GMS Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 22, 2023

There are 10 speakers on the call.

Operator

Greetings. Welcome to GMS Incorporated 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to Carrie Phelps, Vice President, Investor Relations. Thank you. You may begin.

Speaker 1

Thanks, Sherry. Good morning, and thank you for joining us for the GMS earnings conference call for the Q4 and full year fiscal 2023. I am joined today by John Turner, President and Chief Executive Officer and Scott Deacon, Senior Vice President and Chief Financial Officer. In addition to the press release issued this morning, we have posted PowerPoint slides to accompany this call in the Investors section of our website at www.gms.com. And answer session are not only in the Private Securities Litigation Reform Act of 1995.

Speaker 1

Forward looking statements address matters that are subject to risks and answer session will be answered. Many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward looking statements represent management's current estimates and expectations. The company assumes no obligation to update any forward looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward looking statements contained in the company's filings with the SEC, including the Risk Factors section of the company's 10 ks and other periodic reports.

Speaker 1

And answer session. Please note that references on this call to for the Q4 of fiscal 2023 relate to the quarter ended April 30, 2023. Finally, once we begin the question and answer session of the call, in the interest of time, we kindly request that you limit yourself to one question and one follow-up. With that, I'll turn the call over to John Turner, whose discussion will be starting on Slide 3. J.

Speaker 1

C?

Speaker 2

Thank you, Carrie, and thank you all for joining us today. 2023 was a year of strong growth and profitability with record levels of full year net sales, net income, adjusted EBITDA and cash flow generation. For fiscal 2023, we achieved full year net sales of $5,300,000,000 an increase of 15% compared to the prior year. Net income increased 22 percent to $333,000,000 Adjusted EBITDA grew 17% to $665,700,000 and adjusted EBITDA margin improved 30 basis points to 12.5%. Cash generation was also significantly improved year over year, reaching a full year record high with cash from operations of $442,000,000 and free cash flow of $389,000,000 each more than double their levels from a year ago.

Speaker 2

For the quarter, even after seeing a pullback in single family demand and without the benefit of the steel inflation that we experienced during fiscal 2022 early 2023, our team performed exceptionally well to close out the year. For our fiscal Q4, we grew net sales to $1,300,000,000 up 2.8% on a same day basis. Net income declined slightly to $75,600,000 but despite having one less selling day, adjusted EBITDA grew to 154 point $3,000,000 marking our 9th consecutive quarter of year over year adjusted EBITDA growth. Adjusted EBITDA margin was 11.8% for the quarter compared with 12% in the prior year period. Strong multifamily demand and continued growth in commercial construction, combined with a favorable pricing environment in wallboard, with modest year over year single family growth.

Speaker 2

Looking at our balance sheet, during fiscal 2023 and just after the end of our Q4, We refinanced our ABL and extended and amended our term loan facility. The foundational strength of our well positioned capital structure and liquidity position helps enable us to continue driving growth and improve profitability through the execution of our strategic priorities, Our team has worked tirelessly to be the supplier of choice for our customers, providing exceptional service, expertise and product availability. For Wallboard, despite being impacted the most by the slowdown in new single family housing, our teams have successfully strengthened existing relationships and entered into new agreements with key customers across our end markets. In steel framing and ceilings, We are also strengthening relationships and successfully winning business in most of the sectors we serve, even in large office, new and remodel, which does remain muted. As such, utilizing a combination of data sources, including the Gypsum Association, The Steel Framing Industry Association and our suppliers disclosures, we believe that we continue to maintain or grow share in each of our core product categories And we'll continue to focus on this objective going forward.

Speaker 2

Next, we are growing our complementary products. Broadening and realizing incremental scale in our offerings helps enhance the value we bring to our customers, while also allowing us to accelerate our growth and strengthen our margins. The complementary products group comprised of our field business leaders and our central purchasing team is progressively sharing best practices, Identifying areas of opportunity, leveraging scale and consolidating vendors where sensible. This focus allows us to leverage sales of our core products, We are also expanding our Eaves and Stucco lines to new locations and onboarding additional specialized sales expertise to boost growth in this category. Also during fiscal 2023, we furthered the growth of our complementary products with the continued expansion of the AIMS footprint.

