Installed Building Products, Inc. (NYSE:IBP)
Q2 2016 Earnings Conference Call
August 5, 2016 9:00 AM ET
Jason Niswonger - SVP, Finance and IR
Jeff Edwards - Chairman and Chief Executive Officer
Michael Miller - Chief Financial Officer
Robert Wetenhall - RBC Capital Markets
Susan Maklari - UBS
Trey Grooms - Stephens Inc.
Kenneth Zener - KeyBanc Capital Markets
Nishu Sood - Deutsche Bank
Scott Rednor - Zelman & Associates
Judy Merrick - SunTrust Robinson Humphrey
Greetings and welcome to the Installed Building Products Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce to your host, Mr. Jason Niswonger, Senior Vice President and Investor Relations. Thank you. You may begin.
Good morning and welcome to Installed Building Products second quarter 2016 earnings conference call. Earlier today, we issued a press release on our financial results for the second quarter, which can be found in the Investor Relations section on our website.
On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements include the demand for our services, expansion of our national footprint, our ability to capitalize on the new home construction recovery, our ability to strengthen our market position, our ability to pursue value-enhancing acquisitions, our ability to improve profitability, and expectations for demand for our services for the remainder of 2016.
Forward-looking statements may generally be identified by the use of words such as, anticipate, 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 in or suggested by the forward-looking statements as a result of various factors, including, without limitation, the factors discussed in the Risk section of the Company's Annual Report on Form 10-K for the year ended December 31, 2015 as the same maybe updated from time-to-time in subsequent filings with the Securities and Exchange Commission.
Any forward-looking statements 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 the non-GAAP performance measures, adjusted EBITDA, and adjusted net income on this call. You can find a reconciliation of such measures to the nearest GAAP equivalent in the Company’s earnings release, which is 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.
Thanks, Jason. And good morning to everyone joining us on today’s call. I am happy to have the opportunity to talk to all of you about our second 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 who will discuss our results in more detail before we take your questions.
Following a very strong first quarter, our financial results strengthened significantly in the second quarter and we experienced another quarter of year-over-year growth in net revenue, same branch sales, and profitability. Our results continue to benefit from strength throughout the homebuilding industry, growth at our existing branch locations, and the contribution of our recently acquired businesses. Our results represent the strongest quarterly revenues and profitability in our history. With the first time quarterly revenues exceeded over $200 million, these accomplishments are a result of the continual improvement in the housing market in another quarter of outperformance to the market. This record performance is a direct result of the strong local market presence of our branches and the hard work and experience of our teams.
Second quarter total revenues were $212 million, compared to $160 million in the second quarter of last year and $192 million in the first quarter of 2016. Solid organic growth, the contribution of our recent acquisitions and improvements in the rate of housing completions continued to favorably influence revenues which were up 33% compared to the second quarter of last year. The higher revenues we experienced in the second quarter combined with controlled spending and a more favorable mix of installation services helped improve our second quarter profitability with a 54% increase in net income, a 48% increase in adjusted EBITDA and a 48% increase in adjusted net income per diluted share.
As many of you are aware, our business model generates a significant amount of cash from operations and I am encouraged that operating cash flow increased 135% to $36 million during the six months period ended June 30, 2016. As the housing recovery remains on track, we are continuing to invest our operating cash flow in the business to support our growth initiatives and fund our acquisition strategy.
We continue to believe the recovery in the US housing industry has room for ongoing improvements. According to US Census Bureau’s historical data in the June 2016 blue chip consensus forecast for housing starts, total US housing starts are forecasted to increase at a 9% compound annual growth rate from 2015 to 2017.
During the 2016 second quarter, total US housing starts increased 1.1% and single-family starts increased 7.3%. We continue to expect residential end-markets to benefit from various factors including stable employment, rising household formations and historically low mortgage interest rates.
