Installed Building Products Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

Key Takeaways

  • Installed Building Products reported record Q1 sales of $659 million (up 12% YoY) and adjusted EBITDA of $105 million (up 25%), with margins improving 160 bps to 15.9%.
  • Same-branch multifamily revenue surged 38% and light commercial sales rose 22%, while resilient pricing mix (up 16.5%) drove adjusted gross margin up 250 bps to 31.9%.
  • Single-family same-branch sales declined 3% YoY amid broader housing market softness, with the company expecting any single-family weakness to be concentrated in Q2.
  • During Q1 IBP closed three acquisitions adding about $46 million in annual revenue, and it remains on track to acquire at least $100 million more in 2023.
  • IBP’s strong balance sheet—net debt/adjusted EBITDA of 1.4×—and robust operating cash flow supported a $0.33/share Q2 dividend and leave headroom for further share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
Installed Building Products Q1 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Installed Building Products Fiscal 2023 First 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darren Hicks, Managing Director of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Good morning, and welcome to Installed Building Products Q1 2023 conference call. Earlier today, we issued a press release on our financial results for the Q1, 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, anticipations, beliefs, estimates, forecasts, plans and prospects. These forward looking statements are based on management's current expectations and involve risks and uncertainties.

Speaker 1

Any forward looking statement made by management 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-nineteen 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 ks 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 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 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.

Speaker 1

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.

Speaker 2

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 record 1st quarter sales and profitability due exceptional efforts of our employees and the excellent service they provide our residential and commercial customers every day. 1st quarter sales benefited from our recent acquisitions and robust same branch growth within our multifamily and light commercial end markets.

Speaker 2

The ongoing strength in multifamily helped drive 1st quarter residential sales growth by 7%, which more than offset a modest deceleration in single family revenue. Our first quarter results reflect the resiliency of our business model, the hard work of our employees nationwide and the benefits of our product, Market and geographic diversification strategies. Looking at our Q1 results in more detail, we experienced We experienced a 4% increase in residential same branch sales from the prior year period, a 38% increase in multifamily same branch revenue more than offset a 3% decline in single family same branch sales. By comparison, total U. S.

Speaker 2

Residential completions increased 12% during the first quarter, which was driven by significant year over year growth in multifamily completions. IBP's multifamily sales growth accelerated to 38% on Same branch basis, up from 23% on a same branch basis last year. We acquired CQ Insulation, A Florida based insulation installer uniquely focused on the new multifamily end market in 2015, and the company has been successful in selling IBP's installation services across branches and other markets that historically have not served multifamily customers. Within our commercial business, 1st quarter same branch installation sales increased 22%, driven by light commercial project strength. Bidding activity and project bid acceptance rates in our heavy commercial business remained steady in the Q1 relative to the 4th quarter And same branch sales have begun to show improvement increasing modestly from the prior year.

Speaker 2

We are focusing on improving our operational efficiency while pursuing projects with favorable economics. Our Q1 performance reflects our continued strategic focus, which prioritizes the profitability of a given job over job volume. We have worked hard to align with national, regional and local builders who value our local market knowledge and job efficiency. We believe this approach is needed now more than ever as builders strive for more normalized construction cycle times. During the quarter, price mix increased by 16.5% over the prior year period.

Speaker 2

Inflationary trends we experienced in the construction industry throughout 2020 carried forward into the Q1, and we continue to make the necessary adjustments to align our pricing with the value that we offer our customers. We believe our strategy focusing on profitable work help us achieve same branch incremental EBITDA margin of 39.4 With a focus on growth, our profitability standards extend to our acquisition targets. We have closed 3 deals so far this year with over $46,000,000 of annual revenue. We expect to acquire at least $100,000,000 of revenue once again in 2023. During the 2023 Q1, we completed 2 acquisitions, including a Maryland and West Virginia based installer of fiberglass and spray foam insulation into residential projects with annual revenues of approximately $4,000,000 and a Rhode Island based installer of residential, mechanical and industrial insulation serving residential, commercial and industrial customers across the Northeast with annual revenue of approximately $39,000,000 In April of 2023, we also completed the acquisition of a Florida based installer of fiberglass and spray foam insulation serving residential and commercial customers with annual revenue of approximately $3,000,000 Although we are still in the first half of twenty twenty three, indications from recent public homebuilder earnings commentary Supports our belief that the housing market is returning to more normal seasonality and housing demand during the spring selling season has been fairly well supported.

