Installed Building Products, Inc. (IBP) Q3 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Installed Building Products Fiscal 2020 Third Quarter Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Jason Niswonger, Senior Vice President, Finance and Investor Relations. Please go ahead.

Good morning, and welcome to Installed Building Products' Third Quarter 2020 Conference Call. Earlier today, we issued a press release on our financial results for the third 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 statements with respect to the housing market and the commercial market; industry conditions; our financial and business model; our efforts to manage material inflation; our ability to increase selling prices; the demand for our services and product offerings; the impact of the COVID-19 crisis will have on our business and end markets; expansion of our national footprint, products and end markets; our expectations for our end markets, including our large commercial business and multifamily; our ability to strengthen our market position; our ability to pursue and integrate value-enhancing acquisitions; our diversification efforts; our growth rates and ability to improve sales and profitability; the impact of the COVID-19 crisis on our financial results; and expectations for demand for our services and our earnings in 2020 and 2021. 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 certain factors, including, without limitation, the duration, effect and severity of the COVID-19 crisis; the adverse impact of the COVID-19 crisis on our business and financial results; the economy and the markets we serve; general economic and industry conditions, the material price environment and the timing of increases in our selling prices; and the factors discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2019, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission. 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 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, adjusted gross profit margin and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website. This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer. I will now turn the call over to Jeff.

Thanks, Jason, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights on the quarter and then turn the call over to Michael Miller, IBP's CFO, who will discuss our results and capital position in more detail before we take your questions. 2020 is shaping up to be a record year, reflecting the success of our business model, the positive fundamentals underway across many of our end markets and the dedication, hard work and resiliency of our employees. IBP's strong operating and financial performance is encouraging given the unprecedented economic and social effects that COVID-19 pandemic has caused throughout 2020. I'm also excited by the long-term opportunities within our residential and commercial markets as a result of our ongoing geographic end market and end product diversification strategies. As an organization, we remain focused on supporting our employees, customers and suppliers across the country. While ensuring our business is well positioned to withstand the impacts of the COVID-19 crisis as well as other natural disasters and business disruptions that occur from time to time. Across our national footprint, our branches continue to follow federal, state and local requirements in response to COVID-19, and I am pleased to report all IBP branches remained open during the quarter. In addition, the 2 hurricanes that made landfall in our Gulf Coast markets during the third quarter did not have a noticeable impact on our sales and profitability. Overall, our record third quarter financial results continue to highlight the strength of our business plan, the power of our financial model and our core operating values focused on supporting our employees and customers. I'll use my time today to review these items and why we believe IBP is extremely well positioned for the current market environment as well as the long-term opportunities we have to create sustained growth and value for our shareholders. Revenues during the third quarter were up over 6% and year-to-date are up over 9%. And when I look back at our business over a long period, I'm encouraged that our 2020 third quarter revenue is higher than what our full year revenue was prior to our 2014 IPO. We believe this success is a direct result of our focus on strong U.S. housing markets, our sales of complementary building products and our greater presence and participation within the multifamily and large commercial construction end markets. IBP's current geographic footprint continues to provide us access to nearly 70% of total residential permits compared to approximately 50% 6 years ago. During the quarter, single-family completions in the U.S. increased 2.6%. Analyzing market data and our results, we believe the lag between starts and completions has increased as a result of the COVID-19 pandemic due in part to labor and material shortages impacting other construction trades within the industry and a delay in homebuilding returning to full production following the COVID disruptions earlier this year. We believe these timing factors have impacted the comparability of our sales to the rate of completions in just one quarter. Typically, we see our largest volume of insulation installation during the third and fourth quarters of the year. In the 2020 third quarter, we benefited from a higher mix of complementary product sales, which are typically installed later in the production cycle than insulation, further indicating a longer production cycle and the conversion of industry backlog to completions. While we anticipate a return to normalcy in the coming quarters, the increased lag between starts and completions and the dramatically increased order volumes from our builder customers will have a more meaningful impact on our business in 2021. During the quarter, multi-family growth remained strong and helped drive a 1.6% increase in same-branch residential sales during the third quarter. Given the timing of completions and when we perform our install work, we believe it is useful to analyze our performance over multiple quarters. Looking over the 9-month period ended September 30, 2020, residential same-branch sales have grown 4.4% compared to an increase in total completions of 2.2%. The higher mix of complementary building products, combined with a higher mix of multifamily sales, also impacted both price/mix and gross margin during the quarter compared to the 2020 second quarter. However, on a year-over-year basis, the benefits of our pricing strategies, combined with higher total sales volume, helped drive a 160 basis point increase in our adjusted gross profit margin. Recently, a material price increase effective January 2021 was announced for our fiberglass insulation materials. This increase is in line with our expectations for an increase early in 2021. With our availability of labor and our strong position with our customers and suppliers, we believe we are all well positioned to navigate the deflationary environment next year. We believe single-family industry dynamics remain strong and support the continued demand for our services. According to the U.S. Census Bureau, single-family starts in September were up over 20%, and single-family homes under construction increased to the highest level since December of 2007. We also believe we are well positioned for continued multifamily growth as a result of our suburban market focus and the success of our expanded multifamily sales strategy. As you can see, our residential markets have quickly rebounded from the COVID-19 pandemic, and market trends remained favorable. As we highlighted in last quarter's call, COVID-related safety protocols on large commercial construction sites continue to affect our operations. This has slowed the timing of our work and disrupted schedules as we adhere to requirements of managing the number of trades on the job site each day. While we expect to see this continue into the foreseeable future, we are encouraged by the relative strength in the end market. Our commercial backlog at September 30 was up 5% compared to the prior year, and our total pipeline and bid activity within the large commercial market has remained stable over the past 3 months. Based on the long lead time nature of our projects, we believe this will benefit our large commercial end markets in the second half of 2021. We believe our solid pipeline and growing presence within the large commercial end market will help us navigate any near-term softness. Long-term fundamentals are expected to remain intact, and diversifying our end market exposure continues to be an important component of our growth strategy. In addition, we are opportunistically pursuing additional commercial acquisition opportunities that increase our scale competitiveness. After briefly pausing our acquisition closings at the early stages of the COVID-19 crisis, our acquisition strategy has started to accelerate. In August, we acquired Storm Master Gutters, a New Jersey-based provider of gutter installation and repair services to residential and multifamily customers with annual revenue of approximately $20 million. We also acquired the North Charleston, South Carolina and Pooler, Georgia branches from Energy One America in August. These branches provide spray foam, fiberglass and air barrier installation services to residential, multifamily and commercial customers with combined annual revenue of approximately $22 million. So far in the fourth quarter, we have made 2 additional acquisitions, both in the Pacific Northwest. They include a provider of insulation, waterproofing and fire-stopping installation services to commercial and multifamily customers with annual revenue of approximately $26 million and an installer of specialty coatings for fire protection, insulation and acoustics in commercial and industrial applications with annual revenue of approximately $10 million. To date, we have acquired 8 installers with approximately $94 million of revenue compared to 6 installers with approximately $36 million of revenue at this time last year. As you can see, 2020 is shaping up to be another strong year of acquisition growth. Our acquisition pipeline remains robust, and we continue to actively pursue acquisitions of well-run residential, multifamily and commercial installers that support our geographic product and end market diversification strategies. Before I turn the call over to Michael, I want to highlight the record profits we are achieving. Record quarterly sales, strong gross margin and controlled operating expenses continued to produce record profits. Our same-branch incremental adjusted EBITDA margin was over 100% for the second consecutive quarter and helped drive an 18% increase in third quarter adjusted EBITDA. In addition, our trailing 12-month adjusted EBITDA margin has expanded to 14.5% from 12.6% for the same period last year, a result of lapping the impact of the material inflation environment in 2018 and our subsequent pricing strategy. So to conclude my prepared remarks, I'm extremely pleased with how our team has responded to the unique challenges that have occurred throughout the year. Our continued success reflects the power of our business model, the experience of our management team, the long-standing customer relationships we have developed and the strength of our balance sheet and operating cash flow. We believe that we will achieve record results in 2020. And given current market trends, 2021 is expected to be another strong year for IBP. As always, I'd like to thank our installers who are hard at work every day, representing IBP and serving our customers. On behalf of the entire leadership team, we recognize your efforts, and I want to personally thank you for your dedication. With this overview, I'd like to turn the call over to Michael to provide more details on our third quarter results.

