Installed Building Products - Q2 2023

Transcript

Operator (participant)

Greetings, and welcome to the Installed Building Products Fiscal 2023 Second Quarter Financial Results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darren Hicks, Managing Director of Investor Relations. Thank you, sir. You may begin.

Darren Hicks (Managing Director of Investor Relations)

Good morning. Welcome to Installed Building Products Second Quarter 2023 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the second quarter, which can be found in the Investor Relations section of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include statements about future expectations, anticipation, beliefs, estimates, forecasts, plans, and prospects. These forward-looking statements are based on management's current expectations and involve risks and uncertainties.

Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially as a result of various factors, including, without limitation, the adverse impact of the ongoing COVID-19 pandemic, general economic and industry conditions, rising home prices, inflation and interest rates, the material price and supply environment, the timing of increases in our selling prices, and factors discussed in the Risk Factors section of the company's annual report on Form 10-K, as may be updated from time to time in our SEC filings. Any forward-looking statement speaks only as of the date hereof. The company undertakes no duty or obligation to update any forward-looking statement as a result of new information or future events, except as required by the federal securities laws.

In addition, management uses certain Non-GAAP performance measures on this call, such as EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income per diluted share, adjusted gross profit, adjusted gross profit margin, and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release, and additional reconciliation for EBITDA and adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer, and Michael Miller, our Chief Financial Officer, and joined by Jason Niswonger, our Chief Administrative and Sustainability Officer. I will now turn the call over to Jeff.

Jeff Edwards (Chairman and CEO)

Thanks, Darren. Good morning to everyone joining us on today's call. As usual, I will start the call with some highlights and then turn the call over to Michael, who will discuss our financial results and capital position in more detail before we take your questions. IBP produced another record quarter of operating and financial results, which included record, record second quarter sales, net income, and earnings per share. Our financial results continue to benefit from our strategic focus on profitability over volume, as well as our diversified end markets and products. As a result, we were able to more than offset softer single-family sales through ongoing strength and solid execution within our multifamily business and improving demand within our commercial business. Our continued success is a direct result of the efficiency and diligent effort of our installers and employees across the country.

Looking at our installation segment results for the second quarter, total installation sales increased 2% year-over-year. This was driven by a 41% increase in multifamily sales and a 24% increase in commercial, which combined to more than offset a 10% decline in single-family sales. Family sales growth accelerated to 38% on a same-branch basis, up from 30% on a same-branch basis last year. We have been successful in selling IBP's installation services across branches and other markets that historically have not served multifamily customers. Within our commercial business, second quarter same-branch installation sales increased 16%. Bidding activity and project bid acceptance rates in our heavy commercial business improved in the second quarter relative to the first quarter, while same-branch sales improved both sequentially and year-over-year.

During the quarter, price mix increased by 7.2% over the prior year period. We continue to apply our own local market knowledge and improve job efficiency while making adjustments to align our pricing with the value we offer our customers. The strong growth in our multifamily and commercial end markets has also been a benefit to our price mix disclosure, as sales to these end markets have higher average job prices relative to our single-family end market. We continue to expand our product offering and geographic presence through acquisition and have closed five deals so far this year, with annual revenue of over $48 million. We expect at least $100 million of annual revenue once again in 2023.

During the 2023 2Q, we completed two acquisitions, including a Florida-based installer of Fiberglass and Spray foam insulation, serving residential and commercial customers with annual revenue of approximately $3 million, and a Texas-based installer of Fiberglass, Spray foam, and Cellulose insulation, serving residential, multifamily, and commercial customers with annual revenue of approximately $3 million. Overall, the residential housing market remains resilient as stable employment and relatively low existing home inventory levels continue to support demand for residential new construction activity. We are very encouraged that the publicly traded homebuilders that have reported results in the last two weeks, growth of approximately 18%, the first positive result for the group in over a year. While these orders will take time to impact our revenue, we believe that the recovery in single-family home construction is clearly underway.

As for the multifamily end market, the backlog remains at historically high levels, with jobs standing beyond. We believe we are well positioned to report another year of strong financial performance in 2020, as we continue to focus on profitability and effective capital allocation. Longer term, we believe IBP's strong relationships, experienced leadership team, national scale, diverse product categories across multiple end markets will help IBP navigate future changes in the U.S. housing market. Our strong balance sheet, coupled with our high operating cash flow generating capability, supports ongoing acquisitions, dividends, and opportunistic share repurchase activity. We believe the installation industry is well positioned to benefit from demand driven by government legislation, including the Inflation Reduction Act of 2022 and the Bipartisan Infrastructure Law, which are intended to improve energy efficiency in residential homes.