Speaker 2

In addition, we entered the New York City market through the acquisition of Tanner Bolton Nut, a leading distributor of tools, fasteners Other related construction products in that area, added additional eaves focused locations with the acquisition of Angler, Meyer and Justice and purchase Blair Building Materials, a highly respected provider of complementary products in Ontario, Canada. As we've discussed on previous calls, within our complementary product offerings, we are focused primarily on expanding several high opportunity growth subcategories,

Speaker 3

is

Speaker 2

expected during the Q4 and 25% for the full year. We intend to continue this push to profitably expand and scale these product offerings 3rd, we continue to take steps to expand our platform through accretive acquisitions and greenfield opportunities. As I just mentioned, during the Q4, we completed our acquisitions of EMJ in Chicago and Blair Building Materials in Ontario, Canada. With EMJ, we significantly expanded our Chicago operations and in the process strengthened our relationship

Speaker 3

comes from the line of John Paulson with Armstrong

Speaker 2

World Industries in this important market. Meanwhile, the Blair acquisition will allow us to further Our complementary product offerings in the Greater Toronto area. In addition, we are pleased with our continued growth of new greenfield opportunities with the opening of a new yard in Ottawa, Canada during the quarter as well as 2 new AIM store locations. For the year, we completed 4 acquisitions and opened 6 new greenfield yards and 11 Ames stores. Expanding our footprint, scale and product offerings remains a key priority for GMS.

Speaker 2

We have a healthy list of opportunities in our pipeline of core GSD businesses as well as numerous complementary focused businesses. Our 4th strategic priority relates to our efforts to drive improved productivity and profitability by leveraging our scale and employee technology and best practices to deliver a best in class customer experience and further drive profit improvement. Notably, the steps we are taking to build our yard of the future are yielding improvements in efficiencies, productivity and profitability, All while making it easier for our customers to do business with us. To highlight some of our initiatives, We now have about 60% of our non cash U. S.

Speaker 2

Customers set up with online accounts. Also, we are at the midpoint in our initiative to bring digital capabilities into our larger warehouses, equipping our teams with automated tablets will be answered to increase the speed and accuracy of the picking and shipping process and better facilitate customer pickups. And We are bringing a much more robust and data driven approach to our purchasing efforts. Using our automated forecasting and replenishment platform, We are seeing improved turns and reduced stockouts. While in the early stages of implementation now, We hope to eventually push approximately 60% to 70% of our purchase orders through this system.

Speaker 2

Finally, As we mentioned last quarter, some of our ongoing initiatives are focused on the consolidation of certain back of house functions as we continually look to improve efficiencies, we have underway to improve our productivity and profitability. Such steps along with growth in complementary products and expansion of scale have contributed to our taking adjusted EBITDA margins from the upper single digits pre COVID to now consistently reporting these returns at double digit levels. As a result of our productivity initiatives and heightened systematic focus on organizational and people development, we have become better operators And look forward to making further improvements as we execute on all of our strategic priorities. With that, I'll now turn the call over to Scott. Scott?

Speaker 3

Thanks, JT, and good morning, everyone. I'll be starting on Slide 5. As JT mentioned, in terms of the economic backdrop, we are seeing generally positive, but in some ways inconsistent fundamentals. We've seen strong levels of multifamily construction activity and many signs of recovery in commercial construction, while at the same time navigating soft But improving single family construction demand and still saw new and remodel activity in the office space, particularly in large urban centers. Additionally, we are seeing deflationary pricing in steel framing, but largely resilient pricing in wallboard and other products, All while we manage continuing inflationary and activity based increases in operating expenses as product demand shifts between end markets.

Speaker 3

With that overview of current market conditions in mind, I'll provide some details related to our 4th quarter results. Net sales increased 1.2% year over year to $1,300,000,000 for the quarter. Organically sales were roughly flat with a year ago. Adjusting for one less selling day year over year, however, Net sales increased 2.8% with daily organic sales increasing 2.2%. From a U.

Speaker 3

S. End market perspective, continued strength in multifamily and increased commercial wallboard volumes coupled with resilience in wallboard pricing led to residential sales dollar growth of 5.8% for the quarter. Commercial sales dollar growth in the U. S. Was softer 1.2% overall with an increase of more than 25% for commercial wallboard revenues offset primarily by declining steel prices.

