Q3 2023 Installed Building Products Inc Earnings Call

Participants

Darren Thomas Hicks; Director of IR; Installed Building Products, Inc.

Jason R. Niswonger; Chief Administrative & Sustainability Officer; Installed Building Products, Inc.

Jeffrey W. Edwards; Chairman, CEO & President; Installed Building Products, Inc.

Michael Thomas Miller; CFO, Executive VP of Finance & Director; Installed Building Products, Inc.

Adam Michael Baumgarten; MD; Zelman & Associates LLC

Jeffrey Patrick Stevenson; VP; Loop Capital Markets LLC, Research Division

Joseph David Ahlersmeyer; Research Analyst; Deutsche Bank AG, Research Division

Keith Brian Hughes; MD; Truist Securities, Inc., Research Division

Kenneth Robinson Zener; Senior Analyst; Seaport Research Partners

Michael Jason Rehaut; Senior Analyst; JPMorgan Chase & Co, Research Division

Philip H. Ng; Senior Research Analyst & Equity Analyst; Jefferies LLC, Research Division

Reuben Garner; Senior Equity Research Analyst; The Benchmark Company, LLC, Research Division

Stephen Kim; Senior MD & Head of Housing Research Team; Evercore ISI Institutional Equities, Research Division

Susan Marie Maklari; Analyst; Goldman Sachs Group, Inc., Research Division

Trey Grooms; MD & Analyst; Stephens Inc., Research Division

Presentation

Operator

Greetings, and welcome to Installed Building Products Fiscal 2023 Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the call over to your host, Darren Hicks. Thank you. You may begin.

Darren Thomas Hicks

Good morning, and welcome to Installed Building Products Third Quarter 2023 Earnings 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 of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on management's current expectations and beliefs. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those described today.
Please refer to the cautionary statements and risk factors in our SEC filings, including our most recent 10-Q and annual report on Form 10-K. We undertake no duty or obligation to update any forward-looking statements as a result of new information of future events, except as required by federal securities laws. In addition, management refers to certain non-GAAP or adjusted financial measures on this call. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for EBITDA and adjusted EBITDA for earlier fiscal periods in our investor presentation, which are available on the Investor Relations section of our website.
This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer; and joined by Jason Niswonger, our Chief Administrative and Sustainability Officer.
I will now turn the call over to Jeff.

Jeffrey W. Edwards

Thanks, Darren, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights and then turn the call over to Michael, who will discuss our financial results and capital position in more detail before we take your questions. IBP produced another solid quarter of operating and financial results, achieving all-time and third quarter record results on several profitability and cash flow generation metrics during a volatile economic backdrop for residential and commercial construction activity.
Consolidated revenue comparisons were challenging given the over 40% growth achieved in the prior year period, but our end market, product and geographic diversity helped to offset softer single-family installation activity. Despite top line headwinds, we achieved record third quarter net income, earnings per share and operating cash flow in 2023. Our multifamily end market continues to stand out and exemplify the benefits of employing a centralized service-oriented operation across our branches.
On a same branch basis, multifamily sales in our installation segment increased 28%, with growth driven by continued success selling IBP's installation services in markets that historically have not served multifamily customers. As a result, we were able to partially offset softer single-family installation same-branch sales, which were down 12%.
In August, we published our third annual ESG report. In addition to presenting our sustainability achievements and advancements, we highlight the critical position, insulation installers hold and contributing to energy efficiency in homes and other buildings. Our business is in a unique position to benefit both our shareholders and the broader global environment that surrounds us. IDP has experienced tremendous success as a public company. And while a path has not always been straightforward, the dedication and consistency of our team members have been the key to navigating an increasingly complex economic, social and business environment. To everyone at IBP, thank you for your commitment, your hard work and a tough job always done well.
We continue to expand our product offering and geographic presence through acquisitions and have acquired 8 companies so far this year with combined annual revenue of over $58 million. We expect to acquire at least $100 million of annual revenue each year. However, acquisition timing is unpredictable and certain acquisitions may change from their intended closing dates within a given calendar year. During the 2023 third quarter and in October, we completed 3 acquisitions, including a Virginia-based installer of shower, shelving and mirror products as well as fireplaces into new and existing residential and commercial construction projects with annual revenue of approximately $6 million.
A North Carolina-based installer of fiberglass, spray foam, cellulose insulation and fireplaces to residential customers with annual revenue of approximately $2 million and a North Dakota base stall of fiberglass and spray foam insulation to multifamily, residential and commercial customers with annual revenue of approximately $2 million.
Overall, the residential housing market continues to be resilient as relatively low existing home inventory levels have led to a higher percentage of new construction home sales despite broader housing affordability challenges, which has been exacerbated by the rapid rise in interest rates this year. Still, we are encouraged that the publicly traded homebuilders that have reported financial results in the last 2 weeks have showed a combined year-over-year new order volume growth rate of roughly 40%. While these orders will take time to impact our revenue, single-family housing starts, which impact our business sooner than orders have been trending positively in the third quarter.
As for the multifamily end market, our project backlog remained stable at historically high levels with activity extending beyond 1 year. We believe we are well positioned to report another year of strong operational and financial performance in 2023 as we continue to focus on profitability and effective capital allocation to drive growth. Longer term, we believe that housing demand will continue to grow and the insulation installation industry is well positioned to benefit from demand driven by government legislation including the Inflation Reduction Act of 2022 in the bipartisan infrastructure law, which are intended to improve energy efficiency in residential homes.
IBP's strong customer relationships, experienced leadership team, national scale and diverse product categories across multiple end markets will help the company navigate future changes in the U.S. housing market. I am proud of our continued success and excited by the prospects ahead for IBP and the broader insulation and other products installation business.
Before I turn the call over to Michael, I want to say thank you to Jay Elliott, IBP's Chief Operating Officer, who will be retiring at the end of the year. Jay has been a valuable member of IBP's leadership team over the past 20 years and his keen ability to resolve operational challenges combined with his industry knowledge, has benefited IBP on countless occasions.
While Jay will act as a close adviser to the company after this year, on behalf of IBP, I want to thank Jay for his commitment and wish him and his family the very best in his retirement. IBP is fortunate to have a deep bench of experienced talent, and we have tapped current Regional President, Brad Wheeler, to be Jay's successor. Brad has served as one of IBP's regional presidents since 2015 and has been the President of our heavy commercial focused business, Alpha, since 2022. Brad is an exceptional leader, and I look forward to his continued contributions to IBP.
So with this overview, I'd like to turn the call over to Michael to provide more detail on our third quarter financial results.