I'm proud of our continued success and excited by the prospects ahead for IBP in the broader insulation and other product installation business. With this overview, I'd like to turn the call over to Michael to provide more detail on our 2nd quarter financial results.

Michael Miller (CFO)

Thank you, Jeff, and good morning, everyone. Consolidated net revenue increased to a second quarter record of $692 million, compared to $677 million for the same period last year. The improvement in sales during the quarter was driven by increases in multifamily and commercial sales, higher price mix from the prior year period, and revenue from recent acquisitions. The 7.2% price mix increase during the second quarter continued to benefit from stronger growth and a higher price per job in our multifamily and commercial end markets relative to our single-family end market. Our installation segment revenue increased to $652 million, while our other revenue, which includes IBP's manufacturing and distribution operations, increased to $40 million.

On a same branch basis, residential installation revenue declined 5% in the prior-year quarter, as robust multifamily growth of 38% partially offset a 13% decline in single-family same branch sales. Same branch commercial sales increased 16% during the 2023 second quarter. Adjusted gross profit margin improved 160 basis points year-over-year to 33.6% in the second quarter, which was a reflection of our strategic focus on securing the most profitable installation jobs over volume growth and the benefit of price mix improvement during the quarter. Adjusted selling and administrative expense as a percent of second quarter sales was 17.9%, compared to 16.1% for the prior-year period.

Higher selling and administrative expenses relative to the same period last year, primarily reflects higher variable compensation related to higher gross profit margin performance from the prior year period. Our second quarter net income per diluted share of $2.18 increased 5% from the prior year quarter, and our adjusted net income per diluted share improved 6% to $2.62. As a percentage of revenue, our net income per diluted share and adjusted net income per diluted share came in at a second quarter record of 8.9% and an all-time record of 10.7%, respectively. During the 2023 and 2022 second quarters, we recorded amortization expenses of approximately $11 million related to the acquisition of new businesses.

Based on recent acquisitions, we expect third quarter 2023 amortization expense of approximately $11 million and full year 2023 expense of approximately $44 million. We would expect these estimates to change with any acquisitions we close in future periods. This non-cash amortization adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Adjusted EBITDA for the 2023 second quarter improved to a record $122 million. Adjusted EBITDA as a % of net revenue, reached a record 17.7% for the 2023 second quarter, slightly above the same period last year.

In the second quarter, we experienced same-branch sales and adjusted EBITDA declines, resulting in a decremental same-branch to adjusted EBITDA margin of 25.8%, compared to an incremental margin of 25 points for the same period last year, when sales and adjusted EBITDA growth were positive. We continue full-year long-term incremental adjusted EBITDA margins in the range of 20%-25%. For the 2023 second quarter, our effective tax rate was approximately 26%, and we continue to expect an effective tax rate of 25%-27% for the full year ending December 31st, 2023. Now, let's look at our liquidity, balance sheet, and capital requirements in more detail.

For the 3 months ended June 30th, 2023, we generated $64 million in cash flow from operations, compared to $51 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income and lower net working capital requirements. Through interest rate swap agreements, we have fixed the interest rate on $400 million of our existing variable rate debt until December 2028, limiting our interest rate exposure. In addition, we have no significant debt maturities until 2020. Our second quarter net interest expense fell to $9.8 million from $10.4 million in the prior year period, as we were able to earn a higher interest rate on cash and cash equivalents invested throughout the quarter.

At June 2023, we had a net debt to trailing twelve-month adjusted EBITDA leverage ratio of 1.3x, compared to 1.5x at September 30th, 2022, which is well below our stated target of 2x. June 30th, 2023, we had $348 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 3 months ended June 30th, 2023, were approximately $14 million combined, which was 2% of revenue, in line with the same period last year. With our strong liquidity position and modest financial leverage, we continue to focus on expanding the business through acquisition and returning capital to shareholders.

