Q4 2020 GMS Inc Earnings Call
Greetings and welcome to CMS fiscal fourth quarter and full year 2020, <unk> earnings conference call. At this time, all participants are no listen only mode. A question answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press star Zero and your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to Leslie Kratcoski President <unk> Investor Relations. Thank you may begin.
Thanks, Jerry Good morning, and thank you for joining us for the Gms conference call for the fourth quarter fiscal 2020, I'm joined today by John Turner, President and Chief Executive Officer, Scott Beacon, Vice President and Chief Financial Officer. In addition to the press release issued this morning, we have posted presentation slides to accompany.
This call in the Investor section of our website Gms Dot com.
On today's call management's prepared remarks and answers to your question may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Forward looking statements addressing matters that are subject to risks and uncertainties 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 FCC, including the risk factor section in the.
Companies 10-K, and other periodic reports.
Today's presentation also includes the discussion a certain non-GAAP measures.
Definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides.
Please note that references on this call to fourth quarter and full year fiscal 220 20 relate to the quarter in fiscal year ended April Thirtyth 2025.
Finally, once we begin the question 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 now turn the call over to John Turner G.
Thank you airplanes.
Good morning, Thank you for joining us today.
I'd like to begin by saying that we hope all of you joining the call your families and colleagues are safe and well.
My opening remarks will include review of our operating highlights including actions we've taken in response to the impacts of the current pandemic.
And then I'll turn it over to Scott, who will cover our financial results and provide an update on sales trends.
Then share some closing thoughts before taking your questions.
First off the thoughts and prayers at the entire Gms family or with everyone, who has been impacted by the Cobiz 19 pandemic.
The health safety and well being of our employees business partners and communities remains our top priority.
In response to the crisis, we have taken actions to promote the safety of our stakeholders by enhancing operating protocols and compliance with public health requirements recommendations and guidelines.
These precautions include curtailing non essential traveling group meetings implementing routine cleaning.
Practicing disciplined social distancing restricting or modifying access to facilities, including limiting walk in traffic in showrooms.
Recommending that employees, who can effectively work from home do so and use of appropriate personal protective equipment.
As we monitor recommendations of public health officials and the reopening guidelines of state and local governments, we will adjust our protocols as appropriate.
I would like to share my sincere appreciation for all of our teammates who continue to be engaged.
Focused and proactive as we come together to support our customers and each other during this time.
Additionally, on behalf of everyone, a gms I would like to express our deep gratitude to the first responders health care providers and a central workers, who have been in continues to be on the frontline's every day.
Turning to slide four.
We entered the fourth quarter with strong momentum.
Inline with what we had seen through the first three quarters of fiscal 2020 grounded in our team's focus on effective execution of our strategic priorities.
Through mid March we experienced favorable end market trends and generated robust volume growth.
Even as disruptions from Cobiz 19 began to escalate in the second half of March construction and building products distribution were Fortunately BMD central businesses in the majority of our markets, which enabled us to keep most of our locations open.
However, demand weakened significantly in late March and even more so in April.
Our operations in several large him essays were required to close.
Building and remodeling projects were caused by order of government mandate and customers appropriately and understandably retrenched and some of the hardest hit markets to focus on responding to the effects of cobot 19 on their businesses.
As a result net sales for the fourth quarter of fiscal 2020 were down 1.2% year over year as a high single digit sales increase in February and March combined was more than offset by a double digit decrease in April.
As Scott will cover in more detail, we were pleased and encouraged to see improved sales trends since the end of the fourth quarter.
Despite the significant disruptions to our operations in the second half of the quarter. We were pleased to have overall generated higher fourth quarter year over year wallboard volume growth an indication of just how strong our momentum was prior to the escalation of cobot 19.
Our leadership team quickly and proactively took action upon the earliest indications of rapidly changing industry conditions to reduce costs increased liquidity and improved financial flexibility to not only ensure we remain well positioned for the duration of this period, but that we're able to exit even stronger.
These actions most of which are ongoing include.
Actively drawing nearly $90 million under our revolving credit facilities.
Deferring or limiting non essential operating or other discretionary expenses.
Implementing a wage and hiring freeze and certain permanent head count reductions.
Immediately furloughing employees in response to declining demand.
Utilizing certain benefits of the cares Act.
