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Greetings, and welcome to the TopBuild's First Quarter 2023 Earnings Release. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Tabitha Zane, Vice President, Investor Relations. Thank you, Ms. Zane, you may begin.
Thank you, and good morning. On the call today are Robert Buck, President and Chief Executive Officer; and Rob Kuhns, Chief Financial Officer. We have posted senior management's formal remarks and a PowerPoint presentation that summarizes our comments on our website at topbuild.com. Many of our remarks will include forward-looking statements, which are subject to known and unknown risks and uncertainties, including those set forth in this morning's press release as well as in the Company's filings with the SEC.
The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Please note that some of the financial measures to be discussed on this call will be on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of these financial measures to the most comparable GAAP measures in a table included in today's press release and in our first quarter presentation, which can also be found on our website.
I will now turn the call over to Robert Buck.
Good morning, and thank you for joining us today. We are pleased to report that 2023 is off to a good start with a solid first quarter performance. Revenue increased 8.2% and our adjusted EBITDA margin expanded 150 basis points to 18.8%. Both business segments, installation and specialty distribution also expanded our adjusted operating and EBITDA margins.
Our consistently strong performance quarter-after-quarter is a direct result of the hard work of our operations and branch support teams, the insight and command we have into all facets of our business, our focus on operational efficiency and excellence; our uniquely advantaged business model with both installation and specialty distribution, our diversified end markets, residential, commercial and industrial, our strong partnerships with our suppliers and customers and our strategic approach to acquisitions and their integration onto our advanced ERP platform.
Our installation business is benefiting from the large backlog of single and multifamily homes under construction, and we are encouraged that our builder customers continue to see improvements in terms of buyer interest. This supports our steadfast conviction that the long-term fundamentals of the housing industry are strong, supported by limited supply of both new and existing homes and favorable demographic trends.
Our installation business is also benefiting from an increase in light commercial work. We've mentioned before that light commercial and residential installation are very similar and most of our branches are able to perform either type of project. Our heavy commercial branches are also involved in numerous large and long-running projects, including the Salt Lake City Airport expansion, the new Microsoft and YouTube corporate centers and a new Intuit Dome just to name a few.
The support and encourage both light and heavy commercial growth initiatives we have been providing additional resources and tools for our salespeople and branch managers to help them better identify commercial opportunities and secure this work. One of these is our proprietary lead app tool showcased at our Investor Day last May. This cloud-based data hub identifies and aggregates commercial construction project leads which are then pushed out to our sales force dramatically improving bid opportunities, sales productivity and win rates.
Direct labor remains tight within the construction industry, but is a continued strength for TopBuild. We remain focused on enhancing labor and sales productivity through the sharing of best practices, the use of proprietary technology tools and a highly efficient branch management process, all of which drive better financial results. In addition, our advanced ERP system gives us the ability to monitor productivity in real time and share labor among our branches. This is a major differentiator and gives us a competitive advantage.
Looking at our specialty distribution business. Overall, sales increased 2.7%. Residential distribution volume declined as our smaller contractor customers brought inventory levels down and has a mix of units under construction shifted to multifamily. Offsetting the decline in residential distribution volume and demonstrating the stream of our diversified business model was a solid 8.7% increase in sales from our commercial and industrial channels. Our specialty distribution teams are supporting a number of major industrial manufacturing projects, including the Tesla Gigafactory in Austin and its Taiwan semiconductor manufacturing center in Phoenix. Other long-running projects include alternative fuel facilities for Marathon and Phillips 66.
Looking ahead, we expect to continue to support these large industrial and commercial projects. Our customer base recognizes that we are the leading supplier of mechanical insulation in North America and our 37 fabrication facilities across North America enable us to customize and engineer any type of product solutions our customers require. In addition, with only 10% market share of this very fragmented $5.5 billion market, we see great opportunities for growth, both organically and through acquisitions.