Our acquisition pipeline is robust, our goal of acquiring $100 million of annual revenue in 2023 remains unchanged. IBP's Board of Directors approved a third quarter dividend of $0.33 per share, which is payable on September 30th, 2023, to stockholders of record on September 15th, 2023. The third quarter dividend represents a 5% 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, dedication, 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)

At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please, while we poll for questions. Our first question comes from Stephen Kim with Evercore. Please proceed with your question.

Stephen Kim (Senior Managing Director)

Yeah, thanks very much, guys. Congratulations on the strong quarter. Was curious if we could start off with your comments about the overall market. Single family starts have really rebounded nicely here. Multifamily, there's, you know, concerns about where that might go, as we head into next year. Was curious as to, you know, how you're thinking about the re- change in thinking around starts. Is that, is that, what, is that kind of in line with how you see the world? I was also curious if you could talk a little bit about the setup for a fiberglass price increase, you know, later this summer, in the context of that. Thanks.

Michael Miller (CFO)

Yeah, thanks, Stephen. This is Michael. On the starts perspective, yeah, yeah, I would say that ours, our thought process aligns with that. We've seen, and I think everybody's seen sort of that inflection happen on the single family side. Because the, you know, cycle times to build single family have really normalized, and we talked about this in the last call, that means that from sort of start to when we do our installation work has normalized as well, versus last year, where you saw that, you know, very extended lag between start and install. You know, we feel good on the single family side, as we go into the, the back half of the year.

We would say in multifamily that, you know, we really have -- our team has just performed incredibly well on the multifamily side, and we believe that, while maybe not at the same elevated levels that we're seeing right now, they will continue to perform, even if there is, call it in, you know, back half 2024, 2025, weakness in multifamily starts. We feel very good about our team's ability to continue to execute, even in a, a more difficult multifamily environment.

Jeff Edwards (Chairman and CEO)

Yeah, this is Jeff. I couldn't agree more in that regard. It's just, I mean, for us, it's been a matter of really market penetration. In a lot of markets in which we weren't participating in the multifamily at all. To the material, potential material price increase environment, second half of the year, latter half of the year, I would think that more than likely, the material, you know, continues to be pretty tight. It's gonna get more so as single family comes back online based on the content that's involved and the fact that the multifamily is still, still strong, at least in terms of what's being built in the field. I would think that it'd be probably pretty conducive to, you know, the manufacturers taking a look, look at that.

Stephen Kim (Senior Managing Director)

Yeah, I agree. That's, that's helpful. wanted to talk a little bit about this multifam, and, you know, I think, one of the things that I wanna make sure that we're clear on is how you all talk about volume. I know you all talk about it in terms of the number of jobs, but actually, it's really the number of trips, if I remember correctly. I have in my notes here that a typical single family job will take, you know, I don't know, 3-to-4 trips, with 2-to-3 of that being the insulation itself, and then another one or so for other products. Commercial, which is sorry, multifam, which is mostly the garden-style apartments. I have in my notes, like, 4-to-6-trips.

I was wondering if you could sort of clarify that for, for me, just make sure that, you know, we got that right. Then, how does commercial look? You know, how does that sort of factor in from a volume perspective and the number of trips? Thanks.

Michael Miller (CFO)

Obviously it depends, but multifamily and light commercial are going to be fairly similar in terms of the number of phases or the number for trips, which are going to be fairly kind of similar. On the single family side, yeah, your thinking there is, makes sense. I would say, though, that, you know, when we're counting jobs and we're on the volume side, disclosing the absolute volume of jobs, it is just the number of jobs compared to the price mix calculation. That, again, is influenced by a number of factors that we've talked about before.

In this quarter, the two biggest components that impacted price mix were both a higher growth rate from non-production builders on the single family side, and also the higher rate of single family, or excuse me, multifamily and commercial jobs, like commercial jobs in the price mix disclosure. You know, we obviously did see price in the quarter. You know, we're continuing to experience the sort of residual benefits, if you will, from the pricing actions that we took in the back half of last year. As we're going through the year and the comms get tougher, that, you know, that benefit continues to reduce, particularly because we've been in an extremely benign inflationary environment across the board.

Stephen Kim (Senior Managing Director)

Okay, great. Appreciate that.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Kenneth Zener (Senior Analyst)

Good morning, everybody.

Michael Miller (CFO)

Morning, Ken.