Speaker 2

We believe the residential housing market will be more resilient in the back half of twenty twenty three as a result of strong employment trends and relatively low existing home inventory levels. In addition, the backlog of our multifamily business extends beyond 1 year. We expect strong execution in our repair and remodel business to continue With incentives from the Inflation Reduction Act of 2022 likely to support demand this year. We believe we are well positioned to Navigate future changes in the U. S.

Speaker 2

Housing market given our strong customer relationships, experienced leadership team, national scale and diverse product categories and end markets. In addition, our strong balance sheet coupled with our high operating cash flow generating capability supports ongoing acquisitions, Dividends and opportunistic share repurchase activity. I'm proud of our continued success and excited by the direction in which IBP is headed. So with this overview, I would like to turn the call over to Michael to provide more detail on our Q1 financial results.

Speaker 3

Thank you, Jeff, and good morning, everyone. Consolidated net revenue increased to a 1st quarter record of $659,000,000 compared to $587,000,000 for the same period last year. The 12% year over year improvement in sales during the quarter was primarily driven by an increase in price mix from the prior year period and the revenue contribution from recent acquisitions. This quarter, the price mix calculation benefited significantly from the strong growth in our multifamily and light commercial end markets, which favorably impact mix due to higher average job prices. This growth contributed to an 11% increase in our installation segment revenue to $623,000,000 Our other revenue, which includes IBP's manufacturing and distribution operations, increased from $26,000,000 to $37,000,000 driven by organic manufacturing and distribution revenue growth as well as the April 22, 2022 acquisition of Centra Aluminum.

Speaker 3

On a same branch basis, residential installation revenue improved 4% from the prior year quarter as multifamily growth of 38% offset a 3% decline in single family same branch sales. Same branch commercial sales increased 22% in the quarter. Adjusted gross profit margin improved 250 basis points year over year to 31.9% in the 1st quarter, which benefited from Strong's price mix growth during the quarter. It's important to highlight that our operating segments have different gross profit profiles And segment gross profit is exclusive of depreciation and amortization and the cost of sales. During the 2023 Q3, Our installation operating segments gross profit margin was 34.1% compared to the other operating segment gross margin of 26.5%.

Speaker 3

Again, both of these margins are before depreciation and amortization in cost of goods sold. Adjusted selling and administrative expense As a percent of Q1 sales was 17.9% compared to 16.9% for the prior year period. Higher selling and administrative expenses relative to the same period last year primarily reflects higher variable compensation, including selling commissions and bonuses due to the higher gross margin and improved profitability. On a GAAP basis, our 1st quarter net income per diluted share of $1.74 increased 53% from the prior year quarter and our adjusted net income per diluted share improved 40% to $2.15 During the 2023 And 2022 1st quarters, we recorded amortization expense of approximately $11,000,000 related to the acquisition of new businesses. This non cash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability.

Speaker 3

Based on recent acquisitions, we expect Q2 2023 amortization expense of approximately $11,200,000 and full year 2023 expense of approximately $44,300,000 We would expect these estimates change with any acquisitions we close in future periods. Adjusted EBITDA for the 2023 1st quarter Improved 25 percent to $105,000,000 Adjusted EBITDA as a percent of net revenue was 15.9% for the 20 3 Q1, a 160 basis point improvement from the same period last year. Same branch incremental adjusted EBITDA margin was a 1st quarter record of 39.4 percent compared to 22.9% for the same period last year. We continue to target full year long term incremental adjusted EBITDA margins in the range of 20% to 25%. For the 2023 Q1, our effective tax rate was approximately 26.8 percent And we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31, 2023.

Speaker 3

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 3 months ended March 31, 2023, we generated $74,000,000 in cash flow from operations compared to $48,000,000 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 $400,000,000 of our existing variable rate debt until December 2028, limiting our interest rate exposure.

Speaker 3

In addition, we have no significant debt maturities until 2028. Our first quarter net interest expense fell to $9,700,000 from $10,600,000 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 March 31, 2023, we had a net debt to adjusted trailing 12 month EBITDA leverage ratio of 1.4 times compared to 1.46 times at December 31, 2022, which is well below our stated target of 2 times. At March 31, 2023, We had $328,000,000 in working capital, excluding cash and cash equivalents and investments. Capital expenditures and total incurred finance leases for the 3 months ended March 31, 2023 We're approximately $16,000,000 combined, which was 2.4% of revenue compared to 1.9% for the same period last year.

