Installed Building Products Inc

NYSE:IBP

Earnings Call Transcript 2020-Q4

[Operator]

Greetings, and welcome to Installed Building Products Fiscal 2020 Fourth Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jason Niswonger. Thank you. You may begin.

[Jason Niswonger, SVP, Finance & IR]

Good morning, and welcome to Installed Building Products' Fourth Quarter 2020 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 on our website.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include statements with respect to the housing market and the commercial market; industry conditions and trends; our financial and business model; payments of a quarterly cash dividend; the possibility of an annual variable dividend in 2022; our stock repurchase program; our efforts to manage material inflation; our ability to increase selling prices; the demand for our services and product offerings; the impact that COVID-19 crisis will have on our business and end markets; expansion of our national footprint; products and end markets; our expectations for our end markets including our large commercial business and multifamily; our ability to strengthen our market position; our ability to pursue and integrate value-enhancing acquisitions in the expected amount of acquired revenue; our diversification efforts; our growth rates and ability to improve sales and profitability; the impact of COVID-19 crisis on our financial results; and expectations for demand for our services and our earnings in 2021.

Forward-looking statements may generally be defined by the use of words such as anticipate, believe, expect, intend, plan and will or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.

Any forward-looking statement made by management during this call is not a guarantee of future performance, and the actual results may differ materially from those expressed in or suggested by the forward-looking statements as a result of various factors including, without limitation, the duration, effect and severity of the COVID-19 crisis; the adverse impact of the COVID-19 crisis on our business and financial results; the economy and the markets we serve; general economic and industry conditions, the material price environment; the timing of increases in our selling prices; the risk that the company may reduce, suspend or eliminate dividend payments in the future; and the factors discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2019, as the same may be updated from time to time in subsequent filings with the Securities and Exchange Commission.

Any forward-looking statement made by management on this call speaks only as of the date hereof. New risks and uncertainties come up from time to time and it is impossible for the company to predict these events or their effect. The company has no obligation and does not intend to update any forward-looking statements after the date hereof, except as required by federal securities laws.

In addition, management uses certain non-GAAP performance measures on this call, such as adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted net income per diluted share, adjusted gross profit, adjusted gross profit margin and adjusted selling and administrative expense. You can find a reconciliation of such measures to their nearest GAAP equivalent in the company's earnings release and additional reconciliation for adjusted EBITDA for earlier fiscal years in our investor presentation, which are available on our website.

This morning's conference call is hosted by Jeff Edwards, our Chairman and Chief Executive Officer; and Michael Miller, our Chief Financial Officer. I will now turn the call over to Jeff.

[Jeffrey Edwards, Chairman, CEO & President]

Thanks, Jason, and good morning to everyone joining us on today's call. As usual, I will start the call with some highlights on the quarter and then turn the call over to Michael Miller, IBP's CFO, who will discuss our results and capital position in more detail before we take your questions.

IBP produced another strong year of record operating and financial performance. For 2020, revenue increased 9.4% to a record $1.7 billion, earnings increased 43.4% to a record $3.27 per diluted share and adjusted EBITDA increased 24.8% to a record $245.6 million. I am proud and humbled by our performance as we achieved these record results despite the unprecedented effects of the COVID-19 pandemic, which demonstrate the hard work, dedication and commitment of our nearly 9,000 team members nationwide.

Throughout 2020, we maintained our commitment to quality and dedication to providing our customers unparalleled service while protecting the health, safety and well-being of our employees, customers, partners and communities. The most important part of our business is the men and women working in our locations throughout the U.S. We strive to provide an environment where people want to work and succeed, focusing our resources on attracting, retaining and developing talent.

I'm pleased to report that we have continued to maintain employee turnover well below industry averages, a direct result of the employee programs we've introduced since 2017 and the culture we value. Our record results also demonstrate the success and the resiliency of our proven business model, our strong position within compelling geographies and end markets, the strength of our balance sheet and capital position, and the experience of our senior leadership team.

In addition, since our IPO in 2014, the compound annual growth rates of revenue, net income from continuing operations and adjusted EBITDA have grown at 21%, 38%, and 33%, respectively. Our consistently strong performance is encouraging, and we believe we are well positioned for the future as we continue to focus on creating sustainable value for our shareholders.

Before discussing our operating performance and outlook in more detail, I want to review this week's announcement outlining our capital allocation priorities. The strong free cash flow of our business model and our strong balance sheet provide us with considerable flexibility to pursue our growth-oriented acquisition strategy while also returning capital to shareholders and supporting the long-term capital needs of our business.

As a result, I am pleased to announce IBP's Board of Directors approved the initiation of a quarterly cash dividend. The first quarterly dividend of $0.30 per share is payable on March 31, 2021 to shareholders of record on March 15, 2021. In addition to the quarterly cash dividend, the Board of Directors will consider an annual variable dividend to be paid during the first quarter of each year, commencing in 2022. The variable dividend will be determined based on the cash flow generated by operations with consideration for planned and expected cash obligations for acquisitions and other factors as determined by the Board.

The Board of Directors has also increased existing share repurchase program to $100 million and extended the program to March 1, 2022. It's important to note, we will continue to prioritize capital investments on profitable growth through our proven acquisition strategy. Acquisitions typically contribute to profitability immediately and generate strong returns on investment. In addition, we have been able to self-fund our acquisition strategy through IBP's strong free cash flow, while simultaneously strengthening our balance sheet. We believe we can support these capital priorities while targeting a net debt leverage ratio under 2x trailing 12-month adjusted EBITDA.

As you can see, we have come a long way since our IPO, and I'm extremely pleased with our ability to support our growth plan while simultaneously returning capital to our shareholders. With this update, let's review 2020 performance and favorable outlook in more detail.

Looking at our end markets, 2020 was another strong year of residential, multifamily and commercial growth across many of our geographies despite the impacts of the COVID-19 crisis. Total residential completions in the United States increased 2.5% in 2020, which included a 0.9% increase in single-family completions. Single-family housing demand continues to benefit from low mortgage rates and favorable demographics have driven an increase in demand for entry-level housing.

