TopBuild Corp

NYSE:BLD

Earnings Call Analysis

TopBuild Targets Strong Performance in 2024

In a disciplined financial year, TopBuild delivered impressive results, raising operating cash flow by 71% to $849.4 million. Adjusted earnings per diluted share marked a 15.3% increase over 2022. Notably, the company reduced other income and expenses to $53.3 million from $55 million and decreased its leverage from 1.3x to 0.56x adjusted EBITDA. For 2024, it forecasts revenue ranging from $5.36 billion to $5.56 billion, alongside an adjusted EBITDA of $1.04 billion to $1.13 billion. Moreover, maintenance demands and a positive trajectory in single-family starts are set to create a favorable environment, with opportunities for price growth and customer expansion in multifamily and commercial segments.

Sales and Earnings Momentum

The company has reported a solid increment in net sales, up by 1.7% to $1.3 billion for the quarter. A notable segment performance came from Installations, where net sales grew by 3.8% to $790.4 million, attributed to a mix of strategic acquisitions, increased volume in multi-family and commercial sectors, and a slight uptick in pricing. Specialty Distribution also saw a marginal 0.2% rise to $564.5 million, overcoming lower residential volumes with stronger commercial and industrial sales and better pricing. Gross margin and adjusted EBITDA for these segments witnessed a healthy improvement, both marking 80 basis point increases from the previous year.

Optimistic Financial Outlook for 2024

Looking forward, management has set an ambitious revenue target, expecting it to land between $5.36 billion and $5.56 billion with adjusted EBITDA forecasted to range from $1.04 billion to $1.13 billion for the year 2024. They project a mid-single-digit growth in residential sales, pinned on a strong multi-family backlog and stable single-family starts. Commercial and industrial sales are also expected to experience mid-single-digit growth, bolstered by healthy bidding activity and a robust backlog, indicating strong sales momentum moving forward.

Confidence in Future Performance

The company's leadership is enthusiastic about the future, endorsing both key business segments—Installations and Specialty Distribution—to exhibit strong performance. They credit their diverse business model and relentless pursuit of operational excellence for the ability to thrive irrespective of market conditions. The retirement of Tabitha, a seasoned team member, and the introduction of a new Vice President of Investor Relations, show a period of transition that the company seems well-prepared for.

Reflection on Exceptional Performance and Margin Flow-through

Reflecting on the past year, executives expressed that despite challenges, the company experienced an exceptional performance, indicated by a same-branch EBITDA flow-through of 108%. Notably, they acknowledged overperformances essentially as one-time benefits totaling approximately $25 million from multi-family and commercial projects. Adjusting for these, the company's EBITDA guidance stands with an expected flow-through rate between 22% to 27%, which aligns with their established targets.

Supply Chain and Market Insights

Management also communicated that, while supply chain tightness isn't as severe as during the peak COVID years, current maintenance and single-family start trajectories do suggest a constrained environment that could offer price upside potential. Continuous dialogue with suppliers ensures that the company receives a fair share of necessary materials, and they foresee a positive environment, with especially strong indicators for organic growth and customer acquisition in multifamily and commercial segments during the year 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the TopBuild Fourth Quarter and Year-End 2023 Conference Call. [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, Tabitha. You may begin.

[Tabitha Zane, executive]

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 fourth quarter presentation, which can also be found on our website.

I will now turn the call over to Robert Buck.

[Robert Buck, executive]

Good morning. We're glad you could join us today. I'd like to begin by thanking all of our TopBuild installation and social distribution teams for their hard work and unrelenting focus on working safely, servicing our customers and continuing to push for operational excellence every day. We accomplished a lot this past year for our stakeholders, and I'm proud to be part of this talented and very results-driven team. .

Before reviewing our fourth quarter and year-end results, I want to update you on our SPI transaction. As a reminder, SI is a specialty distributor and custom fabricator mechanical insulation and a specialty distributor building installation to the 3 end markets we serve: mechanical, commercial building and residential. We're in the process of responding to a secular [ request ] for information from the antitrust division of the Department of Justice. In today's environment, these requests have become more common, resulting in a lengthier process. We are compliant with their information request and addressing their questions.

Now turning to our financial results. We finished 2023 with a strong fourth quarter, completing another outstanding year for TopBuild. For the full year, gross and adjusted EBITDA margins expanded 120 basis points and 140 basis points, respectively, to 30.9% and 20.2%. Our diversified business model and focus on driving operational efficiency led to the successful execution of our overall strategy. We once again delivered on our objective of achieving profitable growth and outperforming in any operating environment. 2023 was markedly better than we had originally anticipated. When we first issued guidance 12 months ago, we were facing declining single-family starts, steady interest rate hikes and the possibility of a slowing economy. Despite these headwinds, TopBuild showed positive growth from the outset, exceeding the high end of our initial sales and adjusted EBITDA guidance.