Speaker 3

Now looking at these 4th quarter results for each of our product segments. Wallboard sales of $544,700,000 increased 10.9% in total And 12.7% on a per day basis, comprised of a 15.5% increase in price and mix, Offset by a 2.8% decline in volume. There's a slowdown in the single family residential market most heavily impacted this product segment, Offsetting increases in both multifamily and commercial wallboard volumes. Organically, 4th quarter wallboard sales on a per day basis grew 13.1% year over year comprised of a 15.7% increase in price and mix and a 2.5% decrease in volume. In terms of U.

Speaker 3

S. Wallboard volume, multifamily residential led the way was 27.9% volume growth for the quarter as compared with a year ago. U. S. Commercial wallboard volumes improved 7.3% Working the 4th consecutive quarter of year over year commercial wallboard volume growth.

Speaker 3

And finally, again reflecting reduced demand across most regional markets. Single family wallboard volume in the U. S. Was down 16.6% in the 4th quarter. Similar to our experience last quarter, wallboard pricing has remained resilient given the supply side capacity and cost dynamics in that market.

Speaker 3

Plus, there has been a small benefit to wallboard prices from a mix shift toward higher commercial volumes, which utilize a higher grade, higher cost wallboard product. While we are starting to see some minor reduction in wallboard pricing as we head into the summer, we believe that a lack of excess capacity in the market, The inflationary input and production cost environment and increasingly pressured access to synthetic gypsum are causing wallboard pricing to be more resilient than we've seen in prior cycles. For the Q4, the average realized wallboard price was is $4.82 per 1,000 square feet, up slightly from our fiscal Q3 and up 15.9% as compared with a year ago. While we are extremely pleased to see a jump in single family starts for May and are encouraged by the recent sentiments expressed by several key homebuilders both regionally and nationally, permits are still down more than 10% year over year. Therefore, we believe that even as starts begin to recover, it will take some time for builders to reverse Multifamily residential is expected to continue its solid construction levels in the near term.

Speaker 3

In the commercial space, even though our bidding activity remains robust, concerns about credit risk and lease renewals are creating uncertainty about the prospects of this end market. With that in mind, given the current headwinds and affordability issues, we expect some modest degradation of wellbore prices in the coming quarters with likely sequential stabilization in the back half of our fiscal year. 4th quarter ceiling sales of 100 and $5,100,000 increased 4.2% year over year or 5.9% on a per day basis, comprised of a 6.9% benefit from price and mix and a 1% decrease in volumes. Organic sales in ceilings grew 3.8% or 5.4% on a per day basis with a 6.4% benefit from price and mix, Partially offset by a 1% decrease in volume as tile and grid volumes lag what was otherwise a period of demand for Architectural Specialties. For the prior year quarter were 17.9 percent on a per day basis as deflationary pricing drove a 24.7% decline in price and mix, While volumes increased 6.8%.

Speaker 3

Organically, steel framing sales were down 17.8% on a per day basis With a 24.2% decline in price and mix, partially offset by a 6.4% increase in volume. In addition to strength in multifamily, many of our regional markets are experiencing favorable commercial activity with active healthcare, Prices for steel framing products were down as expected with specific declines of 22.8% year over year and 11.9% on a sequential basis. Prices hit their low point during the quarter in March with a very slight improvement in April. Steel prices will likely remain relatively volatile with slight sequential declines expected for each of the next several quarters. Complementary product sales of $380,500,000 for the quarter grew 2.3% year over year or 4% on a same day basis As we benefited from positive contributions from acquisitions.

Speaker 3

Organically, sales of complementary products increased 1.5% on a per day basis. Included in this product segment are our Canadian lumber sales, which comprised 8.5% of the category in the 4th quarter for complementary products in the Q4 grew 7.6% or 9.3% on a per day basis. As JT mentioned, we continue to focus on the growth of our tools and fasteners, eSIM stucco and insulation product lines, All of which contributed to higher sales growth in the broader complementary category with 4th quarter combined sales growth of 14.8% 16.6% on a same basis. Now turning to Slide 6, which highlights our profitability for the quarter. Gross profit of $424,500,000 increased 2.8% as compared with the prior year period, Principally due to the continued pass through of product inflation, improved commercial wallboard sales, growth in higher margin complementary products And incremental gross profit from acquisitions.

