Installed Building Products - Q4 2021

Transcript

Operator (participant)

Greetings, and welcome to Installed Building Products Fiscal 2021 Q4 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 during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darren Hicks, Director of Investor Relations.

Darren Hicks (Director of Investor Relations)

Good morning, and welcome to Installed Building Products Q4 2021 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the Q4, 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 COVID-19 crisis, general economic and industry conditions, the material price and supply environment, the timing of increases in our selling prices, and the 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 statements speak only as of the date hereof. The company undertakes no duty or obligation to update any forward-looking statements as a result of new information or future events, except as required by federal securities laws.

In addition, management uses certain non-GAAP performance measures on this call, such as 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 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 Senior Vice President of Finance and Investor Relations. I will now turn the call over to Jeff.

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 achieved another year of record annual revenue and profitability. For 2021, revenue increased 19.1% to nearly $2 billion.

Net income, income per diluted share increased 22.6% to $4.01, and adjusted EBITDA increased 16.2% to $285.4 million. The record 2021 results extend our history of revenue, net income, and adjusted EBITDA growth to seven consecutive years since IBP became a public company in February of 2014.

I am proud and humbled by our performance as we achieve these record results despite the continued impacts of the COVID-19 pandemic and unprecedented supply chain challenges. Our strong 2021 results demonstrate the continued hard work, dedication, and commitment of our nearly 9,500 team members nationwide.

The most important part of our business is the men and women working at our locations throughout the U.S. We strive to provide an environment where people want to work and succeed, and we continue to focus our resources on attracting, retaining, and developing talent. Employee turnover remains well below industry averages, which we believe is a direct result of the investments made in our employee programs, which have been in place since 2017.

Our success in 2021 is a reflection of the resiliency of our business model, our competitive position within key geographies and end markets, the strength of our balance sheet, and the experience and dedication of our senior leaders and employees throughout the company. Since our IPO in 2014, we have achieved many operating and financial accomplishments. Revenue, net income from continuing operations, and adjusted EBITDA have grown at compound annual growth rates of 21%, 36%, and 31%, respectively.

During this period, we have completed almost 90 acquisitions, expanding our footprint across the U.S. and diversifying our revenue to additional end markets and product categories. We have pursued a growth-focused capital allocation strategy that prioritizes investments in acquisitions while allocating excess capital toward our dividend and share repurchase programs.

Finally, over the past several years, we've been developing a comprehensive ESG framework that was formalized in October of 2021 with the publication of our inaugural ESG report. We continue to evolve into an increasingly conscientious company, and we are devoting more resources toward sustaining that effort, which I'll touch on later. As you can see, we have come a long way since our IPO.

I'm extremely pleased with our ability to execute our growth plan and return capital to our shareholders while being a good corporate citizen. With this update, let's review our 2021 full year and Q4 end market performance in more detail. 2021 was another strong year of residential and multifamily growth, while the COVID-19 pandemic continued to impact activity within our commercial operations.

For the year, we experienced a 12.8% increase in residential same-branch sales from the prior year period, which was driven by a 14% increase in single-family same-branch sales growth also from the prior year period. By comparison, 2021 total U.S. residential completions increased just 4%, and single-family completions rose 6.1% from the prior year. During the Q4, price mix increased 12.9% over the prior year period, which is the strongest quarterly increase we have achieved as a public company.

This reflects the underlying demand for our installation services, combined with the hard work of our local branches in keeping pricing aligned with the value we offer in inflationary trends. As expected, the supply chain for many of the building products and materials we install remained constrained during the Q4 and throughout 2021.

We anticipate that supply chain challenges will continue for the foreseeable future, but our asset-light business model should enable us to remain flexible and generate strong cash flow. In addition, we continue to benefit from our national scale, material buying advantage, and strategic plans aimed at diversifying and expanding our products and markets and geographic presence.

Overall, single-family housing demand continues to benefit from historically low mortgage rates and favorable demographics that have driven an increase in demand for entry-level housing. According to the U.S. Census Bureau housing data, the December 2021 backlog of total units authorized but not started, was up 45% from December of 2020, and new home construction starts continued to remain near cycle highs in 2021. As a result, we expect positive trends within the U.S. housing industry will support further growth in 2022.

For the 2021 Q4, Same Branch multifamily revenue increased 6% compared to the prior year quarter, relative to a 12.5% decrease in U.S. multifamily completions. Our multifamily sales continued to grow at a healthy rate despite difficult year-over-year comparisons, which resulted from exceptional sales growth in the 2020 Q4.

Our commercial markets continue to be impacted by the COVID-19 pandemic, more specifically, less consistent material availability relative to pre-pandemic periods and supply chain disruptions. For the 2021 Q4, our commercial end market sales growth continues to be driven by our strategic acquisitions.

