family side, it was touched upon briefly in the prepared remarks, but can you talk about how the CQ team is helping the branches manage through pressure in the end market?

Michael Miller (CFO)

Sure. That's a great question. As you know, units under construction right now are down 20% from their peak last year, so from March of last year to March of this year, which is a huge headwind. We are extremely proud of what the team was able to do with a 20% headwind, having multi-family revenue only down 5%, is in part a direct result of the benefits that we're seeing from CQ. As I think everyone on the call knows, CQ does not manage all of our multi-family revenue. They only manage around 45% of our multi-family revenue, and they continue to show positive results on the multi-family revenue that they're managing. Their backlog continues to be very solid. We feel very strongly that we will continue to outperform the multi-family opportunity.

That being said, we believe that units under construction need to come down at least another 10% in order to stabilize relative to historical trends based on current multi-family starts rates, although we do think multi-family starts have bottomed. As I'm sure everybody realizes, multi-family starts year-to-date, as reported by the U.S. Census Bureau, are up 9%. We think that's encouraging for the multi-family industry in 2026, but we do think that the headwinds for multi-family for us and for the industry will persist through 2025.

Steve Kim (Senior Managing Director and Head)

Thanks for that. It's Steve. I just wanted to follow up real quickly. You mentioned the California fire and the weather impacts in the quarter on residential [audio distortion]. I was wondering if you could quantify roughly how large each of those was as a headwind in the quarter, and do you expect to fully recover that in 2Q, or just how should we be thinking about the going forward outlook there?

Michael Miller (CFO)

Yeah. I mean, the lost day is, call it $10 million-$12 million. The day is lost. For the year, we have one less selling day, so that we do not really necessarily make that up. In terms of the weather impact, we estimate that that was, on a net basis, because we did make some of it up in March, was probably another $10 million-$20 million. Unfortunately, there is a little bit longer tail on that than there normally would be for a couple of reasons. One, the continued softness or the softness in single family, combined with the fact that it was not just that we could not get to the job site, it was that all the other trades could not get to the job sites as well. It just sort of pushed out the recovery, if you will, of that additional revenue.

I think it'll be sort of measured throughout the second quarter and third quarter, basically, that we catch up on that lost revenue opportunity.

Steve Kim (Senior Managing Director and Head)

Okay. Great. Thanks a lot, guys.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Alex Isaac (Equity Research Analyst)

Hi, this is Alex Isaac on for Mike. Thanks for taking my question. I wanted to ask related to trends in single family, how do you view between different end markets like production, regional, like local and custom, as well as different regional areas? How do you sort of view the trends in those specific end markets?

Michael Miller (CFO)

I would say that in the quarter, right, our regional and local builder business was slightly better than the production builder or public builder business. We kind of think of the production builder business being aligned with the public. In the fourth quarter call last year, we mentioned that one of the things that we do every quarter is we measure orders and backlog at all the production builders or public builders combined with either their guidance or consensus relative to their revenue. When we compare that to and weight that based on our revenue with those public builders, as we mentioned in the fourth quarter call a couple of months ago, that based on those numbers or estimates, it came out to be a +3% for us on single family revenue with the public builders.

Doing that same analysis this quarter, it's a -3% on the single-family side with the public builders. We think that's a fairly key or a fairly decent indicator of where the publics will be, at least based on people's expectations now. We would probably expect that we're going to continue to see the regional and local builder doing slightly better than that, just given our footprint and our experience with them. There has been a relative strength in a weak market with some big custom home builders. Obviously, the custom builders are less susceptible to some of the both macroeconomic uncertainty and current rate environment, just given the nature of the customer there. In terms of on a regional basis for single-family, I think a lot of people have talked about this. I mean, Florida is very weak. Texas for us is still pretty solid.

The West Coast is solid. We feel good about the Northeast and the Midwest, quite frankly. They seem to be pretty solid as well. The Mid-Atlantic is good, not great. Clearly, our expectations for single family on a macro level, just like everyone else's, has changed in the past couple of months where I think we were all constructively at least flat to modestly up, whereas I would say that we'll be at best flat, probably down mid to low single digits on the single family side this year.

Alex Isaac (Equity Research Analyst)

Thanks. That makes a lot of sense. Appreciate all the color on that. As my follow-up, I was curious on material prices throughout the year and then into 2026, how do you view those, especially with more installation supply coming online?