Michael Thomas Miller

Thank you, Jeff, and good morning, everyone. Consolidated net revenue for the third quarter decreased modestly to $706 million compared to $719 million for the same period last year. The decrease in sales during the quarter was driven by lower single-family sales, partially offset by higher multifamily and commercial sales within our installation segment. As we evaluate our performance on a year-over-year basis, the exceptional growth our company experienced last year, set difficult comparisons for this year but also rising interest rates and changes in residential construction and industry activity have been headwinds to our revenue opportunity in 2023.
According to the U.S. Census Bureau, in the third quarter of 2023, the housing units under construction or the sales pipeline for our installation services showed single-family units were down 16% year-over-year, while our single-family same branch sales were down 12%. In the multifamily end market, industry units under construction were up 14%, while our multifamily same branch sales were up 28%.
Although the calculations behind our price mix and volume disclosure, have several moving parts that are difficult to forecast and quantify. The results this quarter reflect our strategy of focusing on the value of our installed services over Jobin. During the third quarter, price/mix increased 3.5%, while volumes decreased 10.8%, in part due to the continued impact of multifamily and light commercial activity relative to our single-family end market. Our profitability-centered strategy led us to achieve record results in the third quarter as measured by adjusted gross profit margin, adjusted net income margin and adjusted EBITDA margin. Our adjusted gross margin improved 350 basis points year-over-year to 34.3% in the third quarter as a result of pricing stability and improved operating cost efficiencies.
Adjusted selling and administrative expense as a percent of third quarter sales was up 200 basis points to 17.7% due to higher variable compensation related to higher gross profit and EBITDA performance from the prior year period. Adjusted net income per diluted share improved 11% to $2.79, representing an all-time record margin of 11.2%. Adjusted EBITDA for the 2023 third quarter increased 8.6% to a record $131 million, and adjusted EBITDA margin reached a record 18.5% compared to 16.7% for the same period last year.
During the third quarter, our same-branch adjusted EBITDA growth was positive, while our same-branch sales were lower than the prior year. This very strong result rendered the calculation of our same-branch incremental margin meaningless during the third quarter, but we continue to target full year long-term incremental adjusted EBITDA margins in the range of 20% to 25%. For the first 9 months of 2023, total incremental adjusted EBITDA margins were 45%, substantially above our target range. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect fourth quarter 2023 amortization expense of approximately $11 million and full year 2023 expense of approximately $44 million. We would expect these estimates to change with any acquisitions we closed in future periods. Also, we continue to expect an effective tax rate of 25% to 27% for the full year ended December 31, 2023.
Now let's look at our liquidity position, balance sheet and capital requirements in more detail. The 3 months ended September 30, 2023, we generated $112 million in cash flow from operations compared to $99 million in the prior year period. The year-over-year increase in operating cash flow was primarily associated with higher net income and was an all-time quarterly record. Despite the recent rising interest rate environment, in August, we reduced the borrowing cost on a portion of our debt by 25 basis points through repricing approximately $492.5 million of our existing term loan.
Furthermore, through interest rate swap agreements, we have fixed the interest rate on $400 million of our existing variable rate debt until 2028, limiting our interest rate exposure. We have no significant debt maturities until 2028. Our third quarter net interest expense decreased to $9.7 million from $10.7 million in the prior year period due to the term loan repricing and the higher rate of interest we earned on cash and cash equivalents invested throughout the quarter. At September 30, 2023, we had a net debt to trailing 12-month adjusted EBITDA leverage ratio of 1.1x compared to 1.5x at December 31, 2022, which is well below our stated target of 2x.
At September 30, 2023, we had $335 million in working capital, excluding cash and cash equivalents. Capital expenditures and total incurred finance leases for the 9 months ended September 30, 2023, were approximately $49 million combined, which was approximately 2% of revenue, roughly in line with the same period last year. With our strong liquidity position, asset-light business model and modest financial leverage, we continue to focus on expanding through acquisition and returning capital to shareholders.
Our acquisition pipeline remains robust and our goal of acquiring $100 million of annual revenue each year is unchanged. However, as Jeff mentioned, the timing of acquisitions can move forward or backward from plan, which may influence our ability to close a specific annual revenue amount worth of deals in a given calendar year. We currently expect that certain acquisition targets may be delayed to the first quarter, which would result in our acquired revenue for 2023 being below $100 million.
IBP's Board of Directors approved the fourth quarter dividend of $0.33 per share, which is available on December 31, 2023, stockholders of record on December 15, 2023. The fourth quarter dividend represents a 5% increase over the prior year period.
With this overview, I will now turn the call back to Jeff for closing remarks.