Within our large commercial business, Same Branch sales decreased modestly in the 2021 Q4, but bidding activity has remained stable and project bid acceptance has been steady relative to 2020 Q4. We believe the current bidding environment supports continued improvement in this end market.

We estimate our large commercial backlog was $143.2 million as of the end of 2021. Looking at our acquisition strategy in more detail, we continue to prioritize profitable growth through acquiring well-run companies that install insulation and complementary building products.

During the 2021 Q4, we acquired a Texas-based installer of glass, mirrors, and related products for new commercial construction projects with annual revenue of approximately $20 million, an Oregon-based installer of insulation, gutters, windows, and siding for single-family, multifamily, and commercial customers with annual revenue of approximately $2.8 million, and a Tennessee-based installer of fiberglass and spray foam insulation for new residential, multifamily, and commercial construction projects with annual revenue of approximately $10 million.

In addition, in December, we announced the acquisition of AMD Distribution. Since this is our first conference call since the acquisition, I want to provide some additional highlights on AMD. AMD is a Minnesota-based distributor serving customers across 21 states in the Midwest and Mountain West, with annual revenue of approximately $71 million. The company distributes products, materials, accessories, and equipment used throughout the insulation installation process.

This is one of the largest acquisitions we have completed and the first major acquisition of a distribution business. AMD's experience serving our core insulation markets provides us with a distribution platform, which further diversifies our revenue mix, end markets, and geographic footprint.

Over the long term, we expect AMD will improve the flexibility of both our supply chain and cost structure for insulation accessories. We believe there's an opportunity for this platform to contribute to the growth of our complementary building products in the quarters and years to come.

We also expect this acquisition will be immediately accretive to earnings. The AMD acquisition capped off an historic year of acquisition growth for IBP. Throughout the year, we completed 12 acquisitions, representing approximately $211 million of annual revenues, surpassing our $100 million acquired revenue target for 2021. Looking ahead, our acquisition pipeline remains robust and includes opportunities across multiple geographies, products, and end markets.

As a result, we expect to acquire at least $100 million of revenue in 2022. As we look to 2022 and beyond, we remain excited by the direction we are headed and the compelling outlook across our residential and commercial end markets. We anticipate that effective management of our supply chain will continue to be a priority throughout this year.

Our purchasing, logistics, and warehousing teams will continue to work with our suppliers and customers to help ease these industry-wide supply chain challenges. As many of you know, insulation manufacturers are continuing to run at full capacity and with limited incremental capacity coming online this year, we are planning for multiple price increases throughout 2022.

However, with access to labor, a strong position with our customers and suppliers, and a healthy housing industry demand backdrop, we believe we are well positioned to navigate the current inflationary environment better than any other period in our history. It is also important to note that although prices have been rising, insulation represents a small portion of the total cost to build a home, which we believe allows us greater flexibility to prudently increase prices with our customers.

I'm very proud of our legacy of growth and excited by the opportunities to create additional value for our customers, team members, and shareholders in the future. Before I turn the call over to Michael, I want to recognize the promotion of Jason Niswonger to Chief Administrative and Sustainability Officer. Among many other financial and operational responsibilities, Jason has been the main point of contact with the investment community since our IPO.

While Jason will remain accessible to investors, his primary IR responsibilities will be transferred to Darren Hicks, Director of Investor Relations. Anyone who's had the pleasure of engaging with Jason understands his passion for, commitment to, and knowledge of IBP. On behalf of everyone at the company, I want to congratulate Jason on his promotion. So with this overview, I'd like to turn the call over to Michael to provide more detail on our Q4 results.

Michael Miller (CFO)

Thanks, Jeff, and good morning, everyone. Net sales for the Q4 increased to a quarterly record of $533.7 million, compared to $441.5 million for the same period last year. The 20.9% year-over-year improvement in sales during the quarter was mainly driven by an increase in price mix, a higher volume of jobs completed, and the revenue contribution from recent acquisitions.

On a same-branch basis, net revenue improved 11.8% from the prior year quarter, driven by single-family same-branch sales growth of 16.6%. Multifamily same-branch sales increased 6%, which resulted in a combined total residential same-branch sales growth of 14.8%. This growth significantly outpaced the total U.S. housing completions decline of 1%.

Residential construction cycle times continued to be extended during the Q4 relative to the prior year period. However, the lingering effects of the pandemic continue to impact our commercial end market. Same-branch commercial sales decreased 7.3% in the 2021 Q4, while our large commercial same-branch sales declined by a more modest 2.7% in the quarter.

