Q4 2023 Installed Building Products Inc Earnings Call
Participants
Darren Hicks; Managing Director, Investor Relations; Installed Building Products Inc
Jeffrey Edwards; Chief Executive Officer; Installed Building Products LLC
Michael Miller; Executive Vice President, Chief Financial Officer, Director; Installed Building Products Inc
Susan Maklari; Analyst; The Goldman Sachs Group, Inc.
Stephen Kim; Analyst; Evercore ISI
Joe Ahlersmeyer; Analyst; Deutsche Bank AG
Ken Zener; Analyst; Seaport Research Partners LLC
Mike Dahl; Analyst; RBC Capital Markets, LLC
Doug Worman; Analyst; JPMorgan Chase & Co.
Adam Baumgarten; Analyst; Zelman & Associates
Keith Hughes; Analyst; Truist Securities, Inc.
Reuben Garner; Analyst; The Benchmark Company, LLC
Philip Ng; Analyst; Jefferies LLC
Noah Merkousko; Analyst; Stephens Inc.
Presentation
Operator
Greetings and welcome to the Installed Building Products' fiscal 2023 fourth quarter financial results call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darren Hicks, Managing Director of Investor Relations for Installed Building Products. Thank you. You may begin.
Darren Hicks
Good morning and welcome to Installed Building Products' fourth quarter 2023 earnings conference call. Earlier today, we issued a press release on our financial results for the fourth 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 and 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 annual report on Form 10-K. We undertake no duty or obligation to update any forward-looking statement as a result of new information or future events, except except as required by federal securities laws.
In addition, management refers to certain non-GAAP and adjusted financial measures. On this call, you can find a reconciliation of such measures to the nearest GAAP equivalent in the company's earnings release and additional reconciliation for EBITDA adjusted EBITDA for early the earlier fiscal years in our investor presentation, which are available on our 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 officer. I will now turn the call over to Jeff.
Jeffrey 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 improved both sales and profitability in the fourth quarter, helping IBP achieve another year of record financial results, including record revenue, net income and adjusted EBITDA. I'm proud of IBP's performance in 2023 as installation sales growth in our multifamily and commercial end markets more than offset softer single-family sales growth throughout the year.
Our installation teams worked efficiently to optimize the value we provide to our customers, which with each completed job driving record annual net profit and adjusted EBITDA margins in 2023, the talent and commitment of our employees, combined with the strength of our business model, enabled the company to once again reach new heights in 2023. Throughout 2023, our acquisitions contributed positively to our financial results.
We invested approximately $60 million in acquisitions, while returning nearly $70 million to shareholders through dividends and share repurchases. I'm pleased to report that for the 2024 first quarter, our Board of Directors has approved an increase to our regular quarterly cash dividend by 6% and declared an annual variable dividend of $1.60 per share, representing a $0.70 per share increase over last year's variable dividend.
On February 12, 2024, we celebrated the 10th anniversary of our public offering by ringing the closing bell at the New York Stock Exchange since our IPO in 2014, net revenue, net income, and adjusted EBITDA have grown at compound annual growth rates of 21%, 37%, and 31%, respectively. During this period, we completed almost almost 90 acquisitions, expanding our footprint across the United States in diversifying our revenue to additional end markets and product categories.
As a result, IBP has transformed from a regional installer of insulation to one of the largest installer of building products in the country. The success of our growth strategies, combined with our disciplined approach to capital allocation has created significant value for our shareholders. The credit for our accomplishments goes to the hard-working men and women across our roughly 250 branches throughout the United States and those who support them from our office in Columbus, Ohio. To everyone at IBP, thank you.
As we continue to focus on profitable growth, we remain committed to doing the right thing for our employees, customers, communities, and shareholders. During 2023, we acquired eight companies with combined annual revenue of approximately $75 million, further expanding our product offering and geographic presence. 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 with any given calendar year.
During the 2023 fourth quarter, we completed two acquisitions, including a North Dakota-based installer of fiberglass and spray foam insulation in multifamily, residential, and commercial customers with annual revenue of approximately $2 million and a Florida-based installer of diverse mix of building products to new residential construction projects in the Orlando market with annual revenue of approximately $16.5 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 relative to historical averages. Additionally, an elevated volume of multi-family units under construction continue to be supported by our installation business.
We believe we are well-positioned for another year of strong operational and financial performance in 2024 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 has favorable opportunities ahead, including demand driven by 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 US housing market. I'm proud of our continued success and excited by the prospects ahead for IBP in the broader insulation and other product installation business. So with this overview, I'd like to turn the call over to Michael to provide more detail on our fourth quarter financial results.
Michael Miller
Thank you, Jeff, and good morning, everyone. consolidated net revenue for the fourth quarter increased 5% to $721 million compared to $687 million for the same period last year. The increase in sales during the quarter was driven by higher multifamily and commercial sales, which was partially offset by softer single-family sales within our Installation segment as we evaluate our performance on a year-over-year basis, the exceptional growth our company experienced in 2022 set difficult comparisons this past year. Also rising interest rates and the decrease in single-family housing units under construction were headwinds to our revenue opportunity in 2023.