There are many factors driving these outstanding results, I'm extremely proud of our installation segment leadership who targeted multiple avenues for growth, successfully expanding our multifamily and commercial business to offset the decline in single-family construction. For the full year and on a same branch basis, we grew our multifamily business by over 50% in our commercial business by over 11%. This strong growth more than offset the low single-digit decline of our single-family sales. At our Specialty Distribution segment, we saw commercial and industrial sales grew 6.3% in the fourth quarter and 4.6% for the year. This revenue includes maintenance repair work on many commercial and industrial sites, driving ongoing stable revenue.

Today, maintenance and repair work accounts for approximately 25% of specialty distribution revenue. In both business segments, our proprietary lead app tool is providing qualified leads to help our local businesses drive commercial and industrial organic growth. This is a great example of our innovative approach, enhancing the sales process. In 2023, we continue to spearhead [indiscernible] to increase labor productivity. Even small improvements leverage across our installer base of over 8,000 will deliver significant savings to our bottom line. Our common ERP system enables us to easily track productivity and identify future opportunities to drive operational efficiency. This continued focus on improved labor productivity as a distinctive bench for TopBuild as labor constraints persist across the construction industry.

Another initiative contributing to our profitable growth last year was the expansion of our special operations team comprised of seasoned leaders whose sole mission is to drive operational efficiencies and share best practices throughout TopBuild. They're also attached with focusing on the bottom 4 trial of our installation and specialty distribution branches. Their goal is to understand why these branches are underperforming and to put into place the necessary changes to improve their growth and profitability. This team helped drive some great and sustainable permits last year that positively impacted our top and bottom lines. Looking ahead, they've already identified multiple opportunities that will enhance our operating performance and organic growth in 2024 and beyond.

We're also successful in the capital allocation front, completing 4 residential installation acquisitions that are expected to contribute approximately $173 million of annual revenue. This included SRI Holdings and Best Insulation, which to date are our third and fourth largest residential installation acquisitions. The other 2 acquisitions completed last year were Rocky Mountain insulation and Panhandle Insulation, the latter of which closed in October. These 4 companies complement our growth strategy and bring experience installers, great management teams and strong customer relationships to TopBuild. As always, when we evaluate acquisition opportunities, we look for deals that are accretive to our existing footprint and current operations, meet our strategic growth initiatives, leverage our scale advantages in a meaningful way and our [ culture ] fit with our organization.

Now let's turn to 2024 and how we see the year unfolding. While Rob will provide more details and clarity on our outlook, you can see we expect another strong year of profitable growth for TopBuild, led by outstanding execution, a continuous focus on revenue operational improvements and an eye towards innovation throughout the company. As we said on previous calls, we are bullish on the long-term fundamentals of residential construction. There remains a shortage of housing inventory and strong pent-up demand. In the near term, we are encouraged by the improvement over the past few months of single-family starts and the outlook for interest rates. As a result, we are optimistic single-family residential new construction could have more upside as the year progresses and we believe this will be an important source of organic growth. There is also a strong backlog of multifamily work that should keep us busy throughout the year.

On the commercial and industrial front, at both installation and specialty distribution, we expect another year of growth based on our bidding activity and strong backlog. Our TruTeam branches have worked hard to build relationships with general contractors in their respective markets and they are fostering these relationships to ensure we continue to win more than our fair share of light and heavy commercial work. We also expect solid performance this year for mechanical insulation, including new projects and maintenance and repair work. As I mentioned last quarter, we are in the second phase of our growth strategy and operational improvement initiatives related to our specialty distribution model. We have identified any cross-selling opportunities and see this as another important driver of organic growth.

Looking at material and [indiscernible] maintained our current trajectory, fiberglass will be tight. We are seeing good price realization from the December-January material cost increase with upcoming maintenance on a number of production lines, we don't see any significant material capacity improvement this year, even with the addition of the [ Cana ] plant, which is expected to be operational sometime mid-2024. Moving to capital allocation. 2 months into the quarter, we've already [indiscernible] 3 deals; pest control insulation, a specialty distributor generating approximately $24 million of annual revenue and 2 residential installers [ Brovel insulation ] and [indiscernible], which combined are expected to generate approximately $9 million of annual revenue.

Looking ahead, our prospect pipeline is robust, and we intend to stay active on the acquisition front. As always, we'll remain focused on acquiring high-quality residential and commercial installation and specialty distribution companies. All 3 of brand markets are highly fragmented and present great opportunities to reinvest our strong free cash flow to drive shareholder value. Operationally, our team is focused on driving organic growth and exceeding customer expectations. We will also continue to implement initiatives and maintain an innovative approach to drive operational efficiencies and improved labor and sales productivity. Energy codes should continue to strengthen, serving as a tailwind for all areas of our business. Rob?

[Robert Kuhns, executive]

Thanks, Robert, and good morning, everyone. We are pleased with our strong 2023 performance, and I want to congratulate and thank the entire TopBuild team for a job well done. Your hard work to serve our customers and drive operational efficiencies led to another strong year of financial results. Since becoming a public company in 2015, we have grown sales and adjusted EBITDA for 8 consecutive years at compounded annual rates of 15% and 33%, respectively. This consistent track record of growth is something we can all be proud of and build upon in 2024 and beyond.