Michael Miller (CFO)

I mean, the environment continues to be very benign.

Jeff Edwards (Chairman and CEO)

Yeah. It's healthy, but certainly probably not deflationary.

Michael Miller (CFO)

With the exception, of course, of there's a lot of uncertainty around the tariff impacts. Fortunately, we source a very large portion, over 90% of what we buy, we source domestically. Based on what's been announced, combined with working with our suppliers and negotiating with our suppliers for the things that we don't source domestically, we estimate that the impact of the tariffs could be anywhere between $10 million-$20 million, which is about 1% of cost of sales for us. It's a pretty nominal impact, but it's still there. Obviously, we will work to pass on any of those costs to our customers.

Clearly, it's not the best operating environment when it comes to any kind of an increased cost in an environment where you're seeing headwinds from a volume perspective.

Alex Isaac (Equity Research Analyst)

Thanks. That makes a lot of sense. Just a quick follow-up on that. Would you say that the sourcing is your individual sourcing is uniquely more domestic, or that's industry-wide?

Jeff Edwards (Chairman and CEO)

That's pretty representative of the products that we handle in the industry that we compete in. That's pretty representative of the industry.

Michael Miller (CFO)

Yeah. I would say that there are some of our suppliers, for example, our big suppliers of spray foam, there's a lot of talk about MDI and the cost of some of the inputs for spray foam going up that are sourced internationally. The bulk of our spray foam suppliers source their products and their chemicals domestically. They are not susceptible necessarily to some of those restrictions.

Now, one thing that we have not factored into that $10 million-$20 million, and I think is really uncertain as to what the implications will be, is what, if any, so we feel fortunate that our suppliers are sourcing their materials domestically, but because other vendors may be sourcing their materials internationally, we do not know what the impact that will be on the overall price in the market. I mean, theoretically, a domestic distributor or supplier would increase their price of goods if the price of the internationally sourced goods are going up because of tariffs.

Alex Isaac (Equity Research Analyst)

Right. Yeah. That makes a lot of sense. Appreciate all the color on that.

Michael Miller (CFO)

Sure.

Operator (participant)

Please ask one question and one follow-up question. Next question comes from Susan Maklari with Goldman Sachs. Please proceed.

Susan Maklari (Senior Equity Research Analyst)

Good morning, everyone.

Jeff Edwards (Chairman and CEO)

Good morning.

Michael Miller (CFO)

Good morning, Sue.

Susan Maklari (Senior Equity Research Analyst)

Thinking a bit about the gross margin, it sounds like there were some one-time or sort of unique things that came through in the first quarter that may have been factors to that. I guess, can you talk a bit about what we saw in the first quarter and then how you're thinking about the setup for this year, given your focus on profitability and the service that you offer relative to the environment that we are in, which starts coming down?

Michael Miller (CFO)

Yeah. Thanks for that question, Sue. Within cost of goods sold are our fleet expenses basically for the install fleet. That includes depreciation, fuel, and vehicle insurance. Because of the decline in sales and the increase in depreciation and increase in vehicle insurance, that was a headwind to the gross margin in the first quarter of about 60 basis points. While those costs are not fixed, they certainly do not—they are not variable relative to the volume of jobs very quickly. They have a very lagging effect from a variability perspective. As we had mentioned in the fourth quarter call as well, both spray foam and the other segment—again, that is our distribution and manufacturing segment, which naturally has a lower gross margin—had better sales growth relative to the install segment.

As a consequence, those two things combined had about another 30 basis points of headwinds to gross margin in the quarter. Going forward for the rest of the year, I mean, we have talked about on a full-year basis, adjusted gross margin being in that range of 32-34. Obviously, in the first quarter, we were at the lower end of that range. Historically, the first quarter is the lowest gross margin quarter because it is your lowest volume quarter. We would expect that to be the case through the rest of 2025 as well. However, I would caveat that and say that we believe that, as we said in answer to the previous questions, there will definitely be headwinds to volumes and demand for single-family and multi-family throughout 2025.

Susan Maklari (Senior Equity Research Analyst)

Okay. That's very helpful, color and Michael. Speaking about price mix and appreciating the comments that you've already given, it's good to see that that's holding positive even with a tough comp in there. As you think about just the setup for this year, can you talk about your ability to continue to see the benefits of that coming through and to keep that positive?