According to the US Census Bureau in the fourth quarter of 2023, the housing units under construction, the sales pipeline for our installation services showed single-family units were down 12% year over year, while our single-family same-branch sales were down 7%. And the multi-family end market industry units under construction were up 8%, while our multifamily same-branch sales were up approximately 30%. We are pleased with our performance relative to the market opportunity.
Our focus on efficiency and job optimization led us to achieve a record fourth quarter profitability as measured by adjusted gross profit margin, adjusted net income margin, and adjusted EBITDA margin. As the inflationary environment began to normalize in 2023, our ability to compete based on service and provide value to our customers helped to support a 240 basis point improvement in adjusted gross profit margin at 34.1% in the fourth quarter relative to the same period last year.
Adjusted selling and administrative expense as a percent of fourth quarter sales was up 160 basis points to 18.3% due primarily to higher insurance and variable compensation related to higher gross profit and EBITDA performance from the prior year period. Despite a higher adjusted selling and administrative expense ratio in the fourth quarter, adjusted net income margin improved to 10.7% from 10.1% in the prior-year period.
Adjusted EBITDA for the 2023 fourth quarter increased 11% to a fourth quarter record of $128 million, and adjusted EBITDA margin reached a fourth quarter record of 17.8% compared to 16.8% for the same period last year. We continue to target full year long-term same-branch incremental adjusted EBITDA margins in the range of 20% to 25%.
For the 2023 full year, total same-branch incremental adjusted EBITDA margins were substantially above our target range. Although we do not provide comprehensive financial guidance, based on recent acquisitions, we expect first quarter 2024 amortization expense of approximately $10.5 million and full year 2024 expense of approximately $40.9 million. We would expect these estimates to change with any acquisitions we close in future periods. Also, we continue to expect an effective tax rate of 25% to 27% for the full year ending December 31, 2024.
Now let's look at our liquidity position, balance sheet, and capital requirements in more detail. For the 12 months ended December 31, 2023, we generated $340 million in cash flow from operations, an all-time annual record compared to $278 million in the prior year period.
The year-over-year increase in operating cash flow was primarily associated with higher net income and effective management of working capital. During the fourth quarter, interest rates increased year over year. But through interest rate swap agreements, we have fixed the interest rate on $400 million of our existing variable-rate debt until December 2028, limiting our interest rate exposure. We have no significant debt maturities until 2028.
Our fourth quarter net interest expense decreased to $7.8 million from $9.9 million in the prior-year period due to the term loan repricing in August 2023 and the higher rate of interest we earned on cash and cash equivalents invested throughout the quarter.
At December 31, 2023, we had a net debt to adjusted annual EBITDA leverage ratio of one time compared to 1.5 times at December 31, 2022, which is well below our stated target of two times. At December 31, 2023, we had $337 million in working capital, excluding cash and cash equivalents.
Capital expenditures and total incurred finance leases for the year ended December 31, 2023, were approximately $65 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 goal of acquiring $100 million of annual revenue each year is unchanged. IBP's Board of Directors approved the first quarter dividend of $0.35 per share, which is payable on March 31, 2024, to stockholders of record on March 15, 2024. The first quarter dividend represents a 6% increase over the prior year period.
Also as a part of our established dividend policy, today we announced that our Board has declared a $1.60 per share, annual variable dividend of $0.70 per share increase over the variable dividend we paid last year. The 2024 variable dividend amount was based on the cash flow generated by our operations with consideration for planned cash obligations, acquisitions, and other factors as determined by the Board.
The variable dividend will be paid concurrent with the regular quarterly dividend on March 31, 2024, to stockholders of record on March 15, 2024. We are committed to continuing to grow the company while returning excess capital to shareholders through our dividend policy and opportunistic share repurchases.
The Board of Directors authorized a new stock buyback program, which expands our repurchase capability, to $300 million of our outstanding common stock, up from $200 million in the previous program. The new authorization replaces the previous program and is in effect through March 1, 2025. With this overview, I will now turn the call back to Jeff for closing remarks.
Jeffrey Edwards
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. Our success over the years is made possible because of all of you. Operator, let's open up the call for questions.
Question and Answer Session
Operator
(Operator Instructions) Susan Maklari, Goldman Sachs.
Susan Maklari
Good morning, everyone, and congrats on a great quarter. My first question is if we think about 2023, you saw some really nice price mix that came into the business despite all the headwinds that you had in there. As you think about the outlook for '24, how you're thinking about the setup there? Can you talk just generally to the different moving pieces and any thoughts on price specifically as the manufacturers perhaps look to offset some ongoing inflation?
Michael Miller
So this is Michael. Yeah, our view really hasn't changed very much as it relates to price mix going into '24. If you take out the high inflationary period that we experienced in '22. And really that was partially in '21, '22 and still catching up a little bit coming into '23. We really have consistently run price mix and sort of a mid to low single digit pace.
