Installed Building Products, Inc. (IBP) Earnings Call Transcript & Summary

Greetings, and welcome to the Installed Building Products' First Quarter 2025 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Darren Hicks, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Installed Building Products' First Quarter 2025 Earnings Conference Call. Earlier today, we issued a press release on our financial results for the first quarter, which can be found in the Investor Relations section of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of federal securities laws. These forward-looking statements are based on management's current beliefs and expectations and are subject to factors that could cause actual results to differ materially from those described today. Please refer to our SEC filings for cautionary statements and risk factors. We undertake no duty or obligation to update any forward-looking statement as a result of new information or future events, except as required by federal securities laws. In addition, management refers to certain non-GAAP and adjusted financial measures on this call. You can find a reconciliation of such non-GAAP measures to the nearest GAAP equivalent in the company's earnings release and investor presentation, both of which are available in the Investor Relations section of our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer, and we are also joined by Jason Niswonger, our Chief Administrative and Sustainability Officer. Jeff, I will now turn the call over to you.

Thanks, Darren, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights and then turn the call over to Michael, who will discuss our financial results and capital position in more detail before we take your questions. IBP delivered solid first quarter financial results, reflecting our focus on maintaining a high level of installation service for our customers across the U.S. Our core homebuilding customers continue to navigate industry-wide housing affordability challenges and a slower-than-expected spring selling season. Still, we continue to play our integral role in making homes and buildings as energy-efficient and efficiently constructed as possible. We expect housing demand to remain connected to changes in affordability and the macroeconomic backdrop this year. In the current environment, we are competing from a strong financial position and our homebuilding customers are operating from a position of health as well, which helps the navigating market uncertainty. Longer term, our view on demand for our installed service is unchanged. We believe long-term trends across our residential and commercial end markets are favorable as builders work to meet demand through the increased supply of houses, apartments and commercial structures. IBP's business model remains consistent and centered around geographic end product and end market growth with a disciplined approach to capital allocation. Throughout our business, we believe that less than 10% of the diverse products we buy and install are sourced outside of the U.S. We are working with our suppliers to reduce any potential tariff impact. At present, we do not anticipate meaningful disruptions to our business. Our business continues to generate strong operating cash flow, and we remain committed to investing in growth and prudently returning capital to shareholders throughout economic cycles. During the first quarter, we continued to grow through acquisition, paid nearly $57 million in cash dividends or $2.07 per diluted share and repurchased approximately $34 million of our common stock. As we pursue initiatives focused on achieving profitable growth and maximizing returns for our shareholders, we remain committed to doing the right thing for our employees, customers and communities. Looking at our first quarter sales performance. Consolidated sales decreased 1% and same-branch growth was down 4%. In our largest end market, new single-family installation sales were down relative to the same period last year, partially due to 1 less selling day and unusually difficult weather which impacted our ability to complete jobs during the quarter. On a same branch basis, multifamily sales in our installation segment decreased 5%, following a strong year-over-year comparison of a 13% increase in the first quarter of last year. We continue to see strategic growth opportunities as our centralized service-oriented model continues to partner with our existing branch network to broaden our geographic footprint and product offering in the multifamily end market. On a same-branch basis, first quarter commercial sales in our installation segment declined modestly from the prior year. Strong same-branch sales growth within our heavy commercial business was offset by a decrease in sales from our light commercial markets. The strength in our heavy commercial end market was driven in part by successfully winning jobs in the rapidly growing data center construction industry. Based on our current backlog, we expect growth in heavy commercial sales to continue throughout this year. During the first quarter, cash flow from operating activities increased 9% to $92 million, which primarily reflected effective management of working capital. Acquisitions continue to be our top priority as we consider all of our options for capital allocation. Despite our growth over the years, we believe a meaningful opportunity still exists for us to expand our geographic presence and diversify the mix of building products we install across our national branch network. During the 2025 first quarter and in May of 2025, we completed the following acquisitions: a South Carolina-based installer of a diverse mix of after-paint products, including closet shelving, shower doors, mirrors primarily in the new residential end market with annual revenue of nearly $6 million; and a Wisconsin-based installer of spray foam and air barrier products in the commercial end market with annual revenue of nearly $4 million. To date, we have acquired over $10 million of annual revenue. And although deal timing is hard to predict, we expect to acquire over $100 million in annual revenue in 2025. Based on the U.S. Census Bureau, single-family starts year-to-date through March 2025 have decreased by 6%. We continue to believe that our business is supported by a fundamental undersupply of residential housing and gradual building code adoption for the purpose of improved energy efficiency across the U.S. Our strong customer relationships, experienced leadership team, national scale and diverse product categories across multiple end markets are advantages when navigating the ebbs and flows of demand related to the U.S. construction market. Although the uncertainty around tariffs, inflation and consumer sentiment influences prevailing market conditions in our industry and many others, we remain focused on profitability and effective capital allocation to drive earnings growth and value for our shareholders. I'm proud of our team's continued success and commitment to doing an excellent job for our customers. To everyone at IBP, thank you. I remain encouraged by our competitive positioning and optimistic about the prospects ahead for IBP and the broader insulation and other building product installation business. So with this overview, I'd like to turn the call over to Michael to provide more detail on our first quarter financial results.

