Installed Building Products (IBP) announced a small acquisition last night. While not a huge deal, it serves as a good example for what the company has been trying to accomplish in terms of its market roll-up strategy.
IBP is one of the largest new residential insulation installers in the US. It handles everything from material procurement to installation to inspection. IBP installs insulation in all areas of a structure, including exterior walls, attic, basement, and crawl space. About 66% of 2018 revenue came from insulation installation, but IBP is also a major installer of garage doors, rain gutters, shower doors, window blinds, closet shelving, waterproofing, and mirrors. Most of IBP's business comes from new single-family home construction.
Last night, IBP announced it acquired Expert Insulation, Inc. which serves the Minnesota and surrounding states. The company provides fiberglass and spray foam insulation installation services, as well as waterproofing. The acquired company posts just $12 mln in annual revenue.
IBP has been very active on the M&A front, as it uses what is known as a "roll-up" strategy. The installation business is highly fragmented. It's mostly small, local businesses -- a lot of mom-and-pop shops and small family businesses. IBP saw an opportunity where it could come in and acquire smaller installers all around the US.
This roll-up strategy has been quite effective. Probably the biggest benefit is that this greater scale has allowed IBP to negotiate better prices from insulation vendors (IBP goes direct to national manufacturers, skipping middlemen) which improves margins.
From a broader perspective, lower interest rates are good for IBP as it spurs new home construction as homes become more affordable. On May 2, CEO Jeff Edwards said "Demand remains strong throughout our geographies and end markets." Also, it's worth noting on the pricing front that IBP expects pricing trends to rise in 2H19 as IBP is still working through lower-priced jobs from the backlog created during the 4Q18 slowdown. Once these jobs are out of the way, IBP should benefit from higher-priced jobs later this year.
IBP is a name to watch on two fronts. Lower rates are acting as a tailwind for the new home construction market. Also, it's using an M&A roll-up strategy to consolidate a very fragmented industry made up of mostly small family businesses. There are some real benefits here in terms of cutting out middle-men and leveraging its scale to negotiate better prices with insulation manufacturers.