Suspending company matching contributions to the borough NK plan.
Closure of certain underperforming locations.
Delaying or reducing certain non currently critical capital expenditures.
Temporarily suspending acquisition related activity and optimizing all areas of working capital.
As a result of the lower demand environment, coupled with mix gross margin was down slightly year over year adjusted EPS DNA as a percentage of sales was 90 basis points higher year over year due to overall lower sales operating inefficiencies related to cope with 19 business interruptions and the impact of lower selling prices.
The latter of which was somewhat more pronounced than previously expected.
In addition, while we took significant action on the cost front as the impacts of the pandemic escalated our fourth quarter results did not reflect the full alignment of our cost structure due to the very rapid nature of the decline in sales, which took place late in the quarter.
As a result, we realized a year over year decline in adjusted EBITDA to $63.6 million or 8.2% of sales.
As disclosed in our press release. This morning, we recorded a non cash goodwill impairment charge of 63.1 million in the fourth quarter related to our Canadian business as part of our annual goodwill impairment test.
Scott will in his remarks cover the accounting specifics and timing dynamics, which triggered the impairment.
Notwithstanding in the fourth quarter, our Canadian operations generated approximately 3% organic sales growth on a constant currency currency basis. Despite cobot 19 disruptions. This was the first time, we experienced an increase in sales in Canada since the second quarter fiscal 2019.
This represented a continuation of the positive trajectory, we had been reporting throughout fiscal 2020 as year over year sales declines narrowed and now have turned positive.
While current forecast calls for declines in the Canadian construction markets in calendar 2020, they indicate recovery in calendar 2021, and we firmly believe that our Canadian operations remain a very important compelling and profitable component of Gms is long term growth strategy.
Early in the fourth quarter, we completed the previously announced acquisition of trial trade supply Inc., which represents our entrance into Vermont, thereby increasing our coverage in the U.S. to 44 states and further bolstering our position in the important new England market.
We also opened a greenfield location in Panama City Beach, Florida, which will enable us to more fully participate in rebuilding efforts in the Florida Panhandle following hurricane Michael in late 2018.
If you turn to slide five.
Although just a few months ago no. One would have predicted that fiscal 2020 would have concluded the way. It did it was a strong year overall for Gms and our teams made meaningful progress.
Reported and organic net sales growth of 4% and 2% respectively resulted in record sales of $3.2 billion for the year.
We generated almost 300 million of adjusted EBITDA also a record and an adjusted EBITDA margin of 9.2%. Despite the significant disruptions of covered 19 late in the fiscal year.
Strong free cash flow of $278 million or 93% of adjusted EBITDA was generated not only as our business grew in the first three quarters of the fiscal year, but also in the contracting environment.
The fourth quarter, when we quickly and proactively identified and executed initiatives to increase and preserve liquidity.
As a result, we were able to invest in organic business initiatives conclude three business acquisitions opened six greenfield locations and reduce our net debt leverage from 3.6 times to 2.9 times over the course of the fiscal year.
I'd like to extend my thanks to all of our teams for their dedication and commitment to all of our customer score and trusting their business to us to all of our suppliers for their partnership and to all of our shareholders for their support.
With that I'll now turn it over to Scott to provide more perspective on our financial results for Q4.
Thank you Jay team looking at slide six net sales were $770.9 million down 1.2% compare to the fourth quarter of the prior fiscal year.
As an indication of a mark to change in momentum.
Proximately, 7% increase in sales for February and March combined.
More than offset by an approximate 16% decline in April.
This was comprised of a deep 70% decline markets subject to mandatory shutdowns, notably, including Washington State, Pennsylvania.
In Michigan.
Together with a more a much more modest 9% decline elsewhere.
In aggregate, we estimate the negative impact of the coping 19 pandemic on fourth quarter net sales to be in the range of $60 million to $65 million.
Overall organic net sales declined 1.8%.
In terms of product line mix sales of wallboard rone, 0.3% compared to the same period last year.
On an organic basis sales were down marginally, which included an organic volume increase of 2.7%, but with lower price and mix of 3%.
Fourth quarter ceiling sales decreased 1% year over year or 2.6% on organic basis.
The 2.3% increase from pricing mix was more than offset by a night.
4.9% volume decline.