Our core single-family branch sales grew over 13% in the second quarter of 2016 and outpaced the market growth of the US single-family completions of approximately 11%. We have outperformed the market in each quarter as a public company which speaks to our customer loyalty and leading market position in some of the strongest US housing markets.
We also continue to benefit from our national scale, long-standing supplier relationships and a broad customer base that includes production and custom homebuilders, model family and commercial contractors and home owners. Year-to-date, IBP’s single-family same branch sales have increased nearly 20% compared to growth in total US single-family completions of approximately 14%.
Turning to our acquisition strategy, acquisitions continued to enhance our financial performance and represented 48% of second quarter revenue growth. In the second quarter, we completed the acquisition of Alpine Insulation based in Sheboygan, Wisconsin. Alpine has five operating locations throughout the state and had approximately $24 million in revenues in 2015.
We also recently acquired FireClass, L.L.C. in Detroit, Michigan. FireClass sells complementary products predominantly to the new single-family market with trailing-twelve month sales of approximately $4 million.
With our strong cash flow and approximately $213 million of capacity under our existing bank facilities and available cash, we have significant liquidity to fund our acquisition strategy. We have a robust pipeline of potential deals over the next 12 months and we anticipate 2016 will be another strong year of acquisition growth.
I am extremely pleased with 2016’s record second quarter and very strong first half results and I am excited about our business prospects for the remainder of the year. With two quarters to go, we are encouraged by our financial and – performance and anticipate 2016 to be an another terrific year.
I would now like to turn the call over to Michael to provide more details on our second quarter results.
Thank you Jeff, and good morning everyone. We continue to make significant progress in growing revenue and improving profitability.
For the second quarter, net revenue increased 32.7% to $211.9 million. Our same branch sales improved 16.9% due to an increase in volume in all of our end-markets and favorable improvements in price and mix.
Our same branch single-family sales growth of 13.2% exceeded the 11.3% increase in single-family US housing completions during the second quarter as a result of the dedication and commitment to quality insulation services of our local branches.
Second quarter 2016 gross margin increased 40 basis points to 29.4%, compared to 29% in the prior year quarter and was up 90 basis points compared to the 2016 first quarter. The year-over-year and sequential improvements were primarily due to operating efficiencies and a more favorable customer and product mix than the comparable periods.
For the 2016 second quarter, selling and administrative expenses as a percent of net revenue was 20.2% compared to 20.9% for the 2015 period. As a percentage of revenues, administrative expenses declined to 14.6% in the second quarter from 15.4% in the second quarter of 2015. We expect administrative expenses as a percent of net revenue to continue to improve over time, as we further scale our operations and benefit from higher sales.
As we have 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 second quarter, we recorded $2.8 million of amortization expense an 89.2% increase over the prior year period and a 13.4% increase over the 2016 first quarter expense. This non-cash adjustment impacts net income, which is why we believe adjusted EBITDA is the most useful measure of profitability.
Based on acquisitions completed to-date, we expect third quarter 2016 amortization expense of approximately $2.9 million and full year amortization expense of approximately $11.1 million. These figures will change with each subsequent acquisition.
For the second quarter of 2016, adjusted EBITDA improved to $26.2 million representing an increase of 48.2% from $17.7 million in the prior year.
As a percent of net revenue, our adjusted EBITDA improved 12.4% in the second quarter representing an increase of 130 basis points from 11.1% in the prior year quarter and a 230 basis point increase from the 2016 first quarter.
We are pleased with the successful steps we have taken to enhance our operating efficiencies and significantly increase our adjusted EBITDA margin. We continue to believe our financial model can produce full year incremental adjusted EBITDA margins of 20% to 25%.
However, as we have stated on previous calls, the mix of organic and acquired revenue impacts our combined incremental adjusted EBITDA margin and a higher contribution of revenues from acquisitions can temporarily reduce our overall incremental adjusted EBITDA margin.
In the quarter, our combined incremental adjusted EBITDA margin was approximately 16.3%, while on our same branch sales growth, our incremental adjusted EBITDA margin was 22.2% for the quarter.