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the first quarter decreased 1% to $685 million compared to $693 million for the same period last year. The modest decrease in sales during the quarter reflected single-digit declines across all our core end markets, partially offset by revenue from recent acquisitions. Same-branch sales were down 4% for the first quarter. Although the components behind our price/mix and volume disclosure have several moving parts that are difficult to forecast and quantify, we achieved a 1.5% increase in price/mix during the first quarter. This result was offset by a 5.6% decrease in job volumes relative to the first quarter of last year. With respect to profit margins in the first quarter, our business achieved adjusted gross margin of 32.7%, down from 33.9% in the prior year period. The margin headwind during the quarter was in part related to higher vehicle insurance and depreciation expense. Adjusted selling and administrative expense as a percent of first quarter sales was 20.1% compared to 19% in the prior year period. The increase was due primarily to lower sales and higher administrative wages and higher facility costs. Of the $6 million increase in adjusted selling and administrative expense, $4.4 million was due to acquisitions and start-up expenses. Adjusted EBITDA for the 2025 first quarter decreased to $102 million, reflecting an adjusted EBITDA margin of 15%, and adjusted net income decreased to $58 million or $2.08 per diluted share. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect second quarter 2025 amortization expense of approximately $10 million and full year 2025 expense of approximately $40 million. We would expect these estimates to change with any acquisitions we close in future periods. Also, we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31, 2025. Now let's look at our liquidity position, balance sheet and capital requirements in more detail. For the 3 months ended March 31, 2025, we generated $92 million in cash flow from operations compared to $85 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with improvements in working capital, which more than offset lower net income. At March 31, 2025, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.17x compared to 0.97x at March 31, 2024, which remains well below our stated target of 2x. At March 31, 2025, we had $351 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 3 months ended March 31, 2025, were approximately $21 million combined, which was approximately 3% of revenue. With our strong liquidity position and modest financial leverage, we continue to prioritize expanding the business through acquisition and returning capital to shareholders. During the 2025 first quarter, IBP repurchased 200,000 shares of its common stock at a total cost of $34 million. At March 31, 2025, the company had approximately $466 million available under its stock repurchase program. IBP's Board of Directors approved the second quarter dividend of $0.37 per share, which is payable on June 30, 2025, to stockholders of record on June 13, 2025. The second quarter dividend represents a 6% increase over the prior year period. With this overview, I will now turn the call back to Jeff for closing remarks.

Thanks, Michael. I'd like to conclude our prepared remarks by once again thanking IBP employees for their hard work and commitment to our company. Our success over the years is made possible because of all of you. Operator, let's open up the call for questions.

[Operator Instructions] Your first question comes from Stephen Kim with Evercore ISI.

This is Aatish on for Stephen. I just wanted to get an idea of how you're managing your labor force in this pressure demand environment.

