Installed Building Products (NYSE: IBP)Q1 2019 Earnings CallMay. 02, 2019, 10:00 a.m. ET

Contents:

Continue Reading Below

Prepared RemarksQuestions and AnswersCall ParticipantsPrepared Remarks:

Operator

Greetings, and welcome to the Installed Building Products fiscal 2019 first-quarter conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jason Niswonger. Please go ahead.

Jason Niswonger — Senior Vice President, Finance and Investor Relations

Good morning, and welcome to Installed Building Products' first-quarter 2019 conference call. Earlier today, we issued a press release on our financial results for the first quarter, which can be found in the investor relations section on our website. On today's call, management 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 with respect to the housing market, residential and commercial industry condition, our financial and business model, our efforts to manage material insulation, our ability to increase selling prices, the demand for our services and product offerings, expansion of our national footprint, products and end market, our expectations for our end markets, our ability to strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, our diversification efforts, Alpha's revenue and profitability, expansion of our commercial business, our growth rates and ability to improve sales and profitability and expectations for demand for our services and our earnings in 2019.

Forward-looking statements may generally be identified by the use of words such as: anticipated, believe, expect, intend, plan and will or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-looking statement made by management during this call is not a guarantee of future performance, and actual results may differ materially from those expressed and/or suggested by the forward-looking statements as a result of various factors, including, without limitation, the factors discussed in the risk factors section of the company's annual report on Form 10-K for the year ended December 31, 2018 as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission.

10 stocks we like better than Installed Building ProductsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Installed Building Products wasn't one of them! That's right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for the company to predict these events or their effect. The company has no obligation and does not intend to update any forward-looking statements after the date hereof, 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 and adjusted net income per diluted share, adjusted gross profit 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. I will now turn the call over to Jeff.

Jeff Edwards — Chairman and Chief Executive Officer

Thanks, Jason. And good morning to everyone joining us on today's call. I'm happy to have the opportunity to talk to all of you about our first-quarter results. As usual, I will start today's call with some highlights and then turn the call over to Michael Miller, IBP's CFO; and Jason Niswonger, who will discuss our results and capital position in more detail before we take your questions.

2019 is off to an excellent start, driven by record first-quarter sales and strong earnings. As we have stated in the past, the first quarter is typically our seasonally weakest quarter for revenues and profitability. Despite this normal seasonal trend within the industry, demand was strong throughout our geographies and our end markets. Over the past few months, the homebuilding industry has experienced a period of softer demand in certain local markets where the pace of housing starts has been sporadic.

However, we did not experience the same degree of volatility in our revenue due primarily to the fact that the industry entered the period with an extended backlog of homes that had already been started but not yet completed. This high backlog enabled our installation crews to remain continuously productive during the quarter. Additionally, overall, our national footprint in diversified end market and customer base serves to lessen the impact to us from periodic softness isolated in individual markets. We expect residential and commercial industry trends will remain favorable throughout 2019, and our diversification efforts will result in another strong year for IBP.

Total revenues for the 2019 first quarter increased over 13% to $342 million, driven by higher volume and customer and product growth and the contribution from last year's acquisitions. Single-family same branch sales increased nearly 7%, while total single-family sales increased approximately 14%, compared to the increase in total U.S. single-family completions of approximately 4%. Same branch multifamily sales increased nearly 10%.

Combined new residential same branch sales during 2019 first quarter increased 7%, while total residential sales increased nearly 14%, compared to the increase in total U.S. completions of approximately 6%. We continue to proactively work with our customers and suppliers to lessen the impact of rising material costs across all our product lines, and we believe we will receive the benefit of selling price increases during the second half of 2019. We continue to outpace industry growth, which we believe is a result of our focus on operating branches and strong and diverse U.S.

housing markets. IBP's current geographic footprint provides us access to nearly 70% of total residential permits, and we remain committed to expanding our footprint through acquisitions, organic branch growth and capitalizing on cross-selling opportunities of other product offerings within our existing markets. The market for residential and commercial installation services remain highly fragmented, and we continue to have a robust pipeline of acquisition candidates. Our current pipeline includes insulation installers that expand our footprint and geographic reach into compelling housing markets.

Our pipeline also includes installers of complementary building products that diversify our end markets and product offerings. As a result, we believe 2019 will be another good year of acquisition growth. Our acquisition strategy is focused on identifying well-run installers that expand both in geographies we serve and the types of building products we install. During the 2019 first quarter, we acquired 1st State Insulation, an insulation installer in Delaware with annual revenues of approximately $8.8 million.

1st State expands our geographic presence in the markets which we previously weren't able to effectively serve. Turning to Alpha, revenues increased nearly 7% for the 2019 first quarter. Organic geographic expansion continues to be a key component of our commercial construction strategy. We are opening a new Alpha location in Phoenix later this year and expect this location to quickly ramp given favorable trends within the region.