We continue to believe our same branch sales growth in excess of total market completions combined with the adjusted EBITDA contribution from our acquisitions will allow us to achieve adjusted EBITDA margins in the mid-teens as the single-family housing market approaches stabilization.
On a GAAP basis, our second quarter net income was $10 million or $0.32 per diluted share, compared to net income of $6.5 million or $0.21 per diluted share in the prior year quarter.
For the second quarter, our adjusted net income improved to $10.7 million or $0.34 per diluted share, compared to $7.2 million or $0.23 per diluted share in the prior year quarter.
For the second quarter of 2016, our effective tax rate was 33.2% compared to 36.4% in the prior year quarter. For the full year, we expect an effective tax rate of 35% to 36%.
Now moving onto our balance sheet and cash flow. At June 30, 2016, we generated $36.2 million in cash flow from operations, an increase of $20.8 million, or 135% from the prior year. We continue to use this cash flow to fund acquisitions and reinvest in our business.
Capital expenditures at June 30, 2016 were $13.4 million while total incurred capital leases were $2 million. As expected, capital expenditures and incurred capital leases increased consistently with the year-over-year increase in our revenue.
At June 30, 2016, we had total cash of $13.7 million, compared to $6.8 million at December 31, 2015. We currently have nothing outstanding on our $100 million revolver and $112.5 million of capacity under our delayed draw term loan providing us 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.
Thanks Michael. Well, I think that pretty well sums up the numbers and drivers of what was another fantastic quarter and as you can see our growth-oriented business strategy continues to drive strong financial results. With the housing industry continuing to demonstrate improving trends, we are excited about our opportunities for 2016 and beyond.
Operator, please open up the call for questions.
[Operator Instructions] Our first question is coming from Bob Wetenhall of RBC Capital Markets. Please proceed with your question.
Hey, good morning and very nice results this quarter. I wanted to ask you, we’ve had commentary from OEMs about capacity constraints impacting the industry and I know this is something you guys have seen before and I wanted to understand how you anticipate the price volume dynamic evolving if capacity becomes constrained on the production side and what you guys do to optimize the business mix if we go into that kind of market?
Hey Bob, this is Michael. How are you? We feel very good about our ability to improve that business mix we think which is demonstrated by – if you look at both the volume growth and particularly the price mix growth that we’ve seen in the first half of this year going up approximately 9% and that’s on the backdrop where the OEMs have sufficient capacity to get things done or to supply the industry.
So, as and if they get to a point where there is tight capacity and we do see sustained material price increases, we believe that helps us even more, but as a company, we’ve demonstrated a very strong ability to continue to improve our price mix regardless of what’s going on at the OEM level.
And, Bob, this is Jeff. But, I mean, it would obviously be a positive development for all the reasons why everyone would expect it to be, that would mean obviously the builders are busy, we are busy that consumers are feeling good enough about things to buy houses.
So there is a lot of good things that happen in the backdrop, but we as a company are in this obviously for a long haul, the long haul – and our customers are our partners. So, I don’t – we don’t look at this in a way in which it’s our job to be completely opportunistic at all, because again, we are in this for long haul, we want to do the best job we can for our customers.
We obviously want to reflect any cost increases we have in or in the business to make money but at the same time, this is not something we are thinking about tomorrow’s sale and not the next day or tomorrow’s customer and switch them up, so.
That’s helpful color. Maybe then, if you could just help me understand very nice price mix, if you look at stuff on a like-for-like basis, what was the split basically between pure pricing versus improved mix that Mike called out?
And also, it seems like you are doing great in terms of market share growth and if you could comment on what’s going on with market share gains and how you are getting it and why you are outperforming the industry?
Bob, as you know, we really haven’t broken down the price mix between pure price and installation jobs, because every job we do is a little bit different. We would say that, clearly there is some benefit on our price side, but at the same time, and we’ve been consistent in saying that, for the past couple of quarters, we are clearly benefiting as a company within the single-family business with the shift towards the local and regional builders.