We have not seen an impact on demand in either the commercial or industrial markets following the recent turmoil in the banking industry. On the commercial installation side, our backlog remains robust, and we are already bidding projects into late 2024 and early 2025. For specialty distribution, we see a lot of major projects being planned across several diverse industries, giving the demand for mechanical insulation. Maintenance and repair work on many commercial and industrial sites has also been scheduled, and this recurring revenue stream should serve as a continued stabilizing revenue driver for our specialty distribution business. We remain very optimistic about the opportunities for growth in both the commercial and industrial end markets.
Turning to fiberglass. Most of you know there was an industry cost increase in December for both batts and loosefill, which did have some traction. Supply is expected to remain tight as we expect a number of production lines to be bought down for maintenance during the year.
Looking ahead, Acquisitions remain our #1 capital allocation priority and will continue to be a key component of our growth strategy and important additions to our overall momentum of our business. We completed one acquisition in the first quarter, SRI Holdings, which is expected to contribute approximately $62 million of annual revenue.
SRI is a great addition to our installation segment with a strong presence in Georgia, Florida, Ohio and Michigan. As we do with all acquisitions upon a close, our integration team immediately works to share best practices to streamline processes and procedures, incorporate the newly acquired company onto our supply chain, leverage technology and best practices to improve labor and sales productivity, eliminate back office and operational redundancies, optimize fleet and logistics and locally empower great talent. Our growth targets are high-quality installation focused companies, both installers and specialty distributors that will enhance our scale, expand our customer base and generate strong returns for our shareholders.
We have a robust pipeline of prospects and expect to close some of these deals this year. In recent meetings, a number of you have asked if we have a target in terms of the mix of our business over the long term. The answer quite simply is no. We see opportunities to expand our presence both organically and through acquisitions in all three end markets we serve: residential, commercial and industrial. Combined, they represent a total addressable market for installation of over $17.5 billion, of which we have a combined 20% share. so plenty of white space in which to expand.
Before turning the call over to Rob, I want to emphasize that driving operational excellence and great execution throughout our organization has been and remains one of our most important areas of focus and is a key component of our 940-basis point of adjusted EBITDA margin expansion since first quarter 2018.
We locally empower our 400 plus business leaders to run their branches as distinct operations with full P&L responsibility. Branch leaders build their teams to include local management, sales and, at our installation branches, direct labor.
At the corporate level, operational efficiencies are achieved across our entire network by leveraging supply chain efficiencies, sharing best practices, and streamlining back-office processes and procedures. Our ‘drive to improve’ culture is inherent in everything we do at TopBuild.
Rob?
Thanks Robert, and good morning everyone. As Robert noted, our team continues to execute at a high level, generating strong results. The strength of our strategically advantaged model was evident as we grew sales and expanded adjusted EBITDA margins at both Installation and Specialty Distribution.
In addition, we saw solid sales growth across all of our diversified end markets. Moving to the financials, I will start with an overview of our first quarter results, update you on our balance sheet, and review our 2023 outlook. First quarter net sales increased 8.2% to $1.3 billion, with sales from our installation segment increasing 13.4% to $767.1 million, and sales from Specialty Distribution increasing 2.7% to $558.4 million.
Installation's sales were driven by strong volume growth and higher selling prices. Specialty Distribution's sales were driven by higher selling prices offset by a decline in residential volume which Robert discussed earlier. Our adjusted gross margin for the first quarter was 29.3%, a 100-basis point expansion. This was driven by operational efficiencies, fixed cost leverage, and our continued success in managing inflation.
First quarter adjusted EBITDA increased 18.1% to $238.3 million and our adjusted EBITDA margin was 18.8%, a 150-basis point improvement compared to first quarter 2022. First quarter incremental EBITDA margin was 38%, and 43% on a same branch basis. First quarter adjusted EBITDA margin for our Installation segment was 21.4% and 15.8% for our Specialty Distribution segment, an improvement of 230-basis points and 20-basis points, respectively.