Looking at 2023 compared to 2022, we delivered $5.2 billion in revenue, representing growth of 3.7%. We improved gross margin by 120 basis points to 30.9% and our adjusted EBITDA margin was 20.2%, a 140 basis point improvement. And for the first time in our history, we delivered $1 billion in adjusted EBITDA. Turning to the fourth quarter. Net sales grew 1.7% to $1.3 billion. On a segment basis, installations net sales grew 3.8% to $790.4 million as lower single-family volume was more than offset by acquisitions, stronger multi-family and commercial volume and slightly higher price.

Specialty Distribution net sales totaled $564.5 million in the fourth quarter, up 0.2%. Lower residential volumes were more than offset by stronger commercial and industrial volumes and pricing. Gross margin for the fourth quarter was 30.4%, representing a 70 basis point improvement compared to prior year. Fourth quarter adjusted EBITDA totaled $251.6 million and adjusted EBITDA margin was 19.6%, an 80 basis point improvement versus the fourth quarter of 2022. Fourth quarter adjusted EBITDA margin for our installation segment was 21.4%, an improvement of 60 basis points year-over-year. Specialty Distribution's adjusted EBITDA margin in the fourth quarter was 17.5%, an improvement of 80 basis points versus last year. Other income and expense totaled $10.5 million in the fourth quarter, a decrease of $4.7 million versus the prior year.

For the full year, other income and expense was $53.3 million, down from $55 million in 2022. Higher interest income on deposits more than offset higher interest expense on our variable rate term loan in both the fourth quarter and full year. In the fourth quarter, adjustments to net income totaled $7.4 million, and for the full year, they were $21.6 million, which were largely acquisition-related. Fourth quarter adjusted earnings per diluted share of $4.69 represents growth of 6.6% versus the prior year. For the full year, adjusted earnings per diluted share [indiscernible] or growth of 15.3% versus 2022.

Moving to our balance sheet and cash flows. We are pleased with our 2023 operating cash flow, which increased 71% to $849.4 million compared to $495.8 million in 2022. Higher profitability and significant progress in working capital drove our cash flow improvement versus [ last ] year. Working capital was 13.2% of sales versus 15.7% last year. Our teams in the field did a great job reducing our inventory days on hand by 8 days from last year. 2023 CapEx totaled $64 million or about 1.2% of revenue slightly below our long-term guidance of 1.5% to 2%. Total outstanding debt at year-end was approximately $1.4 billion, and we finished the year with leverage of 0.56x our trailing 12-month adjusted EBITDA which compares to [ 1.3x ] at the end of 2022. Total liquidity was $1.28 billion, including cash of $848.6 million and availability under our revolver of $436. 2 million.

Turning to our outlook for 2024, which does not include acquisitions that have not yet closed, revenue is expected to be between $5.36 billion to $5.56 billion and we anticipate adjusted EBITDA of $1.04 billion to $1.13 billion. Breaking down our revenue outlook. Total residential sales are expected to grow mid-single digits. The midpoint of our outlook assumes that single-family starts for main near current levels for the year. Our multi-family backlog is strong, and we anticipate it will support our sales throughout 2024. On the commercial industrial side, we continue to see healthy bidding activity and have a strong backlog. We also anticipate strong sales from recurring revenue on repair and replacement projects. As a result, we are projecting sales for commercial and industrial to grow mid-single digits. Keep in mind that the project nature of this business can cause lumpiness from quarter-to-quarter.

While we did start the year off a bit slow in January due to weather, we've seen a solid rebound in February. With that, I'll close by expressing my optimism and confidence in our outlook. I'll now turn the call back over to Robert for closing remarks.

[Robert Buck, executive]

I outgo Rob's confidence in 2024. We are excited about the year ahead and expect both segments, installation and specialty distribution to perform well. Our diversified model and multiple avenues for growth enable us to adapt to any operating environment, and our team manages the business with a constant mindset of driving improvements and achieving operational excellence. Before I open it up for questions, I want to like to know this is Tabitha's last call as she retires at the end of March. While Tabitha will be missed, we are very excited to introduce [ PI Aquino ], our new Vice President of Investor Relations. PI has over 20 years of IR experience, and she's looking forward to getting to know all of you. Operator, we are now ready for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Phil Ng with Jefferies.

[Philip Ng, analyst]

Tabitha, you'll definitely be missed. I was looking at the press release this morning, I was thinking, I wish more management teams had it structured so clean and concise. So you'll definitely be missed. Congrats on a strong quarter, a strong finish to the year, and you're obviously guiding to another strong 2024 but when I think about a more upbeat environment for single-family and continued growth in C&I, I'm a little surprised that your EBITDA guidance assumes EBITDA growth decelerates from, call it, the 2023 level where you're dealing with an air pocket in a single family. So any nuance that you want to call out that's a drag that maybe we may not be appreciating out of the gates?