In response, homebuilders' land positions improved throughout the year and many adjusted their communities to develop more affordably priced entry-level homes. We believe these trends will continue, supporting further growth as the industry approaches stabilization in the years to come. In the 2020 fourth quarter, our multi-family revenue increased approximately 34% compared to the prior year quarter and increased nearly 38% over the full 2019.

We continue to perform well in the multi-family end market as a direct result of our enhanced sales strategy as we are growing the end market in locations that had previously been over-indexed to single-family construction.

As expected, 2020 was also benefited from a pricing environment, more in line with historical trends. For the year, our price/mix improved 2.8%. And on a 2-year stack basis, price/mix was up over 8%. The 4.5% decline in fourth quarter price/mix was not a result of pricing deflation but reflects a mix shift in the single-family end market. During the fourth quarter, we experienced a higher volume of sales to production builders compared to last year, and overall same branch volume was up 7%. This shift within the single-family end market impacted price/mix as the average insulation selling price for entry-level production builder jobs is typically lower than a move up or custom home.

Given consumer demand for entry-level homes, we believe this trend in mix may continue over the near-term. Even with the decline in fourth quarter price/mix, fourth quarter gross margin increased 70 basis points as profitability benefited from higher volumes, increased efficiencies, and the contribution from sales of complementary building products.

Early into 2021, we are experiencing inflation in many of the products we install. The January 2021 price increase for fiberglass insulation materials was in line with our expectations and was followed with another price increase effective in April of 2021. While the timing of the fiberglass increase is similar to what the industry experienced in 2018, the current housing demand environment is considerably different.

With our availability of labor and our strong position with our customers and suppliers, we believe we are well positioned to navigate the inflationary environment in 2021. Furthermore, we believe single-family industry dynamics remain strong and support the continued demand for our services. According to the U.S. Census Bureau, single-family starts in the fourth quarter were up over 12% and single-family homes under construction increased to 590,000 units, the highest level since November of 2007.

We also believe we are well positioned for continued multifamily growth as a result of our suburban market focus and success of our expanding multifamily sales strategy. COVID related safety protocols on large commercial construction sites affected our commercial operations throughout the year.

Despite these unique challenges, large commercial sales growth increased 15.3% for the year and on a same branch basis, increased 2.8%. Our total pipeline and bid activity within the large commercial market has improved over the past 3 months. And based on the long-lead time nature of our projects, we believe this trend will benefit our large commercial end market in the second half of 2021.

We also believe our solid pipeline and growing presence within the large commercial end market will help us navigate any near-term softness in the commercial market. Long-term fundamentals are expected to remain intact and diversifying our end market exposure continues to be an important component of our growth strategy. In addition, we continue to pursue additional opportunistic commercial acquisitions that increase our scale and competitiveness.

2020 was another strong year of acquisition growth, and we completed 9 acquisitions representing over $107 million of annual revenues. During the fourth quarter alone, we completed 4 acquisitions representing nearly $50 million of annual revenues. Acquisitions included a Georgia-based installer of complementary building products to residential and multi-family customers, a Virginia-based installer of insulation services to residential customers, a Washington-based provider of insulation, waterproofing and fire stopping installation services to commercial and multifamily customers and a Washington-based installer of specialty coatings for fire protection, insulation and acoustics in commercial and industrial applications.

Our acquisition pipeline remains robust, and we continue to actively pursue acquisitions of well-run residential, multifamily and commercial installers that support our geographic end product and end market diversification strategies. Our acquisition strategy is supported by our solid and flexible capital structure, and we are targeting approximately $100 million of acquired revenue in 2021. We may exceed this target depending on the timing of acquisitions within our large and growing pipeline.

Before I turn the call over to Michael, I want to provide additional information on our expectations for 2021 in our longer term outlook, which was included in our investor deck and is available on the Investor Relations section of our website. We believe most of our markets will remain strong in 2021, and we expect 2021 will be another good year of growth and profitability for IBP despite the continued effects of the COVID-19 pandemic.

For 2021, we expect single-family completions to increase in the mid- to high single-digit range. The increased lag between starts and completions, combined with the dramatically increased order volumes from our builder customers, are expected to continue throughout the year, which may positively impact the seasonal trends in our business that we historically encounter. We believe our multifamily end markets will remain strong during 2021. And while near-term demand remains uncertain within the commercial end market, we expect a rebound to occur in the second half of the year.

Gross margins are anticipated to remain favorable despite the impacts of material inflation and higher mix of sales to entry-level single-family homes. We continue to proactively manage our expenses, anticipate higher sales would continue to leverage administrative expenses throughout the year. As a result, we believe 2021 will be another strong year of profitable growth with annual adjusted EBITDA margins expected to be in line with our long-term mid-teens expectations.

So to conclude my prepared remarks, I'm extremely pleased with how our team has responded to the unique challenges that have occurred throughout the year.

Our continued success reflects the power of our business model, the experience of our management team, the long-standing customer relationships we have developed, and the strength of our balance sheet and operating cash flow. We are off to a strong start to the year and 2021 is expected to be another great year for IBP.

As always, I'd like to thank all those in the field who are hard at work every day, representing IBP and serving our customers. On behalf of the entire leadership team, we recognize your efforts, and I want to personally thank you for your dedication. With this overview, I'd like to turn the call over to Michael to provide more details on our fourth quarter results.

[Michael Miller, CFO, EVP, Finance & Director]

Thank you, Jeff, and good morning, everyone. Net sales for the fourth quarter increased to a quarterly record of $441.5 million compared to $401.2 million for the same period last year. The 10% year-over-year improvement in sales was mainly driven by a higher volume of customer jobs completed during the quarter, growth in other complementary products and the contribution from our recent acquisitions. On a same branch basis, net revenue improved 2.8% from the prior year quarter. Multifamily sales increased 33.6%, contributing to an 11.3% increase in total residential sales during the fourth quarter.

Sales in our large commercial construction business increased 40.4% and on the same branch basis, increased 6.4%. It is important to note that sales from our large commercial construction business are not included in the volume and price/mix metrics we disclosed. Profitability remained very strong during the quarter. Adjusted gross profit margin was 30.6% for the 2020 fourth quarter. The 70-basis point increase over the prior year period primarily reflects the benefits of our product diversification strategies and a higher volume of completed jobs.