Michael Miller (CFO)

Yeah. Quite honestly, it's really lapping increases from still increases that happened in the kind of back half of last year. As we said, relative to material costs that are very benign, we would expect that pricing would be very benign as well and that we wouldn't continue to see positive benefits throughout the year.

Susan Maklari (Senior Equity Research Analyst)

Okay. Thank you. Good luck with everything.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Michael Dahl (Managing Director and Senior Analyst of Equity Research)

Hi. Thanks for taking my question. Let me talk through kind of the cadence a little bit more. I mean, appreciate the comments around the changing macro views. Your large supplier was talking about down low to mid-teens in U.S. resi yesterday in their installation business. Your peers seem to be indicating pretty sharp declines in 2Q. Yeah. I think both those are probably a combination of some of the single-family and multi-family. Can you just talk through kind of near-term cadence, how you'd expect that volume progression to look, particularly on the resi side? I'm also curious, the blend of heavy versus commercial. You were still down in the quarter on commercial overall. Maybe just talk through that part as well, how that blends out.

Michael Miller (CFO)

Sure. As you know, we do not provide guidance, but we definitely do think that there are going to be headwinds in the residential side, both single family and multi-family, through the year, not just in the second quarter. We think that those headwinds are going to persist unless there is some significant change in consumer confidence. We do think, particularly on the single family side. As we said to the answer to an earlier question, we do think that multi-family starts have bottomed. We think that given the affordability issue that exists with single family, it does play into the strengths of multi-family in terms of people's need for housing, but looking to multi-family as a temporary step before they do buy a single family home. As Jeff said in his prepared remarks, we feel very confident about the long-term prospects of the core residential business.

We feel very good about that. Again, we're going to have headwinds throughout 2025, in our opinion, as it relates to both single-family and multi-family. As it relates to the commercial business, I mean, the heavy commercial business is performing exceedingly well. That business was up over 14% in the quarter, and we're continuing to see very strong, solid backlogs and bidding in that business. We suffered through a lot of pain in that business for a couple of years and are really pleased to see how well the team is just performing and executing in the heavy commercial side. Offsetting that was a little over 10% decline in the light commercial business.

As you can tell from those differences, the light commercial business is still larger than the heavy commercial business, although that will probably flip by the end of the year given the current sales trends that we expect. We do expect the light commercial business, which is the worst-performing part of our business, our end market right now, to continue to be weak. We would expect some recovery as we go into sort of the back half of the year. When we think of it on a full-year basis, the light commercial business will definitely be the weakest part of our end market segments.

Michael Dahl (Managing Director and Senior Analyst of Equity Research)

Okay. That's very helpful. Second question, maybe just digging into the margins a little bit more. I guess those impacts from the vehicle stuff in particular, presumably it works in both directions. You would have benefited from it when sales were up and now sales are down. It is getting spread across a smaller base. When we think about that through the year, is that something that's going to pressure your decrementals? There is a lot going on, right, with mix and with that. How do you think about the decrementals in the environment?

Michael Miller (CFO)

Yeah. There's no doubt that it provides a headwind to the decrementals because we, in essence, those costs are relatively fixed. We've talked a lot about decrementals and variable costs. We like to think of all of costs being variable over time. The reality is that when you're looking over, say, a 12 to 18-month time frame, some of your costs are fixed. There are certain insurance costs that are fixed. In essence, rent and facility costs are basically fixed. When we think it over sort of a 12-month time frame, we think of there being—and I'm thinking of our total cost structure now, not just cost of goods sold—but that roughly 10% of our cost structure is fixed. About 15% of our cost structure is lagging variable. It takes time before it adjusts to changes in volume.

About 75% of our overall costs are directly variable, the largest components of that being material and the install labor. When you are in a situation when you have volumes decline, when you had an expectation for volumes being flat or up, the fixed and lagging variable component of your cost structure really presents a significant headwind to margins and to decremental margins. That obviously came through in our same branch incrementally, but decremental margin in the quarter, as everyone saw.

Michael Dahl (Managing Director and Senior Analyst of Equity Research)

Okay. Thank you very much.

Michael Miller (CFO)

Sure.

Operator (participant)

Next question, Trey Grooms with Stephens. Please go ahead.