This is Michael. I think you really have to break it down into the various labor components in terms of the installed labor versus the sales force and then the G&A labor. The installed labor really fluctuates consistently with the volume of jobs. So our intention is really never to hold crews when it comes to the installed labor. There is an exception to that statement, and it would be times like we had in the first quarter, where you had both the California fires and some of the severe weather in the bottom half of the country. In those instances, you will hold labor because you know that it's a temporary situation. But when you're in a situation where there's a prolonged headwind relative to volume, you would then obviously adjust your installed labor to meet that demand expectation. As it relates to the sales force, I mean, generally speaking, you're not adjusting your sales force in terms of headcount unless it's a situation where you expect to have significant prolonged headwinds as it relates to volume. In terms of the G&A labor force, we're constantly looking to optimize the -- and have the right headcount and right people doing the right things within G&A. I would say that clearly a focus of ours has been to make sure that we have optimization within the G&A ranks, and that's obviously something that we're continuing to focus on and will focus on and would expect to see some reductions in the G&A workforce as we're going forward here through the rest of the year.

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

Sure. That's a great question. As you know, units under construction right now are down 20% from their peak last year, so from March of last year to March of this year, which is a huge headwind. And we are extremely proud of what the team was able to do. With a 20% headwind, having multifamily revenue only down 5% is, in part, a direct result of the benefits that we're seeing from CQ. As I think everyone on the call knows, CQ does not manage all of our multifamily revenue. They only manage around 45% of our multifamily revenue, and they continue to show up positive results on the multifamily revenue that they're managing. Their backlog continues to be very solid. So we feel very strongly that we will continue to outperform the multifamily opportunity. That being said, we believe that units under construction need to come down at least another 10% in order to stabilize relative to historical trends based on current multifamily starts rates, although we do think multifamily starts have bottomed. As I'm sure everybody realizes, multifamily starts year-to-date as reported by the Census Bureau are up 9%. So we think that's encouraging for multifamily -- the multifamily industry in '26. But we do think that the headwinds for multifamily for us and for the industry will persist through 2025.

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

Yes. I mean, the lost day is, call it, $10 million to $12 million. The day is lost. So for the year, we have 1 less selling day. So that we don't really necessarily make that up. In terms of the weather impact, we estimate that, that was on a net basis because we did make some of it up in March, was probably another $10 million to $20 million. Unfortunately, there's a little bit longer tail on that than there normally would be for a couple of reasons. One, the continued softness or the softness in single-family, combined with the fact that it wasn't just that we couldn't get to the job site. It was that all the other trades couldn't get to the job site as well. So it's just sort of pushed out the recovery, if you will, of that additional revenue. And I think it will be sort of measured throughout the second quarter and third quarter basically that we catch up on that lost revenue opportunity.

Next question, Michael Rehaut with JPMorgan.

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

Well, there -- I would say that in the quarter, right, our regional, local builder business was slightly better than the production builder or a public builder business. We kind of think of the production builder business being aligned with the public. In the fourth quarter call last year, we mentioned that one of the things that we do every quarter is we measure orders and backlog at all the production builders or public builders, combined with either their guidance or consensus relative to their revenue. When we compare that to and weigh that based on our revenue with those public builders, as we mentioned in the fourth quarter call a couple of months ago, that -- based on those numbers or estimates, it came out to be a plus 3% for us on single-family revenue with the public builders. Doing that same analysis this quarter, it's a minus 3% on the single-family side with the public builders. So we think that's a fairly key or a fairly decent indicator of where the public will be, at least based on people's expectations now. We would probably expect that we're going to continue to see the regional and local build, they're doing slightly better than that just given our footprint and our experience with them. There has been a relative strength in a very -- in a weak market with some big custom homebuilders. Obviously, the custom builders are less susceptible to some of the -- both macroeconomic uncertainty and current rate environment, just given the nature of the customer there. In terms of on a regional basis for single-family, I think it's -- a lot of people have talked about this. I mean, Florida is very weak. Texas for us is still pretty solid. The West Coast is solid. We feel good about the Northeast and the Midwest, quite frankly. They seem to be pretty solid as well. Mid-Atlantic is good, not great. But clearly, our expectations for single-family on a macro level, just like everyone else's, has changed in the past couple of months, where I think we were all constructively at least flat to modestly up. Whereas I would say that we'll be at best flat, probably down mid- to low single digits on the single-family side this year.