During the 2019 first quarter, IBP once again experienced strong employee retention, turnover and labor efficiency rates. I'm encouraged with the continued improvements we are making to empower, educate and motivate our employees. I'm also pleased with the launch of the Installed Building Products Foundation, which is led by IBP employees for IBP employees, their families and their communities. Together, we've set a goal to donate more than $1 million to non-profits and individuals in 2019 through its programs.

Initiatives include educational scholarships and employee emergency assistance funds, and a fund to support matching grants for employee donations of time or money to their favorite charitable causes. I encourage our investors to watch the video overview of the foundation on our website, and I look forward to reporting on the continued success and commitment of our employee and community outreach. With this overview, I would now like to turn the call over to Michael to provide more details on our first-quarter results.

Michael Miller — Chief Financial Officer

Thank you, Jeff, and good morning everyone. Net sales increased to a first-quarter record of $342.1 million, compared to $301.7 million in the same period last year. The 13.4% year-over-year improvement in sales was mainly driven by an increase in price mix, a higher volume of completed jobs, good growth at Alpha and our 2018 acquisition. Industrywide construction delays occurred across the country, but especially in the south during the fourth quarter of 2018.

These delays were reduced in the first quarter. The extended lag is very visible in the Census Bureau data. The single-family authorized but not started backlog in the 2018 fourth quarter was 20% higher than in 2017, and it was 30% higher in the south. In the first quarter of 2019, the single-family backlog was up approximately 10% versus last year.

The reduction of the backlog in the first quarter favorably impacted our revenue during the quarter but negatively impacted gross margin as this work did not include the benefits of our efforts to increase selling prices to offset the material inflation we experienced in late 2018 and earlier this year. However, we have made good progress increasing our selling prices and expect that with this backlog conversion during the first quarter and normal seasonal trends, we will see the benefit of our pricing improvements in the second half of 2019. First quarter 2019 gross profit improved to 11.8% to $89.4 million from $80 million in the prior-year quarter. Adjusted gross profit as a percent of revenue was 26.2%, compared to 27% in the same period last year, attributable to the noted construction delays and material price inflation later in 2018.

Without these drags, adjusted gross margin would have improved over the prior-year quarter. For the 2019 first quarter, selling and administrative expenses as a percent of net revenue improved to 19.2% as compared to 19.9% for the 2018 period. As a percentage of revenues, administrative expenses were 14.2% in the first quarter compared to 14.6% for the same period last year. Adjusted selling and administrative expenses as a percent of net revenue improved by 80 basis points from 19.2% to 18.4%.

We expect selling and administrative expenses, as a percent of net revenue to continue to improve over time as we further scale our operations. As we have stated in previous earnings calls, it is important to note that as our acquisition strategy continues and as the volume of total acquired business operations become larger, we will incur additional non-cash amortization expense. In the first quarter, we recorded $5.9 million of amortization expense compared to $7.1 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 our acquisitions completed to date, we expect second-quarter 2019 amortization expense of approximately $5.9 million and full-year expense of approximately $23.6 million. This figure will change with any subsequent acquisitions. For the first quarter of 2019, adjusted EBITDA improved to $35.7 million, representing an increase of 13.5% from $31.4 million in the prior year. On a GAAP basis, our first-quarter net income was $8.8 million, or $0.30 per diluted share, compared to net income of $6.4 million, or $0.20 per diluted share, in the prior-year quarter.

Our adjusted net income improved to $15.3 million, or $0.51 per diluted share, compared to $14.4 million, or $0.45 per diluted share, in the prior-year quarter. For the 2019 first quarter, our effective tax rate was approximately 27.5%, and we expect the full-year effective tax rate of 25% to 27% for 2019. Now let me turn the call over to Jason to review our balance sheet and cash flow.

Jason Niswonger — Senior Vice President, Finance and Investor Relations

For the three-month period ended March 31, 2019, we generated $15.9 million in cash flow from operations, compared to $6.1 million in the prior year, a 161.1% increase. We will continue to use our strong operating cash flow to fund acquisitions, reinvest in our business and opportunistically repurchase shares of our common stock. Capital expenditures at March 31, 2019 were $8.7 million, while total incurred finance leases were $1.1 million. Capital expenditures and finance leases as a percentage of revenue decreased 70 basis points to 2.8% at March 31, 2019 compared to the same period last year.

At March 31, 2019, we had total cash and short-term investments of $98.2 million, compared to $100.5 million at December 31, 2018. During the first quarter, we did not repurchase any of our common stock. We have approximately $61 million available in our expanded $150-million stock repurchase program that is in effect through February of 2020. Total debt at March 31, 2019 was approximately $454.4 million.