Speaker 3

Gross margin improved 50 basis points to 32.5 percent is a relative mix shift that was more heavily weighted toward multifamily and commercial projects provided benefit, particularly in wallboard and steel. As wellbore prices moderate with the continued near term slowdown in single family residential demand and steel margins normalize over the next few quarters, We expect Q1 gross margins to return to our more normal levels around 32%, consistent with our Q1 of fiscal 2023. Selling, general and administrative expenses increased during the quarter to $279,800,000 compared to $264,500,000 in the prior year period. And SG and A as a percent of sales was 21.5%, an increase of 90 basis points from 20.5 from a year ago. While adjusted SG and A expense as a percentage of net sales of 20.9 percent increased 70 basis points from 20.2% in the prior year quarter.

Speaker 3

SG and A leverage was negatively impacted by steel price deflation and the relative mix shift between softened single family and strength in multifamily and commercial. While this end market shift was favorable to gross margin, it also requires a higher operational cost to serve. Inflationary wages, higher facility costs and a one time charge for bad debt also contributed to the year over year variance. All in, including higher interest expenses, net income increased 1.2% to $75,600,000 for the quarter or $1.80 per diluted share compared to net income of $76,500,000 or $1.75 per diluted share A year ago, growth in earnings per share for the quarter outpaced net income as a result of the continued execution of our share repurchase program. During the quarter, we repurchased approximately 497,000 shares for $27,900,000 at an average cost of 56 point $0.15 per share compared with 348,000 shares repurchased for $17,600,000 at an average cost of $50.63 per share during the prior year quarter.

Speaker 3

For the full fiscal year 2023, we repurchased 2,300,000 shares for $110,600,000 at an average price of $48.74 per share. Adjusted EBITDA remains strong at $154,300,000 up just slightly from $154,200,000 in the prior year quarter. Given the previously mentioned single family demand pressure, steel framing price declines and the inflationary operating cost environment, Adjusted EBITDA margin decreased to 11.8% compared to last year's 4th quarter level of 12%. Now shifting to our balance sheet, which is highlighted on Slide 7. At quarter end, we had cash on hand of $164,700,000 $759,200,000 of available liquidity under our revolving credit facilities.

Speaker 3

We have no near term debt maturities And our net adjusted EBITDA debt leverage at the end of the quarter improved to 1.4 times, down from 1.8 times a year ago. Cash from operating activities for the Q4 was $204,800,000 compared with $199,500,000 in the prior year period. Free cash flow for the quarter was $185,400,000 compared with $191,600,000 a year ago. As capital expenditures increased year over year due to opportunistic off lease equipment purchases and certain building and leasehold improvements. For the quarter, capital expenditures were $19,400,000 compared to $7,900,000 a year ago.

Speaker 3

And full year capital expenditures were $52,700,000 compared with $41,100,000 in fiscal 2022. We expect that for fiscal 2024 capital expenditures will be approximately $50,000,000 We are always evaluating opportunities to ensure that our capital structure and allocation priorities align with our 4 pillar strategy, Balancing investing in our strategic initiatives with paying down debt or otherwise strengthening our balance sheet and opportunistically Leveraging favorable market conditions for share repurchases. As such, subsequent to the end of the quarter, we refinanced our term loan, Extending its maturity date by 7 years to 2,030. We also entered into new interest rate swap agreements to reduce rates, Smooth the variability of interest payment cash flows and otherwise hedge exposure to future interest rate escalation. With these steps, we have successfully strengthened our already solid balance sheet, which further enables the execution of our strategic priorities and growth plans.

Speaker 3

All in all, I am extremely pleased with our results for the Q4 and full year fiscal 2023. Despite lower steel prices and near term softness in the single family market, we are entering fiscal 2024 poised with the Same commitment to deliver best in class service to our customers and to drive profitable expansion of the business. We are Position to continue to capitalize on our significant scale, our wide breadth of product offerings and our team's expertise will provide value across all of our end markets. With that, I'll now turn the call over to JT for a review of our outlook starting on Slide 8.

Speaker 2

Thank you, Scott. First, I'd like to provide some further color on our end markets, which continue to inform our outlook. As we enter the new fiscal year, the operating environment continues to evolve and customers are exploring how best to navigate the economic uncertainty. As such, and despite the surge in single family starts in May, we remain cautious in the very near term as homebuyers linger on the sidelines In most markets and broader macroeconomic concerns persist. However, the strong starts does provide some additional confidence In the relatively short duration of this slowdown, for multifamily, given the current backlog of projects, We believe that the current strength in this end market should continue at least into calendar 2024.