Speaker 3

With our strong liquidity position and modest financial leverage, we continue to expand the business through acquisition and return capital to shareholders. IBP's Board of Directors approved the 2nd quarter dividend of $0.33 per share, which is payable on June 30, 2023 to stockholders of record on June 15, 2023. We are committed to continuing to grow the company while returning excess capital to shareholders through cash dividend payments and opportunistically repurchasing our shares. With this overview, I will now turn the call back to Jeff for closing remarks.

Speaker 2

Thanks, Michael. I'd like to conclude our prepared remarks by once again thanking IBP Thank you, 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

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

Speaker 4

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

Speaker 3

Great. Thank you. Thank you.

Speaker 4

My first question is, you've had very impressive Gross margins coming into this year. As you think about some of the dynamics that are going on around inflation relative to volumes, how Should we be thinking about your ability to sustain some of this improvement and any other broader trends that you can share with us there?

Speaker 3

Sue, this is Michael. I mean, on the inflation front, I think we were talked a lot about this in the Q4 call as well. We believe we're in a more normalized inflationary environment right now. Really the supply chain disruptions that we experienced In 2022 have really completely abated at this point. So that's creating a much more benign inflationary environment.

Speaker 3

In terms of the progress that we made on gross margin, we feel very good about our continued focus on Price over volume and obviously as we saw in the Q1 results that benefits gross margin. So It's important for us to be able to maintain the progress that we've made on gross margin, Continue to value price over volume.

Speaker 4

Okay. That's very helpful. And then following up, Have you heard anything or what are you hearing from your private builder customers? How does that compare to what we're seeing from the larger publics in there? And any Any thoughts on the dynamics that we could expect from the mix shift as we go through this year and we see some of the movements across both residential and non residential?

Speaker 3

Yes. So, Sue, this is a similar story to what happened in the Q4 is that we saw higher growth rates From the regional and local builders than we did from the publics or the big national builders. We expect that that trend is going to reverse as we go through particularly the back half of the year because we believe That the public builders are in a very, very strong financial position, probably the Best financial condition they've been in, since they've been public. And I think it's been very clear if you Follow the builders in both, I would say, privately and publicly. I think there's been, on the big public builders front, A strong commitment to pivot towards a higher percentage of spec inventory, and they clearly have the capital and balance sheet To do that, we would say that a lot of the regional and local builders are not in that same position.

Speaker 3

So Again, as we go through the back half of the year, we think that we'll see a higher percentage of spec inventory coming on And that will be driven a lot by the production builders, which will then sort of change that mix shift, if you will, more towards Production builders. And you might remember that the impact that that has on our disclosures is it increases volumes, But it's a headwind to price mix.

Speaker 4

Okay. Thank you for all the color and good luck.

Speaker 3

Thank you.

Operator

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

Speaker 5

Good morning. Thanks for taking my questions.

Speaker 6

Maybe just a follow-up on the mix standpoint. Could you just help us quantify maybe The price mix, like what was the mix impact and what was more of a true like for like price in the quarter?

Speaker 3

Yes, Mike, this is Michael. As you know, we don't really disclose that breakdown, but we did in our prepared remarks note that Both multifamily and light commercial, which were very strong in the quarter, Do help the price mix calculation because the average job price is Higher for those projects than traditional single family. That being said, we continued to get Price or maintain price, I should say, that came over as very solid carryover From the Q1 of last year.

Speaker 6

Got it. Right. So I guess the follow-up Kind of bigger picture, I know it's not exactly comparable how you report or your mix versus your peer, but kind of another quarter, in which I think the volume MyBP was Lower than your larger peer and lower than the completions number. The price was stronger. I understand some of that is Mix, but the optics would still suggest that there's maybe a little trade off going on in your own opening remarks.

Speaker 6

Kind of reference that a little about being selective On which jobs you take and what you're getting paid for and where the value is. So could you just help us understand, Especially as the environment has changed a lot over the past handful of months, how you're evaluating that trade offs, where you think you are In terms of as we go through the year, how you would track against the broader market, that would be helpful.