We are seeing good strength from both a price mix growth there and also volume growth within that customer base and we think that’s critical to the market on the single-family side reaching stabilization.
That being said, and as you can tell from what we disclosed in the earnings release today, our same branch sales growth for the quarter was approximately 17% whereas our single-family same branch sales growth was about 13%.
So obviously what that implies is that we had higher growth on a same branch basis from our other end-markets and we clearly did see outsize growth if you will, in both multifamily and commercial during the second quarter and also on a year-to-date basis.
So, we feel very positive about the trend that we are seeing in the business on a go forward basis for not just the back half of 2016, but going into 2017 and 2018, excuse me, as the single-family market really starts to come back.
Encouraging commentary. Thanks for the great answers. I’ll hand it over.
Thank you. Our next question is coming from Susan Maklari of UBS. Please proceed with your question.
Good morning, Susan.
Good morning, Susan.
The incremental margin was right sort of in that 18 range, but it did seem to take a step down from where we were in the first quarter. As we sort of look through the back half of the year and just given the fact that maybe that catch-up that you had in the first quarter is behind us a bit. Should we be thinking about that staying in this mid-teen range or how do you expect that will trend?
Susan, this is Michael. So, we definitely and consistently have stated and there is nothing to make us change this perspective that on the same branch organic basis, we believe that on a full year basis, incremental EBITDA margins will be in that 20% to 25% range. As you know, we’ve been trending a little bit towards the higher end of that range.
But we feel very good that the incremental margins will stay, sort of consistent with where they’ve been. On the acquired EBITDA, obviously, the EBITDA margin contribution from acquired businesses is wholly reflective of the businesses that are acquired.
So if we acquire a business with a five margin or a ten margin or a fifteen margin, that impacts the incremental margin or the margin associated with those acquired businesses, which then as we said in the prepared remarks influences significantly what the total EBITDA margin contribution is.
So, really the – again the, and I am sorry for maybe blabbering this point, but the organic business consistently 20% to 25% incremental and the acquired businesses they come in at what the acquired businesses are.
And that mix will change over the course of the year and over the course of the quarters as different profitability of different businesses have a different impact within a quarter on those numbers.
Susan, this is Jeff, but, I mean, in addition to that, there are – I’ve said this before I think and maybe even a number of us have, but we perform a number of – let’s just take inflation for example, we perform a number of functions or kind of installation services around insulation for our customers.
And I think we’ve explained it before, sometime we are out earlier in a job and we are doing work to prep the job or we are doing basement drake or we are doing one of the other functions we perform and then typically we are back into the house to do that work and then towards the end of the process.
Obviously, we are in to blowing the attic and there is a difference in the profitability of those various functions that we perform and quite frankly, blowing the insulation in the attic is one of the most profitable functions that we perform and we would consider the second half of the year to be kind of low season.
So, we have the benefit of that, that’s kind of a historical norm for us. But that’s a really typical to the industry, so it’s an addition to be seasonal just from a volume and revenue flow, it’s also seasonally better for us in terms of the functions that we perform in the latter half of the year also.
Okay, thank you. That’s helpful. And then, in terms of the M&A, I know that you talked about having us strong pipeline there. It does seem to have like perhaps that there is a little bit quieter in the second quarter. Can you just talk a bit to what you are seeing out there and how things are going on that front?
Sure, and we are still exactly it is ever really on the - both the sourcing side and working deals that are currently in the pipeline. But, you are not always in time in charge of the timing of when you actually get a deal to close. But I think we feel it’s positive as ever about the number of deals that we’re in conversation with the pipeline and the opportunity to source other deals too.
Okay, thank you.
Thank you. Our next question is coming from Trey Grooms of Stephens. Please proceed with your question.
Hey, good morning.
Good morning, Trey.