Taking into account cash and short-term investments at March 31, 2019, our net total debt was approximately $356 million compared to $354 million at December 31, 2018. Our capital structure remains conservative, and we have considerable flexibility as we continue to deliver on our growth strategy. With that, I will now turn the call back to Jeff for closing remarks.

Jeff Edwards — Chairman and Chief Executive Officer

Thanks, Jason. IBP has a strong platform, a disciplined approach and an experienced and committed team. I'm encouraged by the progress we have made on our selling price increases, stabilizing margins at our new Alpha branch locations and our acquisition opportunities. I believe 2019 will be another strong year for IBP.

Operator, let's open up the call for questions.

Questions & Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from Nishu Sood with Deutsche Bank. Please go ahead.

Nishu Sood — Deutsche Bank — Analyst

Thank you. First, I wanted to ask about the backlog as you were describing them. You had a nice sales performance despite the housing wobbles that we saw in the second half of last year. You mentioned that backlogs actually increased in spite of the weaker start.

So, wondering if you could just dissect that for us a little bit. Was it non-single-family residential? Was it from multifamily? I would have expected that the construction cycle has actually accelerated a bit for builders, which would have pressured the backlogs downward. So just wondering if you could help us to understand that kind of counterintuitive dynamic please?

Michael Miller — Chief Financial Officer

Sure, Nishu. This is Michael. Just to clarify what we were referring to in the prepared remarks is we were looking at the authorized but not started numbers that are part of the U.S. Census Bureau's permits and starts release.

And we looked at basically the averages in both the fourth quarter of '18 to the three-month period and the fourth quarter of 2017, and then the first quarter of 2018 versus the first quarter of 2019. And what you saw there in those numbers is that, as you had mentioned, that they were on average about 20% higher in the fourth quarter of '18 versus '17, and it's actually 30% higher in the south. So there was really quite a bit of backlog that was built up. And that also is evident I guess I would say in the completions versus permit and start numbers.

So for the last six months, single-family completions were about 413,000, where permits and starts were about 370,000. So you definitely have a situation, which is typical and we've talked about this, is that the lag on the completion side, that delta can be fairly significant. But we believe that has started to come down as is evidenced by the single-family authorized but not started numbers coming off that fourth quarter, those fourth-quarter high numbers. So from our perspective, the backlog still remains healthy, and we think that the spring selling season is looking to be certainly more encouraging than I think what people initially expected coming into the year.

So we feel pretty optimistic about what particularly the back half of the year is going to look like.

Nishu Sood — Deutsche Bank — Analyst

Got it. So it sounds like, in terms of the significant volatility and demand that the housing market saw in the back half of the year, the backlog effect that you're describing may end up substantially dampening the kind of downstream impact of that volatility on your sales trends?

Michael Miller — Chief Financial Officer

Yes, that's certainly the case in the first quarter. Obviously, we're only a month into the second quarter at this point. But we're encouraged by what we're seeing from a demand environment perspective. And obviously, the spring/summer season hasn't come to a conclusion yet.

Although, as I said, it seems to be relatively positive or more positive than what a lot of people were thinking as we came into the year. So we think that if there is any kind of pause or indication from the slowdown that happened in order growth in the back half of last year, that it has the ability to maybe impact the second quarter, but that the back half of the year should be very solid.

Nishu Sood — Deutsche Bank — Analyst

Got you. And the other question I wanted to ask was about, you mentioned that your margins were still impacted to some extent by the pricing not fully coming through yet against the rate of material cost inflation. When would that lower price backlog in your business clear? Would it still have an impact in 2Q? And is that how we should understand the deceleration on the price mix number from the 8% range in 4Q to the 4% range in 1Q?

Michael Miller — Chief Financial Officer

Yes, and we've been very consistent since the third quarter of last year and then the fourth quarter and this quarter now as well. We really believe that we will get on completely on top of the pricing issues that we experienced from material price inflation in the back half of the year. So meaning, yes, we could still feel pressure in the second quarter, to your point. I think it's important to highlight though, as we look at the business right now, the only pressure point or headwind that we see is in the materials side.

The rest of the business is performing extremely well. We continue to be very positive and constructive with the labor environment. And as Jeff mentioned in his prepared remarks, retention continue to be very good, and we're really excited about the initiatives and efforts that we've undergone to create and enhance employee engagement and the results that that benefited us from a retention perspective.

Nishu Sood — Deutsche Bank — Analyst

Great. Thank you for the details.

Michael Miller — Chief Financial Officer

Sure.

Operator

Our next question comes from Trey Morrish with Evercore. Please go ahead.

Trey Morrish — Evercore ISI — Analyst

Thanks guys. Picking up off that last question and you completely covering your pricing issues by the back half of this year, is that comment inclusive of the potential for another price increase to happen midyear? Or if there is a price increase midyear, do you think that it's possible that it may take a little bit longer for you to get on top of everything, all in?