Trey Grooms (Managing Director)

Hey. Good morning, everyone. Thanks for taking my questions. I guess to start on maybe working capital and free cash flow, you guys put up some good free cash flow in the quarter, seeing improvements in working capital. Michael, do you think this kind of year-over-year improvement continues as we kind of look through the year with the outlook you have for demand, or how should we be thinking about that?

Michael Miller (CFO)

Yeah. I mean, it's one of the great things about this business is that when you are in a volume-challenged, if you will, environment, the balance sheet naturally shrinks and you generate good free cash flow. Given our commentary around what we think volumes are going to be like on a full-year basis, we would expect that we would continue to generate good free cash flow.

Trey Grooms (Managing Director)

Yep. And then on the M&A side, you still have a target of $100 million revenue for this year. Clearly, it's off to a little slower start, maybe. And I know these things can be lumpy, but have you seen any change at all up there in the kind of in the pipeline as the outlook has gotten maybe a little more challenged and demand has been a little weaker? Any change in the appetite on the M&A side from sellers?

Jeff Edwards (Chairman and CEO)

No. This is Jeff. No, not really, not at all. They're just, like you said, and we've said before, they are kind of lumpy, and we're not in control of the timing a lot of times, but there's plenty of still kind of active negotiations and candidates out there.

Michael Miller (CFO)

M&A is absolutely our number one priority.

Trey Grooms (Managing Director)

Yep. Sure. Okay. Got it. I'll pass it on. Thanks.

Michael Miller (CFO)

Sure.

Operator (participant)

Next question, Phil Ng with Jefferies. Please proceed.

Maggie Miller (VP of Equity Research)

Hey, guys. This is Maggie Miller on for Phil. First, going back to price mix, that piece is holding up. Maybe you could break out the price versus mix components of that and how you see specifically the mix piece trending through the year. I know you've called out a relatively benign cost environment so far, but if we continue to see these demand headwinds and there's additional capacity coming on, how do you think about the risk that fiberglass pricing falls and your ability to hold price in that type of backdrop?

Michael Miller (CFO)

This is Michael. I'll talk to the first part of that question, and then Jeff can kind of talk to the second part of that question. Although I would say we don't expect fiberglass pricing to decline. As we've talked on numerous calls, the price mix disclosure for us is a very complicated disclosure, and there are a lot of moving pieces to it. What I would say is a couple of things. It does not include the price mix and volume disclosures do not include the heavy commercial business, right? The fact that that business is very solid, pricing is very good, and is up, it is not reflective in the price mix calculation.

What you're seeing in the price mix calculation is, as I mentioned in the answer to a previous question, there's definitely carryover pricing from last year that is keeping that positive, if you will, combined with the fact that the production, as I mentioned earlier, the regional and local builders are performing slightly better than the public builders within our revenue base, just given the nature of our customers there. What is presenting a challenge, though, to the price mix calculation, at least the way that we disclose it, is that the multi-family sales being down slightly more than the other components of price mix is obviously a headwind to that.

What our expectation would be—and I sort of alluded to this in the answer to one of the other questions—is that if things sort of stay the way that they are, right, in terms of a little bit more pressure on, well, significantly better than the overall market opportunity, more pressure on multi-family volumes than single-family volumes, it would continue to add pressure and headwind to the price mix disclosure. I do not know if you wanted to add.

Jeff Edwards (Chairman and CEO)

Yeah. On the material side, I think it is important to kind of back up a year, if not years, and look at how tight things were. I mean, it really got to the point where it was inefficient. It was harder for us to do business. There were certain SKUs we could not get.

We were at, we've talked about before, having to go to distribution sometimes and even the big boxes in terms of supply of material. I would categorize this as moving closer to having an efficient market that's still fairly healthy despite the year-over-year decline. Quite frankly, it's kind of working the way it's supposed to.

Maggie Miller (VP of Equity Research)

Okay. Okay. That's super helpful. How should we think about the opportunities you have in the SG&A line as we move through the year, kind of taking into account those fixed and semi-fixed costs that you called out? At what point would you be looking to start taking those costs out if things are kind of steady state from here down year-over-year, but not getting worse? Would you have to see a material step down from where we are now to start making those cost-out actions?

Michael Miller (CFO)

Yeah. I appreciate the question. We are focused on sort of optimizing G&A. I mean, we've targeted at least $15 million of cost reduction, which we have already taken steps to realize those savings, which we believe we'll start feeling the impact of in the third quarter. Those costs, we are going to take out even if volumes improve from where our current expectations are. We are going to continue to focus on optimizing the G&A cost structure as much as we can, quite frankly. This is an opportunity for us to kind of fundamentally optimize the spend on G&A. The entire company is focused on getting there and getting that done.