Thank you, Jeff, and good morning, everyone. Net sales for the third quarter increased to a quarterly record of $420.5 million compared to $396.4 million for the same period last year. The 6.1% year-over-year improvement in sales was mainly driven by a slight increase in price/mix, growth in our multifamily end market, growth in other complementary products and the contribution from our recent acquisitions. On a same-branch basis, net revenue improved 1.7% from the prior year quarter. Multifamily sales increased 36.6% and contributing to a 6.2% increase in total residential sales during the third quarter. Sales in our large commercial construction business increased 2%, and total commercial sales increased 2.7% in the third quarter. It is important to note that sales from our large commercial construction business are not included in the volume and price/mix metrics we disclosed. Profitability remained very strong during the quarter. Adjusted gross profit margin was 31.4% for the 2020 third quarter. The 160 basis point increase over the prior year period primarily reflects the volume benefits of our product diversification strategies and installation pricing strategies. Administrative expenses as a percent of third quarter sales were 13.9%, consistent with the prior year period. Adjusted SG&A as a percent of third quarter sales improved 20 basis points from the prior year period and improved 90 basis points from the 2020 second quarter. The improvements in SG&A are primarily due to higher sales, leveraging cost and the benefits of gross profit improvement over the prior year quarter. On a GAAP basis, our third quarter net income increased 32.4% from the prior year quarter to a record $28.1 million or $0.95 per diluted share. Our adjusted net income improved 20.9% to $35.9 million or $1.21 per diluted share compared to $29.7 million or $0.99 per diluted share in the prior year quarter. During the 2020 third quarter, we recorded $7 million of amortization expense compared to $6.2 million for the same period last year as a result of our acquisition strategy. This noncash 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 fourth quarter 2020 amortization expense of approximately $6.8 million and full year expense of approximately $27.2 million. This figure will, of course, change with any subsequent acquisitions. For the 2020 third quarter, our effective tax rate was approximately 25.8%, and we continue to expect a full year effective tax rate of 25% to 27% for 2020. Adjusted EBITDA for the third quarter of 2020 improved to a record $66.2 million, representing an increase of 18.4% from $55.9 million in the prior year. Same-branch incremental adjusted EBITDA margins were 120.3% for the third quarter as a result of our higher sales and operating leverage. Adjusted EBITDA as a percent of net revenue increased 160 basis points from the prior year period to 15.7%. Now let's look at our liquidity, balance sheet and capital requirements in more detail. Our business model continues to generate strong operating cash flows. For the 9 months ended September 30, 2020, and we have generated $143.3 million in cash flow from operations compared to $106.5 million in the prior year period, an increase of 35%. Operating cash flow during the 3 months ended September 30, 2020, included a onetime $17.8 million charge to terminate certain interest rate swaps associated with our debt. This change will result in lower cash interest expense in future quarters. Our asset-light business model does not require a significant amount of capital expenditures, and our primary capital requirement is to fund working capital needs. At September 30, 2020, we had $144.5 million in working capital, excluding $268.7 million of cash and short-term investments. Capital expenditures at September 30, 2020, were $25.5 million, while total incurred finance leases were $0.9 million. Capital expenditures and finance capital leases as a percent of revenue were 2.2% at September 30, 2020, compared to 3.6% at September 30, 2019. At September 30, 2020, we had total cash and short-term investments of $268.7 million compared to $215.9 million at December 31, 2019. Total debt at September 30, 2020, was $573.4 million compared to $575.5 million at December 31, 2019. Considering cash and short-term investments at September 30, 2020, our net total debt was approximately $305 million compared to $360 million at December 31, 2019. We currently have approximately $45 million of remaining availability under our stock repurchase program. In response to the pandemic, we suspended the program and we did not make any repurchases in the second or third quarter this year. Given the current state of our business and our markets, our program is no longer suspended effective November 9, 2020. The funding of acquisitions continues to be the priority for our capital allocation, and we will pursue share repurchases opportunistically. We believe we have considerable financial flexibility as we have nothing drawn on our $200 million revolving line of credit, strong cash position, staggered debt maturities and limited financial covenants. In addition, with no significant debt maturities until 2025 and strong liquidity, we have considerable financial resources to withstand the economic impacts of the COVID-19 crisis while still investing in our long-term growth opportunities. With that, 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, dedication and commitment to our company during this very challenging period. Our success over the years, and more recently, wouldn't be possible if it wasn't for you. And our thanks goes out to you for a tough job always done well. Operator, let's open up the call for questions.