Sales of steel framing decreased 7.4% were 7.8% on organic basis, including a 2.4% and 5.4% decline in volume and price and mix respectively.
Sales of other products were flat in the quarter were down 23% on organic basis.
Across the product groups, we experienced positive volume growth in February and March or April volumes declined.
A case of ceilings and steel framing meaningful declines were further exacerbated by the mandated shutdowns and other disruptions in April having a disproportionately greater impact on commercial projects in residential ones markets we serve.
In addition, we saw a further deflationary market pricing for both wallboard and notably steel in the fourth quarter.
The impact of this deflation for the fourth quarter was higher than we had anticipated on our Q3 earnings call.
This was due to further pricing declines, resulting from changes in both the demand and competitive environment related to covert 19, as well as on mix given a larger contribution of sales from residential projects. Given then disruption to commercial jobs noted earlier.
Gross profit of $251.6 million decreased 2.1% compared to $256.9 million in the fourth quarter fiscal 2019, primarily due to lower sales.
Gross margin of 32.6% compared to 32.9% a year ago.
And it wasn't the lower end of the range, we provided in our third quarter earnings call.
This again was a result of covert 19 related market disruptions as well as the resulting higher mix toward residential projects.
Turning to slide seven.
Adjusted SGN a expense as a percent of net sales increased 90 basis points to 24.5 per cent compared to 23.6% in the prior year quarter.
Approximately 60 basis points of this was related to the previously mentioned deflationary market pricing that we experienced.
Remainder was due to lower sales and inefficiencies related to covert 19 business interruptions as well as the timing of certain expenses in April more than offsetting SGN a leverage realized in the first two months of the quarter.
As noted in the fourth quarter in connection with our annual goodwill impairment test, we recorded a 63.1 million dollar non cash goodwill impairment charge related to our Canadian reporting unit.
The primary factors contributing to the impairment or increasing the discount rate and a decrease in market multiples each resulting from a pronounced decline in market valuations and uncertainty prevalent at the time of the impairment analysis.
Well the mid to long term outlook remain favorable a decrease in the reporting units forecast of near term cash flows principally resulting from covert 19 was also evaluation consideration.
In addition, we also recorded a $14 million gain in connection with cash proceeds received as a part of a class action legal settlement.
Both the goodwill charge in the legal settlement are excluded from adjusted EBITDA and adjusted net income.
Fourth quarter, adjusted EBITDA of $63.6 million compared to $73.5 million a year ago and represented an adjusted EBITDA margin of 8.2%.
Well, we responded swiftly to the sudden change the demand environment in late March as Jay to mention the timing and the rapid nature of the escalation of covert 19 disruptions.
Prevented or fourth quarter results from reflecting the full realignment of our cost structure.
This resulted in a meaningfully higher decremental adjusted EBITDA margin that we would anticipate going forward.
For some context around that business activity since the end of March has improved on a relative basis to date in the first quarter fiscal 21 2021.
We have experienced sequential improvement in net sales levels as the majority of the mandated shutdowns of the east one lifted and as businesses have begun to reopen.
Specifically.
Sales per day in May were up approximately 16% from levels in April.
Sales per day, thus far in June or sequentially higher levels realized in may.
On a year over year basis comparable we kinda excuse me comparable daily sales through the first three weeks in June or down low single digits compared to the double digit year over year decline experienced in April.
For the month of May we realized an approximately 5% year over year decline in sales per day.
Well, we believe significant uncertainty remains as to the pace and trajectory of a market recovery in fiscal 2021 based on our experience to date first fiscal quarter in coupled with the assumption that the sales for the remainder of June July sprint Similarly to a single digit year over year decline.
We believe we can generate a year over year decremental adjusted EBITDA margin for the first quarter within the range of 10% to 20%.
Now turning to slide eight.
Free cash flow for the fourth quarter fiscal 2020 of $163.4 million increased $80.6 million or 97.4% year over year.
And represents 257% of adjusted EBITDA.
This improvement there was a result, probably 73.4 million dollar increase in cash resulting from changes to net working capital $6.1 million of higher net income after adjustments for noncash items and $1.1 million of lower capital expenditures.
This strong free cash flow generation is not only represent not there's not only representative.
As a defensive nature of our distribution business model.
But as they get direct result of our actions to tightly manage working capital to preserve liquidity.