Good morning, Trey.
I guess, the one I’ve got is going to be more high level. Just kind of around your demand outlook and it still sounds very positive with others that have reported in kind of the building material space, there has been some chatter about flattening or deceleration relative to expectations, that sort of thing as far as just the outlook goes.
Can you talk about, as far as you guys in your market specifically looking into next year or just your view on the rate of recovery overall, any change there with your outlook?
If anything that become more positive, quite frankly, I mean, if you look at what we think on a some of the forward leading indicators on the single-family side in terms of builders orders, construction lending at banks, just metrics builder optimism and builder sentiment, I mean, all those things in our opinion, maybe we are reading that incorrectly.
But they point to a very strong continued strength in the single-family market. And as you know while there is a large amount of multifamily work that is being done right now, because multifamily really reach stabilization very quickly.
There is still a lot of room to run on the single-family side and as I said earlier, we are seeing great strength among that regional and local builder, which really provides us a lot of confidence in the ability of the housing economy to get back to stabilization on the single-family side.
So, we feel better than we ever have. We couldn’t feel really any better about kind of the way that we are positioned after the first six months of the year and the way that we believe the market is going to perform for us the remainder of the year. Our branch managers, our local team is doing a excellent job of managing with very high growth rates and making sure that we are servicing our customers effectively and managing the balance of business that we are doing.
So we see, on a year-to-date basis, price mix growth of 9%. And so, we feel very, very good about the business and about the trends we are seeing in the business. I would say, even to add to that, one of the things that has been very encouraging to us is the strength that we are continuing to see in both the commercial and repair and remodel side of the business.
Right, that’s really encouraging and glad to hear it. And forgive me if I missed something here – I got dropped off or had to hop off for just a second on the front-end of the call. But, as we look into the back half of the year, given the acquisitions that you’ve done, is there any, or any other factor that that might drop some differences here?
Is there anything that we need to be aware of as far as cadence as we look into the back half of the year, why, any reason for it could be different to than what we’ve seen in the past from you guys just from a quarterly cadence standpoint?
You mean, on the acquisition front, or?
I’m sorry, just on, really the sales front, in looking at how the quarterly sales progressed through the year and the cadence that we’ve seen in the past and the quarterly allocation that we’ve seen in the past, is there any reason, given the acquisitions that you’ve done geographic or whatever that that could be any different?
No, we didn’t expect to have a sort of typical second half seasonality. Although as we commented on the first quarter, I mean, clearly we had and the industry had an outsize on a seasonal basis first quarter. I mean, I think that, the story this year maybe is not a quarterly story, but a half story.
So, if you look at first half results relative to second half results, I do think you will see a similar level of seasonality, but probably not as extensive as you saw in the first half of 2015, compared to the second half of 2015, just because I think, most people had sort of a weaker first quarter 2015.
But on the results, in the scheme of things, given the size of the numbers that we are talking about here, because the first quarter was a little stronger and we explained that it – that obviously we benefit from the weather it’s still on the scheme of things, it’s not materially different from a seasonality of the business.
And I would say that in the back half of the year, the largest acquisition that we’ve done so far this year Alpine will fully contribute in the back half of the year whereas it only partially contributed in the first half of the year.
Okay, great. That’s super helpful, guys. Thanks a lot and good luck.
Okay, thank you.
Thank you. Our next question is coming from Ken Zener of KeyBanc Capital Markets. Please proceed with your question.
Good morning gentlemen.
The growth rate for your same branches exceeding single-family indicates obviously, higher growth in this category. Can you talk about – I mean, since you are talking about operating leverage more in the sense of acquired revenue versus your organic, which I understand.
Is there that you highlighted it’s attic blowing insulation is more profitable, well, a more profitable activity. Is there really much margin mix between that commercial repair versus the new?