Michael Miller — Chief Financial Officer

We think that there will be a price increase announcement in July most likely. I think, if you look at the commentary that OC had in their earnings call and what we're all sort of seeing and feeling, we feel comfortable that we'll be able to manage through the rest of the year and that the environment is more typical versus the very atypical environment that we had in 2018, I just wanted to add.

Jeff Edwards — Chairman and Chief Executive Officer

That's fine.

Trey Morrish — Evercore ISI — Analyst

OK. And then turning to Alpha. Sales growth in the quarter was only about 7%, and that really compares to a solid double-digit rate in the back half of last year. And it tends to be [Inaudible] I think you said that you tend to have fairly good visibility into it.

So I'm just wondering, what was the reason for that business slowdown? Was it just near a gapping in projects? Or is there something that, you're going to be running it a little bit lower than that double-digit rate going forward?

Michael Miller — Chief Financial Officer

There is a little bit of a gapping in projects, but it's also weather related. The vast majority of the products that we install in the Alpha locations requires it not to be basically raining and for the project to be dry. And as has been well documented, particularly in the markets that you guys are in, in the southeast, it's been a very wet winter, which really prevented them and inhibited them from getting work done. So we feel very confident based on the backlog that we're going to continue to see good solid growth in that business.

And again, it's something that we are excited about not just from an expansion of the operations from a physical location perspective at a moderate pace, but also we think that our efforts to continue to improve profitability there will pay off.

Trey Morrish — Evercore ISI — Analyst

OK. Got it. Thank you very much.

Michael Miller — Chief Financial Officer

Sure.

Operator

Our next question comes from Mike Eisen with RBC Capital Markets. Please go ahead.

Mike Eisen — RBC Capital Markets — Analyst

Good morning. Thanks guys for taking the questions. I just wanted to follow up on those previous comments. Can you give us a little more color on what you're seeing from the branches you greenfield last year? And then any expectation in terms of cost and when we can start seeing contribution from the Phoenix operations you've been talking about bringing online this year?

Michael Miller — Chief Financial Officer

Sure. In terms of the Phoenix, we would expect that it's not going to be anything that moves the needle, but that we would expect by the end of the year and then for the quarter, I think it will contribute revenue and earnings. But it's not going to be meaningful to the whole company or even to Alpha in total. The new locations are continuing on the path toward acceptable levels of profitability.

But as we've talked about in previous-quarter calls, it's not something that happens overnight. And we do feel that as we particularly look at their backlog and we look at the back half of '19, we're very encouraged in terms of what the potential is there.

Mike Eisen — RBC Capital Markets — Analyst

Got it. That's helpful. And then following up on some of the prior comments around January, or July price increase from the OEMs, and thinking about some of the capacity curtailments and where utilization for the market is going to be at that point of the year, is there anything to note on magnitude of price increases? It seems like it could be a larger price increase given utilizations, and I know that's something that's been an issue in the past pushing through.

Michael Miller — Chief Financial Officer

Yes, I guess we're estimating that it's going to be in line with what we've seen in the past in that kind of high single, low double-digit rate. And again, that's what we think will be announced. I think for us right now, from what we can see, it feels as if the supply/demand environment is very typical versus the atypical environment we experienced in 2018.

Mike Eisen — RBC Capital Markets — Analyst

Got it. Thanks for taking the questions.

Michael Miller — Chief Financial Officer

Sure.

Operator

Next question comes from Phil Ng with Jefferies. Please go ahead.

Phil Ng — Jefferies — Analyst

Hey guys. Your pricing was obviously pretty solid but dipped a touch from the 4Q run rate. Can you address what's driving that? And with some of the timing issues you kind of flagged, do you expect that trajectory kind of reaccelerating back to what you've seen in 2Q? And do you expect that price cost to be more neutral in 2Q? Or are you just going to take until the back half where you kind of flip more positively?

Michael Miller — Chief Financial Officer

Yes, it's definitely more in the back half where we think we're going to see the full benefit of the price increases that we've not only got in 2018 but also worked in getting in 2019. And I know this is a concept that we've talked about quite a bit on the quarterly calls and it's not one that's easy to understand, but we disclose price mix. And I know people think of that as being just price. But mix has this very outsized impact on that as well.

And as you know, we've been growing, strategically have been growing the other product sales significantly. And those other product sales significantly bring down the price mix. So we feel very good how we're managing the business from a content perspective and our ability to drive an improved profitability. But you've got to keep in mind that that price mix number includes mix, and that in itself definitely brings down that reported number.

Phil Ng — Jefferies — Analyst

Got it. That's helpful color. And then from an M&A pipeline standpoint, it sounds pretty robust. Can you give us some color on what you're seeing out there? Where are some of the opportunities and how you kind of rank your preferences between your core legacy residential insulation business versus commercial and some of these adjacent markets you've been branching out into?