Adjusted gross profit margin declined 130 basis points to 29.3% for the same period last year, primarily due to inflationary pressure and material supply shortages. We estimate that overall material inflation in the Q4 of 2021 was in the low double digits, and material supply shortages had an impact of approximately $1.8 million on gross profit during the quarter.

The impact from the supply shortages reduced adjusted gross profit margin by approximately 30 basis points. For the full year 2021, the impact from supply shortages was approximately $9 million on gross profit and reduced adjusted gross profit margin by approximately 45 basis points. Administrative expenses as a percent of Q4 sales were 13.4%, a 30 basis point improvement from the prior year period.

Adjusted selling and administrative expense as a percent of Q4 sales improved 40 basis points from the prior year period. The year-over-year improvements in SG&A expense relative to sales during the Q4 reflects our ability to leverage administrative costs during strong volume growth periods. On a GAAP basis, our Q4 net income increased 5.5% from the prior year quarter to $29.4 million, or $0.99 per diluted share.

Our adjusted net income improved 15.3% to $42.2 million, or $1.42 per diluted share. We estimate the material supply shortages impact Q4 earnings per share by approximately $0.04 per diluted share. During the Q4 of 2021, the acquisition of new businesses drove an increase in our recorded amortization expense, $10.3 million, compared to $8.2 million for the same period last year.

This non-cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability. Based on recent acquisitions, we expect Q1 2022 amortization expense of approximately $10.9 million and full-year 2022 expense of approximately $41.8 million.

We would expect these estimates to change with any acquisitions we close in future periods. Adjusted EBITDA for the Q4 of 2021 improved 11.5% to $74.8 million. Adjusted EBITDA as a percent of net revenue was 14% for the 2021 Q4, compared to 15.2% for the same period last year. Same-branch incremental adjusted EBITDA margin was 6.2% for the Q4.

Similar to the impact on gross profit, we estimate that material supply shortages during the quarter impacted adjusted EBITDA by approximately $1.8 million, reducing our adjusted EBITDA margin by approximately 30 basis points.

For the 2021 Q4, our effective tax rate was approximately 24%, and we continue to expect an effective tax rate of 25%-27% for the full year ending December 31, 2022. Now let's look at our liquidity, balance sheet, and capital requirements in more detail. Our business model continues to generate strong operating cash flow. For the 12 months ended December 31, 2021, we generated $138.3 million in cash flow from operations, compared to $180.8 million in the prior year period.

The year-over-year decline in operating cash flow was primarily associated with increased inventory levels, following efforts to reduce material shortages and greater working capital re-requirements in an inflationary environment.

At December 31, 2021, we had $218.3 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 12 months ending December 31, 2021, were $39.7 million combined, which was 2% of revenue at December 31, 2021, compared to 2.1% for the same period last year. On December 14, 2021, we successfully closed the new term loan facility. The new $500 million term loan facility matures on December 13, 2028, and has no financial maintenance covenants.

In addition, on February 17, 2022, we increased and extended our asset-based lending credit facility, which now matures on February 17, 2027, and was increased to $250 million. There is currently nothing drawn on the amended ABL facility. Through the use of interest rate swaps, we are limiting our interest rate exposure with no significant debt maturities until 2028.

With over $300 million in cash and cash equivalents and additional ABL borrowing capacity, we have in excess of $500 million in liquidity to invest in our long-term growth opportunities. At December 31, 2021, we had total cash and short-term investments of $333.5 million.

Total debt at year-end was $868.1 million, making our net total debt approximately $534.6 million at December 31, 2021, compared to $338.4 million last year. At December 31, 2021, we had a net debt to adjusted trailing twelve-month EBITDA leverage ratio of 1.9 times, which remains below our stated leverage ratio expectation of less than 2 times.

We continue to prioritize profitable growth through our proven strategy of acquiring well-run installers and insulation and complementary building products. During 2021, we invested $241.3 million in acquisitions, compared to $76.4 million in 2020.

We also continue to return capital to shareholders, and today we announced that IBP's board of directors approved a 5% increase to our Q1 dividend of $0.315 per share, which is payable on March 31st, 2022, to stockholders, stockholders of record on March 15th, 2022. Also, as a part of our established dividend policy, today, we announced that our board has declared a $0.90 per share annual variable dividend.

The variable dividend was based on the cash flow generated by our operations, with consideration for planned and expected cash obligations, acquisitions, and other factors as determined by the board. The variable dividend will also be paid on March 31st, 2022, to stockholders of record on March 15th, 2022.

Finally, the board has also increased the existing share repurchase program to $200 million from $100 million and extended the program one year to March 1, 2023. Our dividend policy and renewed share repurchase program reflects our commitment to return excess capital to shareholders. With that, 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, commitment to our company. Our success over the years is made possible because of you. Operator, let's open up the call for questions.