[Operator Instructions] Our first question comes from the line of Adam Baumgarten with Crédit Suisse.

This is actually Marius for Adam. Your acquisition pace has picked up nicely after the shutdown. And I'm just wondering if you've seen any change in the multiples or in valuation levels, especially in the commercial space.

This is Jeff Edwards. No, not particularly, really. I mean the pace is as much as -- the pace pickup, I guess, is as much a function of us actually kind of parking those deals for a period of time as it is, kind of with us, moving towards a different cadence per se. I think we're kind of on the same path we usually are in that way. Haven't really seen much of a difference, frankly, in the multiples or really in even the deal flow. And on the commercial side of things, it's -- they're not markedly different than the deals that we've looked at on the resi side, maybe potentially a little more attractive from a pricing and multiple perspective, but not particularly so.

All right. Also, in the past, you mentioned that you expected the September insulation price increase realization to be higher than the historical realization, closer to 75%. I was just wondering if that turned out to be the case. And what's the implication for next year's price increase?

So I mean I think the September -- I think the statement that was made probably maybe by us and even by others was the idea that the September increase might be pretty sticky and hard, I guess, in that regard. And I think no one would say -- everybody would say that that's still likely and probably the case. So that relates to the September increase. And then as you obviously know, I would think there's a January price increase out there at this point. I'll let Jeff speak to both the January increase, if you'd like, and/or -- okay, sorry, so I'll speak to it. I guess we'll see how that shakes out, obviously, but it's certainly a tight material market. Now Owens Corning, from a supplier perspective is in a much better position in terms of their ability to bring on extra supply. That doesn't change the fact that it's a good housing market. Things are a little tighter than they really appear to be from a material supply perspective right now because a lot of the tightness right now, although, obviously, the homebuilding pipeline and the backlog looks good but, more importantly, back in kind of beginning of COVID, early March, late spring, most of the manufacturers actually curtailed pretty hard even and ran down inventories, and it takes a while for them to both bring that capacity back up and to build inventory. So a lot of capacity constraints right now -- it's not a capacity constraint, it's just a current supply issue. It's something that gets worked on and solved over the next -- in the first and second quarter of next year. And we're just, I think, fortunate as a company because we do buy from all 4 manufacturers and are really, in some cases, much more heavily even indexed and are very good partners with Owens Corning, and they happen to be the ones that have probably the most supply to bring back on -- not probably, they do. So we'll see. That's a long-winded answer both on the price increase in January but also kind of on the current condition as it relates to material supply.

Our next question comes from the line of Ken Zener with KeyBanc.

I have a few questions here. Very strong operating leverage, so that's very good. And given your talk around price increases, tight supply, not an issue necessarily, but your EBIT leverage was very strong, but you actually had all the gain really in the gross margin, not the SG&A piece. So can you talk to the drivers of gross margin benefits? Obviously, I think part of it, there's price going through. But can you talk to -- but insulation price really wasn't up a whole bunch. I don't know, why is it in your -- it doesn't look like price was up a lot in your revenue. So I mean I know gutter costs were lower, for example, in this quarter. But can you really walk us through what those drivers were for such a strong organic EBIT growth related to the gross margin expansion?

Well, just to be clear, in the quarter, Ken, we did see some G&A leverage of about 20 basis points in the quarter. In fact, G&A was actually lower in the third quarter from the second quarter. So we feel good about kind of how we're managing the kind of G&A side of the house, if you will. But to your point, absolutely, gross margin expansion has been -- we've been very pleased with that over the course of this year. As we talked both in the first quarter and the second quarter, that really the pricing actions that we took in 2019 fully lapped themselves through into the second quarter, which is why -- and I think we were very careful about explaining this that why we felt that price/mix was going to flatten out in the quarter because we have lapped those price increases. Now that's as of September, right? And we talked in the first question about what's going on from a pricing dynamic and a demand dynamic as it relates to 2021, so that's different. But I think it's very consistent. And we spoke quite a bit on the second quarter call about price/mix being in that mid-single digits for a full year basis. Right now, year-to-date, price/mix is at about 5.5%. So we see the year and the quarter unfolding exactly as we discussed with people.