Interest expense increased from $12 million to $18 million in the first quarter primarily as a result of higher variable interest rates. Our current average cost of debt is approximately 4.67% with approximately 60% fixed and 40% variable rates with no upcoming maturities until 2026. First quarter adjustments to Net Income were $3.7 million and were related to acquisition and integration costs.
First quarter adjusted earnings per diluted share were $4.36, a 25% increase from prior year. Moving to our balance sheet and cash flows, first quarter operating cash flow was $169.8 million, compared to $89.5 million in the prior year. This was driven by an 18.4% increase in Net Income and improvements in working capital. Working Capital was 15.6% in the quarter and, as I've mentioned on previous calls, we are targeting a range of 12% to 14% of sales by the end of this year.
CapEx in the quarter was $15.6 million, 1.2% of revenue, and slightly below our long-term guidance. We did not repurchase any shares in the quarter. As Robert mentioned, acquisitions remain our number one capital allocation priority and we are working a robust pipeline of prospects.
There were no significant changes to our debt structure and our outstanding short-term and long-term debt balances remained at just under $1.5 billion. We ended the first quarter with net debt leverage of 1.15x trailing 12 months adjusted EBITDA. Total liquidity on March 31, 2023, was $766.1 million, including cash of $333.8 million and an accessible revolver of $432.3 million.
Moving to annual guidance, we are reaffirming our outlook for 2023 provided on our fourth quarter call on February 23. As a reminder, total sales are expected to be between $4.7 billion and $4.9 billion and adjusted EBITDA to be in the range of $820 million to $910 million. We continue to expect that our residential sales will decline mid to upper single digits and single-family activity to be slower in the back half of the year.
Our expectation for our commercial and industrial end markets is for sales to expand by low to mid-single digits. This outlook does not include any potential acquisitions or share repurchases. We believe the long-term fundamentals of the housing industry are solid and we are pleased to have heard the recent optimism expressed by many of the public builders. We are also bullish on the long-term opportunities in the commercial and industrial end-markets. Our leadership team, technology tools, and flexible cost structure will ensure that TopBuild will continue to outperform in any environment.
Robert?
We see many opportunities in the year ahead to demonstrate the unique advantages of our operating model and take advantage of our multiple avenues for growth. Our focus on continuous improvement in all areas of our company enables us to maximize opportunities at every point in the cycle. Both Installation and Specialty Distribution are performing well, and our advanced ERP system gives us great control and real-time insight into the day-to-day performance of each of our 400 plus branches.
Finally, in our continuing drive to be the Employer of Choice in our industry, TopBuild participated in the national Great Places to Work survey and evaluation, the gold standard of company rankings. We are proud and excited to report that, based on direct employee feedback, the entire TopBuild organization is recognized as a Great Places to Work organization. The direct feedback and ratings from our TopBuild employees speaks to our commitment to fostering a diverse and inclusive workforce where everyone has the opportunity to realize their full potential. Being recognized as a Great Places to Work company is a positive endorsement of the TopBuild culture which we strive to strengthen every day.
I thank all of my TopBuild teammates for their hard work and dedication. Your continuing focus on working safely to deliver value, quality and service to our customers every day is the key to our continued growth and success.
[Operator Instructions] Our first question comes from Joe Ahlersmeyer with Deutsche Bank.
This is Joe Ahlersmeyer from Deutsche Bank. And congrats on the good results in the quarter.
Thanks, Joe.
Thank you.
Maybe if you could start just by talking about your decision not to raise the guidance here given the strong quarter and with broader industry data and commentary sort of supportive of a stabilization? And maybe specifically, could you offer some context to the expectation for slower single-family in the back half, whether that be a specific single-family back half revenue outlook or a single family starts or completions expectation?
Yes, Joe, this is Rob. So I'd tell you, Q1 came in right about where we expected from what we told you 10 weeks ago when we got together. The back half of the year, still a lot of uncertainty out there. So we didn't feel a need to really adjust the guide there. But we're cautiously optimistic given what we're hearing from the builders, a lot of optimism out there. But we're realistic too, knowing that if you look at starts for single family over the last two quarters, it's significantly below where completions have been running. So that's going to work its way through the system. But any meaningful uptick in starts from here will be upside to the forecast we have out there. And I'll just remind you that historically, as a management team, we lean to the conservative side. So like I said, we're cautiously optimistic about the future.