Makes a lot of sense. I appreciate all the color on that. And then as my follow-up, I was curious on material prices like throughout the year and then into '26. How do you view those, especially with more like insulation supply coming online?

The environment continues to be very benign.

Yes. It's healthy, but certainly probably not inflationary.

With the exception, of course, there's a lot of uncertainty around the tariff impacts. Fortunately, we source very large portion -- over 90% of what we buy, we source domestically. Based on what we're -- what's been announced, combined with working with our suppliers and negotiating with our suppliers for the things that we don't source domestically, we estimate that the impact of the tariffs could be anywhere between $10 million to $20 million, which is about 1% of cost of sales for us. So it's a pretty nominal impact but it's still there. And obviously, we will work to pass on any of those costs to our customers. But clearly, it's not the best operating environment when it comes to any kind of an increased cost in an environment where you're seeing headwinds from a volume perspective.

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

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

Yes. And I would say that there are -- some of our suppliers like, for example, our big suppliers of spray foam, there's a lot of talk about MDI and the cost of some of the inputs for spray foam going up that are sourced internationally. The bulk of our spray foam suppliers source their products and their chemicals domestically. So they're not susceptible necessarily to some of those restrictions. Now one thing that we haven't factored into that $10 million to $20 million and I think is really uncertain as to what the implications will be is what, if any -- so we feel fortunate that our suppliers are sourcing their materials domestically. But because other vendors may be sourcing their materials internationally, we don't know what the impact of that will be on the overall price in the market. I mean, theoretically, a domestic distributor or a supplier would increase their price of goods if the price of the internationally sourced goods are going up because of tariffs.

[Operator Instructions] Next question comes from Susan Maklari with Goldman Sachs.

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

Yes. Thanks for that question, Sue. So within cost of goods sold, our fleet expense is basically for the installed fleet. So that includes depreciation, fuel and vehicle insurance. Because of the decline in sales and the increase in depreciation and increase in vehicle insurance, that was a headwind to the gross margin in the first quarter of about 60 basis points. While those costs are not fixed, they certainly don't -- there's not variable relative to the volume of jobs very quickly. So they have a very lagging effect from a variability perspective. Then as we had mentioned in the fourth quarter call as well, both spray foam and the other segments, so again, that's our distribution and manufacturing segment, which naturally has a lower gross margin, had better sales growth relative to the install segment. So as a consequence, those two things combined had about another 30 basis points of headwinds to gross margin in the quarter. Going forward for the rest of the year, I mean, we have talked about on a full year basis adjusted gross margin being in that range of 32% to 34%. Obviously, in the first quarter, we were at the lower end of that range. Historically, the first quarter is the lowest gross margin quarter because it's your lowest volume quarter. We would expect that to be the case through the rest of '25 as well. However, I would caveat that and say that we believe that, as we said in answer to the previous questions, that there will definitely be headwinds to volumes and demand for single-family and multifamily throughout '25.

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

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

Next question, Michael Dahl with RBC Capital Markets.