And that's consistent with our expectation of sort of a fairly benign inflationary environment across the products that we install. So there's nothing that we see right now that would change that. I mean, material, particularly fiberglass continues to be tight. And we believe that as we progress through the year in the back half of the year the material might loosen up a little bit. But that also depends a lot on what happens with the single-family market, which we currently feel very constructive about.
Jeffrey Edwards
Well, it'll loosen up as a relative. As you know, it's we're still not without even as recently as the third and fourth quarter last year at times having to, you know, kind of go fend for ourselves based on how tight the market is. So it's healthy in that regard.
Michael Miller
Yeah, the market feels very comfortable in terms of I mean, things are tight, things, you know, there's always unique challenges. But given the backdrop that we see in single-family and what we're hearing from not just the fiberglass suppliers, but all of our suppliers, we're very encouraged.
Susan Maklari
Okay. All right. That's helpful color. And then on turning to the incremental margin was obviously really impressive on last year as well as you think about the operating conditions and the setup over not just even '24, but just looking further out, what would you need to see to give you confidence to raise that range or to change where you think the business can fundamentally operate? And how do you think about the different puts and takes to that?
Michael Miller
Well, obviously, we performed well above our targeted incremental margins on this year. There was definitely some I don't want to say unique, but factors that contributed to that. I mean, if you look on an annual basis, you know, over the course of the past couple of years, I mean both '22 and '23 were very solid incremental margin on same-branch incremental margin years for us, and we feel very good going into 24. And you know, obviously we don't provide guidance on, but we're feeling good that we will have we will continue to have above the top end of the range incremental margins when we look back this time next year.
Susan Maklari
Okay. All right. Thank you and good luck with everything.
Michael Miller
Great. Thank you.
Operator
Stephen Kim, Evercore ISI.
Stephen Kim
Yeah, thanks very much, guys. Good results. I wanted to ask you a couple of longer-term questions, if I could. On the commercial business was very strong, had a nice year of growth here. You talked about a management change last quarter that you'd made there? And was wondering if you could give us a little bit of an update on that and in particular, how that positions the commercial side of your business for growth as we look ahead and over the next couple of years, what we is what we saw in 2023 kind of representative or is that sort of what kind of a one-off kind of a year that's about that's the kind of color I was looking for.
Michael Miller
Sure, Stephen, this is Michael. Thanks for that question. And we are extremely proud of what was accomplished in the heavy commercial business, particularly the heavy commercial business, not just the overall commercial business. And this year, it really was a year to sort of stabilize that business and start bringing it back up to acceptable margin levels.
I would say that it's still not and at company margins and we believe there's still room for improvement, but just to give you a sense of the benefit we received from the heavy commercial business in the year and in the quarter, and they actually added roughly 100 basis points in gross margin improvement to the overall business.
So that while news is that the bad news is they came from such a low point to acquire, but we do not think that that's transitory and that's sustainable. So that benefit will remain, we believe, as we continue to go through '24.
Now we will not we do not expect that we'll see a strong sales growth in the commercial business, particularly the heavy commercial business in 24. But what we're really managing towards in that business is maximum continuing to maximize profitability and getting the margins up to closer to company averages, and we would much rather have that than sales.
Jeffrey Edwards
This is Jeff. We made I mean, just to be clear, we made a change in the leadership of that business line not last year, but the prior year. But these are long duration contracts and a lot of cases, you know, at some of which we were suffering through kind of the hyperinflation in bid, wouldn't that wouldn't allow us to improve kind of our pricing in that regard, but it's also just a change in the mentality to Michael's point in terms of driving for profitability as opposed to sales that the fact that it's been fixed doesn't mean we'll crawl back in our show is the head of R&D as a matter of fact go. And I think we could go back to grow the business.
Michael Miller
Yeah, I definitely see great opportunity in '24 I mean, you always kind of look across the business and what we call the end markets. I mean, we believe that through 24, the greatest opportunity for organic growth will be in single-family markets, right? But now I want to back that up a little bit and just say our multifamily backlogs continue to be very strong, extremely strong.
What we would at a macro level, expect the multifamily, it starts to come down fairly significantly in our call it, 12% to 13% from '23. We have a lot of confidence around our ability to continue to take market share and continue to perform on the existing backlog that we have, such that we continue to perform much better than the market opportunity on the multifamily side, but single-family nearly as everyone's talking about there's just tremendous potential there this year.
Stephen Kim
Yeah. And so I think that, that all makes sense. You know, switching. So switching to the resi side of your business on multifamily, the backlogs being very strong. I think you had previously said you expected that to sort of be a driver to your business all throughout 2024 pretty much.
And can you talk about the margin profile there? I mean, obviously, the margins have been extremely strong. Your margins in the quarter and the year were strong and kind of above, I believe what you had sort of said was your sort of a long-term outlook for gross margins of [30 to 32]. You're running well, above that was curious is if we would what you would attribute that to?
Is that something where you still feel [30 to 32] is the right range or maybe given some things that you've seen, we could scoot that up a little bit. Just trying to get some color on your outlook for gross margins, whether it's changing maybe going up a little higher and whether multifamily is playing a role in what we're seeing right now?