Kenneth Zener (Senior Analyst)

I wonder if you can talk to, you know, housing starts. You know, I think you commented on that we've obviously seen momentum coming out of this, I think your data, you know, market share and bidding better. Looking at the, you know, the residential side, you know, we estimate that the, the publics have basically share starts to almost 50%, up from low 40s last year, consistent with them having reduced inventory. My question is, could you comment on what you're currently seeing public versus the private mix? I will be tying that over into your comment about price mix benefiting from the, the non-production builders, which is, you know, might be different from what you're seeing right now in the bidding process.

Michael Miller (CFO)

Yeah, Ken, this is Michael. I think there's a difference between starts and when we're doing the installation work. you know, as we've talked about, I think in the past couple of calls, is that, you know, we expect as we go into the back half of the year to see higher rates of growth from the production builders than non-production builders, the regional and local guys. I think that's consistent with your statement, we're all increasing share of starts. as Jeff mentioned in his prepared comments, you know, they saw at least the public builders that have disclosed their second quarter results, so far, you know, they saw really solid order growth, which they hadn't seen. I think almost universally, everyone is talking about accelerating their spec starts and their spec inventory, right?

I think what that lends absolute validation to, is your comment and belief that they are continuing to pick up their % of overall starts. It's just that those starts are a forward-looking impact on our install revenue versus a backward-

Kenneth Zener (Senior Analyst)

Exactly.

Michael Miller (CFO)

On our install revenue.

Kenneth Zener (Senior Analyst)

Yeah, and the, the reason I'm asking this, you know, gross margins, which obviously impact your operating leverage, which has been consistent, which is good. How do you think about price mix in FY 2023? Because it's been strong in the front half. Is it basically going to be a wash for the year because it's going to be weak, not in a bad way, but just it's a mix issue in the back half, so it's kind of a wash? Where I'm going with this is, as you guys, as your exposure to larger production builders, increases, I'm just thinking about how you think about the, the pros and cons for operating leverage being affected by gross margin mix going down. As you guys recall, a couple of years ago, the, the public builders accelerated their starts.

There was kind of confusion, I think, around your operating leverage. As, you know, price mix was impacted by those public builders, which would be the opposite, it sounds like, of the first half of this year. If you could just kind of clarify that and talk about how you think they're going to be offsetting, right, a weaker mix as it relates to the operating leverage of the business? Thank you.

Michael Miller (CFO)

Yeah, sure, Ken. The, I mean, you have that, that, that directionally correct relative to the big national builders, because the average job price for us is lower there than it is with the regionals. To the extent we see a higher rate of growth from them, it does lower the price mix disclosure. As we said earlier, you know, it is a very, it's pretty benign inflationary environment. As demand picks up, you know, we have, you know, as a company, I think we've shown in the, particularly in the past couple of quarters, that we are going to focus on profitable works fairly for the installation jobs that we do over volume. That will continue, particularly as the pace of construction on the single family side starts to accelerate.

If you think about price on a full year basis going into 2024, you know, we expect that there will continue to be benefit in the mix component of the price mix disclosure, given the strength we're continuing to see on the multifamily and like commercial side.

Jeff Edwards (Chairman and CEO)

Thank you, guys.

Operator (participant)

Our next question comes from Joe Ahlersmeyer, Deutsche Bank. Please proceed with your question.

Joe Ahlersmeyer (Equity Research Analyst)

Hey, good morning, everybody.

Michael Miller (CFO)

Morning, Joe.

Joe Ahlersmeyer (Equity Research Analyst)

If I could just talk about with you guys the single family, same branch sales number, and not wanting to get too much into the, the mix and volume at the total residential level, just the single family, same branch sales. I think you had said in the past, couple quarters that the second quarter was likely to be the weakest environment for your sales on single family. Wondered if you had any updated thoughts on that relative to the back half? Then I've got a follow-up there.

Michael Miller (CFO)

You know, we feel good about the back half of the year. I mean, it is going to, as we said in the prepared remarks, I mean, it takes time for the pickup in starts to translate into our install volume. As we look at the context of the entire year, you know, we feel, we feel pretty good. I mean, I think there's, you know, a possibility, despite where our starts have been, at least the Census Bureau numbers would say starts have been, for the first half of the year, down something like 20%. You know, if we see the current trends continue through the back half of the year, theoretically, you could be at a point where we're not just talking about single family, not single family and multifamily.

You could get to a point where, you know, single family starts for the year are pretty flat year-over-year, you know, opposed to $1 million.