Question and Answer Session

Operator

(Operator Instructions) My first question comes from Reuben Garner with Benchmark Company.

Reuben Garner

Wondering if you could talk about your mix between some of the bigger production builders and some of the smaller ones. I think it's been a pretty consistent concern from folks that the smaller builders may struggle a little bit in the near term with the rate environment. I think to anyway, I'll just I'll leave it there.

Michael Thomas Miller

As we've said in previous quarterly calls this year, we do expect that the production builders will continue to gain share. And I think you're starting to see that in some of the forward-looking metrics like orders, where they are starting to gain share, that really hasn't translated yet to us from an install perspective, we still saw in the third quarter a higher rate of growth, if you will, within the regional and local builders than we did with the production builders in terms of their percentage of overall revenue. But we feel very good about our share and mix with the production builders and still firmly believe that in 2024, particularly, you will see, again, their share of closings continue to increase and they will continue to gain share.
I mean quite frankly, as I think everybody on this call probably appreciates the current operating environment within single-family is heavily weighted towards production builders just in terms of their access to capital, their ability to access subcontractors and their very clearly stated commitment to continue to gain share and improve affordability of the existing new construction product that they're building.

Reuben Garner

And then a question about the M&A strategy, a couple of deals or a few deals this quarter. Correct me if I'm wrong, but a couple of categories I think are listed now that maybe I didn't see before the hardware fireplaces, are these kind of new growth initiatives at like the blinds category has been one in the past. Are these kind of areas that you're building off of to expand your M&A opportunity in the future?

Jeffrey W. Edwards

No, we've been in those product lines really a long time. So it's not a new effort. It's just -- we haven't really ever, I guess, specifically called them out in great detail. But it's not part of a new strategy. I don't know how many exact locations we have in fireplaces and hardware, but it's more than a handful. I think the key is there's no change in the M&A strategy.

Reuben Garner

Congrats on the strong results, guys, and good luck through the rest of the year.

Operator

Our next question comes from Stephen Kim with Evercore ISI.

Stephen Kim

Congratulations on the good results again. First question I had related to your margins. You talked about the strength of the business overall. But I was wondering, was there a particular benefit that you experienced in maybe the multifamily side of your business from maybe projects that are a little larger, take -- have a little bit more of a lead in in terms of -- in other words, you're quoting them earlier than you might for single-family jobs that boosted your margin a little bit this quarter.