Administrative expenses as a percent of fourth quarter sales were 13.7%, an 80-basis point improvement from the prior year period. Adjusted SG&A as a percent of fourth quarter sales improved 80 basis points from the prior year period and improved 20 basis points from the 2020 third quarter. The improvements in SG&A are primarily due to higher sales, leveraging expenses, and the benefits of gross profit improvement over the prior year quarter.

On a GAAP basis, our fourth quarter net income increased 45% from the prior year quarter to $27.8 million or $0.94 per diluted share. Our adjusted net income improved 32.5% to $36.6 million or $1.23 per diluted share compared to $27.6 million or $0.92 per diluted share in the prior year quarter. During the 2020 fourth quarter, we recorded $8.2 million of amortization expense compared to $6.4 million for the same period last year as a result of our acquisition strategy. This noncash adjustment impacts net income, which is why we continue to believe that adjusted EBITDA is the most useful measure of profitability.

Based on our acquisitions completed to date, we expect first quarter 2021 amortization expense of approximately $8.2 million and full year 2021 expense of approximately $32.4 million. This figure will, of course, change with any subsequent acquisitions. For the 2020 fourth quarter, our effective tax rate was approximately 25.2% and we continue to expect a full year effective tax rate of 25% to 27% for 2021.

Adjusted EBITDA for the fourth quarter of 2020 improved to a record $67.1 million, representing an increase of 20.7% from $55.6 million in the prior year. Same branch incremental adjusted EBITDA margins were 55.9% for the fourth quarter as a result of our higher sales and operating leverage. Adjusted EBITDA as a percent of net revenue increased 130 basis points from the prior year period to 15.2%.

Now let's look at our liquidity, balance sheet, and capital requirements in more detail. Our business model continues to generate strong operating cash flows. For the 12 months ended December 31, 2020, we generated $180.8 million in cash flow from operations compared to $123.1 million in the prior year period, an increase of 46.9%. Our asset-light business model does not require a significant amount of capital expenditures and our primary capital requirement is to fund working capital needs.

At December 31, 2020, we had $155.9 million in working capital excluding $231.5 million of cash and cash equivalents. Capital expenditures at December 31, 2020, were $33.6 million, while total incurred finance leases were $1 million. Capital expenditures and finance capital leases as a percent of revenue were 2.1% at December 31, 2020, compared to 3.5% at December 31, 2019. At December 31, 2020, we had total cash and short-term investments of $231.5 million compared to $215.9 million at December 31, 2019.

Total debt at December 31, 2020, was $565.3 million compared to $569.2 million at December 31, 2019. Considering cash and short-term investments at December 31, 2020, our net total debt was approximately $334 million compared to $353 million at December 31, 2019. At December 31, 2020, we had a net debt to adjusted EBITDA leverage ratio of 1.4x and well within our stated expectation of maintaining the leverage ratio of less than 2x.

Looking at our capital allocation priorities in more detail. We continue to prioritize profitable growth through our proven strategy of acquiring well-run installers of insulation and complementary building products. During 2020, we invested over $76 million in acquisitions compared to operating cash flow of nearly $181 million. As a result of the cash generation strength of our operations, IBP's Board of Directors approved the initiation of a quarterly cash dividend. The first quarterly dividend of $0.30 per share is payable on March 31, 2021 to stockholders of record on March 15, 2021.

In addition to the quarterly cash dividend, the Board of Directors will consider an annual variable dividend to be paid during the first quarter of each year, commencing in 2022. The variable dividend will be determined based on the cash flow generated by operations with consideration for planned and expected cash obligations for acquisitions and other factors as determined by the Board.

This week, IBP's Board of Directors also increased and extended our stock repurchase program, effective as of February 26, 2021, pursuant to which, we may repurchase up to $100 million of our outstanding common stock. The program will remain in effect until March 1, 2022, unless extended by the Board of Directors.

The Board previously approved stock repurchase program effective as of November 6, 2018, for up to $100 million of the company's outstanding common stock, and there was $26.7 million remaining availability. Under this prior authorization, IBP repurchased $33.9 million of its common stock for the year ended December 31, 2020, which included $18.2 million during the fourth quarter.

We continue to believe we have considerable financial flexibility as we have nothing drawn on our $200 million revolving line of credit, a strong cash position, staggered debt maturities and limited financial covenants. In addition, with no significant debt maturities until 2025 and strong liquidity, we have considerable financial resources to withstand the economic impacts of the COVID-19 crisis while investing in our long-term growth opportunities.

With that, I will now turn the call back to Jeff for closing remarks.

[Jeffrey Edwards, Chairman, CEO & President]

Thanks, Michael. I'd like to conclude our prepared remarks by once again thanking IBP employees for their hard work, dedication and commitment to our company during this very challenging period. Our success over the years and more recently wouldn't be possible if it wasn't for you, and our thanks goes out to you for a tough job always done well. Operator let's open up the call for questions.

[Operator]

[Operator Instructions]. Our first question comes from Mike Dahl with RBC Capital Markets.

[Michael Dahl, RBC Capital Markets]

I want to start out just on the outlook and, I guess, more on the macro side, but it seems to be something that would be guiding your expectations, too, with the mid-single-digit, high single-digit completions. Certainly, appreciate that there are some constraints in the market, whether it's product availability in some cases or labor, but given the trends in kind of units under construction, builder backlogs, from a lag completion standpoint or lag start standpoint, that still seems a bit low. So can you just walk us through kind of puts and takes around your -- what's behind those assumptions there on the completions growth and how to think about your volume relative to that?

[Michael Miller, CFO, EVP, Finance & Director]

Sure, Mike. This is Michael Miller. As we've said in previous calls, we believe that the building products, the construction industry on a macro level, not on an individual builder basis but on a macro level, really has the ability to grow sort of, at given where we are, at the current levels at a high single-digit rate from a completions perspective. We said that, I think, in the last couple of quarterly calls. And we still feel that's the case. I mean, clearly, there has been an unprecedented extension of the backlog and the cycle times to build a new home.

Right now, as Jeff mentioned in his prepared remarks, authorized but not started single-family homes or equivalent to where they were back in 2007. So we're really in an unprecedented point, quite frankly, in this cycle.