I mean, how should we think about that, I mean, that’s something that I don’t really thought about, I mean, you also seem to talk about the incremental leverage in your existing branches. So the commercial – the multifamily people obviously focus on, but is there much of a difference between those in commercial or the repair the remodel to multifamily?
Yes, that’s good question. So, on multifamily, generally speaking, you are going to have a slightly lower gross margin, but your cost of service is different, so the EBITDA margin contribution is similar. On repair remodel, you are going to generally speaking have a higher gross margin, but, again, your cost of service is higher in that business.
So, you are going to have very similar EBITDA margin contribution. And then the commercial side of the business is similar to the multifamily and that you may have lower gross margin, but your cost of service below gross margin is going to be less.
So that’s ultimately where you end up is that, all of our end-markets have very similar EBITDA margin contribution, which is why we talk about…
So – go ahead.
I was going to say, which is why we talk about the consistency in that 20% to 25% incremental EBITDA margin, it’s not really influenced by the mix of the end-markets, because they all come in at – generally speaking at similar EBITDA margin contribution.
Right, so, that’s right. The volatility in the gross margin or the SG&A, I mean, it’s – okay, that’s a good point. I mean, the gross margin step-ups might not be as, perhaps steady, but you are getting the benefit on the G&A side, which ultimately is the same leverage.
How long then, I mean, and I appreciate that, the price mix, some public peers reported as you know, in the distribution side the pricing appear to be down year-over-year, which is interesting to the extent that, your price mix why you are not breaking it out would suggest in fact that your price mix is higher than the stated 6.8% in this last quarter.
Is that a reasonable conclusion? And if so, I mean, how long can we call sort of price mix just can those go on for ever as you continuously add more value, because they see your labor is a very attract – and you are showing up on time it’s a very attractive value proposition?
Yes, we believe that our service at the local level in the way the team is performing at the local level is one of the things that’s very important to us to be able to get a good solid price mix appreciation and historically, we’ve done that at an above market level, if you will.
And we believe that our focus on profitability and not sales and as Jeff was saying earlier, our focus on the customer relationship for a long term is critical for us to continue to maintain, which we have historically a good price mix increase.
Thank you. Our next question is coming from Nishu Sood of Deutsche Bank. Please proceed with your question.
Thanks. Just going back to the acquisitions, so the pace – the acquired revenues to-date this year is, I think about half of what it was last year, and obviously that there is no reason there should be a flow to that, but I wanted to revisit the broader thought process that you’ve laid out that, this is still a – this has been a good time still for you folks to be acquiring since there is still so much growth left in single-family in particular.
Is that still the case? Or is this lower pace an indication that you think there is some maturing of the cycle and then maybe it’s time to begin to slow down?
No, Nishu, this is Jeff. Not at all in that way. This is just, anytime you’ve got human beings involved in a situation like this, and people making – in most cases are very important life decisions from a seller perspective about things like this.
You can’t absolutely control the pace of those deals. Again, we feel great about the pipeline. We feel great about our opportunities. We’ve acquired after this last acquisition of – FireClass now?
FireClass, the fireplace business in Detroit, I think we’ve acquired roughly 50…
Up $50 million.
Maybe little more than that dollars of revenues through the first half of the year and we feel great about continued pace. It would be kind of not dissimilar to what we even had last year. So, it’s just really a timing issue from our perspective.
And timing not necessarily from us in terms of the ability to get them done. It’s exactly is Jeff said, I mean, these are big decisions for individuals and that timing sometimes you cannot control like you may want to and I guess, acquisitions by their nature are very lumpy.
And as we’ve said on several occasions, our acquisition process is purposefully very high touch from our team to their team to that we know that there is a good strong cultural fit between the organizations. And that takes time.
Got it. Thanks, so that makes sense. And second question, strong job numbers today. There have been some wide ranging instances labor rates finally moving at the lower two income quintile.
That’s kind of squarely in the area that you will be hiring, you do hire so, has there been any pressure that you’ve seen on wage rates, especially as you have the new folks you are bringing in with all the growth that you’ve been having? And what’s your thought process there or concerns or how are you handling that?