And Joe, this is Robert. Just to add on to that. I mean I think the team in the field has done a really nice job relative to the other opportunities as well, like the light commercial business. what's happening on the commercial and industrial side. And to Rob's point, what we're seeing and hearing from builders, we're seeing more specs coming out of the ground as well. So we think there's a lot of positive signs out there. And to Rob's point, that's only going to be upside to our guidance.
All right. Understood. Very encouraging. And maybe could you just talk about any considerations with multifamily the rest of the year? I think there had been some discussion about the product mix requiring more loosefill. So could you maybe just discuss the supply/demand and pricing specifically for loosefill maybe relative to the batts or any other multifamily considerations we should be aware of?
Yes. I think -- this is Robert again. So I think given the multifamily backlog, we definitely expect that to carry through 2023 definitely into 2024 as well. We're in great shape from a product perspective relative to what's required to loosefill, for multifamily construction, which does require more loosefill installation. So we're in great shape from that perspective.
The teams -- one thing that we have great insight into is the bidding and the backlog as well as the bidding rates of what the teams in the field are doing. So we feel really good about the multifamily work in the back half and what we've got bid as well as, we think, some good share gain that we captured in that piece of the business.
Our next question comes from Mike Rehaut with JPMorgan.
First, I just wanted to hit, I guess, driving down a little bit more on the residential side. And my second question will be more on the industrial mechanical side. But on the residential, is there a way to think about what your guidance reflects in terms of an outlook for starts for the year? As you -- Rob, as you referred, so far, first quarter single-family starts around 840, which is well below a year ago. So is there some type of implicit expectation for starts as the year progresses? And if for argument sake starts, let's say, really accelerate in the second quarter, would that be more of a third or a fourth quarter event for you guys in terms of upside?
Yes. And Mike, this is Rob. I mean I think it's really important as we look at the data to break it down between single-family and multifamily, right? So multifamily starts remain strong. The backlog is very strong there. We had a great quarter for multifamily. We've been outbidding multifamily, getting ready for the slowdown we've seen comment on the single-family side. So really happy with the field's work on that side of things. And we expect that backlog to last us through the remainder of this year. And then on the single-family side, like I mentioned earlier, I mean, the start data, it's obvious here the last couple of quarters, starts are running about 24% below where completions were. But we're, like I said, cautiously optimistic given what we're hearing from the builders, more spec homes potentially more starts, and an increase in starts from where we are today would be upside to what we have in our forecast right now.
So just to be clear before I hit my second question, what does your forecast reflect? Does it reflect starts remaining at current levels for the rest of the year? Or some type of modest improvement? Any color there?
Yes, I'd say it's flattish from where we are today. I mean it could be modestly up or down given the range we have out there. But like I said, any meaningful movement in either direction is going to be upside or downside to what we have out there.
Okay. Great. And then secondly, on the commercial side or commercial mechanical, you referenced good bidding activity and involvement in various projects into '24. How does that translate in terms of thinking about 2024 versus '23. Would you expect -- given the current trends, would you expect any level of growth? Or any color there would be helpful as well.
Hi, Mike. Robert. So what I would say, and you can translate this into how the future looks. There's just a lot of pent-up work out there on the industrial mechanical side. If you think about -- as we talked about '21, '22, that was a little slower to recover. And now we're seeing those projects come, both new projects, if I think about industrial, onshoring, some things in the food and beverage space.
We talked about some big projects on chemical side earlier. But then also on the MRO side, which is that recurring revenue, which what we love about this business, there's a lot of MRO work that's out there scheduled. We see that coming here in '23, going into '24. And given why we're such a big player there and why we benefit so much there is that our fabrication capabilities, how we engineer those products really for refineries, or any other unique situation really allows us to capitalize on the MRO net recurring revenue. So yes, we have a -- you can tell from my comments, a very positive outlook in that industrial mechanical side of the business for those reasons.