Jeff Edwards — Chairman and Chief Executive Officer

Yes, this is Jeff. We do, as you say, as I have said, we feel really very good about the pipeline. We've kind of really fine-tuned the focus in the last couple or three quarters to try to find pure insulation or nearly pure installation plays that expand our geography, as I mentioned. And we're having a reasonable amount of success in that regard.

So that's kind of where we're headed for the foreseeable future. It doesn't mean that we still won't do either bolt-on deals in markets that we're in or product line expansion deals where we think it's appropriate or good in a particular market. But for the most part, we're so far looking like we're going to have good success and kind of expanding the footprint with the insulation teams, and that's where we'll concentrate.

Phil Ng — Jefferies — Analyst

Got it. That's helpful. And just one clean up question from me. This new Phoenix opportunity for Alpha sounds promising.

I know when you had a big ramp-up of greenfield, this impacted margins a touch. How should we think about this? I know it's not expected to contribute in a meaningful way, but will that have any impact on how we think about incrementals in the back half of the year?

Michael Miller — Chief Financial Officer

Yes, this is a small operation. We just wanted to highlight the fact that we were opening up a new location, because we had talked a couple of quarters ago about those new Alpha greenfield locations and the impact that they had in the overall results. But this is one location as opposed to six locations. So we don't expect it to be a meaningful contributor to either revenue or earnings any time in the near future.

But we also don't expect it to be a drag.

Jeff Edwards — Chairman and Chief Executive Officer

Well, and it's just as important to realize that it's one location versus six in the prior year, which we did talk about a few quarters ago.

Michael Miller — Chief Financial Officer

Yes.

Phil Ng — Jefferies — Analyst

Got it. Appreciate it. Thanks a lot.

Operator

Next question comes from Keith Hughes with SunTrust Robinson Humphrey. Please go ahead.

Josh Aycox — SunTrust Robinson Humphrey — Analyst

Hi, this is Josh on for Keith. Just had a question. Understanding that there was a price increase early this year and potential for another in July, how should we think about kind of 2H incrementals in relation to kind of the 20% target?

Michael Miller — Chief Financial Officer

Well, as we've been saying, we feel certainly much better about the second half of '19, especially as we sit here today. And we would have evened in, say, at the end of the fourth quarter or the beginning this year because it does look like there is decent momentum within the spring selling season. So those volumes, particularly at the higher selling prices that we've been able to work through, should certainly help us get back to higher incremental margins in the back half of the year. I don't think, given sort of where we see the headwinds still from material price inflation in the first and second quarter of this year, that on a full-year basis we'll be back to the 20% to 25%.

But we feel very comfortable that we're going to trend back toward those levels, particularly in the back half of the year.

Josh Aycox — SunTrust Robinson Humphrey — Analyst

OK, great. And then on Alpha, could you kind of talk about, I know last quarter you talked about 2018 kind of a headwind there as you get ramped on the locations. When does that kind of reverse in 2019?

Michael Miller — Chief Financial Officer

They're at a point now where, while they're concluding the margins at Alpha, they're not really diluting the overall margins of the business, just given the size of the overall business. And it's a bigger– it's interesting. So their gross margins are actually lower than the gross margins of the residential business. So they just "drag down" our overall reported gross margin.

But their SG&A leverage is better than the residential business. So as a consequence, their EBITDA margin contributions are within the levels of the residential business. And because of what I was talking about before, particularly on the kind of the really wet weather that they experienced, they have a tendency to hold crews in those situations, where on the residential business we wouldn't. So that kind of impacts their profitability.

It impacted their profitability in the first quarter, but it really is not negative to the overall IBP reported combined numbers.

Josh Aycox — SunTrust Robinson Humphrey — Analyst

OK, great. That's it from me. Thanks.

Michael Miller — Chief Financial Officer

Great.

Operator

Next question comes from Trey Grooms with Stephens Inc. Please go ahead.

Trey Grooms — Stephens Inc. — Analyst

Hey, good morning.

Michael Miller — Chief Financial Officer

Good morning.

Trey Grooms — Stephens Inc. — Analyst

Congrats on the good quarter.

Jeff Edwards — Chairman and Chief Executive Officer

Thanks.

Michael Miller — Chief Financial Officer

Thank you.

Trey Grooms — Stephens Inc. — Analyst

Just a couple left for me. One is just kind of on the size of the homes shrinking and with more entry level. And I understand you guys, with your exposure to homebuilders and quite a few of the larger homebuilders that are kind of transitioning more into the smaller spec'ed homes, that sort of thing, what does that mean for you guys as far as– are you guys doing anything to kind of transition or move into benefiting from these smaller homes or getting more exposure to certain builders in certain geography? Just if you could comment around that at all.