Operator (participant)

Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the queue. You may press star two if you would like 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. One moment please, while we pull for questions. Our first question comes from Trey Grooms with Stephens. Please proceed.

Noah Merkousko (Company Representative)

Hi, this is actually Noah Merkousko on for Trey. Good morning, and thanks for taking my question.

Jeff Edwards (Chairman and CEO)

Sure. Good morning.

Noah Merkousko (Company Representative)

So to start out, you know, it looks like sequentially, the supply chain disruptions that are, you know, it's got a cost impact to gross margin. Looks like that improved a little bit. And I think, you know, the expectation is for, a lot of these supply chain issues to persist through this year. But do you expect that, that cost impact to continue to get sequentially better as we move through this year?

Michael Miller (CFO)

This is Michael. I would say that we would anticipate that it would get slightly better, but that it will be with us for, you know, certainly the foreseeable future and probably through all of 2022.

Jeff Edwards (Chairman and CEO)

Well, every time we think it's this, Jeff, every time we think it's, you know, over the-just barely over the hill, something else seems to happen.

Michael Miller (CFO)

Yeah.

Jeff Edwards (Chairman and CEO)

I think that's probably a common refrain in a lot of industries.

Michael Miller (CFO)

Yeah. And I think it's important to point out that, you know, I think fiberglass is actually getting better. But it really is a lot of the other products, particularly spray foam. The availability and cost of spray foam and the cadence and frequency of price increases has really been unprecedented, and it did not diminish at all through 2021.

Noah Merkousko (Company Representative)

Got it. Yeah, that makes sense. And then for my follow-up, pricing growth in the quarter was really impressive. I understand that manufacturers continue to raise prices, but how are you thinking about your ability to continue to see strong pricing gains this year, and maybe any way you can quantify that for us?

Michael Miller (CFO)

I mean, we are continuing to work very hard to keep up with the material price cost inflation. Obviously, one of the primary ways we do that is by raising selling prices. I will say that one of the things that we felt good about in the Q4 is that our fiberglass margins actually improved, not just sequentially, but also over the prior year in the Q4.

We feel good about where we are in the fiberglass side, but the other products are still acting as a drag on margins, just given the frequency and amount of the material price inflation there, particularly spray foam.

Jeff Edwards (Chairman and CEO)

Well, you don't get much of a forward look at all on the other products pricing, unlike fiberglass.

Michael Miller (CFO)

Unlike Fiberglass, exactly.

Noah Merkousko (Company Representative)

Got it. That makes sense. I'll leave it there. Thanks.

Jeff Edwards (Chairman and CEO)

Okay.

Operator (participant)

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

Chris Kalata (Research Analyst)

Hi, this is actually Chris Kalata for Michael Dahl. Thanks for taking my questions. Just following up on the price cost commentary, and particularly the non-fiberglass part of your business, I mean, how are you thinking about the eventual kind of inflection of the price cost headwinds there? And is there any way you could give us a sense of the magnitude of headwind you're facing in that part of your business?

Michael Miller (CFO)

The headwind is fairly significant. We haven't really quantified it, publicly from a dollar amount perspective, but as I mentioned, earlier, we did see improvement in the fiberglass business, which, as I know you're aware, is, you know, the largest part of our business at, you know, 55%-56%. But, the biggest problem right now is definitely spray foam. We've seen some stabilization in the other products.

Aluminum for gutters is, you know, obviously, given everything that's going on, is, continuing to rise and be problematic. On the spray foam side, I think it's important to point out that unlike in the fiberglass side, where in essence, they're running at about 100%, you know, utilization and material, we expect to continue to be tight and on allocation throughout 2022.

Although we are seeing improved levels of inventory on the fiberglass side. The spray foam industry, we estimate, is operating at more like 50% capacity. So it is not a capacity issue in spray foam. It really is an upstream chemical issue in spray foam, and we believe that has the ability to get fixed in 2022. Unfortunately, we don't think it gets fixed until, you know, Q3 of 2022.

But that will provide, you know, significant relief for us once that does happen. We're currently buying spray foam from really multiple sources and sources that we typically would not buy spray foam from, and it is at a much higher, an elevated price from what we would typically pay for it, but we're doing that to service our customers.

Chris Kalata (Research Analyst)

Got it. Appreciate the color there. And turning to price this quarter, the 13% you guys saw, any way you can help split out how much of that was mix versus true like-to-like pricing and kind of what the carryover pricing benefit you're expected to see or in the first half of this year?

Michael Miller (CFO)

The majority of it was price. As we discussed the last quarter, you know, mix is balancing out in terms of the volume that we're seeing from the production builders has continued to, you know, be stronger than the non-production builders, but it's not having the same impact on price mix that it had in the first half of the year.