Good. Because I want to make sure, I think the biggest issue for you all versus some competitors is, like, you've been able to grow. It's really that focus on incremental EBIT. And given price increases that you're talking about into -- and I realize you explained this up very well in 2Q '20. What are you thinking about your pricing inputs versus what you're going to ask for your customers? In FY '21, if we are seeing, right, this 8% and usually, half of that comes through, maybe it's a little more, maybe it's a little less, but how are we going to avoid the margin degradation that we saw in 2019 -- back of '18, '19 where you actually took a while to recover that price? Because Jeff, as you said, you wanted a good relationship with your customers. It happened so quick. It was really a step function as the industry capacity was put on allocation, certainly, on [ Louisville ]. How are you going to perhaps approach the price increases we're seeing in FY '21 differently than what unfolded in FY '19, so we avoid margin degradation? And Michael, so you can say you have that incremental EBIT in that mid-20 range, which is kind of your long-term target, what's going to be different this time is what I'm asking.

Well, I mean, I'm still stand by the strategy. So having said that, that wasn't a fun period of time for us based on kind of how others thought we handled it. But at the end of the day, we ended up gaining and/or growing sales and gaining share faster than others and, ultimately, got back to the same place in March. Now having said that, obviously, after having taken some heat over that strategy, we will change that to a degree and not end up -- work hard not to end up in a position where there is that degradation and yet still end up in the same place. Not making that a bit easier thus far is that the announced price increases and the magnitude of the 2 that are out there right now are substantially less on a combined basis than what was announced in the previous. And to your point, to the extent that not all of those increases are realized, it's not an unfair ask at all of us from our customers to kind of stay on top of that. So -- and because of the timing going into January, where we were already on top of the one that came out in September, gave us the lag time to get to our builder -- or gave us time to get to our builder and warn them. So although they were supposed to be on a cadence or it was likely and had even been voiced maybe that they were going to be more like spring/fall that makes more sense for the builder to market, and so the January was a little bit off-kilter with that, the January increase that is. I still think, though, certainly, that it's no more than a 2 price increase year after this. And again, hopefully, the sizes are more reasonable. So I think we'll be able to stay on top of that.

And I think as well the environment right now is completely different than the environment in late '18, early '19, right? I mean we were jammed with price increases, repeated after another, did not have the same kind of time frame to implement selling price increases that we would normally have and we have in the current environment. And more importantly, right, I mean, new home sales year-to-date are up 17%. They were up 30% in September. The demand environment that's in front of us coming into 2021 is -- I mean as we've all seen and heard, it's a great opportunity. And as a consequence, working with our builders, it's a lot easier when they have -- they're worried about getting houses completed and done at a much more accelerated pace to go work with them to cover any increased costs we might have.

Right. Right. Now the other side of this, since we're focused on the resi side, is the commercial experience come at degradation of margins you had in almost at the exact same time as you organically opened up new branches, loaded on fixed costs and did not have the sales realization. It certainly seems like you're focused on the northwest this quarter, in commercial areas, which we outlined recently in a report. But what is your strategy? I know you had conversations with the Board about how aggressive that organic growth was. What is your comfort looking into '21 that your acquisitions and/or organic growth in commercial are not going to contribute to a margin degradation as well.

Well, there's no doubt that we're cautious about the short-term impacts or the short-term nature of the commercial business. And Jeff spoke to that in his comments in terms of the new COVID protocols extending construction times. Fortunately, we're still seeing very steady volume of bidding in that business. As Jeff said in his prepared remarks, we think that, that benefits the first half of '21. But again, it's -- the heavy construction business is about 10% of our overall business. While we might see a slowing in growth or even some declines in that business, we think that it's going to be more than offset by the very constructive backdrop in one, single family; and two, on multifamily for us, which has really been an outperformer. I mean our organic sales growth in multifamily in the third quarter was almost 35%. Year-to-date, it's at 37%. So we feel that the benefits that we're continuing to see in the residential markets will offset any temporary softness in the commercial side. But long term -- which is why we're continuing to do acquisitions in the space, long term, we feel confident about the long-term strategy associated with continuing to diversify our end markets towards commercial.

Our next question comes from the line of Trey Grooms with Stephens.

So just so we have a little bit more, I guess, guidance -- I don't want to say guidance, you guys don't give guidance, but a little bit more educated on how the flow-through really works. I mean with the strength that we've seen in starts and, of course, the orders, the backlogs, are all outstanding on the residential side. Single-family, I guess, multifamily, you guys are seeing strength there. But your single-family down in the quarter volume and understanding the lag and all of that, but help us understand, when would that inflect, in your opinion, because it's clear that demand is there?

Yes. You're absolutely right. The demand is there. But the delta right now between new home sales and starts is incredible in terms of homes not getting started that have been sold. For example, as I said before, our new home sales year-to-date are up 17%. And in September, homes that were sold but not started were up 49% from the prior year, which is just a staggering number, quite frankly, right? So we have a tremendous amount of pent-up, if you will, demand that builders are working hard to address. But the reality is that the whole construction industry can't size up by 30% to meet that demand. So we believe what's going to happen is you're going to have an elongated cycle through '21, '22, working through all this demand. We definitely think that the seasonality that the business has normally experienced might be muted a little bit in '21 because of this. And we think that it really sets up '21 for the whole industry to be very, very constructive. But it is -- there's no doubt there is extended lag times. And when you think about building products, most building products are installed in the house after it's been framed and after it's been closed up. And until those houses are done, we can't install any of our products. And we also can't control the flow of the houses being completed and ready for us to do the work. But as we've said numerous times, it's not a question of if we're going to do that work, it's just a question of when.