But what it does is it gives us an extreme level of confidence around the ability of us to perform over the next couple of years because we think, constructively, that we are in a multiyear situation where we're going to continue to work through this very heavy backlog. And we think it's providing an extremely constructive environment for us, and we have a lot of confidence around the business.

[Jeffrey Edwards, Chairman, CEO & President]

Well, we feel great about our position. I mean, let's just say that it is higher than high-single digits. We're not worried about our ability to perform at a higher level than that. I mean, we're in great shape on our labor. As I mentioned, again, turnover has remained well below industry averages. Productivity is great. So if, in fact, the trades that come before us are able to push more houses through the pipeline or grow faster than what we believe to be the case, then we'll be prepared to do the work.

[Michael Miller, CFO, EVP, Finance & Director]

Yes, absolutely. I mean, we -- and we've talked a lot about this before, Mike, is that we're not the bottleneck. The bottleneck are the trades that come before us.

[Michael Dahl, RBC Capital Markets]

Yes. Okay. Great. That's very helpful. And my second question is related to price/mix and how to think through the moving pieces and, I guess, not to put words in your mouth, but it does sound like you're fairly supportive of the trajectory of price increases that have been announced, given the dynamics in terms of demand and supply, but then you've got this potential for, what, at least in 4Q as a pretty meaningful mix headwind. So when you kind of layer in kind of cumulative pricing versus some of the mix headwinds we should be contemplating, any ballpark on just kind of magnitude of how we should be thinking about all-in price mix for this year?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. I mean there's no doubt that and -- particularly our largest customers, the production builders that are building entry-level homes, are seeing a much higher and you've seen this in the public disclosures from the public builders, right? The heavily weighted entry-level builders are seeing much higher sales growth than other builders are. And we have very strong relationships with those builders. And we continue to believe that some of the kind of move up and kind of custom homes and the sort of regional and local builders are still playing, to some extent, a bit of catch-up, if you will, with some of the other big production builders. And it's going to take time as we go through the course of the year to get a more historical balance, if you will, from a mix perspective in terms of more even growth coming from kind of all of our customers, if you will.

But certainly, we're seeing the trends of the strength of that entry-level market continuing. But -- and we've talked a lot about this before. Well, yes, absolutely, it is a lower priced job because it's a lower cost house. It does give us very strong volumes as we demonstrated in the fourth quarter, which then gives us very strong G&A leverage because of the efficiency of doing that work. So we are extremely confident and very constructive around the strength that we're seeing in that entry-level market and in our market share with those customers that are performing extremely well.

Now it does create noise, if I can use that word, around the price/mix. But these price increases that you referred to, I mean, yes, we do think that we are constructive on them, and we've always talked about a rising price environment ends up being constructive for us and we are supportive of that. And the reality is that there's a lot of demand out there in a very tight demand environment. It creates a favorable pricing environment as well. So I think through the course of the year, what you'll see is perhaps some pressure on price/mix in the first half of the year that will be abated in the second half of the year as we continue to get higher selling prices combined with a more even trajectory of sales growth among all of our customers.

[Operator]

Our next question comes from Ken Zener with KeyBanc Capital Markets.

[Kenneth Zener, KeyBanc Capital Markets]

All right. Let's try this another way. I think people are just misinterpreting the price/mix and the revenue. Okay. Didn't you just say in your presentation, gross margins are going to be favorable in FY '21 versus FY '20? Which means positive growth year-over-year. Is that correct?

[Michael Miller, CFO, EVP, Finance & Director]

Correct.

[Kenneth Zener, KeyBanc Capital Markets]

And that stands in contrast to 2018, where gross margins fell 100 basis points year-over-year as you were behind price announcements because they happened so quickly. So -- and then on SG&A, you just mentioned leverage is going to be -- SG&A is going to be lower. And if that's the case, your margins are expanding and the actual negative price/mix we see in the rev line is actually not affecting the operating leverage. It's just a revenue component. It's not actually compressing the margins, right?

[Michael Miller, CFO, EVP, Finance & Director]

Yes, that's absolutely right. And the volumes helped that SG&A leverage.

[Kenneth Zener, KeyBanc Capital Markets]

Okay. Exactly. You're right.

[Michael Miller, CFO, EVP, Finance & Director]

Just to be clear, we don't think SG&A is going to decline in an absolute dollar perspective, but we would expect that we would continue to see operating leverage from an SG&A perspective.

[Kenneth Zener, KeyBanc Capital Markets]

Correct. And within your 20...

[Michael Miller, CFO, EVP, Finance & Director]

Yes. But I would say, to your point, Ken, which is extremely important, and Jeff pointed this out in his prepared remarks, is that the current demand environment that we're in now is 180 degrees different from the demand in 2018 and even the beginning of 2019.

[Kenneth Zener, KeyBanc Capital Markets]

Right. And other -- I mean, look, you all have perhaps along with another company, the most direct contact to new construction, given you're upwards of 30% share. So I think you're speaking from some degree of insight that others lack. Now the incrementals that you guys usually give, and Michael, correct me, but I mean 20%, 25%. That's where you guys are at, right? For incremental EBIT?

[Michael Miller, CFO, EVP, Finance & Director]

Yes.

[Kenneth Zener, KeyBanc Capital Markets]

Would you say there is any strong cadence, first half versus second half, that you see in your business based on backlog on the EBIT line, not the gross or SG&A?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. So historically, we would have -- in the first half of the year, we would have lower incrementals than in the second half of the year. Admittedly, 2020 was, from so many levels, an extraordinary year. And we saw incredibly strong incrementals in the second and third quarter. But 2020 was -- I mean, every quarter was a record for us, and it was a remarkable performance by our team. Just -- I mean, as Jeff gave them a shout out in his prepared remarks, we can't say enough, right, what an incredible job our -- everyone in the field has done this year given the environment.

But we would expect that '21, and we talked about this previously, that given the current demand environment and that we are seeing a lot of demand from what is typically parts of the country that build all year round. Obviously, there was a big disruption in Texas recently. But we would expect that the seasonality in the business would flatten out a little bit. And as a consequence, then you would probably see incremental margins being more stable across the year as opposed to getting that back half weighting of incremental margins.