[Robert Kuhns, executive]

Phil, yes, this is Rob. The main thing to point out there, right, is just that 2023 was an exceptional year for our team despite the headwinds we faced, right? If you look at our same branch results for the year. Sales were up $88 million. EBITDA was up $95 million. So we had a same branch flow-through of 108%, right? So as we talked about back in Q2 and Q3, we definitely had some overperformance in margins around multi-family and commercial work we had done. We talked about around $10 million in Q2 that we called out as kind of onetime overperformance. And then similarly, in Q3, we talked about another $15 million. So I think if you look at our guide on EBITDA, you adjust 2023 for that $25 million, you'll see kind of the midpoint of our guidance, we're at around a 23% flow-through. So right within the range we guided to 22% to 27%. And at the high end, we're at 29% flow-through. So I think that's probably the key nuance to point out the [ folks ].

[Philip Ng, analyst]

Okay. That's helpful. And you guys talked about -- Robert, you talked about how fiberglass inflation is still quite tight right now, and I believe will perhaps might be an allocation as well. Can you give us a little perspective on how that stacks up versus, let's say, the COVID years when material was super tight. Is this an environment that will allow you to perhaps support some of the upside and growth in the back half. And for a big guy like yourself with the distribution arm, is that an opportunity for you to take share and perhaps your smaller competitors might be a little more challenge getting access to material.

[Robert Buck, executive]

Yes, Phil, this is Robert. So I would say maybe compared to the COVID year, maybe not quite as tight as that because there was a lot of erratic, if you will, demand and supply back then. This is really -- maintenance is driving a lot of this as well as the trajectory here of what we're seeing in single-family starts. So as always, getting back through the years, we'll definitely do our job making sure we get more than our part of that material. And we obviously have constant discussions with our supplier partners around that. As we think about what's happening with the single-family starts and especially what's happened in the past few months with that trajectory. I think Rob and I would both say, look, there's price upside here. And you even see some new price announcements, even on the spray foam side of the business that's come out recently as well.

So we do expect it to be tight given all that maintenance given the single-family trajectory, which we think there's upside even on the single-family side and some good organic growth there. So I think it will stack up well for TopBuild. And to your point about our teams gaining new customers like we did last year around multifamily and commercial, especially if you think about [ mineral wool ] and some of the other products that you mentioned there, we think it's going to be a really good environment for TopBuild here in 2024.

[Philip Ng, analyst]

Okay. And just a follow on to that, Rob, is that pricing that Robert just mentioned, that could be a source of upside. Is that in the guide? Or is that something that we could potentially think about if pricing momentum builds?

[Robert Kuhns, executive]

Yes. I mean we've got an assumption for pricing in there. As you know, we don't break it out. But we would say we think with what we see today, like Robert was seeing there's potentially upside to the assumption we have in there.

[Operator]

Our next question comes from the line of Mike Rehaut with JPMorgan.

[Michael Rehaut, analyst]

Congrats on the results so far. Just wanted to circle back to the EBITDA guidance. And Rob, I appreciate your highlighting the $25 million of unusual profit, we kind of back that out and got to a growth rate, plus or minus similar to the underlying sales growth and you kind of pointed out the incremental margins in that 23% to 29% range. Obviously, you've been able to consistently exceed your incremental margin guidance or long-term targets over the last several years. Is there any reason or is there any difference in the market backdrop as you look out into 2024, that might make you let's say, a little more conservative relative to prior years where you've been able to exceed that incremental margin guidance.

Certainly, we talked about the fact that it's going to be a positive year. Housing starts, supply remaining pretty tight in various respects. So just trying to parse out whether the guidance here, that incremental margin guidance kind of in line with your long-term, is it simply a function of conservatism? Or is there anything that you see on top of that, that might push the incremental [indiscernible] not to exceed your -- those targets like you've done in the past?

[Robert Kuhns, executive]

Right, Mike. Yes, I'd say the 22% to 27%, folks have asked that question a lot, right? You guys tend to beat that number, and that's always our goal, right? We're always shooting to do that. When we look at the cost structure of our business and what happens with volume, that's about what we expect to get. But every year, we're working hard with our teams to drive for better than that, right? And we've been very successful in that. We'd rather have that as upside in our guidance, have upside for the things we're going to do to outperform rather than put it in there. So we're going to be shooting to do better than that here in 2024, just like we did in 2023. But like I was saying earlier, I think last year, we really did a great job with it, right, with 108% same-branch EBITDA pull-throughs, and I think we got to be a little realistic about those numbers moving forward.

[Robert Buck, executive]

Yes, Mike, this is Robert. I think, as Rob mentioned, on the high end, we're at that 29% at. I think the whole market of our company has been known for the execution piece to Rob's point is and how we continually performed in changing environments. And I think we're pretty well known for that and pretty well known for pushing the achievement level of the company and our teams.