Speaker 3

Well, I would say a couple of things. 1, we will always value price over volume. I mean, we've been consistent about that since The day we went public and that will continue through the course of this year. I think it's difficult to make a comparison On a quarterly basis of our volumes to completions, particularly, again, because it's just 1 quarter's worth of information But also given the unprecedented level of the disconnect Between completions and starts that's been going on. I think the information from the Census Bureau is in a bit of a catch up mode In terms of what's going to happen with completions, and I'm talking really primarily about the single family side right now.

Speaker 3

And We believe that for the pretty much across the board cycle times on single Family have pretty much caught up to be normalized. And that obviously brings forward In our estimation, some of the decline in starts and that disconnect between STAR sort of running around $800,000 and completions running at $1,000,000 We think that, that impact that the industry will see In terms of that delta or that disconnect will be felt sooner than what we may have expected. But at the same time, We're very encouraged by what we're seeing not only from our regional and local customers in terms of the spring Selling season, but public builders as well. I mean, they're showing pretty solid Quarter over quarter increases in backlog, mid to high single digits, which is very encouraging from our perspective. And I think it's interesting

Speaker 7

for the builders

Speaker 3

that have reported at least up to this point, which is most of them. And what's interesting when you when we look at the backlogs Order trends within the builders, that does not include their speculative inventory. So as a consequence, Right. As they lean in more towards specs, which we believe is a pretty common theme among the public builders That even that makes those numbers that we're looking at even more encouraging. So we feel Better about, I would say, the trajectory of Single family in the back half of the year than maybe we did when we had the Q4 call.

Speaker 3

But I would say that the Softness and weakness that we're all expecting in single family, is probably going to be more concentrated in the second quarter.

Speaker 6

That's very helpful. Thank you.

Operator

Our next question is from Phil Ng with Jefferies. Please proceed with your question.

Speaker 8

Hey, guys. This is Maggie on for Phil. I guess Just digging into that a little more, you talked about kind of a return to normal seasonality and sentiment has Certainly improved the last few months. Maybe if you could just talk about how your conversations with Customers have changed since the last call. And then particularly how that relates to your outlook in the back half of this year.

Speaker 3

Well, I would say it's been very encouraging. I think Spring selling season has turned out to be better than people had maybe feared or were concerned about. And I think there is it's clear that the existing home inventory is not increasing To support the demand and I think it's also very clear that the market, the buyer has adjusted Much more rapidly, the higher rate environment than what we had as our expectations. And we believe that Rates most likely stabilizing at this point. We are very constructive for the consumer and The desire to purchase a home.

Speaker 3

So we're very constructive about the market, not just Back half of the year, but on the single family side.

Speaker 2

Well, on all the information that the public builders have put out, I'd say the same thing. Right. In fact, quite a bit more optimistic than they were in 3rd or Q4 in terms of where they thought it was headed last year or this year for doing Celgene.

Speaker 3

So we're encouraged by that and we're also encouraged by the fact that cycle times have normalized, Which means that when that work gets started and the foundation is forward and the house is framed, that work comes to us a lot faster because there aren't Bottlenecks that had existed in 2022 to get the framing done in the foundation for it.

Speaker 8

Okay, great. And then just on the commercial side, following all the regional bank issues, which seem to be continuing. How are you thinking about the impact of Those and potentially tighter lending conditions on your commercial customers and how that impacts Your backlog probably more into 2024?

Speaker 3

I would say at this point, we have not seen any impact At all, bidding activity has been consistent. Bid acceptance activity has been consistent. We haven't seen any significant Delays or cancellations of projects in our backlog. So I would say for now, We've not seen an impact, but I think it's still for everyone. There's a big Uncertainty out there, just not knowing what, if any, impact there's going to be.

Speaker 3

I would say that from what We see and what we hear and what we read, it feels like the Fed is going to do they're going to be prudent. But at the same time, they recognize the potential

Speaker 6

for

Speaker 3

That tightening credit has the potential to weaken the economy more than they would probably like. And I think they're going to do what they can to make sure that that tightening is as small as possible. Obviously, I don't we don't know, right? We're just just like everyone else, we're just basing that on everything we read and hear.

Speaker 8

Yes, of course. Thanks for the color.

Operator

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

Speaker 5

Hey, good morning guys. This is probably for Jeff Hyer, but how are you guys thinking about the prospect for additional price increases from the fiberglass manufacturers?