[Kenneth Zener, KeyBanc Capital Markets]

And could we look at that sequentially given the stability? I mean, it suggests that sequentiality might be as applicable as year-over-year.

[Michael Miller, CFO, EVP, Finance & Director]

Yes. I think that's probably a reasonable comment.

[Kenneth Zener, KeyBanc Capital Markets]

Great. And the last question, Jeff, to you. Annual variable dividend. Does this -- can you -- what does that mean? I mean, does that mean if you guys have $100 million extra or $50 million on the balance sheet that's basically elective to the Board to have a special dividend. Is that what -- how I should interpret that? Or how do you want to communicate that?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. More or less. I mean, we haven't disclosed that circumstance -- the exact criteria that we'll use. But we certainly do have a criteria. We're not -- it's not just a Ouija board. So -- and it is. It's based on all the things we said, kind of how much we acquire in a year, where we sit from a cash perspective, how much cash we generated in the year, et cetera.

And if we have performed on the other things that we believe take priority, mostly both acquisitions and then, ultimately, if we feel its appropriate, stock buybacks. Then what's left if it's excess, we're going to end up returning to shareholders. And I think...

[Jason Niswonger, SVP, Finance & IR]

And I think a key here, and it was both in my prepared remarks and in Jeff's prepared remarks, our #1 priority from a capital allocation perspective continues to be, without a doubt, on acquisitions.

And we're where we have a very robust pipeline. And just like we've been disperforming record quarters from earnings and revenue. We want to do record years in terms of acquired revenue as well. There's no reason why, given the cash flow that the company is generating, and given our view over the next several years, particularly about single-family residential, that we shouldn't be looking towards multiple ways to create shareholder value.

[Jeffrey Edwards, Chairman, CEO & President]

Absolutely.

[Operator]

Our next question comes from Adam Baumgarten with Crédit Suisse.

[Adam Baumgarten, Crédit Suisse]

Just maybe again on the acquisition strategy. I mean, it seems like you guys are pretty clear that it's very much intact, yet the business has grown and you're kind of guiding to $100 million or above in acquired revenue. I guess, given the bandwidth you have, why not go much bigger? I mean, some of your -- or one of your peers is talking about some pretty sizable opportunities out there. And you guys do seem to have a lot of white space within even just your existing markets, especially in commercial and some of the ancillary products. So has there been any change in acquisition strategy in terms of the aggregate amount that you guys are willing to do or maybe the opportunities that are out there? Just if we could get a finer point on that.

[Michael Miller, CFO, EVP, Finance & Director]

I would say, if anything, there's more opportunities at higher dollar revenues on and it's why I just stated, as an answer to Ken's question, that we want every year to be a bigger year from an acquired revenue perspective. I will say, though, and I'll let Jeff talk about this as well, we are extremely disciplined about our acquisition criteria and the multiples that we pay for businesses. We will not period overpay for a company. And that's been the case for the past 20-plus years. And it's going to be the case for the next 20 years.

[Jeffrey Edwards, Chairman, CEO & President]

Yes. So we -- I mean, there are bigger deals out there. And when the right bigger deal presents itself to us under the right circumstances, we'll get it done. But we can't force people to sell who aren't yet sellers. So -- and we have a tendency, as you may or may not remember, I mean, I think when we originally came out at the IPO, we had suggested maybe we might do $40 million a year in acquisition -- revenue acquisition, and we've ended up averaging closer to the $100 million. So it's kind of -- we're a little conservative, I guess, and we don't like to give guidance, as you know. But we're conservative and usually stating what it is that we want to try to get done.

So I think the step-up from us saying $40 million to $100 million is actually kind of big, and we hope to outperform that considerably. But at least we're now on record as saying $100 million at least as a habit, right?

[Adam Baumgarten, Crédit Suisse]

Yes. No, that's helpful. Makes sense. And then just on price/mix, I mean, can you maybe give us a sense for what like-for-like pricing looked like in the quarter? And how much of a headwind you saw? And if you could size it from this entry-level mix, maybe if there was any deflation across some of the ancillary products for spray foam?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. It was -- it had nothing to do with price. It was all mix. It was mix related to the production builder, entry-level and greater growth in the other products, which we've talked, I think, every quarter for the past couple of years about that, that strategy is great from a leverage perspective in terms of creating G&A leverage. But it is at -- it does create a negative price/mix. So it had nothing to do with price deflation at all.

[Operator]

Next question comes from Susan Maklari with Goldman Sachs.

[Susan Maklari, Goldman Sachs Group]

My first question is, Michael, you touched on this a bit in one of your previous comments. But obviously, we've seen some extreme weather especially in Texas and even in some parts of the East Coast and the Northeast over the last month or so. Can you just talk to any implications that you're seeing from that or what you are hearing on the ground there?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. I mean there's no doubt there's been significant -- just as everyone knows, there's been significant weather events in a month. I would say that the East and Northeast, they are accustomed to lots of snow and bad weather. So it had really little disruption there. The branches that may have had a day or 2 where they were shut down up there, they made it up over the weekend. So there's not pressure there. I would say, though, and I mean, we use this word a lot over the past 12 months, but the weather event in Texas was a bit unprecedented, quite frankly. And all of our operations, quite frankly, in Texas were shut down for the week.

And just as a context for people, Texas, both residential and commercial, represents about 12%, 13% of total revenue. Now the good news is, is that, on a couple of fronts, is that we did start working again on the weekend.

A lot of our branches actually worked Sunday as well to try and catch up. The work is there, as we've talked about before. It's not as if we've lost the revenue, it's just a question of when we get to the revenue. And I would also say is that it wasn't just us that wasn't doing work. Basically all trades were shut down in Texas for basically a full week. So that work is coming to us. But again, it can only come to us as quickly as the framers and the masons and everybody else can get their job done.