Michael Thomas Miller

We've been performing -- our team has been performing extremely well on the multifamily side. And I think they're really highlighting their performance is highlighting our focus on the value of our installed services, the profitability of our installed services. And I say over volume, even though the multifamily volume has been very strong, obviously, and we're -- the team has just done an excellent job executing there. But we continue to focus on that. There's definitely been benefit there. But I would say we are experiencing an almost normalization on the gross profit side, given this is across pretty much all categories, both end markets and end products.
We're benefiting from a stable pricing environment, the complete realization of the pricing actions that we had taken in '22. And keep in mind, as I think everybody on this call recalls, ‘22 was an extremely volatile pricing environment from a material perspective. The fact that, that has stabilized combined with our ability to improve operating efficiencies, particularly at the installer level, has helped to continue to improve gross margin throughout the course of the year. And it's not just multifamily, it's across the board that we're seeing that benefit.

Stephen Kim

So really nothing special to sort of call out here that we might want to adjust for on a go-forward basis is what I'm hearing you say, which is great. A few quarters ago, this was a topic of conversation about maybe leaving -- not walking away per se, but sort of deemphasizing certain projects or maybe you sort of felt like you didn't get the value for your services that you desired. Could you remind us again, is that a fair characterization that you kind of have left those for some smaller players in the industry? If you could just sort of describe those for us again, how we should be thinking about what those kinds of business opportunities are?

Michael Thomas Miller

Again, we continue to focus less on volume and more on value and profitability. And keep in mind, I just want to be careful because I think a lot of times, when we say profitability or value, people think of that as just price -- and it's not. I mean, there are -- it's really selecting and working with the best builders and the best general contractors that allow you to be the most efficient from an install perspective. And that in many respects is more important, quite frankly, than price can be just because it allows you to be efficient in the way that you're scheduling and the way that you're performing your work for those jobs, those contractors and those builders.
So to the extent that we don't necessarily like to say walk away, but that we choose not to do work or bid on work for a particular general contractor or a builder. A lot of times, it's not really a question of price as much as it is, how can we most effectively service and be the most productive with that work. And that's where we're very selective.

Jeffrey W. Edwards

It's fairly straightforward really, I mean, too because we're still -- we're busy enough to in the market is good enough, too, that you can be somewhat choosy on the work that you take, right?

Stephen Kim

Would you characterize that as maybe more like a product type, there are certain products or structures that -- where you have just maybe more downtime or more propensity for callbacks? Is that what you're talking about? Or is it really just down to the kind of the human level, certain counterparties just maybe aren't quite as organized as others? Is it that sort of thing?

Michael Thomas Miller

Yes, it's more the human level. I mean because if you said it was at the product level, those are products that likely we shouldn't be if we can't make the kind of margins that we associate with this business and the things we install and that a particular product line, we shouldn't be in it, right? But to the extent that we are in it and the margins are good, we just, at the human level, decide who we might be doing work for.

Jeffrey W. Edwards

And interestingly, to that question, which was a good one, is that on the product level, there is -- I mean, you could be in one market where a single customer might be a great insulation customer, but they're a terrible gutter customer. So you don't want to do their better work on they want to do their insulation work.

Operator

Our next question comes from Joe Ahlersmeyer with Deutsche Bank.

Jason R. Niswonger

I'd like to revisit the gross margin quickly, if we could. Because just looking back over the last several years, even before COVID, this is, I would say, your smallest sequential revenue growth, 3Q versus 2Q, but it's among your best gross margin performance. I want to make sure I interpret your commentary, Michael, that it's more of a normalization and nothing particularly strong in the third quarter. So if we're looking into kind of the fourth and the third is a good indication of the strength of your margins right now.

Michael Thomas Miller

Thanks for asking that question and getting the clarification. So I mean, historically, we would say that our best margin, particularly from a gross margin quarter, is going to be the third quarter. And last quarter, we talked about a range of gross margin of sort of 30% to 32%. We still think that from an operational environment that is sort of a long-term sort of normalized run rate, if you will, from a gross margin perspective. But we just wanted to highlight the fact that there wasn't necessarily anything extraordinary in cost of goods sold and therefore, gross margin in the quarter that we would just call out necessarily. And except for, of course, what we had said earlier that it being a benign inflationary environment, combined with the availability of the types of material that we need to install and getting it in a timely manner has really improved significantly the efficiency of the operation on the sort of the install scheduling side of the business, and that is really what's flowing through to the gross margin, not just in the third quarter, but really throughout 2023.

Joseph David Ahlersmeyer

And then just curious if you agree with much of the commentary shared by peers and others around a shift back to single-family in 2024 and how that dynamic might play into material tightness into next year and perhaps even more supportive of pricing?