Yes. Okay. I mean that all makes sense. To me, it's just the -- these extended construction times that you're talking about and also there's labor constraints, there's, as you mentioned, some products, including insulation, are tight right now. So I guess 2021, obviously, is a good demand backdrop, and you mentioned being constructive. But with all of these limitations, how are you thinking about just based on the starts growth, the order growth, backlog, et cetera, is it the -- looking into '21, not necessarily volume for you guys but just the overall industry, is it unreasonable to think that it could grow mid-singles, could it handle that? Or is that too low?

Yes, definitely mid-singles for sure.

I think it's probably higher than that.

Yes, I think you can get to high single digits.

Yes, absolutely, maybe not 100%.

Yes, for sure. I mean I think -- and the important aspect to that is -- particularly if you look at just the insulation side, and I can't speak as closely to windows and doors and some of the other products that are having supply issue as well. But as Jeff mentioned in the answer to the first question, clearly, what's within insulation right now, it's the fact that they, in essence, stopped producing during COVID and they're trying to rebuild their inventories, right? But OC's announced additional capacity coming online in the second quarter, which is very significant, a large [ back-line ] coming online. And then with the announced capacity additions from both JM and Knauf, I mean they're really -- we feel confident that while, yes, it's going to be -- take more time to manage, and we're going to have to put more resources in terms of managing material and moving it through the system as effectively as possible, we feel very confident that we're going to be able to support our customers very effectively what the growth that comes our way. The thing that mitigates it or that impacts the timing are all the trades that come before us.

Right. Right. So -- and that is a question that we get sometimes about your ability to scale given that there is some tightness in labor trades and things like that. But it's good to hear that at least in -- as far as the labor that you guys would be targeting, it doesn't sound like you're going to expect any trouble there, in your ability to scale with the demand next year.

No, we have the ability to flex.

I mean it really comes down -- not to dwell on it, but it comes down to how long it takes us to train one of our installers to be proficient versus how long it takes a carpenter or a mason to really become proficient because it's a different time frame, much different.

Yes. Ours is much shorter.

Yes.

Okay. That makes sense. And then last one for me is -- good to see you guys are kind of getting back into the M&A game. But as we're looking at kind of the pipeline there, I know you touched briefly on -- it didn't sound like valuations were changing much or anything like that. But as we look at M&A and we look at the pipeline, is there much of a difference that you see right now or an appetite or anything that really is different between maybe going towards a residential type acquisition or more towards commercial? Is there anything right now that is changing that dynamic?

No, I don't really think so. I mentioned earlier that most of these were queued up prior to March even. So I mean I guess one could say that we're still making sure we cross our Ts and dot our Is as it relates to the commercial side of things as others have asked. But other than that, making sure that the backlog still look good for the businesses that we're buying at their end markets and providing services that we think are still both -- even in the short term and in the long term are going to look good for us, so I mean I guess that would be the only change per se.

Our next question comes from the line of Stephen Kim with Evercore ISI.

Yes. So, so far today, you've talked about a number of things, all suggesting that there's going to be lags that we should be anticipating over the next few quarters. I think you talked about -- in the past, you talked about feathering in price increases. Today, you're talking about lengthening cycle times with the builders, you're talking about material lead times, extending from the insulation manufacturers. I think you suggested that might lag -- last into 2Q next year and then also a greater lag because of your increased complementary products that you talked about. So just sort of stepping back from it all, despite these factors, which are sort of, in general, going to be creating a bit of a lag or a delay, is there any reason -- are there any factors offsetting that that might help us think that from a, let's say, pricing perspective, you could realize maybe pricing actions somewhat more quickly this time than maybe in the past? Is there anything basically that would be helping you to realize pricing maybe a little quicker this time?

Yes. I think there's 2 fundamental things. One is that we've been given more time from announcement to implementation of those price increases. And second, I think, most importantly, is the very strong underlying strength, particularly the single-family housing market and the builders' need to get the houses completed, particularly when you look at the -- as we've talked about numerous times, the low dollar value of the products that we install, insulation being around 2% of the cost of construction but yet being an extremely critical step to getting the house, moving forward, passing inspection and getting the house done. So we believe that working with the right customers that understand the value of the service that we bring to them and helping them keep the cadence or even start improving the cadence of getting the house completed allows us to work with the customers that are willing to pay us a fair price for the services that we provide.

And three, the size of the increases, which I mentioned earlier, being smaller than what was announced the last time. And I guess four would be the rigor at which we will make sure we're out there getting it because we don't really want to go through the criticisms again, frankly.

Okay. Well, I think at the end of the day, you weathered that -- those criticisms just fine. But okay, we'll take the full [indiscernible] here.

Yes. I still will stick with the strategy. But because of our outsized sales growth, compared to others, let's say, and ultimately still getting back where we -- getting the margin back where it needed to be. But we don't want to take a long time to make that happen this time.

Okay. Great. Good to hear. One thing that hasn't been mentioned yet was weather. Weather last year, last winter, was pretty mild. And it helped you somewhat offset the normal seasonality of the industry, in general, the construction industry last winter. I'm curious -- but obviously, this year, you've got this massive surge in orders and all that. So I just want to make sure, is it reasonable to think that the growth that we're seeing in the order growth -- orders and the sales activity today is going to kind of overwhelm the difficult comps, if you will, from mild weather last winter?