Michael Miller — Chief Financial Officer

Yes. I mean, we've had good exposure, maybe not what I wanted to use, we've had good penetration with the big national builders for quite an extended period of time, and we like that entry-level production builder work. And I think we've talked about this on calls before. While the gross margin, both gross margin and gross profit dollars are going to be less on that work, it is extremely efficient work.

So it allows you to get, from a selling and administration perspective, to get better leverage. So that work is, we think, very beneficial. And I think very importantly, just from a macro perspective, we think it's necessary in order to get back to the 1.5 million stabilization rate. So we think the market is– it took a long time to get [Inaudible] this recovery has been.

But we think that the market getting back to a better balance between entry-level versus the total housing market is an overall positive. And we have good penetration with those customers and much better penetration than we'll probably ever have with the big production builders. And we think it's very positive. It's kind of our bread and butter.

Trey Grooms — Stephens Inc. — Analyst

Right. And also, I guess kind of the follow up to that is just on some of these ancillary products and with the direction kind of going to more spec, I guess, and some of these. Is there opportunity for you guys to expand or maybe increase your kind of share of the wallet with some of these more ancillary products? And do they blend themselves more to the direction to the homes where we're seeing them go now?

Jeff Edwards — Chairman and Chief Executive Officer

I don't know that that necessarily would be the case. But obviously, the overarching plan is exactly what you said in terms of us getting a bigger share of the wallet and having a larger sale with the builders.

Michael Miller — Chief Financial Officer

And they do, to your point, they'll probably-it's probably ultimately potentially little. And I'm looking a little bit at Jeff, but a little bit easier sale as opposed to onesie-twosies let's say to kind of work with some of the larger builders on these other products and kind of take a significant part of that business in the market.

Jeff Edwards — Chairman and Chief Executive Officer

And I think it is, without a doubt, for a builder that's building an entry-level home and building more spec, selling up on time, getting the job done right the first time. So the service aspect of our business becomes more and more important to them, especially for these low-dollar value projects. And if they can have one subcontracted that they can rely on to multiple products, that's a benefit to them because they still have to manage– even though it's the $350,000 house versus the $650,000 house, they're still managing that process, and they want that process to be managed much more efficiently as the smaller-dollar value.

Michael Miller — Chief Financial Officer

And we get significant SG&A lift out of these extra sales. And we talked a lot about the margin and gross margin and the potential drags, albeit somewhat small, let's say. We don't like to do things that we clearly would decide– don't do things that we decide don't fit kind of our profit motivation on the one hand. But on the other hand, clearly, these extra incremental product sales, other product sales definitely help us, give us lift at the SG&A level.

Trey Grooms — Stephens Inc. — Analyst

Got it. That's good to hear. Again, that's kind of what I was getting at on other products and things like that on the ancillary side as well. And one last one from me.

Delaware, I know you guys entered that market, I think. It was a new market for you guys with a deal you did or acquisition you did maybe a few months ago. Any other new geographic markets that might make sense as you're kind of looking at Dela as a footprint?

Jeff Edwards — Chairman and Chief Executive Officer

Yes, this is Jeff again. One slight clarification, we were in Delaware with previously or still with another location. It's 45 minutes to an hour away or so. The customer base was different.

The new acquisition does a significant amount of work along the shore in kind of bigger, more custom-like homes and actually new product line too. And the other location was doing primarily more, well, a different geography, and it was a little smaller. So it was largely different things as far as we were concerned in terms of coverage, and it really about tripled, quadrupled our sales there. In terms of other geographies, we continue to not have the presence we would like in the Southwest United States.

That continues to be an area where we'll look as hard as anywhere to find potential acquisition candidates, as well as working on the operations that we do have there, feeling like it's a good growth area for us. Clearly, some other parts that are west and not necessarily southwest, pure west, let's say, they remain to be places where good markets that we can have a foothold in. There's still some holes really in the central kind of America to, I don't think Central America, I mean central United States. And it's surprising.

We've said this before, but depending on the market, you could be probably in traffic, really. You can be as close as 30 or 40 miles away and in essence not be doing work in a particular area if it's really kind of high traffic, hard city to get around, let's say for instance San Francisco. So those continue to be places that we work on to.

Trey Grooms — Stephens Inc. — Analyst

OK. Thanks a lot for taking my questions. Good luck.

Jeff Edwards — Chairman and Chief Executive Officer

Sure. Thank you.

Operator

Next question comes from Matt McCall with Seaport Global Securities. Please go ahead.

Matt McCall — Seaport Global Securities — Analyst

Thank you. Good morning, everybody.

Jeff Edwards — Chairman and Chief Executive Officer

Good morning.

Michael Miller — Chief Financial Officer

Good morning.

Matt McCall — Seaport Global Securities — Analyst

Maybe I'll start with the other segment and the impact of kind of price mix. So you did price mix of 4.1% on a 3.6% comp. The comps get a little tougher, and they've got pricing expectations. Obviously, the continued impact of mix shift specifically to the other.