Michael Miller
Yeah, that's a great question. And I would say that we are definitely encouraged that the gross margin improvement has been solid. And there's no doubt, though, that as we expect to happen and certainly has even happened in January as we get higher growth rates from the production builders, the big national builders purchase, great business.
We love that business and we saw good growth with that in January relative to the regional and local guys, we would expect that that would put pressure on gross margin, but ultimately, the EBITDA margin contribution is similar. But in terms of overall on the gross margin side, the team has done a phenomenal job of really focusing on it's providing as much customer value and service as possible to enhance profitability on it across the company.
So as we look at the business, particularly through '24. And if I look at, say the fourth quarter of '23, I mean, we've been able to work very hard to get the multifamily margins up because historically several years ago, they would have been a drag on margin. Our team has done a great job of not having them be a drag on overall margin.
And the other thing that helped us, particularly in the fourth quarter, is that while the rate of growth was better for the insulation products than the other products, the other products, which we've talked about on several times do have lower margins than insulation, but their margin improvement was better than -- considerably better than the margin improvement in insulation. And as a consequence, did help was a benefit to gross margin. Again, we don't think that's transitory either and that's sustainable. So it definitely makes us feel confident around the gross margin being closer to [32 than 30].
Stephen Kim
That, if I could just follow up there, these non insulation products, the margin improvement you think is sustainable. Can you give a little more color on or some examples of sort of what drove that and why it's sustainable?
Michael Miller
I think there are several things the the inflationary environment becoming more benign, the availability of material becoming more normalized. And honestly, I mean, we say it a lot, but it absolutely is true. It's the performance of the team. I mean, our field team as executed.
So effectively in times that have been very difficult when we think about what's happened over the past couple of years between COVID, the supply disruptions this year, the challenges that single-family presented that we're all well aware of. I mean, the team has just done an outstanding job and their focus on profitability we believe is reflected clearly in the numbers.
Stephen Kim
Great. Thanks so much, guys.
Operator
Joe Ahlersmeyer, Deutsche Bank.
Joe Ahlersmeyer
Hey, good morning, everybody. Thanks for taking the question and congrats on the results. I'm trying to think through where do expect the most strengthen year-over-year sales growth within single-family for the year?
Maybe if you could just talk about what you've seen in starts in the fourth quarter and into January in the data, how you maybe expect that to come to your stage of construction, right, the installation part. And then also in the context of what the comps were last year. I think you've previously spoken to 2Q being the maybe the easiest comp. So maybe it might take into the second quarter before we really see single-family start to expand year over year?
Michael Miller
Yeah, this is Michael. But I think that's right. Although what I would say is that, you know, as we just started the year, obviously, but it is starting to play out exactly as we would have expected in the sense that we're seeing because if you look at the products that we install on the residential side, generally speaking, insulation is the first thing that we do and then the other products, some cut come after what we call after paint, right?
So after that, the house has been painted painted on. So those are much later in the cycle. So what we expect to see in on, yes, certainly through the rest of the first quarter and going into the second quarter is that we'll see some better sales opportunity, if you will, on the single-family side in insulation, where we'll see weakness from a volumes perspective is going to be in the other products until the those later cycle installed products come in more towards the back half of the year.
So the year from the single-family perspective is starting to play out exactly as we would have expected it to in terms of the improvement that we're seeing with the big national builder sales relative to the regional and local guys, and then the installation revenue is starting to improve at a better rate relative to what we're seeing in the other products as we do our planning for '24, we always start sort of with the macro forecast for single-family and multi-family.
And our expectation is that single-family starts are going to be in that [$1 million to $1.1 million] range and which would represent sort of mid single digit growth in single-family. We do believe that that growth is going to be weighted more heavily, much more heavily towards the big production builders, which is why we made the comment about the impact on gross margin and the answer to the previous questions.
And then on the multifamily side, we think that starts are going to probably be down 12%, maybe 15% down to roughly [$400,000] or so. But again, as we said, we feel very good about our backlog, what the team is doing there. And one of the things that our multi-family team is doing is really expanding the cross-sell of the other products, not just insulation and that's really helping support our confidence around their ability to grow above market in that end market for us.
Joe Ahlersmeyer
Yes, a lot of good detail on there and a good callout for the 3Q guidance down in Florida, maybe if we could pivot to price in the early part of the year here. Do you what do we think that maybe the exit rate for 1Q is reaching that full realization of the price increase you're seeing better support for pricing from the labor tightness or from the material conditions, tightness conditions?
Michael Miller
Yeah, definitely it's both as is always the case. It's always been I mean, you know when it's material when it's announced material price increases as everyone on this call. I can appreciate there has been in the market has taken a price increase. You know, generally speaking, people are stronger around that because the labor inflation and labor tightness is a constant, always there. But clearly our ability to show up on time and perform is a function of our ability to attract, retain and train labor.
Joe Ahlersmeyer
Appreciate it. Thanks, guys.