Michael Thomas Miller

So I'll do the first part of that, and then Jeff can talk about the material tightness or potential material tightness, I should say. But we definitely agree with the general perspective around 2024 being certainly enough year for single-family. I mean everything that we've seen both from the public builders that reported so far, their orders are up 40% admittedly from a very low base. But I think both the public builders and all of the private builder surveys that we've seen, combined with the conversations that we're having with our customers, we believe even after the disruptions that we saw in the mortgage market in October, surveys that have come after that have still supported an environment that would be sort of a mid-teens order growth in '24, combined with a mid- to maybe high single-digit closings growth in '24 for single family. And we have not seen or heard anything that would be contrary to that on a macro basis.

Jeffrey W. Edwards

And this is Jeff. As Michael pointed out, assuming relatively robust and positive sales order volume, material is already fairly tight. Now some of that's due to maintenance and rebuilds. There's as we know and all have talked about over the years, so a little bit of capacity coming on with a new plant from Kanoff, supposed to be the latter half, I think, of the second quarter, but it's not so significant as to really put the industry into anything that resembles anything like a loose market as it relates to material. It's going to be tight for some time, I think, based on the health -- the degree of healthiness in the market and the capacity that's out there.

Operator

Our next question is from Adam Baumgarten with Zelman.

Adam Michael Baumgarten

Is there a certain region or even builder type, i.e., maybe spec versus build to order, where you're walking away from more volume and prioritizing margins? Or is it pretty much across the board?

Michael Thomas Miller

Yes. I would say there's -- it would depend upon the market and the individual customers in their market. And keep in mind that even the production builders with very large national footprints, they act differently market to market, right? So there might be an instance where we're leaning into one builder in Southern California, but we're leaning away from them in Florida just because of the -- our cost of serve and just the relationship that's there. But I would say that if you -- and I think this is consistent with what people's expectations would be is that clearly, the Western Census Bureau region has been the weakest single-family housing market year-to-date. And obviously, we have a good presence there, and that impacts us as well.

Adam Michael Baumgarten

And then just on margins. I know that there's been a concerted effort in improving the profitability of the commercial business. Was that also a contributing factor in the quarter on the private.

Michael Thomas Miller

Yes, it was. We have made -- and I say we, as if I had anything to do with it. But our team has done an incredible job really turning the ship, if you will, on the heavy commercial business. And while it's still not at the level of profitability of the rest of the company or where we would expect it to be, it is definitely much more of a tailwind now than the absolute headwind it was in 2022. So going back to the earlier question, if I was going to call out anything that was beneficial to both gross margin and profitability in the quarter on a relative basis compared to last year, it would be the inclusion in the heavy commercial business, but we don't see that at this point as being transient.

Operator

Our next question comes from Mike Rehaut with JPMorgan.

Michael Jason Rehaut

You guys referred to a few times throughout the call, a lot of things regarding price mix being dependent on the market. And I'm wondering if you guys have noticed throughout the data from the past quarter. Are there any particular markets or regions where you're seeing more of an effect from price or mix in particular?

Michael Thomas Miller

Not necessarily. I think it's fairly balanced. I mean there is various components from quarter-to-quarter from region to region and also our penetration of multifamily and the size and scale of particular multifamily projects running through particular regions. Clearly, and we pointed this out in several of the quarterly calls this year that the price/mix calculation has been heavily influenced by particularly multifamily jobs and commercial jobs.
And our share gains in multifamily have been driven primarily in the mid-Atlantic in the South. And that's when you have share gains and volume gains in multifamily or commercial, that's what lifts up the price/mix calculation. So I would say that it really is more driven by that demand component or volume component with the different mix components within price/mix, if that's not confusing.

Michael Jason Rehaut

And then regarding acquisitions, obviously, you guys mentioned that there were a few holdups kind of pushing back some of that revenue. I'm just wondering if the kind of M&A environment and it seems to be across the sector and other areas that some of these acquisitions are taking longer. Has that had any impact on the pipeline and did not -- has the kind of general market volatility have an impact on what you see in the pipeline over the past few quarters?

Jeffrey W. Edwards

No. It's Jeff. Not at all really. I mean, interestingly enough, because of our kind of cash position in our balance sheet, it's actually -- so from a robust pipeline perspective, it hasn't changed. But honestly, private equity is a little wounded in terms of kind of being a competitive bidder with this, not in every case, but probably less so than normal. And so in terms of the sphere of potential buyers, we actually feel better, I think, about the M&A side of things. So at least that there'll be fewer at the table in those instances where we are having to get into more of a competitive bidding situation. When we talked about the for many times, that's not in the condition to -- we've developed a reputation, hopefully, I believe, deserve of being the right people to kind of do a deal with and be honorable in doing so and that they typically are previous owners stick with us for as long as we'd like them to and as long as they'd like to.