Jeff Edwards (Chairman and CEO)

To your point, I think we obviously, last call mentioned that we thought the second, you know, the second quarter would be the, the roughest, and I think that's probably still accurate, is where our heads are at.

Joe Ahlersmeyer (Equity Research Analyst)

thinking about that down 13 revenue, maybe the third quarter, and I realize you don't give guidance, but the third quarter decline, is likely less than that, if it's still a decline after all. The fourth quarter, you might actually see flat single family sales year-over-year. Is that close?

Michael Miller (CFO)

Well, as you said, we don't provide guidance, but we feel good about the, you know, the second half of the year relative to the first quarter of the year.

Joe Ahlersmeyer (Equity Research Analyst)

Relative to the first half and the second quarter?

Michael Miller (CFO)

Particularly the second quarter, yeah.

Joe Ahlersmeyer (Equity Research Analyst)

Got it. And then just maybe a bigger picture question, how you feel about industry manufacturing capacity relative to some of the tailwinds around the incentives with the Inflation Reduction Act and other things that you've discussed?

Jeff Edwards (Chairman and CEO)

This is Jeffrey Edwards. I mean, clearly everybody kind of remembers the last couple of years and, and how tight the market was. If, you know, if volumes were a little bit elevated from here, there's really only at least announced and under construction, one capacity add in Texas that Knauf has under construction that I think is still on- online or on schedule to come on at the end of the second quarter of next year-ish.

Which adds, you know, definitely some capacity, but clearly, if, both the volume returns to the levels we're talking about, and then even still past that, there becomes some tailwind from some of the energy, you know, proposals that have been put forth and are kind of working their way through the system, that it's likely, to get tight again, I think. There's probably some other manufacturers, although I'm sure not announced, that are probably strongly considering capacity add, but that'll take some time.

Joe Ahlersmeyer (Equity Research Analyst)

All right. Thanks for all the detail.

Operator (participant)

Our next question comes from Michael Rehaut with JP Morgan. Please proceed with your question.

Hi, guys. Good morning. Doug Ward on for Mike. Just a quick question for me. I was wondering if you guys could just give a little bit more color on your gross margins this quarter, you know, particularly strong, and just how sustainable you feel that is moving forward? If you could, you know, give a little bit more insight on, you know, what drove the upside, that would be great. Thanks.

Michael Miller (CFO)

This is Michael. Yeah, we had, you know, a very strong gross margin quarter. I mean, there are a lot of puts and takes in that, but, you know, if you just look over, you know, the past, you know, five quarters, right? I mean, gross margin has averaged around 32%. You know, I think that, and we, we've talked about this before, that, you know, in that, you know, 30%-32% range is, you know, I think makes sense, particularly when you're looking at it on a, on a full year basis. We feel good about where we are gross margin-wise, but, you know, you know, we also feel good at that, you know, kind of 30%-32% range as well.

Okay. You feel that range is, I guess, manageable moving forward for the rest of the year?

Yeah.

Got it. Thank you.

Sure.

Operator (participant)

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

Susan Maklari (Senior Equity Research Analyst)

Thank you. Good morning, everyone, and congrats on a nice quarter.

Michael Miller (CFO)

Great. Thank you.

Jeff Edwards (Chairman and CEO)

Thanks, Sue.

Susan Maklari (Senior Equity Research Analyst)

My first question is: As we think about a more normalized operating environment in terms of the starts pace, as well as perhaps some of the pricing that will come through on the material side, is it reasonable to think that your volume versus price mix over the next, you know, call it, I don't know, one year, one and a half or so, will start to move closer together, the way that we've sort of seen those two line items move historically?

Michael Miller (CFO)

Yes, definitely.

Susan Maklari (Senior Equity Research Analyst)

Okay. Then I guess following up, you know, you, you talk about, the bigger production builders sort of taking more of the volume on the ground. What are the implications as it relates to the ancillary products in there, and your ability to continue to add value to that, and how that will perhaps come through in the results?

Michael Miller (CFO)

Yeah, I mean, we have, you know, good penetration of the other products with the big production builders. It's probably a little bit less than it is with the regional and local guys, but we would not expect that to have necessarily a material impact on the price mix disclosure. If you look at, you know, year to date, and even particularly this past quarter, the price or the other products really didn't impact the price mix disclosure this year, this quarter.

Susan Maklari (Senior Equity Research Analyst)

Okay. All right. Thank you. Good luck with everything.