Capital expenditures of $4.3 million and $25.2 million for the quarter in fiscal year came in at the lower end of our previous estimated range as we delayed and reduce capital expenditures that were not anticipated to impact near term business.
We will remain disciplined on this front until there's greater clarity in the market.
As a result, we anticipate cash capital expenditures in fiscal year 2021 to approximately approximate $25 million.
At the same time, we anticipate a reduction in finance lease obligations in fiscal 2021.
As we look to the first fiscal quarter of 2021, we expect working capital will be a use of cash given the relative recovery experienced in our markets since the significant decline seen in April.
Combined with a typical quarterly cash excuse me typical quarterly cadence of our free cash flow generation, we anticipate generating an overall net use of free cash.
First fiscal quarter.
During the fourth fiscal quarter, we reduced our net debt by $141.5 million, including a $50 million prepayment of outstanding principal earlier early in the quarter.
Net leverage was 2.9 times as of the end of the fourth quarter compared to 3.3 times as of the end of the third quarter fiscal 2020.
As a result of their fermented aforementioned expectation for free cash flow in the first fiscal quarter, we expect that our net debt leverage will increase sequentially as is typically the case for the first quarter.
As a precautionary measure to increase cash on hand, and financial flexibility in late March we borrowed $87.2 million under our revolving credit facilities.
As a result as of April Thirtyth 2020, we had cash on hand of $210.9 million availability under our revolving credit facilities of $368.8 million.
Subsequent to the end of the fourth quarter, we repaid $40 million of the borrowings on our revolving credit facilities as prevailing concerns about significant disruptions in the credit markets did not materialize.
In terms of the overall stability of our capital structure for large majority of our debt is not due until 2025.
Now, let me turn the call back over to Jay team before we open the line for questions.
Thank you Scott.
Let's go ahead and turn to slide nine.
Well, we have made near term adjustments to our operations our strategic growth priorities continue to guide our long term management of the business to capitalize on what we believe remains a very attractive business and industry with significant long term growth potential.
As a reminder, you strategic growth priorities include expanding share in our co products and geographies, where we're underpenetrated.
Growing select other product opportunities outside of core products to diversifying and profitably expand our product offering.
Expanding the platform through accretive acquisition and Greenfield opportunities.
Balanced with debt reduction priorities.
And leveraging our scale and employing technology and best practices to deliver further margin expansion.
A few words about acquisitions and new market expansion.
Well, we have taken a temporary pause and deal execution until we have better visibility into the recovery, we're continuing our active dialogue with potential acquisition targets and anticipate resuming activity in earnest as business conditions improve.
Moreover, we are actively working to engage in or in some cases reengage in conversations with potential candidates, who might now benefit from Gms his financial and operational strength during this market downturn.
We also are working to actively advance our greenfield expansion plans. So that we are prepared to implement them when and where most appropriate.
We continue to see acquisitions in Greenfield expansion as an important component for our growth story and strategic Buildout of our geographic footprint.
Over the past year. We believe we've also made progress on other elements of our growth strategy.
Which is helping us more effectively navigate the current environment.
For example, our strategic ecommerce initiative has the potential to enhance not only topline growth, but further leverage our scale and drive lasting productivity and represents our commitment to further employing technology throughout our business.
With the potential for further evolution and change in how business is conducted as a result of the cobot 19 pandemic.
We believe we are well positioned to begin offering more and more of our customers a broader and wider spectrum a virtual experiences to complement the deep in person relationships inherent in our business.
Our ecommerce strategy and platform has been on a multiyear journey focused on developing a digital platform and updated business processes to accommodate how business will be conducted in the future.
Seeking our customers input along the way we have invested in a unified platform to control the customer experience end to end and allow us to continued to deliver unique experiences to our customers.
Well companies going through digital transformation, often look to do two different products for each offering such as commerce payments delivery et cetera.
We offer a unified customer experience with investment in a tightly integrated platform employees, including salespeople dispatchers drivers and customers can all interact and work together on the same platform and data in real time.
Well, you'll be hearing more about our ecommerce strategy ecommerce strategies in the future today I wanted to provide you with this update as customer adoption is accelerating and given the evolving importance of our of our providing customers a digital experience, perhaps now more than ever.
In conclusion, the recent trends we've seen that's got laid out R&D and encouraging unfortunately, unlike in the past downturn construction end market fundamentals were very strong prior to the pandemic.