Jeffrey Edwards
I would say that all I'll just add to that. I mean, it takes a year a very low static market for there, not always to be some degree of kind of price taking going on it. Just does based on like the contract based on number of customers based on type of product we're doing and everything else that is yielding the further we get away from it increase and in a healthy environment like this, you know, to because of the better the better conditions are for it to be kind of real normalized for us.
Joe Ahlersmeyer
Yeah, makes sense. Thanks a lot.
Operator
Ken Zener, Seaport Research Partners.
Ken Zener
Good morning, everybody. So Michael, you said your starts, single-family starts are up mid single unit, probably positive after Q2. I believe you said you have confidence that when you look back on this year, operating leverage is going to be above the high end of your long-term range. Is that -- did I hear you correctly?
Michael Miller
I didn't say above. I just said that it was going to be closer to [25 than 20].
Ken Zener
Okay. Thanks for the clarification. So what gives you that confidence that you're not going to go into Home Depot that is it from really just what you're seeing from the public builders or the fact that we're just going through the space and you know for is it the fact that commercial isn't this risk factor that it was in the past. That's a fairly bold statement for you guys.
Michael Miller
I would say it's really all of the above. We feel good about what we're starting to see and it's just starting. So we think that we feel the full benefit of the single-family recovery in the back half of the year. But we were very pleased to see the strength in the national builder business into the in the start of this year, right?
So we feel good about that. We feel good about backlogs in the multifamily business. We feel good about the progress we're making on the other product margins because as we've talked on several calls before, they can weigh on margins and they impact price mix disclosures, all that kind of stuff, so that those.
Ken Zener
What do you feel bad about?
Michael Miller
To be honest with you, there's no mistake, we have been a lot of people occasionally. I mean, so but it's already built in the numbers from last year, right? So it won't be worse, it will be better, right. And it's nice, it could be a trucking issue, right? So you just never know right that things like that, but I'll mention it will go up right now. No, it's honestly can't. I mean, when we look at the backdrop right now.
Ken Zener
That's good.
Michael Miller
That is good.
Ken Zener
Looking back when you started the business, I believe in 1977 Edwards installation, I'm starting to think that the parallels are very similar in the sense that, as Michael was saying and you guys agree with things are good, they're not that the idea of disinflation from the current levels. We're not seeing it in your material inputs. We're not seeing it in your labor. What can you share some of your broad thoughts about the economies strong and you're running so many different operations. Just give us some of that perspective that you might have if you recall it from what was a inflationary period when you started the business and how that might impact concerns you have separate from what Michael has addressed.
Michael Miller
Okay. So let's be clear. I was 14 I might pause and have not had anybody listened to the call or get scared because they'd be wondering how old I was the volume of new and returning to top line went up by 61. But I can remember those times. But I would say that having grown up around of all of that was in the real estate business and myself that was in the real estate business.
And this business model, as you know, almost 40 years. And I think all of us would look at this environment. I'd say it's pretty healthy. In fact, I was on a call for different matter this morning, and this is like the 1st year in three or four where we weren't really worried about something at this point in time in the year, whether it was a doubling of interest rates, whether it was a pandemic, whether it was an impending recession, whether it was material supply issues, you name it.
Ken Zener
So that was countered by I mean, I know you guys are operating your business well, and Michael, if you could quantify the kind of drag over the last couple of years we've seen from commercial, you talked about 100 basis points lift this year. It would be nice to have some kind of context if you could provide that. But it is interesting. I think you guys are in a very unique position, capturing price and labor, right? We can see your forward curve of demand so that you guys are special, but it does raise questions. I think for us people's expectations around monetary policy because things are so good, that's it.
Michael Miller
Yeah, I think that's true. I mean, clearly, none of us know what the Fed is going to do. I think the market has been extremely resilient as it relates to rates and the builder's ability to buy down rates. And I think they've been particularly the national builders that obviously have a capital advantage over the regional and local guys. It's we've been very surprised. And I mean, I think Jeff said it perfectly is that if we look back to the past three or four years at this time of the year, we've always had something we were facing that was felt like a war and we don't have a war right now.
Jeffrey Edwards
In the business and elsewhere, so that's not the discount from the geopolitical things that are going on now or in two wars. And we've got a messy political situation and an election coming up, right? But business-wise, things feel as good as they have in what we feel really good about the things we can control.
Ken Zener
Right. Thank you.
Operator
Mike Dahl, RBC Capital Markets.
Mike Dahl
Thanks for taking my questions just on, but if I was in the comments there. You just made the comments about the incrementals comments about improvement in margins, in particular in the heavy side, which should persist. I appreciate the public builder mixer. I think I do. Maybe it comes down to you can explain order of magnitude to us, but and I guess it's still not entirely clear why your margins would cut your gross margins would come down as meaningfully in this environment and as to get back to the [30 to 32].
So maybe maybe maybe you can elaborate on how big of a mix impact. The public builder dynamic will be I mean, if it shifts a little bit in terms of public mix, it doesn't seem like that that's really going to drive enough for Tom. But I would just tell you it seems like the margins are going to stay above above what you're articulating.