[Susan Maklari, Goldman Sachs Group]

Got you. Okay. That's very helpful. And then not to beat this but going back to the shift between volume and price/mix. Over the last couple of years, maybe 2 years or so, it's really been the price/mix that has led the revenue growth. But if we go back further, we've seen that they were either more balanced in that it was actually the volume that really kind of led that growth. As we think about coming into this kind of a multiyear housing growth environment, should we expect that it will go back, that volume will really likely be what leads more of your growth versus the price/mix? So that those two will move much more closely in line together?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. See, that's actually a great question. And you're absolutely right. If you look at it historically, they've been much more balanced. I mean, I think this is probably the most pronounced quarter we've ever had in terms of a delta between the two. And it's for the reasons that we talked about. But we would expect, particularly given the pricing environment that we talked about as it relates to kind of the inflationary environment, that as we go through '21, that we would probably get more balanced between the two, certainly more balanced than we have currently or we did, I should say, in the fourth quarter.

So we think that over time, and because you asked the question from a multiyear perspective, I think from a multiyear perspective, we would be more in balance from a price/mix and a volume perspective. But again, we are leaning in hard to the very strong, tight relationships that we have with the production builders that are heavily focused on entry-level. It's great work for us. Yes, it is -- creates a price/mix headwind, but it's also super-efficient, and those are great customers that we're working hard to gain market share with.

[Operator]

Our next question comes from Michael Rehaut with JPMorgan.

[Michael Rehaut, JPMorgan Chase & Co.]

First question, I just wanted to dial in a little bit more on the drivers of the gross margin in the fourth quarter. You kind of went through, I guess, year-over-year being driven a little bit more by some product mix diversification and higher volumes in terms of the year-over-year expansion. I was hoping to get a sense of the sequential move down. I think that was a little bit of a surprise to us. And then as you look at '21, you clarified that your outlook for gross margins to be favorable would mean a year-over-year expansion, in effect, over the 30.9% for 2020. If that -- it's that year-over-year improvement would be kind of across quarters or it would be more back half weighted?

[Michael Miller, CFO, EVP, Finance & Director]

Well, as you know, we don't provide guidance, but we believe that, again, on a full year basis, that we would see improved gross margin. As we sit here today, there's no reason to not think that we would have improvement quarter-over-quarter from the prior year. But obviously, things can change from quarter-to-quarter, and you can have changes to that. But right now, we feel extremely constructive about kind of the overall volume environment and our ability to get price given the demand environment, and we believe that that ends up being constructive from a quarter-over-quarter improvement in gross margin.

And as we've been talking about, obviously, volume is a good contributor to G&A leverage.

[Michael Rehaut, JPMorgan Chase & Co.]

And then just about the first part of the question around the sequential move in gross margins, it declined about 80 basis points, 4Q from 3Q?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. I mean, I think we've always talked about the seasonality of the business and that we, generally speaking, generate our highest gross margin in the third quarter, which has a lot to do with the type of work that we're installing in the fourth quarter versus the third quarter. So we fully expected that we would see improvement like we did from the fourth quarter of '19, and it's very typical that we see this sort of slight compression, if you will, in gross margin from third quarter to fourth quarter.

[Michael Rehaut, JPMorgan Chase & Co.]

Okay. Yes. Okay. It didn't -- I guess that seasonality wasn't the case in the last couple of years, which, again, was why I was a little surprised. But secondly, I just wanted to go back to the thoughts around capital allocation. And I don't want to beat a dead horse, but I think it's an important point for investors. I think you've kind of said repeatedly that you remain very comfortable with the acquisition pipeline, you're targeting to continue that $100 million per year or at least in 2021. And perhaps it could be -- you'd always like it to even be bigger year after year.

I guess, just to, again, kind of clarify here, the idea of dividend and perhaps even a special dividend at the beginning of the year, that is not at all a reflection on the opportunity set in front of you diminishing. In other words, certainly, it's a positive thing to say your #1 priority remains acquisitions and also the fact that you're looking to continue that $100 million per year, which I think is consistent with how we've understood your goals in terms of M&A. But just to kind of round out the overall discourse on this, the other part of it is that while it remains the #1 priority, you could think, okay, it's still the #1 priority, but maybe the opportunity set is diminished, and that's part of why you're looking at this more well-rounded capital allocation approach.

So just wanted your thoughts on that, that this move in capital allocation, again, doesn't reflect a view that, while still the #1 priority, you just have less opportunities in front of you.

[Michael Miller, CFO, EVP, Finance & Director]

Yes, I'll start to answer that question and then let Jeff kind of complete it. But absolutely 100%. We -- the opportunity set in front of us from an acquisition perspective is better than it's ever been. The dividend is absolutely a signal of our confidence of where we are in the cycle, that we have a multiyear benefit that we can see in front of ourselves and our absolute confidence in the business and our ability to continue to generate record cash flow.

[Jeffrey Edwards, Chairman, CEO & President]

Yes. And I'll just say, and these are round numbers. We've stated them. But I mean, more or less, we started the year last year or let's say, December 31, in '19, so January 1, '20, more or less, with roughly $250 million of cash on the balance sheet. We acquired $107 million worth of revenue throughout the year. We ended the year with roughly $250 million of cash on the balance sheet, and we've got an undrawn lines of credit. And debt is easy to get.

So if an opportunity presents itself, we feel very confident of our ability. If it outstretches kind of what we've said in relation to the $100 million and the right deal comes along, we will absolutely look very hard at it and go ahead and hopefully get the deal done.

But at the time, and part of the reason for the idea behind the variable is just if that deal isn't in front of you at that moment, then we should probably return some dollars to shareholders.

[Operator]

Our next question comes from Phil Ng with Jefferies.

[Philip Ng, Jefferies]

Did I hear you correctly? You reiterated your longer term mid-teen EBITDA margin target, but you may have a chance to get there this year. And I guess, longer term, just given the momentum and demand profile you've seen, you're calling out, what's a aspirational longer term target?

[Michael Miller, CFO, EVP, Finance & Director]

Well, we have reconfirmed and have always talked about the mid-teens EBITDA margin. I guess it sort of depends upon how you define mid-teens. I mean, because basically, this year, we were at 15%. And I think what we're saying is that we believe that over the course of '21, that's going to improve. So -- and once we continue to make that improvement, we're not going to stop, right? This is a continual process to continue to improve margins. So the mid-teens is definitely what we've talked about.

And arguably, we're there now, but we continue to believe that, especially given the current demand environment, that we can continue to improve gross margin and also continue to leverage G&A.