However, there does continue to be uncertainty regarding the outlook for construction given current macroeconomic conditions.
Current external forecast Barry with respect to both residential and commercial construction in calendar 2020, and 2021 and include a variety of views as to the shape and duration of the downturn and subsequent recovery.
Within our own operations projects underway are continuing and being completed with commercial projects, having come back online more slowly than residential ones, both single and multifamily.
Our near term project pipelines and backlogs remain principally intact and most of our customers are generally optimistic.
On the commercial side, we see variation in activity, depending on geography and project type.
On the residential side activity levels are currently steady for the most part although we could see a pause due to the disruption in starts this past spring.
With all that said visibility more than a few months out remains cloudy at best.
Not respective of the market dynamics, our focus will be on controlling what we can.
We have taken and we'll continue to take the necessary actions to optimize our operations and align our business with demand.
And for the time being we will be prudent and cautious with respect to reintroducing costs doing so only to the extent that we need to in order to effectively service the business.
I'm confident the strategic foundation, we have built at Gms, coupled with our strong liquidity and cash generating ability will enable us to continue navigating the evolving operating environment and position us for long term success.
Operator, we're now ready to open the call for questions.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad.
Confirmation until the indicate your line is in the question Q you May press star to if he would like to remove your question from the Q for participants using speaker equipment and made the necessary to pick up your headset before pressing the star teas.
Also ask that you limit yourself to one question and one follow up question.
Our first question is from David Manthey with Baird. Please proceed.
Hi, good morning, guys.
Good morning.
So.
We understand that everyone is navigating uncertainty here, but as you look to the new fiscal year.
I would imagine you have some sort of view as it relates to the shapes of the the recovery curves as you mentioned and I'm just wondering if theres any.
Any guidelines you can give us at all in terms of what you are thinking as it relates to the next fiscal year for new residential new non res and renovation and then you mentioned the non res construction that's an area we're.
Keenly focused on what do you think the odds of a double digit decline in non res construction over the next 12 to 18 months.
Well, let me, let me address the non res first.
I think that the latest forecast we saw when you see double digits was was low teens.
In commercial starts most likely commercial spending I think that you know three three months in a row here of the Avi I being lousy probably supports that.
All that being said I also think that the.
Work from home situation is probably pretty difficult for developers and architects I would expect to see that Avi I recover as we move forward, but I don't think it's beyond the pale to expect 10% to 15% decline in commercial.
You know in not on an immediate basis by out nine months 12 months, there is definitely going to be I'll call a spotty recovery at central called the double use right. The w. recovery, the ups and downs and the I think we'll be navigating that kind of environment from a commercial perspective.
Today, our commercial pipeline is good and and everything is come right back as expected. The only notable issue in commercial today is what we call tenant worker tenant improvement work, which you'd expect which is you know the day to day office work that people do did too.
Repositioning for of an office building or to replace the ceilings et cetera. Those things of course are all on hold and we'll have to wait and see what happens when people come back to work after the pandemic.
We could actually see a spike in that type businesses for us get me.
To get recondition people have to have more space to work et cetera. So lot of unknowns, but I do think generally commercial is most likely.
Going to be in that 10% to 15% downrange out six months plus from now.
The good news is I think by then residential will probably be fully recovered and if the if we're kind of putting this recession in the rear view mirror in the pandemic is in the rear view mirror at that point in time, I really think housing is going to come screaming backing not now you. We already had pent up demand and that you're going to have this situation where people want to get out into the suburbs want to go.
Just a little bit further.
And I just feel like the demand situation for new new homes is going to be significant.
That's great color. Thank you very much.
Okay.
Absolutely.
Our next question is from Mike Dahl with RBC capital markets. Please proceed.
Hey, Thanks for taking my questions just a follow up on on that appreciate the commentary and the insights.
I guess to the.
Point of.
The the interplay between commercial falling off and residential recovery I guess you also noted secure.
Do you know resi starts there could be.
There could be some delayed weakness there so when you're again understanding theres not a ton of visibility right now, but when you're thinking about and planning the back half of this fiscal year.
Is it then your expectation that we could see potentially a bit of an air pocket in sales. So maybe stay in a low single digits.
Declines in the near term, but then those.