Our next question comes from Adam Baumgarten with Zelman.
Just curious what you're seeing from a pricing perspective in the residential business. Has there been any kind of competition sprouting up that's kind of outside of the norm?
Yes, Adam, this is Robert. So look, given the tightness of continued tightness of material and labor from that perspective, I think things have been pretty steady relative to that. I think also given where we are in the chain there from a construction cycle, I think the builders realize that value as well. So I'd say nothing out of the ordinary from that perspective. And I think if you look at our results, our field teams have done a great job of walking that balance of volume and working to get price the stuff as well, again, for the value that we're bringing to the customer.
Okay. Got it. Yes. That's good to hear. I guess just also just on the prospect of additional price increases on the fiberglass side, how are you guys thinking about that for the balance of the year?
Yes. As we said previously, we expected the inflation to moderate this year. I think there's still some inflation there. I think you also saw some of the previous results from -- the other public fiberglass manufacturers, they talked about price in the first quarter. So we expect it to that be stabilized. But I think it will all depend on the demand curve, what starts to look like the back half of the year. I think that could drive any future action from the cost increase perspective.
Our next question comes from Keith Hughes with Truist Securities.
You had talked in the prepared comments about commercial industrial being up low to mid-single digits. I believe you're talking about the year here. Is there any differentiation between those two in growth rates? And was -- is that the same as the business you talked about being up 8% in the first quarter?
Yes. So Keith, this is Rob. So yes, you're correct that when we talk about it being up low to mid-single digits, that's what's baked into our guidance. We obviously exceeded that a little bit. in the first quarter, up 8.2% overall for the Company on the commercial industrial front, which was strong on both the install business and on the specialty distribution business. So I think it really a testament to what we've been talking about the strength of our diversified model and diversified end markets, this is going to be a year where we can really show that with the commercial and industrial side of the business growing.
So we're optimistic for the back half, but we're still sticking with that low to mid-single-digit growth for the year, but obviously had a really great first quarter. As far as segregating between the two commercial and industrial, I'd say, there wasn't a meaningful difference between the two in the quarter or in our outlook.
Okay. One other question on that. The numbers you are referring to, does that include pricing? And if so, roughly how much?
Yes, it includes price, but we don't break price down between residential and commercial. Definitely, there's more price flowing through on the residential side, given the higher fiber glass content on that side of things. But we don't have the split of that.
Our next question comes from Phil Ng with Jefferies.
Congrats on another strong quarter. Robert, really appreciate some of the color around some of these bigger projects that you highlighted earlier onshoring, petchem, all that good stuff. Certainly, there's some concerns about tighter letting conditions. I wouldn't imagine you would have much impact this year. But looking out to 2024 and beyond, curious what you're seeing on the bidding activity. Can you kind of help size up big versus small, I would imagine some of your bigger projects, bigger customers wouldn't have much problem getting capital, but maybe the smaller guys and your ability to kind of move stuff around in terms of labor if one part of the segment was a little stronger versus the other? Sorry, a lot to unpack there.
Thanks, Phil. So you're right relative to our build and the ability to move things around if we do see those fluctuations in certain parts of the country. But if you think about the projects, if you think about some of the large projects that I spoke to, I mean, first, let me go on the MRO side, the recurring piece. A lot of that is things that are playing well in the future, funded well in the future and some of those are actually required type of MRO that has to happen if you think about refineries and even food and beverage. So that's part of the positive of that MRO business.
And then relative to new projects, those large projects, and if you think about where our work comes to those projects, most of those projects are already out of the ground. Those are funded and those -- that's one reason we use that term long-running projects because they'll go well into '24 and to '25 even relative to the run rate of those projects. So we haven't seen the impact.