And then also, the other products growth has been in the Q4, was very similar to the insulation growth. So you had limited mix impact, if you will, on the price mix calculation. You know, we would expect price mix to continue to trend positively in 2022.

Obviously, what's going to happen in 2022 is you're going to be coming on top of price increases, because we raised prices throughout all of 2021. And, you know, obviously, we're carrying in those price increases that we did in the Q4 there. But, you know, the 13% is, it's a pretty exceptional, as I think we pointed out, it was a record quarterly increase in price mix for us. But we're continuing to work hard, you know, particularly on the other products, to match up, you know, selling prices with material prices.

Chris Kalata (Research Analyst)

Understood. Thanks. Take my question.

Michael Miller (CFO)

Sure.

Operator (participant)

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

Susan Maklari (Senior Equity Research Analyst)

Thank you. Good morning, everyone.

Michael Miller (CFO)

Good day.

Susan Maklari (Senior Equity Research Analyst)

I want to congratulate Jason on his promotion. That's very exciting to hear and well deserved. So congrats, Jason.

Jason Niswonger (SVP of Finance and Investor Relations)

Absolutely. Thank you, Sue.

Susan Maklari (Senior Equity Research Analyst)

Yeah. My first question is around the purchase of AMD in the quarter. You know, you have not done anything in the distribution part of the business before. Can you talk a little bit more about the decision to get into that? And, you know, you mentioned in your remarks that you do see implications in terms of the supply chain and the cost structure going forward. So can you talk a little bit more about that and, you know, the opportunity set as you look to expand into that area?

Jeff Edwards (Chairman and CEO)

Sure. Susan, this is Jeff. I mean, that's the—it's—to acquire a distributor has been on our list, actually, for a very long period of time. I think we've even mentioned that before. I think it was a matter of us finding what was the right fit, you know, probably large enough to have some capability to scale up and actually be of benefit to us long term in terms of accessory purchases.

But probably not so large as to kind of divert us from what we feel is obviously our primary, you know, business on the install side, and really try to avoid for the most part, customer, you know, kind of conflict, which I think we were successful in doing with this one also.

So, longer term, I mean, it will take us some time to work through, kind of the logistics of sourcing, et cetera, to have, you know, really get full benefit out of the, of the accessory purchases, et cetera. But, over time, we view this to be very positive.

Susan Maklari (Senior Equity Research Analyst)

Okay, that's helpful. My other question is, you know, you obviously have exposure not just to the public builders, but also to a lot of private builders across the country. As we enter this year, and we think about all the different, you know, moving parts in terms of supply chain and higher rates and all those kinds of things, can you talk a little bit about what you're hearing from your private builder customers? And is there anything different relative to what we're seeing from the bigger publics?

Michael Miller (CFO)

I think they're all very, constructive about the demand environment, traffic, you know, what they're seeing from, you know, sort of a order price appreciation, selling price appreciation. But I do think, as is, has been consistent really, since the pandemic started, quite frankly, hate to use that word, sorry. But since it started, that, you know, the production builders have been able to do a better job of maintaining, their scheduling and continuing to complete, homes.

Now, their lead times have been greatly extended as well, but I think the, you know, the smaller guys, the regional and local guys, have had-and there obviously it depends market to market and builder to builder, but I would say as a broad statement, they've had a more difficult time of completing homes than the production builders.

You know, obviously, that creates frustration for them, and, you know, we have a very strong mix of that business, as you know. And we're working, you know, hard with those customers to make sure that they can, you know, make up some of the lost or the extended days or lost days that they're experiencing because of those lag times. But quite frankly, the entire building products chain.

I mean, there really isn't a product that isn't at some level, either because they don't have the labor to do the installs for those other products or the product itself is unavailable. There's really very few things in the building products chain that is not extended right now.

Susan Maklari (Senior Equity Research Analyst)

Yeah, okay.

Michael Miller (CFO)

And I think what you're also seeing-sorry, just to follow up on that. I think it's, you know, I think all building products companies are experiencing this, and we've talked several times about this last year, is that given the backlog that's out there, we're not seeing the typical seasonality that you would have in the business, because of that, because the backlogs are just so strong.

And one of the things that I think there was a slight expectation was that a seasonal slowdown at some point would have given some of the other building products an ability and the other, you know, labor, the ability to catch up a little bit, but we don't really see that happening.

Susan Maklari (Senior Equity Research Analyst)

Yeah. Okay. That's very helpful, Caller. Thank you for all that. Good luck.

Michael Miller (CFO)

Thanks.

Operator (participant)

Our next question is from Stephen Kim with Evercore ISI. Please proceed.