At some point in the back half you see a reacceleration in those declines as you work through that air pocket.
I think the likelihood is again this is just today the likelihood is today that I think the residential recovery six months from now will be stronger than anybody is forecasting and I think the commercial decline will begin at that point in time, and I think it's going to decline in that 10% to 15% range.
So we haven't really balanced business as you guys know, 55% commercial 45% residential we put a lot of emphasis in the other product category I'm not just during this year after I've arrived, but even before getting here, we certainly accelerated our attention in that space I think that other product area has a lot about.
Opportunity for us.
Both residentially and commercially so I just feel like from a wallboard perspective I'm you know some of the residential demand will replace some of the commercial demand. It's dropping off I think ceilings in steel certainly are going to be under pressure, but I think our other product category. While we gained share in some things we're not really in dramatically.
Today, but also.
We have a very robust business residentially and the other product category I really think they could they could kind of offset one another as we move through the next 12 months.
You know that's that's kind of my view today, but like we said in our our call. Just now we're acutely managing volume every day, we look at what we're selling and what ourself prices are and we we align our cost structure according to that.
And we align our cash generating expectations and abilities to that and I think that will be in very good shape as we move.
Into the next robust period of growth whenever that is.
Okay got it that's that's helpful.
My second question on the wallboard side, there was a comment.
The opening remarks about lower than expected prices and some competitive.
Dynamics can you give us a sense of just the odd on a more sequential basis, how did wallboard prices exit quarter and how our theyre performing.
Yes quarter to date through June if you could.
Well the absolute number is lower in wallboard exiting the quarter a lot of that being the mix in April with commercial dropping off so dramatically and just having that residential wallboard in there. So the April prices kind of a bad price to look at I think if you look at the first two months of the quarter sequentially were down less than 1%.
In pricing in wallboard, and Thats kind of what we've been experiencing very very low sequential declines.
On a quarter to quarter basis.
And I will tell you that's what we're experiencing as we speak in wallboard.
The bigger surprise I guess with steel you know, we really felt coming out of third quarter that steel prices were probably getting to the point, where maybe they would start bottoming a little bit and that didnt happen and I guess I would tell you right now I think they are bottoming. When you look at the the commodity itself and you look at the amount of capacity that's been taken offline in the.
In steel so that was a bigger surprise to us than anything actually.
Okay, great. Thanks again appreciate it.
[music].
Our next question is from Keith Hughes with Suntrust Robinson Humphrey. Please proceed.
Thank you to build on that last question.
Given the May June can you give us is there any other deviation.
Any products are doing particularly better or worse than the averages you gave us.
And.
Also on pricing and ceiling pricing index and ceiling south that go into last month after so.
Well I mean, all of our commercial products are down a little bit more than our residential products. So our wallboard business is strong and our other product category is relatively strong lets say and then ceilings and steel or trailing we expect ceilings to kind of have the same.
Experience, we've had which has some volume decline, but pricing is okay stable to up.
Steel seems to be kind of bottoming out.
We're going to trail a little bit the market prices are going to trail a little bit the commodity prices. So we may still see a little more deterioration, but that should that should stop.
Unless theres a complete fall off in commercial demand in mid just becomes very very very competitive in that regard.
We're not seeing that though at the moment.
And do you think in commercial specifically ceilings demand with some of the openings that are coming up and some of the northeastern northwestern cities that they're going to be kind of a you know kind of a pop in demand for period of time to finish those projects out before we make a longer term determination or what commercial looks like.
Yeah, I think that every we're not seeing cancellations right, we're not we're not hearing or seeing that.
Projects that were in the framing stages.
Or where the.
The the foundations were built the you know the.
For those types of projects, we're not hearing that they're being stopped so the expectation is that pipeline will continue for some period of time. The concern is purely this last three month number right and how much of that is real demand destruction destruction verses kinda cobot slash work from home Slash nervousness about.
You know spending money commercially so yes, the near term demand anything that was in the ground is going to be finished all those projects will be finished our pipeline looks relatively good in that regard.
And you're right. So I don't expect ceilings and or steel to be you know.
Big issues until we hit whatever that air pocket is going to be in commercial and I don't think we know what it is yet.
Okay. Thank you.
Yep.
Our next question is from Kevin I'll cover with Northcoast Research. Please proceed.
Hey, good morning, everybody.