Speaker 2

And in the commercial space, Although there is concern that the regional banking crisis and higher interest rates might constrain the availability of capital for construction, To date and absent large office, commercial bidding and quoting activity remains strong. In fact, Our teams recently secured some significant project wins, such as the Walmart Headquarters Campus in Arkansas, A large Ford battery plant in Kentucky and the new Los Angeles Clippers arena in California, as well as many smaller projects underway across our portfolio, providing some confidence for this end market as we head into fiscal 2024. Looking now at each of our product segments. For Wallboard, as I just mentioned, given the current backlog and longer build times associated with multifamily projects. We continue to expect the strongest growth to come from this end market during our fiscal Q1.

Speaker 2

With multifamily wallboard volumes expected to increase in the high teens year over year. Single family wallboard volumes will likely be down 10% to 15%, while the commercial end market should continue its modest growth that we've enjoyed for the past 4 quarters with expected commercial wallboard volumes up mid to high single digits for the quarter. In all, given the near term drag created by softness in single family construction, we expect our total wallboard volumes to be flat is now open to down low single digits for our fiscal Q1 with high single digit year over year inflation in pricing. In ceilings, given the current sources of commercial demand and their relative mix of architectural specialties to acoustical tiles, We expect Q1 ceilings volumes to decline in the low single digits with prices that are up in the low single digits. Will be answered.

Speaker 2

And for steel framing, we expect volumes to be up low to mid teens as compared to the Q1 of fiscal 2023. With a year over year decline in pricing of 25% to 30% as Will anniversary last June's peak Finally, in complementary products and including the benefits of recent acquisitions, We expect to see low double digit sales growth with balanced contributions from both volume and price. Turning now to Slide 9. Combined, we expect net sales for GMS to be up low single digits year over year on a per day basis for our fiscal Q1. Gross margin should be roughly consistent with both our Q1 of fiscal 2023 And our long term average of around 32%, resulting in an adjusted EBITDA expectation in the 170 to $175,000,000 range.

Speaker 2

As is typical during our fiscal Q1, We expect to record a use of cash. However, for the full year, we expect free cash flow generation to be 50% to 60% Our team is prepared to continue to navigate this trend and deliver value to our customers, shareholders, supplier partners and the entire GMS team. Moreover, given the limited inventory of existing homes and the structural need for residential housing, we are also encouraged by recent improvement and start activity and builder sentiment as we look later into the fiscal year. We maintain a high degree of confidence Before we open the line for questions, I'd like to remind you of the strength of GMS and the power of our network. With more than 300 distribution yards and over 100 AIM stores, our unique operating model combines the benefits of a North American platform and strategy with a local go to market focus, enabling us to generate significant economies of scale, while maintaining high levels of specialized customer service.

Speaker 2

As a leader in the markets we serve, our customers have come to rely upon the benefits that our scale provides to secure the products they need. We're continuing to leverage this scale and employ technology and best practices to deliver an outstanding customer experience. We are building the GMS yard of the future to improve efficiency, productivity and profitability, while delivering greater value to our customers and stakeholders. Thank you for joining us today. We have a number of investor focused items on our agenda over the next few months, Including several conferences, another earnings call in just 2 months, and we expect to issue our inaugural corporate social responsibility report

Operator

Our first question is from Matthew Bouley with Barclays. Please proceed.

Speaker 4

Good morning. You have Elizabeth Langan on for Matt today. Thank you for taking the questions. Just to kind of Nice to speak with you again. So just getting started, as we kind of are seeing this New improvement in residential construction.

Speaker 4

Would you mind talking about how that your expectations about how that's going to flow through relative to starts and maybe the timing of when you expect you might start to see volumes pick up on your end?

Speaker 2

I think we still have a couple of quarter trough here to work through in builder activity, But we certainly were encouraged with the May starts number. And if we start seeing that follow on, with the builder sentiment that we're hearing, we would expect that to continue to some That the latter half of our fiscal year should probably be better than we would have previously expected. Not comfortable yet to 1st quarter guide here of down 10 to 15 is probably in the neighborhood of 5 to 10 points better than we would have previously expected for this quarter. So The continuing backlog in the Southeast of starts versus completions that still exists in Florida to some extent. Maybe there's 100,000 units or so total left in that backlog, but now you're starting to see some acceleration in other markets again.

Speaker 2

And like I said, I guess 6 months of still double digit probably declines, I would guess, in volume, but after that should be back into the single digits and maybe we'll get lucky and we'll see some growth in the back half.