Yes. I mean, I think, particularly, you are seeing a lot -- obviously, a lot of that good order growth is coming from the South and the West, which tend to be markets that are not as weather impacted as kind of the Northeast and the Midwest. So as a consequence, I think you could make that -- and this is not necessarily as it relates to IBP, but I think the industry as a whole because, obviously, the weather affects the whole industry. But I think you can definitely make an argument that the benefits that we may have seen from good weather last winter could be certainly overtaken by the strength that we're seeing in new home sales and starts coming into the winter months.

Well, every quarter that goes by almost, we are less indexed towards the Northeast and the Midwest than we are in the West and the South. That's just the Sun Belt and the smile growth inside of IBP's business.

Yes.

Our next question comes from the line of Seldon Clarke with Deutsche Bank.

I just want to make sure I understand the relationship here between starts and volumes and completion. So you started the quarter with same branch sales, up 6% in July. Completions seemed to accelerate throughout the quarter. But obviously, Europe sales growth rate decelerated. So I know you talked about post completion, complementary products driving some of that delta. But could you just give us a sense how underlying installation maybe trended in the quarter? And would the same dynamic imply that your 4Q same branch sales rate would then exceed completions data? Or is there something I'm missing there?

Well, we like -- and as Jeff mentioned in his prepared remarks, when we think it makes more sense to not necessary look at an individual quarter, but to look at it over a longer period. And he highlighted the fact that our residential same brand sales growth was for the year-to-date was 4.4%, whereas total completions growth was only 2.2%. And that was definitely benefited from our multifamily same branch sales growth, which, as I mentioned earlier, has been really rock solid, quite frankly. But in terms of the the lag time that's been created, I mean, it is -- without a doubt, as I was saying earlier, that 49% increase in homes sold that haven't been started yet is quite significant. So from our perspective, we want -- if you look at those metrics more on an annual basis, if you will, than a quarter-to-quarter basis, and we think that, that makes sense because the reality is whether you lag starts -- and particularly lagging starts 90 days right now, I think is not a right metric just given this increased lag time that we have, but even completions isn't a perfect metric for us. So what we'd like to look at it is in the context of kind of on a full year basis, but also more importantly, what are we doing from a margin perspective, how are we servicing our customers and the overall growth that we're seeing in the business.

Okay. So you wouldn't read into that being -- doesn't feel like there's any underlying shift in terms of market share within insulation that would be concerning. And then I guess just like based on that, it sounds like if you're lagging through 9 months of the year, or let's just call it 1 quarter, you would expect some makeup in the next quarter.

It's really going to depend upon kind of where -- the builders getting the house is ready for us to do our work, and that's going to be kind of market by market. So I'm trying really hard to not give guidance. So sorry about that. But it really does depend upon the cadence that we're getting the homes ready for us to do our work. And as we said from the previous question, there is definitely -- given the dynamic that's going on in the market right now, it appears that we're going to have a much smoother seasonal year than typical in '21.

Okay. And then I guess the -- what about the question on just insulation market share or without giving -- like it's not necessarily a guidance question. But did that track more closely in line with how you would have expected it?

Yes.

Our next question comes from the line of Justin Speer with Zelman & Associates.

I just wanted to follow up on Seldon's question, if I could. Is there any chance that you could break out the single-family growth trends through the third quarter into October?

You mean like each month in the quarter? And then...

Yes. Just trying to get a sense for like the nature of seeing pressure there. It was, I think, a little bit of a surprise. I'm just trying to understand if that's just how the nature of the timing of maybe this improvement that we're all looking for? And I guess the bigger question, I know you touched on it just the growth potential and the industry growth potential given some of the broader supplier constraints. I guess folks are just trying to get a sense for what the market will allow as we look into the fourth quarter into next year?

Yes. I would say that as it relates to the third quarter, our single-family same branch growth of less than minus 3% is very consistent with what we talked about in the second quarter that starts were down 17% in the second quarter and that we thought that there would be somewhat of a soft patch that would be offset by growth, particularly in multifamily, which is why same branch sales grew almost 2% during the quarter. As it relates to to the fourth quarter and volumes going forward, again, I think it really comes down to how quickly can builders get to us the houses ready for us to start doing our installed work. And we know that volume is coming, and we're preparing for that volume. But we can't control the other trades that come before us. And as Jeff mentioned earlier, in terms of the framers and the masons, mean it takes them more time to size up than us. The ability for the industry to flex up is that it's not at all constrained by our ability to flex up as a company. We've proven that time and time again. It's really the other trades that come before us that are the governor on our ability to get after that demand, if you will. As Jeff said earlier to one of the other questions, I mean, can we see the industry "size up high single, maybe even 10%?" We think that, that's possible given kind of where we are right now. We're not coming off the same low basis that we were coming off of in, say, '10 and the '11, but we definitely think that, that's possible, but it's going to take time, and it doesn't happen overnight. And to a large extent, the order growth that we've seen is really surprising order growth that we've seen has almost happened overnight, right? So the whole industry is recovering, and I'm not talking about just the insulation industry, I mean, the construction industry is recovering from kind of almost near shutdowns, particularly from a supply perspective, in March and April, then trying to size back up and kind of restart the engine. I mean there are plenty of builders that are having problems just getting permits so that they can start construction. So it really is the disruption that was caused by COVID. And again, I talked about the 17% decline in starts in the second quarter, combined with everybody trying to size back up again and get products to get that done from manufacturers that had draw down -- or brought down inventories because they had stock manufacturing. So it's definitely sort of an unprecedented situation that we're in. And I think everybody is working hard to try and meet the demand, but it's going to take time. But when you think '21 to be a very solid year.