Susan Marie Maklari

Our next question is from Susan Maklari with Goldman Sachs.

Susan Marie Maklari

And congrats on a great quarter, guys. My first question is when we think about the profitability of the business this quarter, in addition to the gross margin, you're also seeing some really nice leverage on the SG&A line. And as we think about some of the dynamics that you talked about that are coming through the business this quarter and then even thinking further out in terms of where single-family starts are coming through today and some of the other dynamics between multi and single. Any thoughts on the ability to sustain some of this? And where that may go over time?

Michael Thomas Miller

And I think it's when -- contextually, when you look at particularly G&A expenses, let's put selling and G&A together quarter-to-quarter, like -- so from the second quarter to the third quarter, really, G&A does not move very much. I mean what impacts the dollar value of G&A is really, especially because we're in not just on the material side, but pretty much across the board, a fairly benign inflationary environment, even on the G&A side, what impacts it really are acquisitions, obviously, because they bring their own G&A.
And then quite frankly, for us, because we have a very high variable compensation structure, the variable comp has an impact on the absolute dollar value of administrative expenses, but it's obviously key to profitability. So as you correctly pointed out, from the second quarter to the third quarter, we actually improved our SG&A leverage and actually, the SG&A leverage in the third quarter was the best that it's been this year. Still higher than it was in prior years, but we feel good about what's happening there, and we also feel good that we're not experiencing the inflationary pressure, particularly the wage inflationary pressure that we experienced through all of really '21 and '22 as it related to G&A expenses. But that variable component definitely is going to flex with profitability.

Susan Marie Maklari

And then I wanted to follow up on the comment that you made around commercial and shifting to a tailwind versus a headwind in there. Just given the macro environment around heavy commercial, can you talk a bit about the backlog that you have there and how you're thinking about the forward trajectory of that business a bit?

Michael Thomas Miller

Yes. We feel good about it. As I think we've said on previous calls, last year, it was all about improving the profitability and not about sales. Now that the profitability has stabilized and improving. The team is doing an excellent job of bidding and bidding at -- and it's not -- again, it's not just the price they're bidding at. The team has come together and is the operational efficiency that they're experiencing is where it should be. They're -- particularly on these large commercial jobs and on multifamily jobs, yes, price matters, but what's more important is how well you manage the crews, how well you manage the GC and how strong that relationship is. And the team is just doing a great job of getting back to where they've been before and being operationally efficient from that perspective.
The backlogs in that business continue to be solid, bidding continues to be solid. That business actually had a record month in October and from a sales perspective. And we feel really good about where that business is headed right now. (inaudible) is different from the way we thought 12 months ago.

Operator

Our next question comes from Trey Grooms with Stephens.

Trey Grooms

So first, I just wanted to talk about maybe the near-term outlook on single-family and multifamily. We've seen a bit of an improvement in single-family starts over the last couple of months. Cycle times have come down. So would you expect that lift to contribute to the 4Q volume? And then on multifamily, I think there's some concerns that it's a little pinkish there, but I imagine there's still a pretty strong backlog. So on multifamily, for how long do you think that will be a positive contributor to volume?

Michael Thomas Miller

So it's our belief on the multifamily side based upon our current backlog and obviously, this can change, but we feel good certainly about that business through '24. There's no doubt that there are considerable macro headwinds to the macro multifamily environment, which I'm sure everyone on this call can appreciate it. On the single-family side, you're absolutely right. Cycle times have, I would say, completely normalized, have not even gotten a little bit better than normal.
That should have an ability of flowing through a little bit into the Q4, but I think it's much more of a 2024 event. In October, our volume trends for October were the best they've been all year, quite frankly. And October was actually a tie for record monthly sales for us as a company. But I would say that we would expect the typical in -- from Q3 to Q4, we would expect the typical seasonal softness that happens in Q4. If you look back at last year, that softness from Q3 to Q4 was about mid-single digits. We'll probably be a little bit better than that. But we would definitely expect to see that kind of softness. One of the things that's maybe too much of a nuance to talk about on the call, but Thanksgiving is very early this year and construction activity slows quite a bit from Thanksgiving to the beginning of the year. So we think that will impact fourth quarter results for all of the building products businesses.

Jeffrey W. Edwards

(inaudible) but on the model family side too, I mean, that business still for us, is it nearly as mature in terms of our market penetration as single-family business. So regardless of what's happening with the multifamily market on a go-forward basis, we'll continue to let that mature for us and gain share to some degree within that market segment.