Joe Ahlersmeyer (Senior Equity Research Associate)

Hey, guys, this is Joe Ahlersmeyer. Just a quick question on the admin expense. I think you talked about leverage from the volume, but with the acceleration in pricing, I actually think we were expecting to see that ratio a little bit better in the quarter. Because in absolute, the dollars, you know, were kind of up mid- to high-teens for both the quarter and the year, even though volumes have remained constrained.

So a couple of questions, I think. You know, first, the absolute increase in admin costs, what may explain that in the back half of the year, particularly? Are you building out cost structure to support the volume growth in 2022 and 2023? And maybe what is a good way to think about the variable portion of admin costs? As we see volumes grow, how should we factor that into growth in those dollars, those admin cost dollars?

Michael Miller (CFO)

So if you look from Q3 to Q4, the vast majority of the increase in admin costs was related to acquisitions that were recently acquired. So while certainly we, like every company, is feeling wage inflation pressure at the G&A level, at the administrative level, it is not significant enough to make that large of a difference in our G&A cost structure.

In terms of the variability of G&A, you know, there's the way that we think of G&A from a variable perspective is that it's a little bit more of a lagging variable, so that to support higher volumes and higher sales, it will eventually trend up, but at a lower rate and slower than that increase in sales would be.Versus cost of goods sold, primarily material and labor, which tend to trend almost directly with our install sales.

Joe Ahlersmeyer (Senior Equity Research Associate)

Okay. Okay, makes sense. So maybe the way to compare the, the cost is more sequentially than year-over-year versus 4Q, which may have been sort of a funky comp anyway.

Michael Miller (CFO)

Correct.

Joe Ahlersmeyer (Senior Equity Research Associate)

Okay, thanks.

Michael Miller (CFO)

Sure.

Stephen Kim (Senior Managing Director)

Hey, guys, it's Stephen Kim. So, I just wanted to ask you a question about price mix. You know, in the past year or so, there was this production builder mix issue. I would think that we probably anniversaried that by now. Are there any other mix considerations that we should be thinking about as we go forward here into 2022?

Michael Miller (CFO)

Assuming the market continues to develop the way we believe it is, a lot of the mix headwinds should be behind us in 2022. Now, obviously, the two things that could impact that would be a greater acceleration in the other product sales, which we've talked a lot about them being at a lower average job price than insulation.

And then also, if we see a greater delta in, you know, sales, orders, completions by the production builders than the current delta is with the regional and local builders. But our expectations at this point is for there to be more stability in the mix component of price mix relative to what we experienced in the first half of last year.

Stephen Kim (Senior Managing Director)

Mm-hmm. Gotcha. That's helpful. Last one for me is, I know that we've chatted in the past about the opportunity that you all have in what you maybe, for lack of a better word, would call nuisance products. You know, things you can do for the builder. I was curious if you could talk a little bit about the current environment.

How does all the craziness that's going on with material shortages and all that affect your ability to maybe gain share in these so-called nuisance products? Is it actually not a very conducive environment or, you know, could it actually be a very good opportunity for you to get incremental business there?

Michael Miller (CFO)

If we have the material, it's a good opportunity to gain share.

Stephen Kim (Senior Managing Director)

Your ability to get the material in these kinds of, you know, non-insulation type products, is that, are you sort of at a disadvantage relative to, you know, insulation because it's maybe not the core business?

Michael Miller (CFO)

I would say that our ability to source material in fiberglass is the highest, just given our market share there and our deep relationships with all four of the manufacturers. But we are a very large purchaser of the other products. It does not have the same dynamics that fiberglass does. So, you know, these nuisance products, quote-unquote, as we call them, are in this kind of a material supply constrained environment, become more of a nuisance to us as well.

Stephen Kim (Senior Managing Director)

Right. Unfortunately.

Jeff Edwards (Chairman and CEO)

But I would say the selling proposition is the same, right? I mean, the overarching kind of theme of it being good for a builder to deal with less, you know, subcontractors on these smaller items. That remains the overarching theme. I think where we have probably in some instances been able to make more headway is more around assuming you can't get the product, as Michael pointed out, but we've been pretty successful, I think, on the labor side of things, and I more so than potentially some of our smaller competitors.

Michael Miller (CFO)

Interestingly, we're seeing very good growth in the other products on the multifamily side.

Jeff Edwards (Chairman and CEO)

Yeah.

Michael Miller (CFO)

Our multifamily team is just-I mean, they're knocking the cover off the ball, quite frankly. I mean, our multifamily backlogs at the end of the year were up almost 50%.

Stephen Kim (Senior Managing Director)

Great. That's helpful. I'm sorry, one last question. You did make a comment earlier, about the spray foam, you know, your optimism around a rebound. And I think you mentioned that you thought that the chemicals issue would be fixed, probably, you're kind of thinking around 3Q. Was just wondering about how you might be positioning the business to prepare for that.