Speaker 4

Okay. Thank you. That makes a lot of sense. And would you also mind touching on multifamily, given that Backlog seems to be pretty resilient. Would you mind talking about how long you think that will continue or if that if you see a point at which that might recede?

Speaker 2

Again, even the starts numbers here just the other day were still strong for multifamily. And I think completions still trailed again this last month Again, I would say not still, but again, trail completions trail starts in multifamily adding to the backlog. So 6 months, I think we've talked about getting through all of all the way to calendar 2024. So that would be at least 6 more months of Solid growth and then we'll have to look at what happens. I would expect those starts numbers to begin to decline as I think most people would say that we're going to be Built out from a multifamily perspective mid-twenty 24.

Speaker 2

We're at record levels now, right, or since at least the early 80s. So, I'm comfortable and confident in the next 6 months. How about that?

Speaker 3

We feel good about through the calendar year, but as you look at Planning rents and you look at cap rates being more difficult to make, there is likely some decline into the next calendar year, but we feel good through this calendar year.

Operator

From markets. Please proceed.

Speaker 5

Hey, thanks for taking my questions today. I just wondered how did your wallboard price at The end of April compare with your 4th quarter average wallboard price. And then wallboard pricing has held in better than feared to start out from the line of Peter. And just wondered if you think the consolidation at the manufacturer level over the last 5 years has helped contribute to the stability of prices so far?

Speaker 2

Let me answer the macro and I'll hand it back to Scott. Whether or not that specific issue Is driving the resilience in pricing, I'll let others speculate, but it's a factor. There's a lot of factors, quite frankly, in my opinion. And that is that's purely that. Even if you looked at the Q1 shipments from the GA, the Gypsum Association 1st quarter shipments calendar quarter were only down 1%.

Speaker 2

And so you still have high levels of capacity utilization And the expectation that those that's what we will see is sequentially kind of normal seasonality in the market, which would mean this quarter should be better than Q1, which means more capacity being utilized. And then we touched on in our script, certainly, There's a lot of noise around synthetic gypsum. And while I'm not an expert in manufacturing of this product, I certainly understand that the raw material itself is becoming more difficult to obtain and more costly to obtain. So I think between And raw material inflation, of course, wage inflation as well, I think we're seeing a more resilient wallboard market.

Speaker 3

Specifically to your question, we ended the quarter just a tick higher than we were for the average. And even further, if you look into May, that actually reversed a little bit to come down just about 1% from where we ended the quarter, so on balance relatively flat.

Speaker 5

Great. That's very helpful color. I appreciate that. And then last quarter, you highlighted the reduction of 170 positions would result in $15,000,000 in annualized savings. And just wondered How much of that savings was realized in the Q4?

Speaker 5

And are there any other kind of cost reduction initiatives the company is considering moving forward?

Speaker 2

I guess based upon the stronger than expected volumes and very strong steel volumes, if you look at it, I wouldn't think that we are doing anything other than The existing productivity initiatives which we always have in place, which we talked about in the script, and that is getting better at what we do in leveraging technology to service is going to make our customers better. And I think that's more of a cost avoidance opportunity for us going forward, the ability to push more through Our machine without having to add as much cost. I think our slight beat to guidance in our SG and A number, We certainly had some contributing factors on the top line, but with steel declining as dramatically as it did, I feel pretty confident that we are achieving That $15,000,000 on a run rate basis. We did talk about it ramping up. So I would say it's probably a couple of $1,000,000 in this quarter that we're talking about now.

Speaker 2

And then that'll it'll kind of ramp up into the run rate of the $3,000,000 or $4,000,000 a quarter as we go forward.

Speaker 5

Great. Thank

Speaker 2

you. Appreciate it.

Operator

Our next question is from David Manthey with Baird. Please proceed.

Speaker 6

Good morning, guys. Thank you. If gross margins were to deteriorate from this 32% level closer to 31% at At some point during fiscal 2024, what would be the most likely cause of that?

Speaker 2

Probably steel doing something strange, I would imagine, would probably be the driver of that. I just don't see it happening in the other categories. Pricing is resilient in wallboard and even if that Top line was to change a little bit, right? The margin probably doesn't change in that category, and it's really the volatility around steel would be the one negative wildcard for gross margin. Okay.