[Philip Ng, Jefferies]

Great. That's helpful. The strength in commercial has been really impressive. I mean, you were up in the fourth quarter. Again, can you expand on what's driving that? And appreciating that you called out more of a recovery in the back half just due to the timing, the lag in your backlogs, but do you expect commercial to be up in the first half?

[Michael Miller, CFO, EVP, Finance & Director]

We talked about this, I think, in the past couple of calls, where we do think the first half of '21 in the commercial business on the same branch basis, and you probably saw that we've added additional disclosures in the release this quarter, just to help give people more insight into that business. But we would expect that it is going to be challenged in the first half of '21 on a same branch basis. But based on the backlogs and the bidding that we're seeing, we feel pretty good about the second half of this year. Quite frankly, and this is not news to anybody, what we're seeing is GCs and owners stretching out their decision-making process around certain projects and waiting to award bids.

So when we look at our kind of backlog of work that we bidded but that hasn't been awarded yet, it gives us that confidence around kind of the back half of '21.

[Operator]

Our next question comes from Keith Hughes with Truist Securities.

[Keith Hughes, Truist Securities]

Just two questions. First, you talked a lot about margins and mix of some of those targets. The bottom-line is you got 20% to 25% EBITDA contribution margin goal that you beat in 2020. Is that still on the table for '21, giving you a lot of moving parts on margins?

[Michael Miller, CFO, EVP, Finance & Director]

You mean beating it or the 20% to 25%?

[Keith Hughes, Truist Securities]

Start with the 20% to 25%. Is that hittable what's going on in this year?

[Michael Miller, CFO, EVP, Finance & Director]

We feel -- yes, we feel extremely confident that, on a full year basis, we'll be in the 20% to 25% incrementals, if not better.

[Keith Hughes, Truist Securities]

Okay. Great. Second question, back to the capital allocation, and you made it very clear, acquisitions are the priority. But there's only something you can do in a year. I guess the question is, what's next? I mean, is it dividend, both special and reoccurring? Is that now the next choice of use of cash before share repurchase?

[Michael Miller, CFO, EVP, Finance & Director]

It's really going to depend because, as you know, we've been very opportunistic from a share repurchase perspective. We did acquire $33 million of shares during 2020. And the bulk of that was in the fourth quarter of this year or more than 50% of that was in the fourth quarter of this year. So we're extremely opportunistic with it, and we will remain in that case.

But from a, I would say, from a capital priority perspective, we definitely believe that, again, we're going to use multiple ways to return "excess capital" to shareholders. But we do think that the dividend is an important component of that, just given kind of where we are as a company.

So again, the main focus is capital -- deploying capital to do acquisitions, obviously, investing in the existing business, maintaining a very strong balance sheet with a lot of financial flexibility. But then clearly, the dividends are going to be an important component of increasing shareholder returns going forward.

[Operator]

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

[Justin Speer, Zelman & Associates]

Just starting off, just thinking about your comments on the completions. But just if you could reiterate kind of what you're thinking that the industry can do? And then maybe juxtapose that with what you think you can do in a completion environment that you're looking for, at least for the single-family side of things. Just trying to get a sense for kind of volumetrically what you're thinking or what you're trying to message there?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. I mean, as we stated in previous calls, we do think that, on a macro level, that a high single digit's completions, and we're talking primarily about single-family here and not multifamily or total completions. But that single-family completions, just given the constraints that the industry has, and particularly some of the material disruptions that have occurred because of production, and I'm not speaking necessarily about just insulation, but all building products, the disruption that they've seen from curtailments or manufacturing capacity that have been taken down during the spring. That's really just catching up with the industry right now, quite frankly, because what happened is most manufacturers during the summer just worked off of existing inventories.

So that's why you're seeing incredible tightness, quite frankly, across the building products market. Now as builders -- excuse me, as manufacturers are trying to rebuild inventories and get product out. As you all know, there's been quite a bit of disruption from a shipping perspective or transportation perspective across the country, which has sort of exacerbated that issue. But we think all of those things, plus then labor, particularly for subcontracted labor at the, say, the framing level is just the ability to size that up, given where we are today, greater than a high single digit. We just -- we don't currently see that happening, quite frankly.

Now obviously, there's going to be exceptions. There are certain builders that are absolutely going to perform well above that. But we're thinking about it in more of a macro level basis and when we think of the bottlenecks that are being created in the industry right now, the material that I just talked about, getting permitting done and the challenges that builders are experiencing there across the board, not all builders, that is just from -- again, from our perspective, I'm not saying we're right, I'm just saying that's our perspective. We think it's a high single-digit single-family completions number.

[Justin Speer, Zelman & Associates]

So as you think about, I guess, if you think about that, I guess, within the context of that kind of an environment, maybe historically, you've taken pretty, I guess, considerable share in, I guess, in a market back drop like that. You think that still continues. And then on top of that, just that price/mix comment, I guess we've got 2 price increases this year. I'm guessing you're assuming there's going to be 1/3. Are you prepared for that? In this kind of environment, do you think you can ease -- you're obviously messaging that you can, but do you expect there might be any friction or maybe a lagged impact to your profitability in the course of the year from that kind of cadence of price increases?

[Jeffrey Edwards, Chairman, CEO & President]

Yes. This is Jeff. I don't think so at all, really. And as we've said, it's a far different environment than it was in 2018. I'm not in any way to make light of it. But whatever we're doing on insulation, pales in comparison to the things that builders are dealing with otherwise. I'm going to think about lumber for a moment, right? So we are a distant afterthought, as -- which we've always said, basically everything we install, we lovingly call business products. But they're typically small ticket items, and we're the least of the worries, I think, when it comes to home price increases and builder cost increase.

[Michael Miller, CFO, EVP, Finance & Director]

Yes. And I think, too, to the kind of first part of that question in terms of our ability to grow above the market. Honestly, if you look at our volumes this quarter compared to the completions, we grew way above the market. And we're really the only major installer contractor that buys from all 4 fiberglass manufacturers, which we believe gives us the opportunity to have greater access to material.

And as Jeff commented earlier, our turnover is well below industry averages. We continue to see labor productivity. So we're very confident that if the trades before us can come, call it, 13%, 14%, we absolutely can meet that demand or exceed that demand.