[Michael Rehaut, analyst]

Okay. No, I appreciate that. So basically, though, no real difference in the backdrop that is causing it other than again, you shoot for better, but these are still your long-term targets. Is that fair?

[Robert Kuhns, executive]

Correct. I'd say -- I mean actually going into this year, there's probably more upside than in most years, right? I mean I think there's certainly a lot more optimism around there, around where things are going with starts. We've talked a little bit about the material being tied to pricing environment. So I'd say compared to most years when we were sitting here at this time, there's probably more upside than usual.

[Michael Rehaut, analyst]

Great. Appreciate that. And I guess, secondly, I appreciate the update on SPI, you kind of mentioned that you were asked for some additional information. Certainly, a lot of this is out of your hands, but any kind of additional take on that additional request in terms of -- if it looks anything outside of the ordinary or if it kind of changes your view at all in terms of the timing of a potential close or if it changes your view on what you would expect that this is a deal that should close and just taking a little longer from an information or process standpoint?

[Robert Buck, executive]

Mike, this is Robert. I think you said it well there at the end. It's just taking longer. If you take the environment today with the DOJ, I mean, this is part of the normal process today. One of the process taking longer, one asking for more information. And if you take the SPI business, there's kind of 3 distinct businesses there. The mechanical business, the spray foam business and the metal building business. So they're trying to do their part to understand that. And just given the environment, it's just a longer process. We responded very timely to what they've asked for the process is progressing down the path here. So probably best we can say that things are still under review, but you can kind of get a flavor given the environment.

[Operator]

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

[Kenneth Zener, analyst]

More upside than usual. I think that says a lot. So here's my question for you guys. October rates were high mortgage rates. They fell into December, they've rallied a bit since. Can you discuss like the bidding cadence that you're seeing from your customers in terms of, right, aspects like the labor, right, such as material that's limited labor. How they were thinking about cycle times as you guys were having those communications with each other? And then any commentary around larger builders versus the smaller builders giving perhaps financing constraints. That was my first question.

[Robert Buck, executive]

Yes, Ken, this is Robert. So I'd say that the builders are especially if you think about the big builders, the production builders, definitely optimistic. A matter of fact, it's kind of a good week. The builder shows going on in Vegas. So we've had a lot of meetings with builders. I'd say they're definitely optimistic. And I think given what the fluctuation in rates, they still are, given what's happening. I think you got some of the smaller custom builders that are kind of waiting for that rate to drop some. I think that happens. You hear that optimism in their voice as well. So relative to bidding -- good bidding activity to start off the spring selling season, which, as you know, starts the end of January. And I'd say very productive conversations with the big builders and what they're planning for this year and what it means from a build perspective.

[Kenneth Zener, analyst]

Okay. And then the second line of questioning, it's a bit more about your future [ strutter ] how it might be changing. I think you said that maintenance repair is about 25% today at FDI. And obviously, I think that's poised to increase. Can you talk to how MRO is contributing to the stability [indiscernible] I mean, how is that -- just kind of refresh us ahead of perhaps this acquisition, how that's affected your business versus just having a more cyclical residential piece, please?

[Robert Buck, executive]

Sure. So this is Robert again. So yes, the 25% is our current distribution business. And so I'll give you a few examples. If you think about the MRO side from the commercial industrial. Those are kind of like annuities, if you will. There are certain regulations or certain environmental type of things that happen given the extreme conditions of some of those environments in insulation where that -- there's constant repair and replacement of those parts, whether it be insulation or even some of the kind of jacketing of materials that go on those very extreme conditions or extreme temperature type of environments and stuff where you can also think about food and beverage, if you will. There can be some codes and regulations that require that to change. So it is a regular cycle. There is some kind of repair type of things that happen on the further moment, and there's also some contracts that are kind of longer term that go for that repair and maintenance work that happens there.

And then if you just think about our standard distribution business, think about the insulation-related products that we supply safety products that we supply, gloves, glasses, those types of things that are constantly reoccurring as well. So it's a real stabilizing environment for that 25% of our business as long as we keep up the great service, which we're known for, and we're able to service on the spur at a moment, which we -- our teams do a great job in the field. So that's why we focus on that recurring piece of the business. We think it's important. We continue to be able to grow that and something that we always talk about.

[Operator]

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

[Noah Merkousko, analyst]

This is Noah Merkousko on for Trey. So first, you noted in the prepared remarks, January weather was tough, no surprise. And I think you said February is looking a little bit better. So just any more color you can give us on how the 1Q is shaping up? And we've still got some time here with March. And I guess if you think March is going to be normal from a weather perspective is basically, do you still see volumes down in 1Q? Or just how are you thinking about that?