Speaker 6

And then second, I'm wondering if there's a world That could possibly see cost of goods sold for you deflate, but your SG and A cost Stack items continue to insulate labor, transportation, occupancy. We've seen everything go up clearly in unison, but is there a world where one continues to go up and the other one moderates or goes down?

Speaker 2

I mean, I think we could see steel continue to decline, right? I mean, even while steel prices declined, we maintained or grew our gross margin in the quarter. So I think that's something that we could see steel deflate and we could see gross margin stay the same or improve slightly potentially Based on the lag effect there on the way down, right, we would have quoted some higher prices out into the future on commercial projects. Inflation is moderating somewhat on the wage side. It's we're still dealing with on a year over year basis, We're talking about kind of the inflation that we committed to last year.

Speaker 2

The inflation we're committing to at this point on the wage side is less on a percentage basis Certainly, if the economy stays in kind of this odd malaise or this switch over to services from goods, I don't see a lot of transportation inflation and I don't see a lot of fuel inflation in this environment either. So I don't know how to answer your question in aggregate. That's some macro things that I see.

Operator

Our next question is from Steven Ramsey with Thompson Research Group. Please proceed.

Speaker 7

This is actually Brian Biros on for Stephen. Thank you for taking my questions. I'm going to start on just wallboard, maybe overall commercial. Just can Can you touch on how much was driven by new construction versus T and I work?

Speaker 2

Yes. We don't have as good internal information on pure new versus the TI, but clearly TI is lower than historical right now. So there's a stronger mix of new commercial. And I think what you're seeing is, you're seeing some of these mega projects that I've mentioned In my remarks, in our script here, you're seeing some of these larger projects come to fruition. And certainly, you've seen some huge plant Announcements made, whether it be chip manufacturing or otherwise.

Speaker 2

I think the I read the other day that manufacturing is now accounting for double manufacturing starts is accounting for double what it did in the prior year period in the put in place construction numbers. So you are seeing a resurgence In large manufacturing in the United States and those projects, they take a lot of wall work depending on the type of manufacturing. So Certainly, we're seeing new construction being more important. All that being said, outside of office, you're still seeing good remodel Institutions are remodeling dorms out there. You're seeing multifamily remodeling to compete with the new.

Speaker 2

You're seeing a lot of retail changes in the retail landscape, a lot of redevelopment of historical malls into All types of multi use facilities and entertainment arenas and areas. So there's still a lot of remodel activity out there as well, Just not office, large office. What you're seeing is you're seeing the suburban office, right, start to tick up a little bit, but that's a lot of that's new.

Speaker 7

Helpful. Thank you. And a follow-up, I guess, is on gross margin expectations. Generally, it's been about 32%. I I think you've consistently kind of outperformed a little bit 32.5% in the past 3 quarters.

Speaker 7

Can you just put it in a context where you've exceeded expectations over time? And I guess how realistic is it to think that might continue in the next quarter or 2? Thank you.

Speaker 2

The mix of multifamily and commercial has helped. The product mix on multifamily and commercial has absolutely helped. And our steel margins were better than expected because our volumes were much better. So some incentive type of impact to gross margin was real in the quarter that probably won't repeat as we go into our fiscal 1st and second quarters. So while we'll still have good volume, those incentives won't be anything won't be a part Sure.

Speaker 2

And that probably gets us back into our and as we mentioned and Scott mentioned as well, the wallboard moderation in price, we expect a little bit of moderation in price In wallboard, so maybe a tip lower in wallboard margins as well.

Operator

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

Speaker 8

It's actually Chris Colada on for Mike. Just to go back to the wallboard pricing comments. I think May, you said pricing came down. How much of that was mix versus like for like? And I think you also said there's some modest tick up in competitive dynamics.

Speaker 8

Is that broad based or is that more regional?

Speaker 3

So it's tough to fully quantify truly how much the mix impact versus what The price impact was, but generally I'd say the price came down, but we were benefited by the mix shift offsetting it. So Single family pricing is came down a little bit more. The commercial and multifamily stuff was a little higher and then we got the Mixed benefit just in terms of the value of those products relative to single family was a benefit as well, Roughly balanced between the 2.

Speaker 8

Understood. That's helpful. And then, just Going back to commercial and your outlook for this year, do you expect volumes to remain positive in commercial through the balance of your fiscal year? Or do you expect some sort of weakness to emerge later in the year as Given the lag to residential weakness or is that kind of big project type of work enough to keep volume supportive?