Michael Miller
Well, keep in mind that we are over-indexed in the single-family business to production builders, as you would expect, right, just given our scale size, ability to service customers of the size of that size and the pricing on to those builders tends to be much tighter given the efficiency and cost to service those builders. It's great work, but it definitely impacts gross margins.
And our belief is that you're going to see. So if let's just say there is a mid single digit growth in single family. We wouldn't be surprised, if you know, a 90% of that comes from the national builders. So our overweighting on that, that just continues to overweight two to those two, those builders. And again, the gross margin on that work is much tighter. So we definitely think it's going to have an impact there. But that's from our perspective and it's expected. It's great work and, you know, I'd say, bring it on.
Mike Dahl
Okay. Yeah, I mean, look, no, no doubt the publics are growing. But I think if you look at the public builder commentary, you're only guiding to deliveries kind of mid-single digits to high single digits. So if the markets up mid single doesn't necessarily seem like it's going to be there that big of a shift. But I hear you on the theme in terms of the multifamily dynamics. If we look at permits, multifamily permits are down north of 20% on a rolling 12 month basis. And you're certainly starting to see that come through in the start. So when you talked about the down 12 to 15, I guess just to clarify, is that your opportunity given you think you can take share against that? Is that a you're specific market exposures may be down less than that or is that truly a market view?
Michael Miller
That's an outlook for the macro outlook for the entire market, not certainly specific to us, but we do believe that you're seeing and assuming there's a lot of assumptions in there, particularly that you're going to see the Fed at some point during the year reduced rates, but some of the dynamics for like if we think about our perspective, when we were in the third quarter going into the fourth quarter, the headwinds in multifamily were fierce to use a very technical term.
And when we are sitting here now, some of those headwinds have definitely subsided relative to multifamily. And we think there's going to continue to be there's going to be a more constructive environment for multifamily in '24 than we would have expected three to six months ago on given the headwinds that that multifamily is experiencing. So we're just I guess we're not as negative on multifamily as everybody else is.
Jeffrey Edwards
Well, in part, you mentioned it earlier. It's partly we take take share which is accurate. In some ways. It's almost like if you refine the way, we're saying that to say what we're really doing is we're entering either product lines or entering markets that were not. I mean, this isn't us taking share necessarily in a market where it is just us beginning to offer the kind of CQ services and a lot of the other things we install and markets and on jobs we previously didn't do so, right, exactly.
Okay, particularly in a geography that up, but it's not we're in there and work with sharp elbows all the time. It does kind of come into them with what we believe is one of our original premises. And that is that we think that general contractors and builders would rather deal with fewer subs to get these greater number of new SaaS products done. And that's true for multifamily, general contractors, channels, less developer, just like it has been, we believe, ranked true with all of our builders over the years.
Mike Dahl
Okay, great. Thank you.
Operator
Mike Rehaut, JPMorgan.
Doug Worman
[Hey, this is Doug Worman, on for Mike]. Obviously, you guys are very constructive about single-family as are your suppliers and very positive for bomb for the upcoming year. I'm just curious in terms of your acquisition strategy, has the kind of positivity and optimism in the market changed, how you're looking at kind of your criteria for acquisitions has it changed kind of what the pipeline has looked like thus far?
Jeffrey Edwards
So this is Jeff. I will say, as always that the pipeline is robust. I would say that whereas we would have had more or less of a internal, at least likely either suspicion or prohibition on commercial acquisition. I think our attitude as we fixed kind of what we've fixed over the last couple of years. I think we would alter our stance at this point and say that they know that the market for commercial acquisition to us is now at this point kind of opened up.
So I would say that that's really an additive components will continue for the most part, let's say, to play within the spaces that we have historically, as you know, we made the distribution acquisition a number of years ago. That's that's performed very well. So that's not the space again, that we're by any means afraid of and could continue to potentially look in that direction.
Not long ago to we acquired a business that as at least a component of their business, was more on the industrial side, of kind of the insulation install side of things. So as long as it kind of involves material purchase and a labor component, that typically it's a product that we could install typically by direct that continues to be on kind of the watch list as .
Michael Miller
Yeah, this is Michael. I just wanted to clarify a couple of other questions. Just to be clear, when we're thinking of the, you know, incremental margins on same-branch incremental margins on a full year basis for '24?
We do not. We still believe that incrementals are going to be in that [20 to 25] range. But just given the confidence that we have in all the things that we've talked about on the call so far, you know, it's reasonable to assume that we're going to come in at a little a little bit closer to [25 than we would closer to 20].
Doug Worman
Thank you.
Operator
Adam Baumgarten, Zalman & Associates.
Adam Baumgarten
Hey guys, thanks for taking my question. Just maybe thinking about weather impact potentially January. Just as we think about the first quarter. I know you guys don't guide explicitly, but some sort of what you're seeing there and if that's going to have any material impact.