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

Sure. As you know, we don't provide guidance. But we definitely do think that there are going to be headwinds in the residential side, both single-family and multifamily, through the year, not just in the second quarter. So we think that those headwinds are going to persist unless there's some significant change in consumer confidence, we do think -- particularly on the single-family side. As we said, to the answer to an earlier question, we do think that multifamily starts have bottomed. We think that given the affordability issue that exists with single-family, it does play into the strength of multifamily in terms of people's need for housing, but looking to multifamily as a temporary step before they do buy a single-family home. As Jeff said in his prepared remarks, we feel very confident about the long-term prospects of the core residential business. And -- so we feel very good about that. But again, we're going to have headwinds throughout '25 in our opinion as it relates to both single-family and multifamily. As it relates to the commercial business, I mean, the heavy commercial business is performing exceedingly well. That business was up over 14% in the quarter, and we're continuing to see very strong, solid backlogs and bidding in that business. And we suffered through a lot of pain in that business for a couple of years and are really pleased to see how well the team is just performing and executing in the heavy commercial side. Offsetting that was a little over 10% decline in the light commercial business. As you can tell from those differences, the light commercial business is still larger than the heavy commercial business, although that will probably flip by the end of the year given the current sales trends that we expect. And we do expect the light commercial business, which is the worst performing part of our business, our end market right now, to continue to be weak. We would expect some recovery as we go into sort of the back half of the year. But when we think of it on a full year basis, the light commercial business will definitely be the weakest part of our end market segments.

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

Yes. There's no doubt that it provides a headwind to the decrementals because we -- in essence, those costs are relatively fixed. And we've talked a lot about decrementals and variable costs, and we like to think of all costs being variable over time. But the reality is that when you're looking over, say, a 12- to 18-month time frame, some of your costs are fixed. There's certain insurance costs that are fixed. In essence, brand facility costs are basically fixed. And so when we think it over sort of a 12-month time frame, we think of there being -- and I'm thinking of our total cost structure now, not just cost of goods sold, but that roughly 10% of our cost structure is fixed. About 15% of our cost structure is lagging variables. So it takes time before it adjust to changes in volume. And then about 75% of our overall costs are directly variable, the largest components of that being material and the install labor. So when you're in a situation when you have volumes decline, when you had an expectation for volumes being flat or up, fixed and lagging variable component of your cost structure really presents a significant headwind to margins and to decremental margins. And that obviously came through in our same-branch incremental EBITDA margin -- decremental margin in the quarter, as everyone saw.

Next question, Trey Grooms with Stephens.

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

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

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

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

And M&A is absolutely our priority.

Next question, Phil Ng for Jefferies.

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

So -- this is Michael. I'll talk to the first part of that question and then Jeff can kind of talk to the second part of that question, although I would say we don't expect fiberglass pricing to decline. As we've talked on numerous calls, the price/mix disclosure for us is a very complicated disclosure and there are a lot of moving pieces to it. What I would say is a couple of things. It does not include -- the price/mix and volume disclosures do not include the heavy commercial business, right? So the fact that, that business is very solid, pricing is very good and is up, it is not reflective in the price/mix calculation. What you're seeing in the price/mix calculation is, as I mentioned in the answer to a previous question, is there's definitely carryover pricing from last year that is keeping that positive, if you will, combined with the fact that the production, as I mentioned earlier, the regional and local builders are performing slightly better than the public builders within our revenue base just given the nature of our customers there. What is presenting a challenge though to the price/mix calculation, at least the way that we disclose it, is that the multifamily sales being down slightly more than the other components of price/mix is obviously a headwind to that. So what our expectation would be, and I sort of alluded to this in the answer to one of the other questions, is that if things sort of stay the way that they are, right, in terms of a little bit more pressure on -- well, significantly better than the overall market opportunity more, pressure on multifamily volumes and single-family volumes, it would continue to add pressure and headwind to the price/mix disclosure. I don't know if you want to add.

Yes. On the material side, I mean, I think it's important to kind of back up a year, if not years and look at how tight things were. I mean, it really got to the point where it was inefficient. It was harder for us to do business. There were certain SKUs we couldn't get. We were -- we talked about before having to go to distribution sometimes and even the big boxes in terms of supply and material. So I'd categorize this as moving closer to having an efficient market. It's still fairly healthy despite the year-over-year decline. And quite frankly, it's kind of working the way it's supposed to.

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

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

It's job one.

Next question, Ken Zener with Seaport Research.