[Justin Speer, Zelman & Associates]

Excellent. And then just kind of following up on that question and thinking about the SG&A needs and requirements of the business, the overhead requirements. I know there's some -- maybe some temporal good guys in 2020 that maybe don't repeat. Maybe could you give us a sense for your SG&A expense growth or design as you think about mapping up 2021 in kind of high level directionally, I guess how much is it going to need to increase to accommodate the growth.

[Michael Miller, CFO, EVP, Finance & Director]

So from a -- I mean, sales are really -- or selling expense, excuse me, are really directly correlated or directly variable, if you will, to sales. So they're going to run between 4.5% to 5%. On the G&A side, we obviously got leverage this quarter, and we would expect that we would see a lower rate of growth on a same branch basis. Obviously, when we acquire acquisitions, they bring in G&A. With one of the notable exceptions, and we've talked about this in previous calls, is that -- our field management team is their -- the vast majority of their compensation is tied to profitability. So as we increase profitability, that increases the G&A costs associated with that variable component to their compensation.

But structurally, there's nothing significant within our G&A currently as we look towards '21 that's going to substantially change that outlook to be more than a typical sort of inflationary rate.

I would say, to the kind of first part of your question, in terms of good guys that we had in '20. Really, at this point, the only thing looking in '20, that's still, from an expense perspective, that's benefiting us, quite frankly, is at lower fuel cost. I mean fuel has been, if you look over the past 10 years, fuel has been -- and it continues to be, obviously, it's changing a little bit. But fuel has been a good guy, if you will, in going into or throughout 2020. And we would expect that that would normalize more as we go through '21.

And to give you a sense of context, right now, we probably have a benefit of about $1 million a quarter from the lower fuel cost.

[Justin Speer, Zelman & Associates]

Okay. Got it. And then just following up on that. Last question for me is on the cash flow side. As you think about free cash conversion for 2021 and your capital needs, are you -- do you have any thoughts there in terms of -- not just for 2021, but just trying to normalize free cash conversion on net income going forward?

[Michael Miller, CFO, EVP, Finance & Director]

Yes. I would say that it's going to be consistent with historical trends. Obviously, since the tax rates have been lowered. It would be consistent with those trends. We don't see anything, especially unique relative to kind of '21 and '22. With the 1 exception, which this is true really, I don't think many companies talk about it, but it's true of every company is that as part of the first COVID Relief Act, we were able to defer. We still expense it, but we've been able to defer the employer portion of certain taxes that are paid to the government, and we have to pay that back in the end of this year and the end of '22. So that will be slighting -- just slightly impact cash flows in '21 and '22.

Not expense. Again, it's all been expensed. It's just that it's a deferral. But other than that, there's really nothing significant from historical trends.

[Operator]

Our next question comes from Ryan Gilbert with BTIG.

[Ryan Gilbert, BTIG]

I really appreciate all the detail that you've provided on this call. Just one question for me on multifamily, really strong growth over the last couple of quarters, and it's pretty clear that the new bidding system that you put in place has allowed you to take some market share. Just looking at the, I guess, the -- nationally, the multifamily permits and starts numbers, we've seen a pretty meaningful year-over-year decline over the last few months. So I'm just wondering if you could add a little detail or give us some color on what you're seeing in your multifamily markets just in terms of permit starts or just overall construction activity.

[Michael Miller, CFO, EVP, Finance & Director]

Yes, you're absolutely right in your question and comments there. We feel, from a multifamily perspective, that we still have a lot of opportunity because we're sort of under-indexed to multifamily, if you will. And the focus of our multifamily is really suburban as opposed to urban, which we think, if you kind of break apart where permits and starts are, it is more suburban rather than urban driven right now for a multifamily perspective. And we have performed extremely well with our strategy of gaining market share in markets where we weren't doing multifamily. We're going to continue to do that.

That being said, I mean, as we continue to perform on the strategy, the comps become incredibly difficult, right? I mean, talk about growing extremely well against the market. I mean, we've really just -- honestly, our team there has just done an incredible job of performing well above any market expectation as it relates to the multifamily opportunity.

So we would continue -- or we believe we will continue to outperform the relative market. But when you grow sales almost 40%, it becomes a really tough comp going into the next year.

[Jeffrey Edwards, Chairman, CEO & President]

Yes. But I mean, I'd just reiterate, our specific market opportunity absolutely runs against in a good way that any -- the tide really in multifamily. Because there's so much market opportunity for us.

[Operator]

Our next question is from Reuben Garner with The Benchmark Company.

[Reuben Garner, The Benchmark Company]

Most of my questions have been answered. I just have 1 kind of high-level macro question. I think one of the headwinds or just the broader industry coming into 2020 was kind of a shrinking square footage per household. And if you guys already talked about this apologies, I've been in and out of call with connection issues. But what are you -- are you guys seeing or hearing anything from the builders about maybe that trend turning around and even in the high single-digit completions growth environment, maybe the amount of material leaded -- needed is maybe a tailwind instead of the headwind that had been for the last several years?

[Michael Miller, CFO, EVP, Finance & Director]

Well, I think it goes back to the -- as entry-level continues to gain share, if you will, or continues to come back to its more historic levels as a percentage of total single-family starts and completions. I think that naturally means that square footage comes down because those are obviously much smaller homes than move-up or custom homes.

That being said, from a fiberglass demand perspective, that entry-level product is pretty much almost exclusively fiberglass as opposed to spray foam or cellulose. So I do think it creates good demand for fiberglass and for our services. But it definitely -- well, if you look at the aggregate macro numbers, I would imagine that, again, as we get back to a more normalized mix between entry-level, move-up and custom, that you would see square footage has come down.

But I don't think people are building a smaller house in the same category if you know what I mean. So they're not building smaller entry-level houses. They're not building smaller move-up houses. I think if anything, there's probably a bit of weighting towards building the houses a little bit bigger given some of the obvious things that are happening from a work from home perspective.

[Reuben Garner, The Benchmark Company]

Perfect. Congrats on the close to 2020. Good luck this year.

[Operator]

We've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Jeff Edwards for closing comments.

[Jeffrey Edwards, Chairman, CEO & President]

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

[Operator]

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