Speaker 2

This is Jeff Edwards. So it's clearly a different environment than it has been for the last 30 months, 36 months, which quite frankly took us all by surprise. I think the whole COVID kind of tightness And other things related to that. But I still think it's a healthy market. I mean, the industry is still Kind of selling and producing at near capacity, if not at capacity, blowing holes tighter than that at this point in time.

Speaker 2

But I I don't know that it's particularly inflationary period of time, but I don't think it is as of yet in any way deflationary period of time either.

Speaker 5

Okay, got it. And then just on the multifamily backlogs, I think you guys talked about that stretching out over a year or about a year. Should we expect that to turn to a potential headwinds at some point next year in 2024?

Speaker 3

David, it would be in the back half 24. I mean the backlog is, as Jeff pointed out in our prepared remarks, is goes stretches beyond a year basically.

Speaker 2

Well, I would also add to it and say that although construction cycle times inside a single family Have started to come back down. They're still elongated in multifamily, in my opinion, in a fairly big way.

Speaker 3

Very much so. And we do constant on that front. We're doing constant check ins, if you will, with the multifamily projects And the multifamily projects that we have in our backlog to make sure with the GC that everything continues to be on track. And right now everything seems to be working fine, but except for the fact that cycle times are incredibly extended.

Speaker 2

Well, it may sound a bit silly because you could say, well, a carpenter is a carpenter, but that's not exactly a framer, let's say. It's not exactly true. There are a lot of times, it's not the same workforce, it's the same pool of workers that are doing multifamily versus single family, And that's true of most subs except for us and a few others that kind of straddle, I would say, a few other but in our industry. And there are some others that do it in other trades, but a lot of times it's they're different.

Speaker 3

Yes. I mean, if you just look at the using again the information from the Census Bureau, I mean, if you look at under construction units under construction, I mean, single family has come down From an average above $800,000 to slightly below $700,000 whereas multifamily has done the opposite Go from an average of in the slightly above $800,000 to above $940,000 The fact that the under construction units for multifamily is has like a 200,000 More than 200,000 unit delta between single families is absolutely unprecedented.

Speaker 5

Got it. Makes sense. Thanks guys.

Speaker 3

Sure.

Operator

Our next question comes from Joe Allis Meyer with Deutsche Bank. Please proceed with your question.

Speaker 9

Hey, thanks for the question. Good morning.

Speaker 3

Good morning. Good morning.

Speaker 9

You in an earlier response to a question talked about and others too, the normalizing supply chain environment, fighting less fires on a branch basis. Can you talk about any early progress around filling in product and capability white spaces again sort of on a branch by branch basis, not

Speaker 3

Well, I think as you know, because we've talked a lot about this, the Other product sales are a key component of our strategy when sort of our core single family insulation business Is in a soft patch and that's continuing. I mean, one of the things that we didn't mention when we were asked About the price mix is we definitely saw higher rates of growth in the other products During the quarter versus our core insulation and that has a headwind to price mix. Obviously, there were multiple things that had a positive impact on price mix as well. But Yes. Our branches are continuing to cross sell the other products and see that as a key component of the strategy.

Speaker 9

Right, right. That's great to hear. The other question I had just quickly more of a technical question on the Multifamily mix as a benefit. If you could just maybe break this down simplistically, the components of mix, not looking for quantification, but Hoping to understand if there's a lower amount of take per unit, how does that actually result in a higher mix benefit Is it that maybe on a job basis for multifamily, there's one job, but there's several units and some maybe that's how it shakes out?

Speaker 3

This is Jason Niswonger. That's exactly right. It is the it's not calculated on a per unit basis. It is on a per job basis This is where there'd

Speaker 1

be multiple units being completed.

Speaker 9

Got it. Makes sense, Jason. Thanks a lot for that. Take care, guys.

Speaker 3

Sure.

Operator

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

Speaker 10

Good morning. This is actually Noah Merkowsko on for Trey. Thanks for taking my question.

Speaker 3

Sure.

Speaker 10

First, I know we've talked a lot of these mixed dynamics going on, but I just wanted to clarify as we look out over the balance of the year, it sounds like there's cross sounds like multifamily is still going to be strong and that's a tailwind. So how do you kind of and again, don't need exact numbers, but how do you think about Those do those completely offset each other and it's a wash or is one more powerful than the other? And if I could Sneak one more in here is how does that impact margins?