If there's, if you could just share with us, if it doesn't happen in 3Q and it gets pushed off, I mean, God forbid, into 2023 and all that, is there anything that you're doing today to prepare, for later this year that you would have to adjust again, that we should be thinking about? Maybe, you know, that might flow through on admin costs or something like that.

Michael Miller (CFO)

It's really just trying to keep up with the material price inflation and, you know, working with our customers to take those price increases. And if it continues, you know, the velocity and frequency of the price increases in spray foam continue into the second half of the year, which is not our expectation, we expect it will continue to be challenged in the first half of the year. You know, we would have to just continue to work with our customers to get more price.

Jeff Edwards (Chairman and CEO)

But what we've done in preparation to try to, I guess, you know, try to guard for this continuing to happen, is we've expanded our supplier base. I mean, we were much more. We weren't by any means single source on foam, but we had a much higher percentage of our foam business with one particular chemical supplier and foam, you know, compounder manufacturer, whatever you want to call it. And we've spread that, you know, kind of those purchases around to a greater degree now.

Michael Miller (CFO)

Which is great from a material sourcing perspective, but not efficient from a material cost perspective. And we've also-I mean, if you look at our balance sheet and inventory, clearly we've been trying to get as much inventory as possible and, you know, right now are quite full from an inventory perspective, across the board in terms of products.

Stephen Kim (Senior Managing Director)

You know,

Jeff Edwards (Chairman and CEO)

Right. Prior to the storm in Texas, we felt pretty good about our decision about being aligned with, you know, really one of the largest, you know, industry leader, and still do feel good about being aligned with them. We just got lucky in that they had at least the same amount of issues and problems as it relates to production as some of the others that are further downstream. But, you know, we couldn't have anticipated that, I don't think, the storm.

Stephen Kim (Senior Managing Director)

Right. Absolutely.

Jeff Edwards (Chairman and CEO)

Well, he has, he has problems. He has that.

Stephen Kim (Senior Managing Director)

Right. Okay, well, great. Thanks very much, guys, and congrats, Jason.

Jason Niswonger (SVP of Finance and Investor Relations)

Thank you.

Jeff Edwards (Chairman and CEO)

Thank you.

Operator (participant)

Our next question is from Denis Zuev[inaudible] with Truist Securities. Please proceed.

Speaker 12

Hi, good morning. This is Denis for Keith. Thank you for taking our questions.

Michael Miller (CFO)

Sure.

Speaker 12

So just wanted to touch a little bit on, if you could comment on any regional dynamics that you're seeing, any regional performance dynamics that you're seeing from the branches. Thank you.

Michael Miller (CFO)

Yeah, I would say that the, you know, Mid-Atlantic, South, Southeast, West, even the kind of central, western states are doing exceedingly well. That's not to say that the Midwest and Northeast aren't doing well, but the performance is, you know, outsized positive from those regions on a residential side.

Speaker 12

Okay, thank you. And then, if you could judge, and apologies if this was already touched on, but if you could just comment on, just where the supply situation is for spray foam now versus say, like, the prior quarter and, just the prior quarter, whether you believe it's tighter than it has been, previously, or about the same. Thank you.

Michael Miller (CFO)

It's a little better. It's a little better, but it's, it comes at a price, right? In our view of, of it being a little better is a little bit subject to what I just mentioned on the earlier question, and that is, you know, we've had an ability to expand our supplier base, so it feels, certainly feels better to us. I can't comment on absolute, you know, sets or volume, but it's probably a little better. Mm-hmm.

Speaker 12

Okay, thank you.

Michael Miller (CFO)

The Q3 was really rough. Yeah.

Operator (participant)

Our next question is from Mike Rehaut with J.P. Morgan. Please proceed.

Doug Wardlaw (Equity Research Analyst)

Hi, good morning. Doug Wardlaw from J.P. Morgan, for Mike Rehaut. I was wondering if you could give further insight on how we should think about M&A in 2022. I know you said the pipeline is robust and you have about the same goal as you did last year. If you can, can you give some further color on what you've seen in the pipeline and if your preferences in the acquisition target has changed from what they were in 2021? Thanks.

Michael Miller (CFO)

Sure. No real changes per se. I mean, we continue to, you know, acquire obviously installation contractors first and foremost. Not to say at all, though, that we're not, you know, out there looking at other product acquisitions also and even different potentially, you know, contractors that would get us into either new end markets and, or even new products sometimes.

But again, like you said, it, the pipeline's robust. We've got, you know, plenty of cash coming off a very big year last year, but we feel good about, you know, this also being a very good year in that regard.