Michael Miller
Yeah, that's a great question. And I really appreciate you asking it because January was we did lose days in January for sure. The weather really across the country. California has obviously had an unprecedented amount of rain, which is big operations for us here in February. We still feel good about the first quarter and our performance there, but we would expect to see the typical seasonal decline from fourth quarter to first quarter in the first quarter, and that's been typically sort of the mid single digit sort of decline from Q4 to Q1.
So that is definitely has been impacted by January, which was definitely weather impacted at all of the things that we're talking about in terms of the strength of single-family, the continued performance of multifamily and the commercial business you know, those all weaken in the first quarter. And as you all know, that's typically our weakest quarter, both from a sales and a profitability perspective.
And we continue to expect that and the real benefit from this shift in single-family, just giving the timing between you now start to when we do our install work is really going to be a second quarter back half of the year opportunity for us. But that being said, we were very encouraged to see what was going on with the national builders in January despite the weather.
Adam Baumgarten
Okay, got it. Thanks. And then just some heavy commercial, I think you talked about growth moderating in that in that business. Do you still expect growth in '24 on an absolute basis?
Michael Miller
Yes.
Adam Baumgarten
Okay. Thank you.
Operator
Keith Hughes, Truist Securities.
Keith Hughes
Thank you. Questions from really about product availability. And could you just talk near term what you guys are saying and do you anticipate any potential shortfall, particularly a single family kicks in a year later this year?
Jeffrey Edwards
I mean, it's tight. This is Jeff. It's tight. It's not the way that was the last, you know, and then there was of those and it got a little better last year, even two. But I think as we get through, let's just put it that way, right? And we're not as you know, Keith, we're only maybe four months away or so from a little bit of supply getting added. There's always stuff that can happen. I mean, there was a brief issue with the plant here recently. I think they're back up and running and so tight.
I mean, it's kind of in some ways healthy type. But so and really a lot of times, it's a SKU that's not available that throws off like that would cause us to buy out a lot of distribution, let's say it would be below five times. It might be the way in which order got composed and we're missing one skew and we were that tied in or, you know or afraid we got a freight issue or something else. But I think that we should be in a pretty good shape. And I think both in industry and ourselves.
Michael Miller
Yeah, and Jeff just makes a very important point here relative to the SKUs or the type of installation that's being required. This shift to more of a production builder business is very good for material availability because they are very standard in terms of what gets installed.
So it's a very regular way product. When we're doing a lot of custom work and multifamily work and some of the light commercial work that we're doing, those tend to be less standardized products and they need to be cost more customized made and their availability is less.
So the fact that we're going to have the highest efficiency products for the manufacturers as this happens we believe is good for material availability.
Jeffrey Edwards
Mineral as an example, it's six months, I know, but you got to plan that way.
Keith Hughes
Okay, that's all. Thank you very much.
Operator
Reuben Garner, The Benchmark Company.
Reuben Garner
Thanks. Good morning, everybody. I hate to beat a dead horse, but kind of a follow up on the gross margin outlook for this year. I guess that would imply some pretty material leverage on the SG&A front can you just kind of talk about the mechanics there? Where do you see that on the selling expenses line where you get more leverage just on admin expenses in general and it could be a couple of few hundred basis points to kind of offset the gross margin headwind? Or am I thinking about that the right way?
Michael Miller
Yes. Combination of selling expense primarily commissions. And I assume what you're asking about is the shift to the production builders away from that they're at a higher growth rate than the others, correct?
Reuben Garner
Correct. Yeah.
Michael Miller
So it's a combination of branch administrative costs that we leverage and primarily selling commissions that we leverage, so SG&A.
Reuben Garner
Okay. And then last year and the Inflation Reduction Act, there was some talk about it, but it didn't seem to really have a material impact. We've kind of heard recently that maybe that's starting to get some traction at the state and local level. Any updated thoughts there? Are you hearing builders looking to take advantage of that in a bigger way? Or maybe is that still kind of far out from having a major impact.
Jeffrey Edwards
I mean, it's having an impact, but I would say not a major impact. It's still slow. I mean getting the construction industry to change practices is not a quick thing. It takes a lot of time and a lot of effort. But I mean, we believe ultimately, particularly as we look at the opportunity for insulation and energy efficiency benefits associated with insulation, that long term, the trend there is extremely constructive on four for us and, you know, are the industry.
Reuben Garner
Fair enough. Thanks, guys. Congrats on the strong close to the year. Good luck in 24 and Jeff, see you next week.
Operator
Philip Ng, Jefferies.
Philip Ng
Consensus has gone for housing starts to be kind of flattish for the full year because you're calling for multifamily be down single-family to be up, call it mid-single digits. Michael, if I heard you correctly, you're expecting multifamily to be up because of share gains in Europe, over-indexed in public builders. You referenced mid-single-digit volumes a few times. Is that a good bogey in terms of thinking about your growth profile and maybe perhaps it comes in stronger given your exposure?
Michael Miller
Yeah. Just to clarify on that, we definitely expect that multi-family starts are going to be down. And so if you think of, say single-family in the [$1 million to $1.1 million] range and multifamily around [$400,000] right, I mean that basically is flat to what happened last year for starts at [$1.42 million or so].