Well, I guess to maybe say something a little differently. But I mean we don't see and have not experienced anything that makes us think that this kind of splat spot slowdown is any different than what we said it was going to be. And all we were doing was lining up with where the builders said their sales fell off the face of the earth. I mean, that started in the second or third week of March, and it lasted until whenever that was. I can't remember when they crawled back and kind of got even with prior year, but I'm going to say it was July or something like that. And so I don't -- we don't see any reason why the pack that we've talked about looks any different than really that patch in terms of orders, which then carries through to when they get home started and when it comes in and that's kind of what we predicted coming into the third and fourth quarter anyway. It doesn't appear to be.

That makes sense. Yes, that makes a lot of sense. I guess the other side of this is in that kind of environment, where maybe you can see the trade ramp up to get the high single, low double as an industry in the coming quarters. You have a legacy of share gains through stacking on other products and services and taking share within the core insulation side of the ledger as well. Is that -- do you think that, that nature of those share gains should continue along the lines of the historical trends? Or is there anything that maybe changes that dynamic as you look at price and cost in your margin profile going forward?

No. We are going to continue to execute on the strategy that we've been working on, and we think that it will continue to pay off in terms of greater penetration of the other product sales.

Yes, so no change. We feel good about it.

Excellent. And then the one other question I had on the top line. I know the multifamily side, just incredible growth there. Just any commentary you can give us there in terms of visibility and maybe backlog in your low-rise multifamily business? How that's shaping up on a year-over-year basis?

Yes. The backlog in that business is up about 22% at the end of the quarter. So we continue to feel very good about the penetration there. Obviously, we're getting tougher and tougher comps in that business, right, given the growth that we've seen. So the year-to-date 37% same brand sales growth that we've seen, that's really hard to replicate, right, when you're comping this real good strength. But we feel very good about our ability to continue to kind of broaden our geographical reach with the multifamily business.

And then on the cost side of the ledger, just any onetime tailwinds from less travel entertainment costs, anything like that, that you're seeing year-to-date and maybe a year-over-year benefit into the third quarter that maybe don't repeat as we look ahead?

Yes, that's a great question. As it relates from the sort of the second quarter to the third quarter, I mean, the 2 things that we kind of talked about in the second quarter were fuel and travel and entertainment that were obviously impacted by COVID, really coming from the second quarter into third quarter, there was really no benefit there. But if you look at the third quarter of '19 versus the third quarter of '20. There's definitely a benefit of a little over $1.1 million from both of those. About 70% of that was from fuel and about 30%, 35% of that was from travel and entertainment. So we hope we want to spend more money on travel and entertainment because it means that we can go to conferences. Our team can do regional meetings. And we think it means a lot for the economy completely opening. So we will be happy to start spending that money again when we can.

Make sense. And I guess, the big picture, just kind of holistically, and there's a lot of moving parts there, a lot of complexity in general in this landscape. But based on the backlog that you have, including on the nonres side, given the extended lead times, given the moving parts with costs and supplier pricing. I guess, do you think that you can achieve -- and you're also comping against just incredible incremental margins this year. Do you think you can achieve the kind of that normalized incremental margin profile that you target? That range that you target as you look into next year, do you think that's possible? Or you think maybe that's governed a little bit by these moving pieces?

No. We feel -- on a full year basis, we feel -- and again, I'll say, full year basis, we feel very confident about the 20% to 25% incremental margins that we've talked about as it relates to '21. And if the year plays out is, I think we're all talking about here and we do see a very constructive volume environment throughout the full year of '21, that helps us definitely feel more confident about that 20% to 25% incremental margin range.

Yes. And this is Jeff real quick just tagging on. But I know that the constraints have been kind of played up a bit in some of the questions and on this call is being a negative. But quite frankly, we think it sets us up for a longer period of time on a playing field that's really great for us to kind of run our strategy. So we're happy that there's these kind of backlogs that we can't work through it at more than maybe as much as 10% per year. It just, for us, provides a backdrop for us -- for our strategy to really succeed, I think.

Next question comes from the line of Josh Large with Truist Securities.

This is Josh on for Keith Hughes. Just one quick question on the kind of monthly progression you saw and what you're seeing in October.

Sure. I mean, we have the -- it's been asked of companies to provide, just given the COVID environment, more data than they normally would about kind of trends going forward. So we're probably not going to continue to do this forever, but we'll definitely -- for October, I would say that sales were up about 7% on a days adjusted basis. It's important to look at it on a days adjusted basis because last October was a 23 selling day month whereas this October is 22 selling day month. On the same-branch basis, sales were up slightly, again, on a days adjusted basis. But we feel that October, certainly, September, October, really played out exactly as we talked about in -- partially in the first quarter, but predominantly in the second quarter about the softness that was coming, so to speak, although I think the softness is much less than what anybody had anticipated given the unprecedented decline in starts in the second quarter. So again, as we've talked a lot on this call, we feel very good about looking forward to '21 in the demand environment that's there. And perhaps a diminishment of the seasonality in the business, as we're going forward.

Okay. And then just last one on the commercial side. You guys had good growth when it's kind of been a market hit more so by the pandemic. Could you just kind of provide some details on what what you were seeing maybe in terms of light commercial, heavy commercial? Were there any kind of outliers that grew or didn't grow that drove the results?