I mean, we feel very good about our local team’s ability to continue to attract and source high quality installers and personnel at the branch level and we think that’s reflective of both our same branch sales growth, our volume, our product mix and as well as our improvement in gross margin.
As we said on several calls, there is a positive feedback loop associated with our labor and the way that we pay our folks that the busier we are and the more efficient we are, they earn more money without it costing us more as a percentage relative to the cost of a job. So, we continue to be in that situation.
We feel, not that it’s not something that we are working on every single day and our team in the branches is working on every single day, but we feel very good about our ability to continue to grow at these rates and higher rates and attract the high quality installers that we need to get that done.
Got it. Thanks and appreciate the feedback loop on one someone is in the door, but so, it doesn’t sound like though either that you are facing issues in terms of getting people in the door at the outset where they maybe comparing across a range of job opportunities?
Not more so than we would every single that we have done every single day since we’ve been in this.
Sir, do you have any additional questions?
No, I am sorry, Jeff, Jeff, I would like to hear your thoughts as well.
I don’t think we are seeing anything appreciably different, to be honest with you and really completely independent of the current labor situation. We’ve talked about labor being tight both internally and externally for probably 3, 3.5 years at this point.
But, we are – this is a company and as they – I wouldn’t call in the size, because obviously it’s very public information, but, we are going to double down on an effort in terms of really making the job and the way that we are sourcing people to perform the job.
The absolute best process in the best environment that we can in an effort to – I mean, our retention rate and our turnover rate is no different, I think than industry average and it’s not different really from most all construction jobs. At the same time, we can do better in that regard and so, I think, we are making a corporate effort to try to improve that process and try and move the needle little bit from a retention perspective, which would really be good for everyone involved, both the employees and for the company.
Okay, thanks for your thoughts.
[Operator Instructions] Our next question is coming from Scott Rednor of Zelman & Associates. Please proceed with your questions.
Hey, good morning, Mike and Jeff.
A question – Mike you wanted a public comment, I want to see you in publicly in last quarter some seasonality would look a little different this year, because of weather and obviously the deceleration in same branch growth was more than what the street was looking for.
So when you look to the balance of the year, should we expect that growth rate from Q2 to be stronger as we look to 2H 2016 or is this kind of a sustainable run rate?
Well, Scott, as you know, we don’t provide guidance, but as we said earlier, we do think there will be typical seasonality in the back half of the year. But that, because of the strength of the first half of this year, it may not be as typical as we saw in 2015 or even 2014.
But we feel very good about going into the back half of the year with what we are seeing in our customer base. What we believe is a backdrop for a strong – to the whole industry as a whole, for very strong single-family growth from the things that we had talked about earlier.
So, while we don’t specifically provide guidance, we definitely feel we are going to see a positive relative to the second half of the year from a seasonal perspective. So, I am not providing you, maybe as much detail if you want.
Sorry about that. But, we definitely feel good about the business and the trajectory that it’s on. And again, not just for the second half of this year, but for what looks like a good 2017 and 2018.
And Michael, maybe just to slice it in other way, I think you might have qualitatively alluded to this, but if we sort through the quarterly volatility that we as analysts and investors see to the first half of the year, is the underlying sales growth better or worst than what you’ve planned coming into the year?
Our sales growth is very, very consistent with what we plan, very consistent with what we plan. I would say the only thing that’s slightly different is the mix – that end-product mix is better in multifamily commercial and repair and remodel than we had originally estimated and I think that is a function of timing in terms of the timing of what we have the opportunity to work on and also our branches’ ability to perform very well on those other end products and are focused on those products.
I mean, as a business we are continuously working to diversify the end-products and the end-markets and we believe our branches are doing a very good job getting that done. So, they are exceeding our expectations in that instance and we believe the back half of the year is setting up for a good solid single-family recovery.