Speaker 3

So I mean, on a full year basis, not talking any specific quarter, we would expect that There is continued benefit from and through the year on multifamily and like commercial, And that will significantly help to significantly offset any sort of volume declines that we experience. But as I said in the in an answer to a previous question, I mean, we do unlike what we talked about in the Q4, We do expect that because the cycle times in single family have normalized that The softness that we believe we will experience and not we, but the industry will experience is going to be concentrated more in the second quarter And will improve as we go through the back half of the year based on the information that we currently have both from our regional and local Builder customers and from particularly the public builder. So we believe that if we look back At the year, while the price mix calculation will absolutely be benefited by A high much higher growth rates in Multifamily and Light Commercial that they will begin to normalize, particularly as we go into 'twenty four back to more

Speaker 10

Got it. That's helpful. And then for my follow-up, Clear picture question here. It seems like we may have hit or are approaching the trough in housing starts. There's a lot Positive sentiment coming out of the spring selling season.

Speaker 10

And I was hoping you could maybe compare and contrast how the past housing cycle, I guess call it starting pre COVID would compare to a new upcycle in housing. Clearly there was a lot of supply chain And I guess ultimately I'm trying to figure out Do you think in another housing upturn that cycle times could extend it again and we run into these same issues where Your ability to realize volume growth is going to be delayed from starts than when it normally is.

Speaker 3

No, actually. I think that I mean, of course, it Depends on what the growth rates look like and how quickly it comes. But it starts, which we would agree that starts are stabilizing and that we wouldn't expect Significant declines from this point, and we would expect increases, maybe not Huge increases, but still increases. If you think of and again, I'm just talking about single family. With single family starts running around $800,000 but running around $1,000,000 that implies that you can increase starts 25% from where they are today and be at the same level of industry capacity.

Speaker 3

Now again, based on the Answer that we had to a previous question. I mean, the Census Bureau information, particularly on a quarterly or monthly basis isn't a complete picture, but it certainly is Directionally correct. So as a consequence, we think there's plenty of room to grow from a starts perspective, with the existing capacity In the industry and then that's not assuming that we even get growth within capacity. Now fiberglass, as I think everybody knows, It's pretty tight right now, and it leads to Jeff's answer on why we don't think it's necessarily a Inflationary environment. But the reality is, is all building products right now are Experiencing some softness given the significant decline in starts.

Speaker 3

I mean, if you look at on a quarter over quarter basis For the public builders in the 4th quarter, they reported backlogs that had declined over 20%. Now what we find extremely encouraging is that their quarter over quarter 1st quarter backlogs are up mid to high single digits. So That's very encouraging and it kind of constructs or informs our view of being a little bit more positive about the back half of the year That we may have been, but also that 4th quarter backlog that was down, the highest that it's been down this cycle It's the work that we're working on in the Q2. So as I said to a previous or the answer to a previous question, We think that the softness in single family is going to be more concentrated in the Q2 than we had originally anticipated, But that the recovery is actually better than we expected as we go into the back half of this year.

Speaker 10

Right. And with normalized cycle times, you'll benefit from

Speaker 2

And as we've said before, we are not we are typically not and never really been the bottleneck. Yes.

Speaker 5

And Mike,

Speaker 2

I could hit it again. I mean, one, there's capacity inside currently of the capability that the overall labor force contractor workforce had. In addition to that, I think we have been on record as before not knowing I mean, we're not absolute experts, but there's probably 5% to 10% kind of a capacity growth that we were able to

Operator

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

Speaker 7

Yes. Thanks very much guys. Just to clarify this multifamily accounting as one job. Just From a clarity perspective, townhomes and duplexes and things of that nature, those are attached single family, that's considered one job as well?

Speaker 1

It wouldn't be an entire building would be considered one job. So if you're looking at a multiunit apartment complex, there might be multiple trips. Each of those multiple chips would be a job.

Speaker 3

Okay. Got you. That is helpful. Okay.

Speaker 7

All right. Okay. The second question I had relates to the 45L, Energy Star opportunity. This is something that I found intriguing that we haven't heard you talk more or you and your other competitor talk more about, but it would seem like that would be An open door for you to be able to extract a higher value per unit. It seems like The detail around the quality of the install is very important for builders achieving that Tax credit.