All right.
You mentioned sales down low single digit so far in the quarter I'm curious do you think you're still gaining share and there is a little better than anticipated and how is it.
It is volume flattish in there in pricing pricing down a little bit just any color you could give there would be helpful.
Yes on a year over year basis, but you know pricing is down a little bit in wallboard, but again sequentially flattish as we speak or we're gaining share.
Again, that's a that's fairly subjective question, we don't have a lot of additional data points out there I think we're doing as well or better than most how about that.
In that in that area and our I'm very happy with our other product category and all the work that we've done there you know if you look at the fourth quarter to in essence be flat in the in the fourth quarter and the other product category and having a very difficult April.
So wallboard another both very strong in my.
In my estimation for the fourth quarter so.
Again, we're not seeing a sequentially a lot of pricing decline.
But.
We'll have to see what happens going forward competitively I mean, obviously residential is very very competitive.
It is anytime builder business is driving the business is the most competitive all that have all the end markets.
And commercial seems to be holding it right now I mean pricing commercially seems to be whole non okay and another real positive surprise for us has been multifamily. It just kids come really roaring back our multifamily contractors were really worried regarding the kind of the pandemic, we'll have to multifamily looks like 912 18.
In months from now, but right now seems to be good.
[noise] <unk> and on the gross margin front it turned down.
Down here year over year for the first time in a while.
Sounds like residential markets being a stronger as the mixed impact there.
It is that the only thing or is there is there also some price cost tailwinds I know that that would had been a big tailwind. If you guys. The last several year or so and I think that's anniversarying that around now. So wondering if you just give a little color on the factors driving gross margins there and how how should we think the growth margin.
Going forward the balance of the year.
Okay.
I mean, I'll, let me talk about the.
Price cost dynamics first and say that I think it's fairly balanced at the moment right and I'm not seeing it I'm not seeing a big advantage for us going forward is not a big disadvantage going forward I think everybody's in it together right now I think make suppliers and distributors all understand that the environment that we're in and we're all acting somewhat responsibly moment so in that.
In that regard I feel pretty good about where we are.
Ill, let Scott talk little bit more about gross margins I think we gave a detrimental guide more in line, mostly because I think we're going to have to balance gross margin issues up and or down with mixed as it moves around and with demand and with competitiveness with what we're doing on the cost side of the business I don't think it.
To stable as it wasnt as easy to talk about as it was six months ago as my perspective.
Scott I mean look it's a little tougher to tell you exactly what it would be but I think the kinds of ranges we've been operating with our are holding true.
Time your question back to the question about how we're pursuing a marketplace and share gains. The nice thing about all this is we're able to deliver the volumes that we've been delivering and not take meaningful reduction for the spread than we're realizing on margin. So we've got a lot of discipline in the business in terms of our aligning the cost side of the business with the pricing.
Side of things and you might see a little bit of movement on the fringes in terms of basis points, but.
It's kind of staying the same kinds of ranges we've been operating as is our expectation.
Okay. That's very helpful. Thank you very much.
Our next question is from Matthew <unk> with Barclays. Please proceed.
Hey, good morning, Thanks for taking the questions. So hope everyone's doing well I'm.
Sticking with the margin side and I hear you on the Decremental guide for Q1, and you know what.
Scott you just mentioned around the gross margin, but you know just assuming some of the cost actions you took our now.
Somewhat fully flowing through.
Any additional color on the SGN a side.
Then that.
The flex say cost structure, given the pronounced very quick downturn in the business. The timing of some April expenses, just put in the normal course.
Were there relative to the sales decline may was was really positive in that regard so as long as we're able to maintain are relatively.
Relative volume decline or increase the margins are.
Relatively low percentages I think our ability to continue to practice that discipline with expenses is pretty good. So we're encouraged by may we expected to continue into.
And to the remaining months of this quarter, but obviously, we just got to be careful that if there is a significant shift in volume up there the ability to flex some of those costs quite as quickly maybe an issue for us but.
On balance the alignment of the revenue for the costs and our ability to.
So tightly manage the flexing of that I think is pretty solid right now so that's why we're pretty comfortable with that range.
Okay, Perfect and then just secondly that the strength in our free cash flow and.
You called out the strength in working capital management.
Last year, there was a timing benefit on payables in Q4, and obviously this year you still perform better than not anything else to call out this year.