Michael Thomas Miller

And that's an excellent point. If we look at our single-family market share in the markets that we're in compared to our multifamily market share of the markets that we're in. We are 10 points lower in market share in those markets in multifamily relative to single family.

Trey Grooms

Maybe shifting gears here to the price mix side of the revenue equation. I think previously, as we look to sort of the back half of this year, we were anticipating 2 negative mix impacts. One, on serving more production builders; and two, on serving more multifamily demand. And I think on an answer to a question earlier, it sounded like the potential negative mix impact from serving more of the larger production builders hasn't really materialized yet. Am I hearing that right? That's more of an impact to potentially come? And then I guess, in the quarter, was there a significant mix impact for multifamily...

Michael Thomas Miller

Yes. Multifamily gave was a significant impact on the price/mix calculation, and you did hear it correctly. In all honesty, the shift to production builders weighted towards production builders relative to the regional and local builders has not happened as quickly as we expected it to. So we think that the dynamics around production builders seeing a negative impact or a headwind to the price/mix disclosures is really a 2024 event, quite frankly.

Operator

Next question is from Phil Ng with Jefferies.

Philip H. Ng

It's great that you guys have managed this air pocket very well with single-family slowing down, but certainly, it sounds like you're -- you got some favorable outlook as we look at 2024. How does that all kind of play out? I mean do you expect your volumes kind of bottom out in 3Q and you start seeing a positive inflection by 2024? Because it sounds like most of your end markets, you're pretty positive, housing up, (inaudible) sounds pretty resilient and same thing on the multifamily side. So kind of help us contextualize how your volumes could kind of progress in the next few quarters?

Michael Thomas Miller

Yes. I think I would say that volumes are not going to be great for the next couple of quarters. I think it's really going to be more maybe back half of second quarter and into the back half of the year. And that's really as the production builder is just absolutely accelerate their construction pace. I mean, just from a context perspective, their backlogs are still down dramatically from where they were. Now that's a reflection of the order growth having declined so much. Now in the past few quarters, they haven't grown significantly and us improving not just us, the industry significantly improving cycle times to bring those backlogs down. But as they continue to work to build those backlogs back up and continue to build homes, which we think will again be a 24 event, that should positively impact our volume disclosures.

Philip H. Ng

Michael, we should expect the rate of decline to moderate in the coming quarters? Or it's going to still take some time until like mid next year?

Michael Thomas Miller

Yes. I would say that as it answered the previous question that our volume trends were the best in October that they've been all year.

Philip H. Ng

And then your margins were -- have been very impressive this year and your messaging has been pretty clear value over volume. It sounds like labor material is still very tight. Is that a backdrop where you see material prices go higher? And more importantly, is that an environment you can raise prices and drive margins higher in 2024? Or is the goal just kind of hold on to price margins just because margins have been strong and obviously your customers are looking to tackle affordability as well.

Michael Thomas Miller

Yes, I'll start that, and then Jeff can finish. But obviously, and I think we've been pretty consistent in this, is that we always want to value the services that we provide fairly and we always -- we do want to maintain margins where they are. But there is a balance. We have to have a balance between our customers, profitability, our suppliers. And it's hard to express really how important the stability that we've seen across the board in so many aspects of the business have really helped us to manage very effectively this year and deliver the kind of improvement in profitability that we have.
The team has just done an outstanding job of managing the various inputs, if you will, and dealing with the fact that they don't have the stress that they had last year associated with getting materials. So yes, we will continuously work to maintain and improve margin. But admittedly, our margins have been -- our gross margins have been really we've been very confident with and feel very good about the results that we've had this year.

Jeffrey W. Edwards

And I would say despite there being maybe some future clouds on the rise as it relates to certain market segments being deteriorating to some begets a healthy market overall. I mean let's face it, the builders are doing well. We're doing well. And I mean I can also say for sure that we don't have a lot of costs that are coming down. So if we don't have costs coming down, it's pretty tough to sit there and just take it on the chin in terms of pricing in a healthy environment.

Operator

Our next question comes from Jeffrey Stevenson with Loop Capital Markets.

Jeffrey Patrick Stevenson

Congrats on the nice quarter. So regarding insulation pricing, it sounds like any potential realization from the car manufacturer increases will be delayed until the late fourth quarter at the earliest. But if the increase does gain modest traction, are you confident that you'd be able to pass along incremental pricing to your builder customers if needed?

Michael Thomas Miller

Historically, we have been able to and particularly in an environment which we believe will exist in '24, where there's going to be growth on the single-family side. And historically, that has been a very good operating environment for us to make sure that we're getting paid a fair value for our services based on the cost of materials, the cost of labor. I mean, while we've talked a lot about the performance of our team and how things have been benign and fairly stable. The reality is, is that labor continues to be very tight across the industry. And there's a value price paid for that labor. And as Jeff just said, I mean, our costs aren't going down and if our costs are going up, we need to work with our customers to make sure there's a fair balance there.