Michael Miller (CFO)

Thanks.

Operator (participant)

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

Trey Grooms (Managing Director)

Hey, good morning, everyone.

Michael Miller (CFO)

Morning.

Trey Grooms (Managing Director)

Hey, you kind of alluded to it just a little bit ago, you know, as part of some of the new actions, efficiency codes. I, I think the public comment period has been extended here. Do you guys have any early views, you know, of the tenor that this mandate might have, you know, for you guys, for the industry, timing? If you could just educate us a little bit more on, on kind of your thoughts around that.

Michael Miller (CFO)

Yeah. This is, Michael, Trey. you know, assuming that the, FHA require, I don't think anybody in the industry expects it to have an impact until probably early 2025.

Trey Grooms (Managing Director)

Mm-hmm.

Michael Miller (CFO)

That if Fannie and Freddie go down the same path, it probably won't be until late 2025, early 2026, not that that has the full impact. You know, and obviously over a few years, you will see greater energy efficiency, you know, come through and as code gets, you know, as the higher energy codes get, you know, across the country. It could be, you know, a noticeable uptick in sales. We feel, you know, pretty good about that, but it's, it's a 2025, 2026 event, not necessarily a 2023, 2024 event.

Trey Grooms (Managing Director)

Sure. Is there any way, and I know this is further out, but still it's a pretty interesting thing that's going on with the industry? Is there any way to kind of parse out, you know, I think now the most recent kind of updated energy codes that are required are, I think, maybe 2009, at least required from HUD? Is there any way to kind of parse out what that incremental amount of, you know, insulation could be if they were to have to update the more recent, I guess, 2021 edition?

Michael Miller (CFO)

Yeah. I'll be honest with you, there's a lot of work going on within the industry to really get a good handle on what the kind of increased pound usage estimation is going to be by state. You know, we're sort of working with that information and really haven't finalized our conclusions, but I would say that it is definitely positive and, you know, reasonably significant in relation to our single-family revenue.

Jeff Edwards (Chairman and CEO)

I mean, I know, this is Jeff. The, you know, the difference between the 2009 code and the 2021 code is significant, very significant. There are not that many states. In some of the states that are still carrying the 2009 codes are not really large markets either. There's maybe, I'm going to guess, and say ten-ish or so, but it's a lot of, you know, I know like Alaska and a number of others are some of the upper, upper Midwest states, Wyoming, et cetera, some of those states where there's just not the number of builds, and maybe it's 10 or a dozen or so. The rest are not at 2009.

Obviously, the difference between whatever codes they're adhering to and whatever local codes you might even be adhering to, are much closer to the 2021 specs than the 2009 spec.

Michael Miller (CFO)

Yeah, in the top half of the, in the top half of the country, you might have, a jurisdiction that has the 2009 code, the building practices to build to the 2021 code already.

Trey Grooms (Managing Director)

Right. Okay. Got it. All right, well, thanks for some of that info. Switching gears here on, on multifamily, I think you mentioned, you know, that you expect that multifamily to remain strong for maybe another year. I, I'm sure that's based on, you know, what you're seeing from your backlog there or, or maybe your, your customer's backlog there. You know, and that sounds better than what some are looking for as far as from multifamily and as far as the duration of strength there. Clearly, multifamily has been a focus for you guys. Do you feel like you've been gaining some share there on multifamily, or, or, you know, what's driving that relative strength for you guys, especially looking into, into next year?

Michael Miller (CFO)

This is Michael. I mean, it's a couple of things, quite frankly. It is that we're gaining share. We're doing multifamily in markets that previously we hadn't done multifamily. We're also doing a very good job of cross-selling the other products into multifamily, which we hadn't previously done. It's a combination of things that is leading to the outperformance there. It's, you know, that outperformance, while again, you know, we don't anticipate that the growth rates are gonna continue to stay at such great levels. You know, we do think that even in a more difficult operating environment from a multifamily perspective, that our team's gonna be able to continue to perform above the market.

Jeffrey Stevenson (Senior Equity Research Analyst)

Sounds good. Thanks a lot, guys. I'll pass it on. Good luck.

Michael Miller (CFO)

Thanks.

Operator (participant)

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

Adam Baumgarten (Managing Director)

Hey, good morning, everyone. If you think about the 7% increase in same-store installation price mix, how much of that was due to mix versus, you know, pure pricing?