[Robert Kuhns, executive]

Yes. No, this is Rob. So we get kind of the seasonality of our guidance there, right? I'd say -- when you typically look at our quarters, right, the strongest quarters are going to be Q3, Q2, Q4 and then Q1 in that order. So Q1 is the lightest and then I think as you look year-over-year, just because of how 2023 played out, we came into the year with a strong backlog on the single-family side, that softened up as the year went on. We had a really strong commercial quarter in the first quarter of last year. So I would say our first quarter from a comp perspective is probably our toughest. It was our largest quarter of growth in 2023.

With that, I think we'll still be in that flattish to low single-digit type growth for Q1. But we -- like we said, January put us behind that a little bit. But what we're seeing in February is we're making up a good part of that. And if things stay good here through March, we should get back to where we expected to be.

[Noah Merkousko, analyst]

Got it. That's really helpful detail. Shifting gears to maybe a more longer-term question. You'd mentioned the multi-family continuing to hold in strong. I think you noted it will hold up through the balance of the year. But I guess with the starts that have kind of come in and the sentiment deteriorating there at some point if you think about maybe later this year or 2025, when you do see less multi-family construction, do you think that could free up capacity in the industry so that single-family completions could give worth of that $1.1 million that was the prior peak?

[Robert Buck, executive]

Yes. This is Robert. So yes, I think obviously, when you think about labor or you think about material, if that does happen in '25 to your assumptions there, obviously, folks will shift towards a single family side. And as you think about even from a revenue perspective, the take per unit on a single family is more than a multi-family. So that's a positive for the business as well. So yes, I think you'll see the industry respond accordingly, and that mix shift will be a positive, obviously.

[Robert Kuhns, executive]

Yes. And I'd just add, I mean, to get to that [ 1.1 ] on the single-family side, there's a lot of other variables, right, a lot of products, a lot of labor -- what we're excited about is the long term, right? The demand is there. We know there's short supply. So with a tight environment, right, we should see growth for years to come here.

[Operator]

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

[Susan Maklari, analyst]

My first question is focusing perhaps a bit more on the gross margin specifically. You continue to see some nice expansion there. As you think about the coming year and your comments around pricing on materials and those kinds of elements, can you talk a bit about how you think about the sustainability of the gross margin, the path there and anything on price cost for the year?

[Robert Kuhns, executive]

Yes, Susan, this is Rob. So from a gross margin perspective, as you said, it was [ right ] year for us in 2023. Now the $25 million I've talked about kind of onetime Q2, Q3 benefits that we saw, that obviously hit in the gross margin line. And if you look at the year, you can see Q2, Q3, our gross margins jumped up to 32%. So as we think about 2024, I think we'll be more in that 30% to 31% type range. But like we've said, we're always doing what we can on the productivity side to drive improvements there. And on the price cost side, we're always managing that as aggressively as we can to maximize the benefit on that side, too.

[Susan Maklari, analyst]

Okay. That's helpful. And then perhaps shifting to the commercial and industrial side of the business. I think you commented that you expect mid-single-digit growth there this year. How much of that is coming from the market versus your own ability to continue to gain share there and outperform out of business?

[Robert Buck, executive]

Yes, this is Robert. So I think if you looked at some of the industry type of numbers you would see we're above that as you look at our numbers for commercial industrial. So yes, I said we continue that the field teams continue to do a nice shot of growing that business, continuing to gain traction and penetration with the customers across both commercial industrial. I think that's the right story where our special ops team is focused as well. We talked in the prepared remarks about growing the business top line and bottom line. So our teams have done some really nice work around that commercial industrial and you see it in our performance. And so that's why we're very optimistic in our performance around commercial industrial here in '24 and beyond '24.

[Operator]

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

[Stephen Kim, analyst]

I wanted to -- my first line question was around productivity, any impact that, that could be having on the incremental guide. You talked about overall labor productivity effort. You also brought up the work down on your special ops team. So a couple of questions here. How much was generated in 2023 from the special ops team and -- you've had this team for a while. Can you describe what the expansion is you're talking about? And why the expansion is necessary or good now versus in the past? And lastly, just to confirm my understanding is that you typically don't include expectations for the results from this special ops team in your guidance. I just want to make sure if that's changing or not.

[Robert Kuhns, executive]

Yes. So I'll take -- this is Rob, Stephen. I'll take the piece around the numbers, and Robert will add some more details around special ops. But obviously, that's a key strategy to our business. It's been a key part of our success for years to your point, we're not including upside to that in our guidance. So we would say that, that should be upside because it's a constant iterative process for us, right? And 2023 was a great year. We don't break out exactly what was tied back to that. But we know when we talk about that same branch performance we had even when I pull out the $25 million that we're calling one time, our same-branch flow-through was 80% for the year, right? So it's -- it was a really strong performance, and a lot of that upside is coming from this special ops teams doing. Robert can give you a little more details around what the team is doing.

[Robert Buck, executive]

Yes, Stephen. So it has been something that we've had. We continue to invest in it. So if you think about our footprint, if you think about opportunities relative to me think from labor productivity, sales productivity, logistics, yields on material, those types of things. We just continue to see the ability [indiscernible] point about the pull-through of the same branch. I mean that comes from all that work we're always doing. I mean you hear us talk about maybe we keep using these terms to efficiency driving operational improvements whenever we say that, that's the action that's happening behind the scenes to continue to drive that. And we see more opportunity.