Operator (participant)

Our next question is from Philip Ng with Jefferies. Please proceed.

Collin Verron (SVP)

This is actually Collin on for Philip. I just wanted to go back to the, the price cost. Understanding that spray foam sounds like it's going to continue to be an issue through the first half of this year, and that you're already more than offsetting the higher cost in your fiberglass business. I guess, when do you see your pricing actions being margin neutral to accretive for the total company?

Michael Miller (CFO)

You know, that is-It's difficult to say only because on the other products, as Jeff said earlier, there's not the same visibility that there is in fiberglass. But I would say that we are actively working, you know, very hard to get on top of with the other products, as we have on the fiberglass side, at least in the Q4. You know, the inflation, the material price inflation relative to our selling prices there.

You know, one of the things that I think, you know, that's important too, when you look at the results for the Q4, is that, you know, the large commercial business for us, you know, we were, you know, obviously we're working hard. We had good growth in it, but that was really all acquisition related.

You know, on the large commercial side, you know, same-brand sales were down about 2.7% from the prior year. But that business is a little different from the residential business in terms of your ability to adjust labor very quickly. You know, so that, in that business, we've definitely seen significant delays in projects that have extended out to 2021 and into 2022.

I mean, we feel very encouraged by it because our backlog is up about 20%, which is reflective of the delays that we've seen in that, those projects. But in the Q4, our large commercial business was a headwind of about $3.5 million to EBITDA. You know, that is, it's frustrating, but you know, we feel good about, you know, particularly the back half of next year, our ability to kind of unwind some of that headwind.

Collin Verron (SVP)

Okay, that's, that's really helpful. Thank you. And then just the supply chain sounds like it's gonna remain pretty tight across the board in 2022. So I guess given these constraints, what type of organic volume growth do you see yourself growing at this year?

Michael Miller (CFO)

But I wouldn't say specifically to IBP, because we, you know, don't provide guidance. But I would say, and I'm glad that you asked the question, that if you just look at the backlog, which we all well know how elevated it is, it was up, you know, 45% in December from the prior year. It's really at an unprecedented disconnect between starts, in terms of the, you know, starts and completion numbers. We think that that backlog would easily support, you know, a high single-digit, a low double-digit completions rate.

But unfortunately, given the continued supply constraints that we expect there to be for all building products, you know, not necessarily insulation, but the continued supply constraints that are out there, we would expect that on an aggregate basis, that you're going to have sort of a mid-single digits growth in completions for 2022. Now, I do think an exception, there will, there will absolutely be exceptions to that.

I think some of the big production builders, as I think was clear in some of their order or their completion growth, home delivery targets that they've established for 2022, that they would expect closer to a high single, maybe even low double digits. And I think for them, that is achievable. But I do think that if we look at the entire market, you're probably looking at, you know, mid-single digit growth rate in completions.

Collin Verron (SVP)

Okay, that's very helpful, too. And then I guess just one last one. Just touching on the backlog, any way you can help us think how that compares to what it looked like in mid-2018? Just given there's concerns that in this rising interest rate environment, you could see a similar, air pocket in demand like, the market saw in 2018, when we saw interest rates, tick up there. So I guess we're just trying to understand better how IBP would be set up for something like this.

Michael Miller (CFO)

Yeah, that, that's a really good question. And if you go-I mean, the 2018 completions were very weak, and actually, I think in the Q4 of 2018, completions were down sort of mid-single digits. So the, in 2018 and even going into 2019, starts and completions were, were somewhat on top of each other, and the lead time was not nearly as extended as it is today.

So as a consequence, when there was a softening in starts, it quickly resulted in the completions number flattening or going down. Whereas we believe that any flattening we see in starts in 2022 is not gonna impact completions, which is most relevant to us, just given how elevated the, the backlogs are, quite frankly.

What our perception is of what's sort of happening in the market now is, you know, there's obviously concern about rising rates and affordability, and we think that that has probably accelerated a little bit, people's decision to try and buy a home. Unfortunately, particularly on the existing home side, there aren't very many homes available to buy.

But we believe that any slowdown we see from, again, rising rates, and the, you know, decrease in affordability, is going to be more than offset by this very high completions backlog. Or excuse me, backlog that will lead to continued completions growth, and goes back to my earlier comment about, you know, getting to that, you know, mid-single digit, completions growth in 2022.

Collin Verron (SVP)

Great. That's really helpful commentary. Thank you and best of luck in 2022.

Michael Miller (CFO)

Great. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, we've reached the end of the question and answer session. I would like to turn the call back to Jeff Edwards for any closing comments.

Jeff Edwards (Chairman and CEO)

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

Operator (participant)

This does conclude today's conference. You may now disconnect.