Michael and Jeff, feel -- one or two, feel free to chime in. I think you've made some very, again, limited comments about the market, and you're talking about demand, public and private. So I just would like to get your, question one, concept of right supply and demand. So we all can see what the publics are doing. And I think you broadly reflected that. But I'm surprised, on the supply side, the Census data talks about units under construction closer to [ 380,000, 390,000 ] versus the long-term average of 280,000. And it seems that that's more on the private side where you have that excess. So can you think the strength you're seeing in the privates versus the apparent high supply that they have, if you would? Or do you think the data is wrong versus your perception of privates?

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

Correct.

So I would just say that over the past 2 quarters, our experience has been that the sales level with the regional and local builders has been better than it has been with the production builders. Now in the beginning of last year, that was not the case. The production builders -- the production builder business was pretty solid. It's still solid now, but I'm just talking about it on sort of a relative basis. In terms of there being a lot of excess inventory at the regional and local builders, I really don't think that's the case, quite frankly. At least that's not our experience and that's not the feedback that we're hearing.

Very interesting, because the census that at least present something different. So I appreciate that. You gave comments -- I know you don't give guidance, but you did highlight that 1Q gross margin tends to be the lowest structurally. And we saw SG&A, which also tends to be the highest in 1Q, and that was up about 100 bps. You talked about $15 million targeted savings. But is it fair to assume the 100 basis point SG&A headwind we saw in 1Q and kind of persist, if you think about it year-over-year as the year progresses? As well, if we could hear your gross margin comments to SG&A, that would be very helpful.

Yes. I mean, the difficult thing is that, say, let's just take G&A, for example, G&A is relatively static. And we talked about this in the fourth quarter call earlier this year, is that we expect G&A, absent these targeted reductions that we're making, we expect G&A to grow with general inflation really outside of what's happening with volumes, generally speaking, right? Because it is -- we think of it as a dollar amount and not necessarily as a percentage of revenue, right? So if you look at the adjusted selling and administrative expense increase from the first quarter of last year to the first quarter of this year, the dollar increase was about $6 million. Of that $6 million increase, $4.4 million was related to acquisitions because, obviously, acquisitions come with selling and general and administrative expense of their own and then the start-up costs associated with the internal distribution efforts that we've talked about now for a couple of quarters, which is going very well, by the way, but there still are start-up costs associated with it. So our objective in G&A, kind of going back and forth between SG&A and G&A here, but G&A, generally speaking, is running between $105 million to $110 million a quarter. And it's our objective on an annualized basis to be able to get that down by, say, $15 million, although there will continue to be inflationary pressures within G&A. So we're working, as Jeff said, and it's absolutely true. Job #1 for us is to optimize G&A. And we're working on that, and we will continue to work on that throughout the year.

Next question, Adam Baumgarten with Zelman & Associates.

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

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

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

I mean, the manufacturers are capable of regulating the amount of materials that they produce. I mean, clearly, there's been some small amount of curtailment already because they like -- obviously like to see the market be healthy. And they're not going to make material that they can't sell and not want to sell at the price that they can sell that. So it's a little bit rational in that way, as you would expect in terms of supply.

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

Yes. We're continuing -- we always evaluate sort of the opportunity to bring branches together because it can be -- especially when we're doing these sort of small tuck-in acquisitions that we do that we don't really talk about. I mean, that's part of the strategy of doing them, is being able to combine locations. And we have 3 or 4 locations right now that we're looking to combine. But that's just part of our sort of everyday management of the footprint to make sure that we're optimizing it as best as possible. I mean sometimes you'll stay -- if you have a lease that you're sort of stuck in, you might keep it open a little bit longer than you want to. But we really try to optimize the footprint as best as possible.

Jeff Stevenson with Loop Capital Markets.

So first, on the strong heavy commercial results during the quarter. Was a portion of that demand trend driven by previous delayed large commercial projects moving forward since the start of the year? And would you expect that trend to continue moving forward?

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

Got it. Okay. Understood. And then healthy installation price mix during the quarter, which was great to see, and thanks for all the color expectations on fiberglass pricing moving forward. But just shifting to spray foam, did you see any sequential improvement in the quarter? And what are your expectations for pricing trends moving forward?

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

Next question, Collin Verron with Deutsche Bank.

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

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

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

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

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