Jeff Edwards (Chairman and CEO)

Good job, one. So.

Maggie Miller (VP of Equity Research)

All right. Thank you so much.

Operator (participant)

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

Ken Zener (Senior Analyst of Housing Sector)

Good morning, everybody.

Jeff Edwards (Chairman and CEO)

Morning.

Michael Miller (CFO)

Morning, Ken.

Ken Zener (Senior Analyst of Housing Sector)

Michael and Jeff, Phil, one or two, feel free to chime in. I think you've made some very, again, illuminative comments about the market, and you were talking about demand, public and private. I just would like to get your question one concept of, right, supply and demand. We all can see what the publics are doing, and I think you broadly reflected that. I'm surprised on the supply side. The census data talks about units under construction closer to 380, 90,000 versus the long-term average of 280. It seems that that's more on the private side where you have that excess. Can you think the strength you're seeing in the privates versus the apparent high supply that they have, if you would? Do you think the data is wrong versus your perception of the privates?

Michael Miller (CFO)

Our perception is guided by our experience, not necessarily the macro information that you're looking at. I think you're speaking just to single-family and not multi-family, correct?

Ken Zener (Senior Analyst of Housing Sector)

Correct.

Michael Miller (CFO)

Okay. I would just say that over the past two quarters, our experience has been that the sales level with the regional and local builders has been better than it has been with the production builders. In the beginning of last year, that was not the case. The production builder business was pretty solid. It's still solid now, but I'm just talking about it on sort of a relative basis. In terms of there being a lot of excess inventory at the regional and local builders, I really don't think that's the case, quite frankly. At least that's not our experience, and that's not the feedback that we're hearing.

Ken Zener (Senior Analyst of Housing Sector)

Very interesting because the census at least presents something different. I appreciate that. You gave comments—I know you do not give guidance—but you did highlight that 1Q gross margin tends to be the lowest structurally. We saw SG&A, which also tends to be the highest in 1Q, and that was up about 100 basis points. You talked about $15 million targeted savings. Is it fair to assume the 100 basis point SG&A headwind we saw in 1Q should kind of persist? If you think about it year-over-year, as the year progresses, as well, if you could mirror your gross margin comments to SG&A, that would be very helpful.

Michael Miller (CFO)

Yeah. I mean, the difficult thing is that, say, let's just take G&A, for example. G&A is relatively static. I mean, we talked about this in the fourth quarter call earlier this year, is that we expect G&A, absent these targeted reductions that we're making, we expect G&A to grow with general inflation, really outside of what's happening with volumes, generally speaking, right? Because we think of it as a dollar amount and not necessarily as a percentage of revenue, right? If you look at the adjusted selling and administrative expense increase from the first quarter of last year to the first quarter of this year, the dollar increase was about $6 million. Of that $6 million increase, $4.4 million was related to acquisitions because, obviously, acquisitions come with selling and general administrative expense of their own.

The startup costs associated with the internal distribution efforts that we have talked about now for a couple of quarters, which is going very well, by the way, but there still are startup costs associated with it. Our objective and G&A—I am kind of going back and forth between SG&A and G&A here—but G&A, generally speaking, is running between $105 million-$110 million a quarter. It is our objective on an annualized basis to be able to get that down by, say, $15 million, although there will continue to be inflationary pressures within G&A. We are working, as Jeff said, and it is absolutely true. Job number one for us is to optimize G&A, and we are working on that, and we will continue to work on that throughout the year.

Ken Zener (Senior Analyst of Housing Sector)

Thank you.

Michael Miller (CFO)

Sure.

Operator (participant)

Next question, Adam Baumgarten with Zelman & Associates. Please proceed.

Adam Baumgarten (Managing Director)

Hey. Thanks, guys. I guess I can appreciate that you've talked about the material costs being stable. I'm assuming that was a sequential comment, and that your view is that they won't come down. If the volumes get worse and capacity or supply increases across the industry, why wouldn't prices come down like maybe they have historically in a weak macro and volume environment, meaning that could benefit you guys?