Jeffrey Patrick Stevenson

And then a second question is just on how you're thinking about share repurchases moving forward. In the past, you've taken advantage of market volatility and wondered the fact it possibly it'd be on the table in the future?

Michael Thomas Miller

Absolutely. As you know, we've been opportunistic with our share repurchases, and we are in an incredibly strong capital position right now. This business generates a lot of free cash flow, which is fantastic. And we see as the #1 way we can return capital to shareholders is through share repurchases.

Operator

Our next question comes from Ken Zener with Seaport Research Partners.

Kenneth Robinson Zener

Well, I guess, gross margin, say, it's good to be choosy. I wonder it's obviously good not to buy a product at Home Depot as well. So could you kind of talk about -- I realize there's a lot of moving parts here, but could you kind of isolate the benefit you're having from normalization of price, which helps you, but also in terms of the bid you've made, but also the fact that perhaps your volume relationship with the manufacturers is also helping you. Is there a way to kind of focus on that delta alone of the input costs, the material?

Michael Thomas Miller

I think clearly, as you pointed out, not having to buy certain materials out of distribution is a sale in obviously. And it was a fairly significant headwind to the business, as we pointed out last year and even in the back half of '21. But we have not quantified specifically that on these calls.

Kenneth Robinson Zener

So looking at the past and thinking about the future, one of your -- not your largest customer reported recently. And they basically had volumes closing kind of flattish, right? Nothing too crazy, but it really missed a huge in terms of their start activity, which was, call it, 25,000 ton to 13,000 back up to like 22,000, 23,000 units. That's a big deal which you guys had to navigate. So 2 things. The cadence -- and that same customer has kind of talked about grad oil increases and starts, although avoiding seasonality. So in the past, that large customer really was meaningfully part of the market, you guys had attributed price mix issues associated with them because of the lower mix associated with them.
You've talked in generalities already about kind of next year, but is that being one of the largest, you have the best data set for next year, except for perhaps another competitor about starts. What are you seeing right now? I mean, to make it a little more specific around production builders, I mean they're holding price or the reduced price. Why should we not expect a kind of price mix drag next year, I guess, would be my question.

Michael Thomas Miller

We do.

Kenneth Robinson Zener

But it is not necessarily bad amid stable pricing and efficiencies. In regards to your long-term operating leverage.

Michael Thomas Miller

Correct. And while our average job price with some of the large production builders is lower than it is with the regional local builders, which makes complete sense because they're building more efficient homes and lower square footage homes on average, right? So there's less insulation that actually goes into them. But we feel very good about our relationships with the biggest production builders and our ability to size up with their intentions to grow both orders in double digits and high single digits closings next year. We work at the local level very closely with the production teams of those large builders to make sure that we're there for them when they need us. And they expect that, and we deliver that.
And then as it relates to your kind of growth patterns but also this internal or local skill set you have, I'm looking at Slide 12 on your 3Q presentation where you talk about right penetration in markets where developed where you have a lot of -- well, basically, your take is 4,400 where you're established compared to, let's say, 2,200. How does a slowing activity or a shift to more production builders traditionally affect that side of your business in terms of your ability to go deeper with customers. Is there anything that you can expand on their market volatility tends to create opportunity?

Jeffrey W. Edwards

It really depends upon the customer. I would say that in the developing markets, they can tend to be larger production builder markets than some of the more established markets. And I would say that we're doing a good job of trying to cross-sell the other products into that production builder base. And quite frankly, which is a little counterintuitive to some of the things that we've said in the past relative to the other products. But as their production increases, they value more our ability to provide multiple installed products for them, especially these -- which we've talked a lot about, the small dollar value nuisance products that we install. So it should help to improve the characteristics of the developing market with those production builders.

Operator

Our next question is from Keith Hughes with Truist Securities.

Keith Brian Hughes

So the total installation volumes year-to-date have held up much better than the peak housing starts declines. I may have missed this, but I was wondering if you could give us an indication on how much of that relative outperformance is backlog support? How much of that comes from like pivoting to a commercial business?

Michael Thomas Miller

It's a combination of really all of that, quite frankly, and the team is doing an excellent job of performing and executing on all the things that we've talked about previously in the call. So yes, it's a combination of all of that.

Operator

We have reached the end of the question-and-answer session. I'd now like to turn the call back to Jeff Edwards for closing comments.

Jeffrey W. Edwards

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

Operator

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