Michael Miller (CFO)

More of it was mix than price. There is price in it.

Adam Baumgarten (Managing Director)

Okay, got it. Then maybe switching gears to commercial, you know, if you could talk through how the heavy commercial business performed in the quarter, and then just maybe an update on the profitability profile of that business. I know that's been a big effort behind the scenes, for you guys. Any update there would be helpful.

Michael Miller (CFO)

Yeah, it, it was a, it was a good success story during the quarter, and we're feeling good about it as we go into the back half of the year. You know, they had high single-digit organic growth in the quarter, and the margin profile, while still not what we expect it to be or close to the company average, it did have a considerable improvement over last year's quarter.

Adam Baumgarten (Managing Director)

Okay, got it. Thanks. Thanks a lot.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Philip Ng (Analyst)

Hey, guys, congrats on a really strong quarter. I guess this is a question for Michael. It appears you're at least committing to volumes, perhaps bottoming out in 2Q. We appreciate, obviously, orders, starts have inflected. When do you see that kind of funneling through to your volumes? Is that a fourth quarter or 3Q then? When we kind of look out to 2024 with easier comps, do you see your volumes inflecting positively on a year-over-year basis by, call it, early 2024?

Michael Miller (CFO)

Well, I mean, I hate to sound like a broken record. We obviously don't provide guidance. I think it, you know, just given what we've talked about and assuming things continue along the positive trajectory that we've been talking about, you know, I think it's, you know, fair to assume at this point that you'll see a full-year positive volume in 2024, especially given what the production builders have sort of committed to, and what you've seen from an order growth and a commitment to the, to the spec lens, which we think makes a lot of sense in the current operating environment. You know, the starts growth that we're starting to see definitely takes time to become install sales for us. You know, there's, you know, definitely on a relative basis, given how strong 2022 is, there's still weakness there.

We're very encouraged as we look towards the full scope of the back half of the year, you know, that there's going to be a decent volume of single family work for us, in the back half of the year.

Philip Ng (Analyst)

Okay, that's helpful. Then, from a commercial activity standpoint, certainly tighter lending conditions, well-documented.

Michael Miller (CFO)

Yeah.

Philip Ng (Analyst)

Appreciating you're, you're not very big in office, I would imagine. How, how is commercial bidding activity kind of progressing? Any, any color on your commercial exposure in terms of perhaps heavy commercial that's a little more insulated from some of the concerns people have on office and retail?

Michael Miller (CFO)

Yeah, I mean, you know, as you know, the heavy commercial business, you know, in aggregate, for the company is, you know, like 7% or so. Not meaningful, but, you know, as I said earlier, we are seeing decent growth there and I'm getting some margin uptick. You know, we have, across the board on the commercial side, we're being very sort of cautious because we obviously are not ignoring the fact that everyone's talking about the tightening of credit. You know, and I think that, that goes to multifamily as well. We have not seen it in bidding and in terms of bidding activity and our backlogs, but we're being, you know, extremely mindful of it and monitoring it, you know, as closely as we can.

Jeff Edwards (Chairman and CEO)

We didn't directly answer the part about office. Office is, is a insignificant piece of our overall revenue and even of our, of our commercial business.

Michael Miller (CFO)

Yeah.

Philip Ng (Analyst)

Okay. Okay. Great color, guys. Appreciate it.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Jeffrey Stevenson (Senior Equity Research Analyst)

Hey, thanks for taking my questions today, and congrats on the nice quarter.

Michael Miller (CFO)

Thanks.

Jeffrey Stevenson (Senior Equity Research Analyst)

Inventories moved lower sequentially, and we've heard some commentary in the channel about some destocking ahead of the air pocket and single family demand. I just wondered if you'd attribute the sequential move lower to some destocking or something else entirely?

Michael Miller (CFO)

Well, I mean, we don't think of it as destocking. We think of it more as we're not, we don't need to maintain as high an inventory level because there's, I mean, fairly wide, you know, material is fairly widely available now, unlike, say, this time last year, where material was so tight, we were just getting as much material as we could, and we're just working our inventory down to a more typical level relative to the sales. I think you'll see, as we go through the course of the year, we'll continue to normalize our inventory, you know, assuming, which is our assumption, that we continue to have, you know, good availability of material.