Our light commercial business grew a little bit better than our heavy commercial business. As Jeff said in his prepared remarks, our total commercial business was up 2.7%. And the heavy commercial business was up only 2%. We definitely think there is -- again, we're more cautious about that part of our business, particularly the heavy commercial business, but it is only 10% of our overall revenue. We think long term, that business is very solid. We've talked about this on numerous costs given our low market share, the markets that we're in, the investments that we made in opening up additional locations that are starting to come online and do more work. The bidding volume in that business has been pretty steady. We think that there's been a little bit of a slowdown in finalizing bids and projects, given just some of the uncertainty surrounding COVID. And certainly, I think there's been a little bit of uncertainty in there still today around the elections. So I think those things have just compounded, if you will, to create a more difficult environment there. But we feel really constructive, quite frankly, about our ability to manage through that given what we're seeing. And quite frankly, we had a very difficult -- we talked about this in the second quarter that coming into the third quarter, we had a very difficult comp in that business because that business really had a very strong third quarter last year.

Our next question comes from the line of Phil Ng with Jefferies.

Both you and your competitor talked about calendar seasonal trends. Will that allow you kind of play a little more catch up and closing this gap between starts and completions versus historical levels? And then can you give us a little more color, I know -- I'm not trying to page number. You talked about potentially being able to ramp up to like maybe high single-digit growth in 2021. Help us understand potentially the opportunity to kind of scale up. Would it be more back half loaded? Or you can get there, perhaps even a little earlier?

Yes. I think so the latter part of your question, really, what are talking about scaling up or sizing up of whether it's 10% or high single digits, we're thinking of that more as the industry, the construction industry. And it was more in that context necessarily than providing any guidance relative to what we expect sales to be in '21.

And we have been able to grow faster than ultimately what we say the rest of the industry is able to grow.

Absolutely. And I think the ability to shrink the window from starts to completions again, is not an IDT issue because we can -- as we've demonstrated before, we can flex up to do that. It's really an industry issue. It's getting the house is closed up ready for us to install. And I think to the point of your question, though, if we do have less seasonality, and it's more of a flat situation rather than a typical seasonality or typical seasonal situation over the winter, I think you're absolutely right. That definitely has the ability to shrink the delta between starts and completions, which would be, I think, very constructive for the whole industry, right? Because it keeps people employed. You don't have to flex your labor force. And it also gives the manufacturers a better ability to maintain manufacturing as opposed to a more consistent manufacturing as opposed to having to deal with the typical seasonality of the business. So again, we can't predict the weather, we can't predict the future. But it does set up, we believe, the whole industry for a really constructive 2021.

Your question one absolutely influences question 2.

Yes, it did not [indiscernible].

It's just a matter of the pig and the python. And when the pig went into the python this year, it was 3 months lighter than it would be normally. I mean, you're right in the middle of your spring seiling season, it was interrupted and truncated, and it was made up for roughly, let's say, and a gradual comeback, but 3 months out of sequence. It should mean that causes -- and then there's a little bit of stutter steps in restarting the machine. And when I say machine, I mean the entire industry. So that starts to impact kind of when we'll be in the house. And how long it takes to get a house under construction. And then it just -- it's going to feed into a different type season to be where there's more work than you can kind of shape the ticket, right?

Next question comes from the line of Susan Maklari with Goldman Sachs.

My first question is, you've mentioned in your comments that you saw some nice growth in the complementary products this quarter. Can you talk a little bit about that and maybe how we should be thinking about it on a going-forward basis, especially maybe with the lags that you are seeing?

We've talked a lot about the other product growth. And as you mentioned in the second quarter as well that we saw higher growth in insulation than we did in the other products. But that did flip in the third quarter. The nice thing that we're seeing that we're really encouraged by in the other products. It's not just the the higher -- slightly higher growth, but that we're actually even seeing better margin growth the other products than we are in insulation, the insulation product. So that's -- while there's still, as you know, because we've talked a lot about this, their margin profile is lower than insulation. We're seeing, as we're gaining more scale on those products that are improvement in margins. So we feel very good about continuing to perform on that strategy. It definitely, we think, will benefit us, particularly in this environment or backdrop, where we're seeing high levels of volume and builders want to streamline the number of installers that they're using, especially for these nuisance products. So it's a strategy that we've been pursuing for a very long time, and we feel confident that it continues to be the right strategy.

Okay. Great. And then my last question is just you mentioned that the suspension that you'd had around buybacks is no longer in effect that you guys can kind of go out there and start to repurchase stock. Can you talk about your appetite to do that? And any color there?

Yes, we've mentioned in the prepared remarks. I mean, we'll be opportunistic about it. But our #1 capital priority continues to be M&A, and we're going to continue to focus on that, particularly geographic expansion with installation -- residential installation deals given the backdrop that's there. So really not a change, but we thought it was important to let the market know that we have -- that if there's an opportunity, we will look at share repurchases.

Next question comes from the line of Ryan Gilbert, BTIG.

Just, I guess, expanding on the complementary product question, it sounded like it was a bit of a headwind or a contributor to price/mix flattening out in the third quarter. And I'm just wondering if we should kind of be thinking about that expanded mix of other complementary products, maybe limiting on some of the price/mix growth that we've seen in prior years as we look out to the fourth quarter and 2021. Is that the right way to think about it?

Yes. And we talked a lot about that. I think the one thing that will kind of be a tailwind, if you will, though, to price/mix is what we expect to be is a rising price environment on the insulation front. So again, on a full year basis, we've been consistently year-over-year been -- sort of been in the mid-single digits on price/mix. We talked about that in the second quarter. On a year-to-date basis, that's exactly where we are in price/mix. So there's definitely the headwind provided by the growth in other products because of their lower price points. But we do feel pretty constructive around the pricing environment for insulation as we go into full year of '21.

And we have no further questions on the phone line. I'll turn the call over back to you, sir.

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

Thank you.

That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.