Jeff Edwards (Chairman and CEO)

I mean, if it's severe enough, that's obviously the case, as you pointed out. As you said, historically, that's what happens. We just don't see it at this point, that way at this point.

Michael Miller (CFO)

Yeah. I mean, if we're down, let's call it 3% on the single-family side, and that's—I'm not saying we are, because we don't provide guidance—but say on the macro level, even if it's down 5%, that's not such a significant decrease in volume that necessarily would warrant a lower price environment. As Jeff said, we're in more of a normalized environment now versus the situation where we were at 100% capacity, and we couldn't get SKUs, and material was hard to come by. Right now, material is readily available.

Jeff Edwards (Chairman and CEO)

I mean, manufacturers are capable of regulating the amount of material that they produce.

I mean, clearly, there's been some small amount of curtailment already because they obviously like to see the market be healthy, and they're not going to make material that they can't sell or they're not going to sell it at a price that they can sell it at. It is a little bit rational in that way, as you would expect, in terms of supply.

Adam Baumgarten (Managing Director)

Okay. Got it. Just sticking on the cost side, any meaningful opportunities for branch consolidation, looking at your current footprint, that could save some costs as well?

Michael Miller (CFO)

Yeah. We always evaluate sort of the opportunity to bring branches together because it can be, especially when we're doing these sort of small-token acquisitions that we do that we do not really talk about. I mean, that's part of the strategy of doing them, is being able to combine locations. And we have three or four locations right now that we're looking to combine, but that's just part of our sort of everyday management of the footprint to make sure that we're optimizing it as best as possible. I mean, sometimes you'll say if you have a lease that you're sort of stuck in, you might keep it open a little bit longer than you want to. But we really try to optimize the footprint as best as possible.

Adam Baumgarten (Managing Director)

I got it. Thanks. Best of luck.

Michael Miller (CFO)

Sure.

Operator (participant)

Jeff Stevenson with Loop Capital Markets. Please go ahead.

Jeff Stevenson (VP of Equity Division)

Hey. Thanks for taking my questions today. First, on the strong, heavy commercial results during the quarter, was a portion of that demand strength driven by previously delayed large commercial projects moving forward since the start of the year? Would you expect that trend to continue moving forward?

Michael Miller (CFO)

We expect the trend to continue, and it was not any project-specific.

Jeff Stevenson (VP of Equity Division)

Got it. Okay. Understood. A healthy installation price mix during the quarter, which was great to see. Thanks for all the color on expectations on fiberglass pricing moving forward. Just shifting to spray foam, did you see any sequential improvement in the quarter? What are your expectations for pricing trends moving forward?

Michael Miller (CFO)

Yeah. We did see some price in the quarter. The spray foam business is still—it's a very solid business. As we've talked the past couple of quarters, it has been a headwind just because there had been a significant decrease in pricing that now is stabilizing and rising for a number of factors. The headwind to gross margin was less this quarter than it was last quarter. We feel good that the spray foam business will, in the back half of the year, not be a headwind to gross margin.

Jeff Stevenson (VP of Equity Division)

Great. Thank you.

Michael Miller (CFO)

Sure.

Operator (participant)

Next question, Colin Verron with Deutsche Bank. Please go ahead.

Collin Verron (Director)

Good morning. Thanks for taking my question. Just one for me. A lot of them have been taken. I guess just looking at working capital and inventory, you talked about releasing some of that and generating good free cash flow in a down market. When I look at your inventory balance in the quarter, it is up a bit sequentially and a good amount year-over-year. Any color as to just what is driving that? How much of it is M&A, pricing, or mix versus actual units? How much opportunity is there from inventory adjustments this year for cash flow generation, just given the current demand backdrop?

Michael Miller (CFO)

Yeah. Not a lot of it is M&A, but obviously, that's a component of it. The biggest component associated with it, though, quite frankly, is this internal distribution effort that we're doing because we are opening and setting up new distribution facilities that are primarily focused on internal distribution. Obviously, that means adding inventory to those locations. That is definitely a driver there of the higher inventory balances. What I would say is that just like it happened in the first quarter, I mean, clearly, receivables and primarily receivables, but receivables and inventory will trend up or down with higher or lower volumes.

Collin Verron (Director)

Understood. Thanks for the color. Good luck.

Michael Miller (CFO)

Sure. Thank you.

Operator (participant)

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

Jeff Edwards (Chairman and CEO)

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

Operator (participant)

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