That's the one thing about sitting in our business is that we continue to be more opportunity there. And you always -- it doesn't matter what you're looking at in the business. As you know, you only got a bottom quartile. And so our mindset is you're always uplift in that bottom quartile, whether it be products, branches, customers, that type of thing. So it's just a constant cadence of how we run the business.

[Stephen Kim, analyst]

Yes. That's encouraging. Appreciate that color. The second question I had related to the SPI acquisition. My -- we have heard that maybe the metal building installation segment might be part of the holdup here. I was wondering if when you look at the 3 businesses that you come with SPI, would you be willing to split that business off? And if so, would that have any meaningful impact on your anticipated synergies.

[Robert Buck, executive]

Yes. So as you think about the business, you're right, there's 3 parts to the mechanical spray foam and the MBI. The DOJ has been trying to understand all 3. I mean, they're good businesses in the SPI model. So all the information and what we're working with them on has been really across the business here of SPI. We really haven't had to consider that part about the splitting off and stuff. And you've known us from the big acquisitions in the past. We're good at driving synergies in the different models and stuff. So I wouldn't be the synergy piece here with the whole business or it's really not a concern of ours. So it's too early to speculate anything but something we really not consider given how the process is going forward.

[Operator]

Our next question comes from the line of Keith Hughes with Truist Securities.

[Keith Hughes, analyst]

Two questions. I guess, first on the discussion you had on residential and commercial growth in the press release for '24. Is that a unit comment? Or is that a unit in pricing in those businesses?

[Robert Kuhns, executive]

Yes, Keith, this is Rob. That would include price. So it's volume and price in terms of the mid-single-digit growth. .

[Keith Hughes, analyst]

Okay. And second on the SPI deal. This might be kind of hard to answer in one number because they have a couple of different businesses. But what would this take your market share from into if you're able to successfully complete it in that market?

[Robert Buck, executive]

Yes. I think if we think about the core business of SPI in the mechanical space, which is the core business of it, which keeps us in the double digits in the low teens, if you will, like the double digits relative to that.

[Operator]

Our next question comes from the line of Joe Ahlersmeyer with Deutsche Bank.

[Joseph Ahlersmeyer, analyst]

Congrats on the strong finish to the year. And [ Tabitha ] also congratulations to you and you will be missed. Yes. If I could just dig in a little more on -- not exactly SPI, but what it could look like if you don't close it. Obviously, that is allocable capital even if it's not cash on the balance sheet today. So -- and you're also going to generate a lot of cash in the year ahead and beyond that. So if you could maybe just talk about your thoughts around increasing the buybacks over time, especially as your pipeline of targets will probably shrink throughout time, right? So is there a way to think about how capital might shift more to buybacks versus the acquisition deployment?

[Robert Kuhns, executive]

Yes, Joe, this is Rob. So from a capital allocation standpoint, I'd say nothing's changed with our strategy there. M&A's priority one in terms of where we see the best returns. So we're going to continue to deploy capital there. But just like we've said in the past, we're -- that's going to be lumpy, and we're going to stay disciplined in our process there. So we always do look at buyback opportunities trying to be opportunistic there and weighing it with the pipeline and the deals we have coming. So I think you'll see us doing buybacks again at some point as well, but we're also going to stay aggressive on the M&A front.

[Robert Buck, executive]

Adding to that, just say definitely a healthy pipeline of acquisitions you saw what we did in '23, and then we've already got 3 deals that are signed up for 2024 here early on. So a lot of good activity, still very fragmented, a lot of players out there.

[Joseph Ahlersmeyer, analyst]

I think oftentimes, investors think about this business in terms of the large production builders. But maybe if you could talk to the smaller portion of your business that goes into R&R or even tear down construction with some of the more custom builders. Just anything you're seeing on that front as we think about that being part of the solution to solving the underbuilt construct that we [ got ].

[Robert Buck, executive]

Yes. So relative to the R&R, the rebuild, I mean, definitely, there's a lot of teardowns in the East, which constitutes a new start. But relative to the repair model, that's something our Service Partners business does a great job of getting after that. That's probably the smaller contractor that's doing that work. So that's really the targeted customer. And we do see upside in that, whether it be relative to what you're talking about, but then also just relative to some normal repair and maintenance that happens that we see with our smaller contract customers on a service partner side. So we do see that, and that team does a nice job of servicing those customers.

[Operator]

Our next question comes from the line of Rafe Jadrosich with Bank of America.

[Rafe Jadrosich, analyst]

Congratulations. You'll definitely be best. So the first thing I want to ask is just you mentioned that insulation is still -- it's still tight for material rate, but you do have [indiscernible] off later this year. In that environment in a year where you have new capacity coming on, how does that -- like how historically has that impacted your business and your allocation relative to your competitors? Is there an opportunity to take market share with new capacity coming on?