I think, given the mix of business that we have there and the multiple avenues, I think overall, we feel good. And really, even if you think about segments within commercial industrial we're not really oversaturated in one area where we think from the onshoring the food and beverage to the industrial, and you could think semiconductor space, EV, liquid natural gas, we're kind of across the gamut there. So -- and a lot of those really acquire infrastructure that's coming. So we feel good about it. We'll watch it constantly, obviously, like everyone else is, but no signs of it here thus far. And also no signs in talking with our bigger customers.
That's great color, Robert. And then from an IRA Act standpoint, I believe there's some tax credits for the average homeowner and potentially even the builders. Can you kind of expand on those benefits? And do you expect any uplift from that, whether it's this year or going to 2024?
Yes. I mean I think they're -- think about the homeowners. So definitely from an energy efficiency and some of the potentially rebate there. Definitely, as people look to maybe reinsulate, if you will, to drive some energy efficiency or some of the rebates, we'll get after that business on our specialty distribution side. And if you think about that smaller contractor that may be doing our work -- doing that work, that's our -- get our primary customer on the specialty distribution side, especially residential.
If you think about some of the other infrastructure piece, Definitely, I mentioned the Salt Lake City Airport as an example, those types of infrastructure projects, that will definitely benefit us some on the industrial commercial side, hard to kind of quantify that. But given, again, we play across that entire space. we'd expect to see some nice tailwind from that as those bills come into play, both again, commercial and industrial.
Okay, super. And great job in retooling the portfolio to kind of to happen to some of these growth avenues.
Yes. Thank you, Phil.
Our next question comes from Stephen Kim with Evercore ISI.
Appreciate all the help and the guidance. Congrats on the quarter. You made an interesting comment near the beginning. I think you said that 1Q when you were talking about the residential, well your overall market or your overall sales, I think you said 1Q came in roughly in line with what you expected. And -- but clearly, in the residential side of the business, the 1Q sales environment and therefore, planning for 2Q by homebuilders and so forth is pretty greatly exceeded the industry's expectations.
So I just want to confirm that you saw that, too, you see that and you hear that as well. And kind of as a follow-on to that, one of the things that we're anticipating is that you might see a little bit more market share shifting to the larger builders because they may have the balance sheets and the open lines of credit to be able to do more of the spec building, which I think you mentioned versus small privates that may have a little bit of difficult time increasing their spec activity given the regional bank stress.
So -- or I guess I'm wondering, is it reasonable to assume that if you see this market share shift that might lead to a slightly lower incremental margin in the residential install side of the business later this year?
Yes. So I'll start off, Stephen, this is Robert on that and try to hit it. I'm sure Rob will add on some comments as well. So I think on your large production builder coming, I think you're exactly right. I mean, what we're seeing and obviously what the builders are saying around the spec home piece and having the balance sheet to support that, seeing us come out of the ground. Yes, I think you're absolutely right about that. They'll get ahead of the curve here as things stabilize and that allow for some share gain piece of it.
I think given the material situation, the labor situation, our relationships with those production builders, we're not too concerned from a margin perspective if that shift happens or that share shift happens with the production builders. So no concern from that perspective. Back to your Q1 comment, and then I'll hand over to Rob if he's got any add-ons. I think whenever we say in line, we saw what happened to single family. It was pretty flat.
Multifamily was up really, really healthy given what our teams in the field have done exactly what we expected, talked about distribution volumes, commercial industrial is strong, what we expected, a little bit down on the residential distribution side given some lowered inventories by the smaller contractors as well as the shift in multi-family, and then we talked about came in as we thought those were some of the dynamics we thought would play out in the quarter, and they did.
Yes. Yes, Stephen, I'd just add, I mean, I think when we made that comment, we're talking in total, right, we're about where we expected. I'd say on the installed side a little better from a volume perspective. The team did a great job getting out there, getting a lot of multifamily work. And like we mentioned in the prepared remarks, residential volume on the specialty distribution side down slightly.