We're also starting to see, which is good, is that, and we've talked about this a lot last year, is that, you know, not only was material tight, but certain types of material that, that are not as widely used as other types of material, are now becoming available again, which has significantly is probably the wrong word, but has helped productivity in the field, because, you know, we have the material that we need in the right sizes and the right type, and so that helps as well.

Jeffrey Stevenson (Senior Equity Research Analyst)

Okay, no, that's great color. Then I just wanted to touch on the increase in SG&A from higher variable compensation, and just how you think that should track the rest of the year.

Michael Miller (CFO)

Yeah. It does link up, if you will, with particularly with gross margin on the selling expense side. I would say, we talked about this in previous calls, about the fact that, you know, the only real sort of quote, unquote, "wage inflation" that we saw last year was really in the G&A side. What, you know, really came through in the second quarter is sort of the full realization of that, you know, sort of inflationary environment. You know, that's really behind us now, and I think it's been talked a lot about in the press that, you know, wage inflation, while still higher maybe than some people want, is normalized considerably.

Jeffrey Stevenson (Senior Equity Research Analyst)

Understood. Thank you.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Keith Hughes (Managing Director and Senior Equity Analyst)

Thank you. Most of my questions have been asked, but could you just give an update on where you are in terms of mix of single family versus commercial versus multifamily and install?

Michael Miller (CFO)

Sure. This is for the quarter and for the whole company, so it's not broken out by the install segment versus the other segment. It's roughly, excuse me, 56%-57% single family, like 16%-17% multifamily, about 7% R&R, roughly 7%-8% R&R, 7% heavy commercial, and then the remaining 11%-12% light commercial.

Keith Hughes (Managing Director and Senior Equity Analyst)

What was the heavy again? I just couldn't hear you.

Michael Miller (CFO)

7.

Keith Hughes (Managing Director and Senior Equity Analyst)

7%, okay. I guess within that, is there a distinction in multifamily between, you know, tower business versus garden apartments versus some of this mixed use that's out? Is that all lumped in that same category?

Michael Miller (CFO)

That, that's a great question. It is all lumped in. It's all multifamily.

Keith Hughes (Managing Director and Senior Equity Analyst)

It's all multifamily. Okay. All right. Thank you very much.

Michael Miller (CFO)

Yep.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from Michael Dahl with RBC Capital Markets. Please proceed with your question.

Chris Cialino (Analyst)

Hi, it's actually Chris Cialino from Mike. Thanks for taking our questions. Just going back to margins and specifically net price cost trends, could you help or flesh out a little more color how much net price costs changed this quarter versus last quarter? Then what your outlook is for the back half of this year, just given what you're seeing today on the inflation front?

Michael Miller (CFO)

Yeah, we don't break that out. You know, it's the kind of the price mix, but, as we said, it was definitely more mixed, but there was definitely price in the 7.2% price mix growth this quarter.

Chris Cialino (Analyst)

I guess, in terms of the inflationary dynamics there, is there some additional color you can provide on what you're expecting for, what you saw this quarter, what do you expect for the backup?

Michael Miller (CFO)

We still expect it to be a fairly benign environment. I would say, though, that, you know, we have focused profitable work over volume, and to the extent that there's a higher acceleration in single family than we're expecting, we would obviously anticipate that we would get paid fairly for that work, and we would lean into the more profitable work, in that instance.

Chris Cialino (Analyst)

Understood. Just for my second question, just on capital allocation, I was hoping you can maybe comment what you're seeing today in terms of your M&A pipeline, how deal multiples have trended, and the extent they're still elevated, your willingness to return to share repos?

Jeff Edwards (Chairman and CEO)

I don't know. This is Jeff. I don't know that we've seen any meaningful increase or decrease in multiples really for quite some time, to be honest with you. It's just not usually who our sellers are. You know, they're kind of not the largest, you know, kind of lots of buyers, you know, PEs, actor, et cetera, typically. We haven't seen that much variation in that regard.

Michael Miller (CFO)

You know, the pipeline's good.

Jeff Edwards (Chairman and CEO)

Yeah, the pipeline's good, but we continue, as Michael said many times, we continue to have plenty of capital to really kind of perform on all four or five of our efforts, including share repurchase.

Michael Miller (CFO)

Yeah. We are extremely-

Chris Cialino (Analyst)

Thanks, Jeff, appreciate all the color.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Jeff Edwards (Chairman and CEO)

Thank you 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.