[Robert Buck, executive]

Yes. So Ray, this is Robert. So a couple of things there. So you're right, new capacity coming on midyear. Now it will take some time to get the lines up and going there. So although that starts up midyear, you're probably thinking more about later in the third quarter, running capacity there. And then as we mentioned, there's a lot of maintenance happening in the industry this year. So it doesn't really have a capacity impact here in 2024 and then to your point about from a TopBuild perspective, if you think about when that plant was announced, which I'm going to say was probably back in 2022, we stated there that we work with management team with [ Knauf ] about how they were planning capacity and planning that operation and stuff. So they're definitely a good partner with us, and we're definitely partnering with them relative to bringing up their new plant there in McGregor, Texas. .

[Rafe Jadrosich, analyst]

Got it. And just to follow up on that, do you have either like commitments or contracts or anything specific around that when there's new [indiscernible] coming on that the manufacturer will arrange with you ahead of time?

[Robert Buck, executive]

We'll definitely do some advanced planning with them. That's probably the best way to say it. .

[Rafe Jadrosich, analyst]

Got it. And then the second question is just on your -- can you remind us on your multi-family exposure relative to single-family and I know your comment that the backlog sort of stretches through the end of this year. What does that actually mean for -- in terms of like what are you implying or baking into your guidance in terms of multi-family. Is that like flat for the year? Is that down small? Like what's the quantification?

[Robert Kuhns, executive]

Yes, Rafe, this is Rob. So I'd say from a multi-family perspective, I mean, in terms of the market, we're going to be indexed similarly to single-family and multi-family as the market goes. So we're somewhat indifferent to either. As far as what's in our assumptions for guidance. We've got multifamily, essentially, from a units perspective, basically flat, right? So we know starts are declining. But with the backlog we have, we feel like we can -- from a what we insulate perspective have pretty much a flattish year from a multi-family side of things. .

[Operator]

Our next question comes from the line of Adam Baumgarten with the Zelman & Associates.

[Unknown Analyst]

This is Marius for Adam. A quick question on antitrust. Given the attention on the SPI build, do you have any thoughts on what this could mean for your ability to do other large deals in this space?

[Robert Buck, executive]

Yes. So as we mentioned, the process is pretty normal today as to what's happening with the DOJ. So it's too early to speculate anything there, as we mentioned on a previous question that came up. But at the same time, we operate in a very, very fragmented environment here across all 3, really residential, commercial and industrial. So we still see as a healthy M&A environment, a healthy pipeline out there for the future. And M&A is always our first choice. As Rob mentioned earlier, we think about buybacks and the best use of capital here. So we're not speculating on anything here going what's the normal process for [ OJ ] right now and the progress and the process is progressing.

[Unknown Analyst]

And another one, can you provide any further details or thoughts on the split between industrial, heavy commercial and light commercial, do you expect all of them to sort of be in that mid-single-digit growth? Or do you expect some variation between the industry?

[Robert Kuhns, executive]

Yes, Marius, this is Rob. So I'd say not too different between the end markets. So as you know, on the install side, about 15% of our business is commercial. It's roughly 50-50 light and heavy commercial. And I'd say we're expecting both sides of that to grow in that mid-single-digit type range this year. And then on the distribution side of the business, the commercial industrial piece is 60% of our business over there. You got service partners servicing the commercial building side of things. And then you've got -- with DI, we're doing the mechanical insulation side of things. And I'd say across both of those ends we're expecting kind of that mid-single-digit growth as well. .

[Operator]

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

[Kenneth Zener, analyst]

Rob, I just wanted you to clarify and expand upon the mid-single digit, both unit and price and how that is consistent with the trends we are seeing today with price up, price still tight. It seems like you're looking for actually even more conservative volume gains in residential. Is that correct assumption?

[Robert Kuhns, executive]

Yes. So like we said, I mean, the guidance we've given is it's price and volume in that residential and the commercial industrial number. From a volume perspective, right, we're expecting on the residential side, single-family starts to remain kind of at the level they're at today kind of around 1 million starts -- ish, right? So any upside to that will be certainly upside to our guide. Multi-family, like I said, we're expecting to be flattish given the backlog and so then we've got some -- so that leads to a little bit of volume growth. I'd say probably low single-digit volume growth when you compare that year-over-year. So then we've got some price layered on top of that. And then similarly, on the commercial industrial side, it's -- some of those products, I'd say, are a little less inflationary on that side. So -- we've got our assumption for price and volume baked into that mid-single digit as well. And like we've said with the environment like we see it right now, could there be more price increases and more inflation than we're anticipating. That certainly seems probably the more likely scenario. So again, that would be upside to the guidance we've got.

[Operator]

Thank you. There are no further questions at this time.

[Robert Buck, executive]

Thank you joining us today. We look forward to talking with you in early May when we'll share our Q1 results. Thank you.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.