Again, the signs that you see from builder order growth from bank lending growth on ADAC loans and builder sentiment it’s just – and given what we are seeing from our customers, there is nothing that gives us cause or concerns relative to the continued strength in the single-family market.
Great. And then, on the acquisition margins, you are trailing last year by several 100 basis points. I was curious if there is anything we should be aware of as we look forward in terms of those contributions from the new deals?
And then alternatively, I would guess that your returns on your investments are actually higher, buying more dilutive assets. So, should your incremental EBITDA for the legacy business maybe be stronger as we look forward if you are buying not as profitable business since day one?
There is really – I mean, there is a difference between the two in terms of the way that we break it out. So the incremental margins of 20 to 25 on the organic business, we still think it’s a good way to look at it. I mean, clearly as we bring into the organic business or organic numbers, acquisitions that we could only acquire them with our scale buying advantage had a very high margin, that obviously helps our overall margin in the organic business now that they are not considered acquired as well.
But, I need to stress as we have on other calls that, the acquired margin is what we acquire at the time of acquisition plus our scale buying advantage. So, our expectations relative to what the acquired branches are doing right now is consistent with what we expected, because we knew what we acquired.
Quite frankly, to some extent, the lower contribution margin from acquired businesses that you are referring to present additional opportunity for us in terms of improving those margins, not just from a scale buying advantage perspective, but also from operational issues that we are working on at some of those acquired entities.
I’d say improvements. In terms of the any operational, I mean, we know what we are buying going in. It’s kind of an interesting, we don’t talk a lot about deal economics. It’s more about kind of the forward and I understand why from your perspective and others in terms of modeling.
But, we as a group kind of had a conversation about this to the day that the fact of the matter is typically, obviously for buying a business is what’s profitable or paying less for that business and it doesn’t really talked about losses. So, ultimately, from our perspective, buying businesses that are less profitable and you hit at it this a little bit earlier.
But, depending on the deal, depending on some of the attributes, whether it’s material advantage or whatever else, it can be a very good – very good long-term deal for us to buy what’s profitable business.
So should we see that maybe help your core incremental, your legacy incremental as we look to 2017 if the acquisition margins that you are acquiring continue to run lower than last year? Could that help you push closer to the 25% and 20%?
Yes, it’s – it will, but it’s so small that it certainly wouldn’t change our perspective on that 20% to 25% full year, because you are looking – I mean, these are things that represent single-digit percentage of overall revenue.
Okay, thank you.
Thank you. Our next question is coming from Judy Merrick of SunTrust Robinson Humphrey. Please proceed with your question.
Thank you. This is Judy in for Keith Hughes.
Just a follow-up on the labor question, did you have any – you seem you extended construction cycles, maybe varying by region or do you think the depletion rate kind of normalize? Any comments there and maybe even from other trades from here?
I mean, if you look at just starts versus completions, for the first half of the year, the delta between starts and completions on the single-family side was very consistent from 2016 to 2016 at about 85%, 86%. If you look at starts versus completions on the multifamily side, there was what we would say is, somewhat meaningful on improvement in the start to completion lag. So, in 2015, for the first half it’s about 72%.
This is again on the multifamily side and in 2016, it lifted to about 79% for the first half. So, what that would indicate is that the lag within single-family on national basis is fairly consistent from 2015 to 2016.
But that we are catching up on the multifamily side, which makes a lot of sense when you think about it given the ramp up, the significant ramp up in multifamily starts that occurred significantly last year and that the deceleration are slowing off the growth of multifamily starts that there would be this catch up and that’s reflected in our earlier comments of the high same branch multifamily sales growth that we experienced not just during the quarter, but during the first half.
Right, okay. Thanks.
Thank you. At this time, I’d like to turn the floor back over to management for any additional or closing comments.
I have none, Michael?
Thank you. We look forward to our next quarterly call with all of you and again, appreciate your time. Good bye.
Thanks very much.
Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.
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