So how should we look at price mix through the year, based on all those things? It seems like maybe it should moderate a little bit on a net basis, or is a flattish, around 4%, the right way to think about it?

Michael Miller — Chief Financial Officer

If you look at just 2018, I mean, we did have outsized price mix in the fourth quarter, but we really trend around that 4% to 5% range on a price-mix basis. And as I said earlier in the Q&A, in the call, the mix, we can't underestimate, or we can't underemphasize, excuse me, the impact that mix shift has on price mix. So that 4% to 5% price, that price mix range over the course of the year seems pretty consistent from what we've been doing when you factor in both the selling price appreciation combined with our continued emphasis on the shift in the mix.

Matt McCall — Seaport Global Securities — Analyst

OK. OK. Maybe adjusting for the strength in Q4. Is that the one thing to keep in mind?

Michael Miller — Chief Financial Officer

Yes.

Matt McCall — Seaport Global Securities — Analyst

OK. You brought up OC earlier. On their call they discussed being more competitive to maintain their current chair position. Have you seen any changes in manufacturing behavior around pricing and pricing efforts since the January increase? Are there any opportunities maybe to secure better pricing than you anticipated when we last spoke?

Michael Miller — Chief Financial Officer

Let me go back to what we said about it being a somewhat benign environment in that we think it's a much more regular way than it was in 2018. And I think that-– I hate to say this, [Inaudible] back to normal. We're back to the operating environment that we're accustomed to have, let's say that we had 2016, 2017. So we do expect there to the price deceleration.

We don't expect to see anything like the price increases or acceleration that we saw in '18, barring any unforeseen change in the capacity landscape, like we saw in late 2017.

Matt McCall — Seaport Global Securities — Analyst

No change in the competitive behavior of those manufacturers at least thus far?

Michael Miller — Chief Financial Officer

That's right, no change.

Matt McCall — Seaport Global Securities — Analyst

OK, last one. You talked about the organic incremental. Sounded like, if I heard you right, Michael, it's going to trend back toward the 20% in the back half. It doesn't sound like you're going to necessarily get there.

And I guess the question is, in the release, you talked about the Q1 organic incremental being kind of in line with normal seasonal patterns or expectations. What is it that would cause the rest of the year to be abnormal if you've kind of got things back to normal in Q1? What is it that's holding back the normal seasonal pattern as you move through the rest of the year?

Jeff Edwards — Chairman and Chief Executive Officer

I think, speaking for Michael a moment, that the realization of all the price increases that we've put out there across all of the work made [Inaudible] being done at previously contracted, not contracted for but let's say committed for pricing; with that shift, we should be able to move back to normal.

Michael Miller — Chief Financial Officer

In the back half of the year.

Jeff Edwards — Chairman and Chief Executive Officer

In the back half of the year.

Matt McCall — Seaport Global Securities — Analyst

OK. Maybe I misunderstood the answer. So, OK, get back to that range in the second half. OK.

All right. Thank you all.

Jeff Edwards — Chairman and Chief Executive Officer

Sure.

Operator

[Operator instructions] Our next question comes from Just Speer with Zelman & Associates. Please go ahead.

Just Speer — Zelman and Associates — Analyst

Hi, guys.

Jeff Edwards — Chairman and Chief Executive Officer

Good morning.

Michael Miller — Chief Financial Officer

Good morning.

Just Speer — Zelman and Associates — Analyst

I have a few questions. I recognize that the back half feels better, but just kind of nearer term, just looking at the second quarter in terms of volumes and margins, do you still expect or are you expecting that overall volumes and overall margins will expand in the second quarter based on what you see today? Or do you expect some of those to filter through?

Michael Miller — Chief Financial Officer

Yes. So we would expect the second quarter to be more typical in terms– or I should say typical in terms of seeing higher volumes in the second quarter. And as a consequence, margin improvement. I would say though that if you look back at '18 and '17, our second quarters, we've talked heavily about them at that time, will be very difficult comps for us in the second quarter of '19 because we had very strong dynamics for a number of different reasons in both '17 and '18 in the second quarter.

So I would call those out as being atypical relative to the entire year. But we would expect that this second quarter would be sort of more typical like we experienced in other years. We're certainly going to see the benefit of improvement in the weather, typical seasonal growth that we see from a building perspective. And we believe on the production builder side that as they pivot toward, and I think this is fairly well documented at this point, as they pivot toward this entry-level work, it definitely decreases the cycle time from sort of start to completion.

And that in itself brings more volume and work to us sooner than it may have been as the market is not adjusted to the demand environment for entry level.

Just Speer — Zelman and Associates — Analyst

So the volumes, in terms of just unpacking that volume, do you think the volumes will hold back in terms of the growth? Will it be consistent at low single-digit type of growth cadence even though the comps, as you mentioned earlier, are increasingly difficult as we look to the next couple of quarters?