So we are aligned with that flatness, if you will, in total starts because single-family will be better and we think that single digits and multifamily will be down double digits basically now that the macro environment, we believe, based on our backlogs and what we see that we will not be down in multifamily. We will continue to see, yes, solid growth. There may be not as good as we've experienced over the past several years and several quarters, but we believe we will continue to experience growth in '24 in the multifamily business.
Philip Ng
So unbalanced is mid-single digits volume growth for you guys a good way to think about your profile and in beverage correctly, might still be down in 1Q maybe, but possibly that's kind of build out at the shape of the year?
Michael Miller
Yeah, that's right. I mean, obviously, there are a lot of things that depend on that, but done now, and we think that volume growth comes primarily from the national builders.
Philip Ng
Okay. That's helpful. And I think thinking bigger picture and I think I don't know, Jeff, Michael, how constructive you guys are on single-family longer-term and certainly this year as well. And certainly, we saw some bottlenecks during the pandemic when we had explosive starts and there's certain bottlenecks and those have alleviated quite a bit, but inflation supply still fairly tight. When we look at the 2025 and beyond, how to how challenging will that be? Do you think you're going to still pretty see pretty steady growth and not say up bad thing for you guys?
It's been actually pretty good overall from a cash flow earnings. But just kind of help us think through when we look at 2025 and beyond, your ability in an industry service, some of that demand?
Michael Miller
I appreciate that question. It's obviously going to depend upon where the demand is coming from. But based on our current expectations that the national builders production builders are going to continue to take share on. I think that material will continue to be tight. And, you know, some of it we answer to the previous question, the mix of what's being installed for that shift towards production builders, benefit availability, if you will.
We do believe that there are, as I think everybody on this call appreciates, you know, copper is adding some additional capacity this year. We believe, as we progress out to '25 and '26, that some of the other manufacturers will probably add additional capacity as well, that will be productive for the industry. So that continued mid-single digit growth. One is necessary from a housing perspective, just in terms of the availability of housing, but we absolutely believe the industry is going to be able to manage effectively in that kind of environment.
Philip Ng
Okay. Appreciate the color. Thank you, sir.
Operator
[Noah Merkousko, Stephens, Inc].
Noah Merkousko
Good morning. Thanks for taking my questions and congrats on the strong results. So So first, I think the big story of '23 was value over volume. You clearly see that in the results. And as we look to 2024, with the improving demand backdrop, especially on single-family, do you think that there's an opportunity to unlock volume from potential customers that may be didn't ascribe value to your services in '23. But now as things kind of ramp up, though, you're able to sort of, again unlock that kind of volume?
Jeffrey Edwards
Sure, but maybe it makes sense yet, but we see it more growing with our existing kind of sellers, their volume as opposed to chasing new customers that don't fully value our services.
Noah Merkousko
Okay. But you don't think that those customers that didn't buy your services that might shift here as demand improves? Or do you think it will just be the same story?
Jeffrey Edwards
It typically does for sure.
Noah Merkousko
Okay. And then second question, just a more macro. Just wanted to get your view more on the macro and the consequences of if we do see the Fed begin to lower rates in the back half of the year? Clearly, I think that would be a positive overall for single-family. But what to what extent do you think existing home sales and sort of maybe coming off the bottom could compete with new demand.
And then a second point to that, you know you there's been a lot of talk on this call about you're seeing a lot more demand from the larger production builders but if and when rates fall, does that come, does that allow the smaller and more local players to participate more heavily in the market?
Jeffrey Edwards
Well, theoretically, yes, I think one of the advantages that the production or the production builders, big builders have a lot of advantages, but one of their I think key advantages going into '24 is their land position I think you saw what happened in '23 is a lot of the regional local guys used up a lot of their land position and now are in a spot where they maybe don't have the even though the demand might be there, they might not have the land to build now a need at the to clarify something I don't want to be super negative on the regional and local guys because we they are the largest part of our business.
There is still very constructive and positive, and we're very pleasantly surprised that there is constructive and positive as they are just given the environment. But if the Fed, as I think most people are expecting does decide to lower rates in the back half of the year. I do think it continues to be good for housing. I don't think they're going to have lower rates enough that it really unlocks the 3% mortgages that so many people with existing homes have that is going to present a competitive alternatives, if you will, to new home construction.
And quite frankly, even if it does the demand for housing is solid. And I think there's plenty of room for both the existing home market and the new home market given the availability or the demand for housing, quite frankly, you know, it's a healthier environment when for housing affordability, when you have a more historical mix of existing homes and new homes right now, as we mentioned in our prepared remarks, I mean the new home sales as a percentage of overall home sales is at a very high level because of the things that we all know about on this call.
Noah Merkousko
Yeah, that all makes sense. And that's helpful. I appreciate the time and good luck with the rest of the year.
Operator
Thank you. Ladies and gentlemen. That concludes our question and answer session, and I'll turn the floor back to Mr. Edwards for final comments.
Jeffrey Edwards
Thank you for your questions, and I look forward to our next quarterly call. Thanks.
Operator
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