Speaker 7

So can you just talk a little bit about that change, and whether or not you've tried to quantify in any way The positive impact that

Speaker 3

I mean, yes, it's definitely there is the potential for pretty significant impact on our repair and remodel business And even on the new single family side, as builders see the benefits and we educate them to the benefits of using Some of the new tax credits that are there. I would say that though because the rules Have been recently written. I don't think the uptick in the benefit, if you will, associated with that Has been felt or realized yet. We think that that's going to take time. Fortunately, because the programs are now permanent, It means that we can invest in the education and the education materials to really educate our builders.

Speaker 3

And I'm not talking about the publics as much as the regional and locals as well as the existing homeowners to the benefits associated with it. So That's there is going to be a very solid benefit associated with that, but It's not going to be felt immediately. It will come over time.

Speaker 2

Well, that's clearly, I mean, you know this. It's Not a major, major part of our business. So even substantial growth within that, it's not incredibly impactful across the whole company. But in addition to that, it's The work has performed in a different way than our kind of core new construction work. Believe it or not, installers are different a lot of times.

Speaker 2

The sales Prospect and the sales process is different. So it is not you can't flip a light switch in terms of kind of converting a

Speaker 7

Go ahead. You said fortunately something.

Speaker 9

Yes. I

Speaker 3

would say fortunately, because our footprint, we started in Columbus, Ohio and we started acquiring businesses In adjacent markets, which tend to be heavier repair and remodel markets, we have had a good repair and remodel business in the top half of the country. And we're working hard to make sure we bring the energy benefits, Quite frankly, to our customers in those markets.

Speaker 7

Got you. That's the well, we're looking forward to that. The Last question I had is on heavy commercial. I think you had said that it could be a potentially big tailwind particularly later in the year. Obviously, you got a comps issue, which is going to make those year over year changes look pretty dramatic, I would assume.

Speaker 7

I guess my question is kind of coming through the comps. Do you think that by the end of the year, let's call it Q4 or something, you could be running back at The levels you were running at in 2021, just sort of doing the stacked comp kind of a thing maybe, all the way back by Q4, could we be flat to up versus 4Q

Speaker 3

Yes, absolutely. I mean, the heavy commercial business in the Q1 was up Yes, single digits, but it was up. And as you know, because we've talked a lot about this is we're really focusing on operational improvements there, Not as much sales, but I would say that we're seeing very good bid activity and bid acceptance.

Speaker 7

Okay, great. Thanks very much guys.

Speaker 3

Sure.

Operator

Our next question is from Carl Reichardt with BTIG. Please proceed with your question.

Speaker 11

Thanks. Good morning, guys. I just have one. I mean, in Q4, the builders were Pounding on trades for concessions by Q1, they're shrugging their shoulders about labor tightness and starting to raise base prices. I mean, even for this business, the volatility and expectations has been changed pretty dramatically.

Speaker 11

So I'm curious how that impacts your smaller peers and their interest in potentially doing M and A deals, Trying to manage through this volatility, thinking they had to cut staff a quarter ago and now maybe business is much better. Can you talk a little bit about how that might impact valuations or interest From your smaller peers on doing M and A deals?

Speaker 2

Yes, sure. Despite kind of the numbers and what the news might have Ted, I don't know that any insulation contractors all of a sudden saw a lot of weakness because of the backlog. I think everybody remained Pretty busy, right, straight through. And just after having been involved in a couple of 100 deals, It's just not the way they're not thinking about, for the most part, the big kind of macro sense of things. I mean, Their desire to sell and their timing on the sale has a lot more to do with their kind of life cycle and lifestyle Desires and how old they are and how long they've been at it or if they're frustrated and it may or may not have been to do with the labor even the amount of work.

Speaker 2

And so I don't think that it's really Impactful. And in fact, I would tell you that I think the spring selling season, had they not got it done, I mean, if they were in fact worried and may have been encouraged to say, hey, At some point in time, this market is not going to be the way it is now. The spring selling season came back strong enough and quickly enough that I think any sentiment that this was somehow going to be A great recession or anything like that all over again is out the window and they're not being prompted now based on Their business prospects to make different decision about whether they would sell or not.

Speaker 11

That makes a lot of sense. All right, thanks. I'm good.

Operator

We have reached the end of our question and answer session. I would now like to turn the floor back over to Jeff Edwards for closing comments.

Speaker 9

Thank you for your questions

Speaker 2

and I look forward to our call next quarter. Thank you.

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