Michael Miller — Chief Financial Officer

Yes, and it's particularly the second quarter that is the difficult comp. I mean, as you know, we don't provide guidance since we're only one month into the quarter, but we feel reasonably good about the trajectory that the business is on.

Just Speer — Zelman and Associates — Analyst

Thank you. The next question for me is just in terms of just high level, just getting your thoughts in terms of the price negotiations with builder customers. And I know you had said not every customer is the same. But generally, the tenor and tone of those price discussions, are they any different? Have you had to eventually-or have the discussions elongated? Or have you lost some business or maybe consciously decided to walk from business over price?

Michael Miller — Chief Financial Officer

We have consciously decided to walk from business over price, and we think that that is absolutely the right decision to make. I would say that in a lot of instances, when we've done that before, we have a tendency to win back all of our portion of that business over time because, as we've always talked about, the service part of our business is pretty critical. And our ability to retain our employees and reduce the turnover, we think it even improves that service level more. So we think those are the right decisions to make for the long term.

In terms of the price discussions, I think justifiably so, just like we're tired from hearing from the manufacturers, I think our customers are tired from hearing from us about price increases. So we're very encouraged that we feel we're in a much more regular way than [Inaudible] inflationary environment right now. Now we just have to do the job of continuing to service our customers and fully realize the price increases that we instituted in both '18 or early '19.

Just Speer — Zelman and Associates — Analyst

Excellent. And last question from me just on SG&A. That's one, yes, I think you levered that really nicely in the quarter. And last year, you did as well.

Just wanted to unpack that because last year, I believe about 40 basis points of that leverage was tired to workers' comp and healthcare benefits, and it's harder for us to really identify, or in terms of the trends, we don't know what those are doing. But how much of that factored into the SG&A leverage in the first quarter? And how should we think about the sustainability of those types of contributions?

Michael Miller — Chief Financial Officer

That didn't factor at all into the SG&A. And in fact, workers' comp is actually a part of cost of goods sold. So that wouldn't have impacted the leverage there. No, it was really more of a combination of volume and trying to make sure that we're effectively managing kind of the cost side of the business at the branch level.

I think it is important to note, and I made sort of a slight reference to it earlier in the call, but it is interesting how, over time, the business is developing because we're seeing very good growth in certain segments and areas of the country just by the nature of those markets, given their size and given their product and customer mix, tend to be a slightly lower gross margin markets for us but very good EBITDA flow though because they have the scale and size and the SG&A leverage in those branches. And as I've mentioned earlier in the call, Alpha is the same way. The gross margins are a little bit tighter, but the EBITDA margins are good. So really, it's just kind of the mix of overall the portfolio of the business, which I know makes it difficult from your perspective when you're trying to kind of build out your models and look at the business.

But it's exactly the direction we want to take the business. We want to make sure that we have a very well-diversified business across all of our end markets and our geographies, and that we're really working to maximize profitability at the EBITDA level from our footprint and from the business.

Just Speer — Zelman and Associates — Analyst

Excellent. And if I could sneak one more in. Spray foam, just how that trended in the quarter and what your expectations are there.

Michael Miller — Chief Financial Officer

It's been consistent with our expectations. And as a business that we continue to like, as we've talked about I think in the last quarter call, historically, spray foam has not been a product that would go into the entry-level home. It's not cost competitive. But we feel comfortable with what we're seeing in that business, and the margins are good.

We're continuing to look at markets to add spray foam where it makes sense, but we don't do it currently. We're very comfortable with that business.

Just Speer — Zelman and Associates — Analyst

All right, thanks guys.

Michael Miller — Chief Financial Officer

Thank you.

Operator

There are no further questions. I would like to turn the floor over to Jeff Edwards for closing comments.

Jeff Edwards — Chairman and Chief Executive Officer

I'd like to thank all of you for your questions, and I look forward to our next quarterly call. Thank you.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Jason Niswonger — Senior Vice President, Finance and Investor Relations

Jeff Edwards — Chairman and Chief Executive Officer

Michael Miller — Chief Financial Officer

Nishu Sood — Deutsche Bank — Analyst

Trey Morrish — Evercore ISI — Analyst

Mike Eisen — RBC Capital Markets — Analyst

Phil Ng — Jefferies — Analyst

Josh Aycox — SunTrust Robinson Humphrey — Analyst

Trey Grooms — Stephens Inc. — Analyst

Matt McCall — Seaport Global Securities — Analyst

Just Speer — Zelman and Associates — Analyst

More IBP analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Source Link:
https://www.foxbusiness.com/markets/installed-building-products-ibp-q1-2019-earnings-call-transcript

[0.603543]

Comments

comments

Advertisement