Kind of specific or onetime in nature or really just.
Strengths and working capital management, probably.
I would say, it's the latter we just very aggressively went after there was a lot of unknowns at the time as we were managing through that there were his talk around liquidity concerns in the marketplace credit availability at central So we we went very conservative very quickly and accordingly, we saw a lot of very.
Nicely improved cash flow from working capital on the balance sheet as things have stabilized as we've gotten better comfort and what we can avail ourselves too in the credit markets. We released some of that so you'll see as we indicated you'll see some reversal of that in one Q, but it really is just are very soon.
Perfect focus on working capital in the fourth quarter that led to all that that swing.
Okay. Thanks, Thanks, a bunch.
Our next question is from Trey Grooms with Stephens. Please proceed.
Good morning. This is actually know macosko on for Trey.
And so my first question you mentioned in wallboard, there was a more competitive environment is that at a distribution level or at the supplier level.
Well I think a little bit of both I mean, I think that everybody's adapting to the expectation of a lower volume environment.
And you had a little bit of a consolidation last year right with manufacturers, so I'm really at both levels, but.
I would say probably more competitive in the end markets with the strong distribution than with than with manufacturers.
Okay. Thank most.
Mostly residential.
Okay.
And then just quick follow up I know, we've been talking about decrementals, but for that 10% to 20% guide.
In Q, what's the biggest swing factor that'll that'll get you to the high or low end.
Ah gross margins.
Volume.
Thank you got our arms around our I mean, we have our arms around the cost structure, we can control that.
In the near term what happens with volume in gross margin a little bit so little bit up here.
Makes sense. Thanks.
And our next question is from Steven Van de Wille Thompson Research Group. Please proceed.
Good morning.
Did that I guess hone in on ceiling volumes.
In the quarter I guess I'm thinking about the April June time through June timeframe volume decline, maybe seems fairly modest me given what some suppliers have discussed publicly on April trends.
Yeah, I mean again April was a was a lousy month in ceilings and in steel.
For sure and we're seeing it bounce I don't know that means it's going to bounce for six months or if it's only going to bounce for three months as we fill that hole right I mean that April whole pretty pretty deep in commercial so refilling that holds bouncing back of projects are coming back.
But I certainly see.
Ceilings our commercial.
Exclusively commercial product.
And so it's going to tie out directly to that as well as I mentioned the one area.
That is that is that is most immediately evident from a not bouncing back perspective would be the tenant improvement work.
And that's a lot of ceilings volume.
In tenant improvement work. So I think ceilings is certainly going to be under pressure.
Yes on the other hand, you could see that spike nicely, if theres some sort of reconfiguration activity that starts up after people start coming back to work.
So in the near term ceiling volumes for sure challenged.
Great. Thanks to the color and then last question.
Talk broadly, but maybe to hone in on Canada trends in Canada.
Trending.
Similarly to U.S. as far as a recovery off the lows in April or increasing the divergent in.
Your outlook, there and cancellations of projects.
You know, Canada performing better.
I'm really just I'm recently disappointed for our Canadian team.
You know that they're having to face now another another huge challenge in the scope at 19 situation after doing such a good job managing through.
Really a lot of the government inflicted.
Housing declines up there, but they're doing a fantastic job our may business in Canada was strong our business on the West coast of Canada.
As most of you know is different than in the balance of the country and on the West Coast in Vancouver Island in particular, we're very much like a home center.
Hi, why we've had a very very strong.
Couple of months out there as you would expect.
And that will come back a little bit as people go back to work.
The good news is is our volumes in residential products look good which is installation and roofing and some of the things that we do in Canada that we don't do in the United States.
Looks good so and candidates in a pretty nice job in general managing this covert 19 situation and hopefully they don't see the resurgence is that we're seeing down here in the in the U.S.. So I feel pretty good about our structure in Canada I feel good about our pipeline in Canada I feel great about our team in Canada, It's really just going to be dependent upon the economy up there.
As to how well we do.
Great. Thank you.
Yeah. It's the end of our question and answer session I will now turn the call back over the last Lee for closing remarks.
Thanks, everyone for joining us today as usual a replay of the call will be available on Gms dot com shortly and as always we appreciate your interest in Gms. Thanks.
Thank you.
Hi.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.