We saw people taking inventory out, anticipating the slowdown as well as with the shift in multifamily mix, some of those smaller contractors that go for residential products, especially distribution had a little bit less share in the quarter. So those are the two things. But overall, like I said, right in line with our expectations for the quarter.
If I could sort of follow up on that, your comments there on the residential side within spec distro. I think you said that -- well, first of all, would it be right to guess that the residential side of the business within spec distribution was down maybe about 4%, if that's wrong, if you could correct me, that would be great. But then you, I think, attributed resi being weaker than the commercial and industrial due to, I think, small -- your small installation -- your smaller customers, basically other small installers and whatnot, reducing inventory. I'm wondering are those inventories in your estimation rightsized from a level that was too high? Or maybe given what we've seen here in 1Q sales for homes, could we be maybe too low now? And then you said also multifamily mix impacted it. Could you talk a little bit about why and how multifamily the mix is impacted negatively? What is it about the multi-fam versus the single-fam that particularly affects the sales?
Yes. Stephen, this is Robert. So I'll try to get all those answered here. Relative to the -- talking about the special distribution, residential yes, low single digits, which, by the way, given if you look around the industry stuff, we think execution in the field on that side of the business was fabulous. So the team did a great job in the other areas, other products, accessory products, some of that, so we think fabulous results from how the team handled that shift on the multifamily side.
So yes, the smaller contractors, which we get after on that residential and specialty distribution side, they're probably participating less in that multifamily work. They're more maybe the custom builder, the smaller regional builder, the repair/remodel type work. So that's what that specific kind of smaller contractor are we going after.
If you think about the multifamily, right? So you got -- and I also kind of speak as to where we picked up share there on the install side. But if you think about the multifamily side, major fluctuations in the amount of material needed, the amount of labor needed in a week's time frame or something like that. That it's harder to obviously react to that, and that's why we're able to move -- when we talk about moving equipment, material, labor around that plays well for us on the multifamily.
And then I'm sure as you've seen, there's a lot of that multifamily work today coming up, but it also has -- a lot of it has this light commercial work with where the first for is could be retail and then you got the multifamily above it. And so with the fact of how we're playing out like commercial and multifamily, it's allowed us to pick up some nice projects due to that ability we have across multiple projects, if you will.
Our next question comes from Carl Reichardt with BTIG.
Robert, you talked about the TAM for the business overall being $17.5 billion. What percentage of that do you think is the MRO recurring revenue side?
Yes. So as we think about, you've probably seen what we published around that commercial industrial space. We call that opportunity, I'd say, call it, $5.5 billion to $6 billion type of total addressable market. I'd say if you look at our business and stuff, the MRO is about 50% on the industrial side.
And so -- and we've probably done a really good job getting our fabrication capabilities of getting after that work. So I'd say is that it maybe a little less than 50% of the total TAM. I think it probably is taking to the exact number. I just know how we're kind of oriented towards that, and how we -- given our capabilities in fabrication, we've tried to make sure and get after that opportunity and gain share in that space.
Okay. And then, Rob, you talked about the working capital as a percentage of sales target going down to 12% to 14%. What are the key drivers to get that number down? I recognize there's probably some seasonality in there? And then as you look beyond '23, where do you think that number ultimately can go? What would be your target?
Yes. I would say our long-term target is still in that 12% to 14% range. I think the opportunity right now lies a little bit on the AR side, but also on the inventory side. So with things potentially slowing down here in the back half of the year, there's definitely an opportunity to squeeze some of that working capital out and generate strong free cash flow.
One of the great stories of our first quarter was our free cash flow. We generated $154 million of free cash flow, up 117% for the year and for the full year, with the numbers we have out there, we should be north of $600 million of free cash flow. So we feel really good about that, and we think 12% to 14% will probably be closer to the high end of that as we close out this year, but long term, towards the middle of that.
There are no further questions at this time. I would like to turn the floor back over to President and CEO, Robert Buck, for closing comments.
Thank you for joining us this morning. We look forward to reporting Q2 results in early August.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.