Speaker 2

I mean, at least in the next couple of quarters, the volume looks good. The backlog looks good. As we mentioned in the script, the regional banking discussions, the availability of capital, tightening lending standards, all those kinds of things That we all read about, they haven't impacted the near term quoting activity yet. You saw the ABI came out, had growth Again, for the first time in a few months, earlier this week, moderate growth, but still growth. So most of the indicators would say We're probably in an environment that we should enjoy this mid single digits through the next couple of quarters.

Speaker 2

After that, it will be based upon new data, right? It will be based on the tightening, Fed tightening, bank tightening, take a look at all that.

Operator

Our final question is from Trey Grooms with Stephens Inc. Please proceed.

Speaker 9

Good morning. This is Noah Merkasco on for Trey and thanks for taking my questions.

Speaker 2

Good morning. Absolutely. Good morning.

Speaker 9

So first, I wanted to circle back on sort of the margin dynamics just with The mix shift to more multifamily and commercial, I guess how much longer should we expect to see the gross margin benefit and SG and A deleverage from this Shift in end market demand.

Speaker 2

Let's see. It will continue until we get we start rolling over where we started to see this, which is probably still 3 quarters. So I would imagine that it will be at least 3 quarters where we'll still see the mix shift benefit on the gross margin side to some extent And then we'll still see the cost of serving a little bit higher. The steel is an example. When you ship 6% or 7% more volume in steel And it's going out at 20% lower prices and there's inflation on the delivery side, the G and A as a percent of sales looks lousy, But you're still generating the same gross margin dollars or more gross margin dollars that we generated in the prior year period.

Speaker 2

So it's still a really nice profitable sale. It's just as a percent of sales that SG and A looks bad, right? So I think that dynamic is going to continue for 2, 3 quarters.

Speaker 3

The macro is the driver. So you take JT's point that if our if the view is that single family is going to be softer for the next couple of quarters As the starts activity resets in the marketplace and then you've got continued strength in multifamily and commercial during that time period, That relative mix shift difference will be there during that window.

Speaker 9

Got it. That makes sense.

Speaker 3

But then in the latter part of the year, we should start to see single family come back and that

Speaker 9

And then maybe last one for me, kind of circling back on that thought that We start to see some single family improvement in the back half of the year. It sounds like supply chains assume that the lag from a start to when you ship volume is shortening at least compared to the sort of last upcycle we went through?

Speaker 2

I mean likely to some extent, yes. So I'm not sure we in Wallboard with the exception of Maybe the Southeast didn't really delay projects in comparison to the long international supply chains of some of the finishes. So, I think we were still able to supply even at the peak, we were still able to supply in a reasonable amount of time. Although there was some scrambling going on for sure. But I would say that, yes, I mean, if you think you're single Sam, if most of the builders can complete in 6 months, then start to finish is still is 6 months, and that's our cycle.

Speaker 9

Yes. That makes sense. All right. Thanks for the time and good luck with the rest of the year.

Speaker 2

Thank you. Thank you. Appreciate it.

Operator

With no further questions, this will conclude today's conference. You may disconnect your lines at this time and thank you again for your participation.

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Key Takeaways

  • GMS reported a record full year in FY 2023 with net sales of $5.3 billion (+15%), net income up 22% to $333 million, adjusted EBITDA of $665.7 million (+17%) and free cash flow doubling to $389 million.
  • In Q4, the company drove nine consecutive quarters of year‐over‐year adjusted EBITDA growth, delivering $1.3 billion in net sales (+2.8% same‐day) and $154.3 million in adjusted EBITDA (11.8% margin) on strong multifamily and commercial demand.
  • The strategic expansion of both core and complementary product lines continued with four acquisitions (including EMJ and Blair Building Materials), the launch of six new greenfield yards, eleven AIM stores and entry into key markets such as New York City and Ontario.
  • Operational initiatives underpinned margin improvement—60% of non‐cash U.S. customers are now online, warehouses are being equipped with automated tablets and an advanced forecasting and replenishment system is boosting stock turns and reducing stockouts.
  • GMS has fortified its balance sheet and liquidity by refinancing its ABL and term loan (extended to 2030), hedging interest rates, repurchasing $110.6 million of shares in FY 2023 and targeting low single‐digit same‐day sales growth, ~32% gross margin and $170–175 million of adjusted EBITDA in Q1 FY 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
GMS Q4 2023
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