Q1 2021 GMS Inc Earnings Call
First quarter School 2021 earnings conference call.
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Now my pleasure to introduce your host Leslie Kratcoski, Vice President Investor Relations. Thank you you may be.
Thanks, Darryl good morning, and thank you for joining us for the Gms, earning conference call for the first quarter fiscal 2021.
I'm joined today by John Turner, President and CEO, and Scott Tecan, Vice President and CFO. In addition to the press release issued this morning, we posted presentation slides to accompany that any investor section of our website at <unk> Dot com.
On today's call management's prepared remarks and answers. Your question may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Forward looking statements address 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 factors.
Section and the company's 10-K and other periodic reports.
Today's presentation also includes a discussion of certain non-GAAP measures the definitions and reconciliations of these non-GAAP measures are provided in the press release some presentation slides.
Please note that references on this call to the first quarter fiscal 2021 relate to the quarter ended July 31st 2025.
Finally, once we begin to question and answer session off the call in the interest of time, we kindly request that you limit yourself to one question and one follow up with that I will now turn the call over to John Turner <unk>. Thank you I believe.
Good morning, and thank you for joining us today.
I'd like to open by saying that all of US Gms hope everyone. Joining this call as well as your families and colleagues are safe and well.
I'll start with a review of our operating highlights and then turn it over to Scott, who will cover our financial results.
I'll then share some closing thoughts before taking your questions.
If you turn to slide three.
Our first quarter results reflect outstanding execution by our entire team against the backdrop.
Business environment, they clearly demand excuse me that clearly remains challenging it throughout the period.
As a result to be economic impacts arising from the cobot 19 pandemic net sales and organic net sales declined 5.3% and 5.7% respectively.
Despite the lower sales, we generated higher net income and higher adjusted net income.
Furthermore, we improved both gross and adjusted EBITDA margins by 20, and 40 basis points respectively.
These improvements with a direct result, though.
The rapid alignment of our cost structure to current demand.
Our balance product and market mix, which has been strengthened through the execution of our growth initiatives.
And a relentless focus on serving our customers with operational excellence.
Adjusted EBITDA of $83.1 million was 10.3% of sales, reflecting a decremental adjusted EBITDA margin of just 1.4%.
This was significantly better than the 10, 10% to 20% outlook. We had provided in our fourth quarter call as a result, a better than anticipated gross margin performance.
Coupled with our proactive and disciplined stance toward cost containment and alignment in the current environment.
On the health and safety, Brett we maintain enhanced operating protocols in compliance with public health requirements recommendations and guidelines aimed at reducing the spread of come in 18, and the health and safety of our employees business partners and communities remains our top priority.
All of US It Gms express our gratitude to those who have been and continued to be on the front lines everyday during these unprecedented times.
Considering the environment in which we're operating we're off to a strong start to fiscal 2021, my congratulations and thanks go out to the entire Gms team, who made these results possible remaining engaged focused and proactive.
As we come together in support of our customers at each other.
At the same time I offer our gratitude for the partnership we share with both our customers and suppliers.
Who have faced their own difficult challenges in navigating the realities of the current market.
With that I'll now turn it over to Scott to provide some more perspective on our financial results for Q1.
Scott.
Thanks to take good morning.
Looking at slide four of our Duck net sales were $802.6 million.
Down 5.3% year over year has continued covert 19 related market declines in the U.S. were partially offset by higher sales in Canada.
Overall organic net sales declined 5.7%.
Wallboard sales of $328 million decreased 4% or 4.1% on an organic basis, principally due to a decline in both price and mix driven mostly by share to a greater waiting of residential wallboard products and to a lesser extent lower volumes, which were down only about.
1% consolidated basis.
[noise] ceiling sales of $113.7 million decreased 11.9% were 12.5% on an organic basis.
Driven by lower volumes and product mix.
Partially offset by higher pricing.
Steel frame in sales of $110.5 million decreased 16.2% were 16.4% on organic basis.
Primarily due to a decline in both volumes and pricing, partially offset by product mix.
The deflationary environment in steel continued in the quarter with pricing down approximately 7% year over year and 2% sequentially.
Year over year sales declines were more pronounced in ceilings in steel product categories tied primarily to commercial construction activity given the relatively more challenged demand environment there versus residential.
That's right well still down year over year continued to improve during the quarter and into August.
Complimentary other products sales of $250.4 million increased 2.3% or 1.5% on organic basis due to positive contributions from acquisitions execution of our strategic growth initiatives and positive organic growth in Canada.
Gross profit of $260.5 million decreased 4.8%, primarily due to the lower sales.
Gross margin of 32.5% improved 20 basis points as a result of favorable product mix, we're purchasing initiatives given a higher proportion of sales in both wallboard and other products.
Turning to slide five.
Adjusted <unk> expense as a percent of net sales of 22.2% improved 40 basis points. This despite a 50 basis point headwind from the deflationary market pricing of wallboard and steel.
Approximately 90 basis points of improvement you realize is a direct result of the proactive measures to deferral or limit non essential operating in other discretionary expenses as we align of the company's cost structure with the current demand environment.
As well as well as well as favorable business mix towards single family residential with respect to operating costs.
All considered.
First quarter adjusted EBITDA in dollar terms declined marginally to $83.1 million from $83.6 million.
Adjusted EBITDA margin, however, improved 40 basis points to 10.3%.
This represented a 1.4% decremental adjusted EBITDA margin.
We were very pleased that our execution in the first quarter generated improved profit margins over both the prior year and against our previous expectations for the first fiscal quarter. Despite the market related decline in sales.
Turning to slide six.
As is typical during our first quarter of the fiscal year, we generated a use of cash from operating activities on free cash.
He's totaled $15.7 million and $20.5 million, respectively, increasing only modestly compared to prior year.
Despite our tempering some other precautionary cash management measures, we put in place on the fourth quarter.
For the second fiscal quarter, we anticipate generating a robust level of positive free cash flow, which is typical over normal quarterly cadence.
Capital expenditures of $4.7 million were $1.1 million lower year over year as we have delayed overdues capital expenditures that were not anticipated to impact near term business.
This said looking forward, we maintain our estimate for cash capital expenditures in fiscal 2021 of approximately $25 million.
As of July 31st 2020, we had cash on hand at $139.7 million mm $372.5 million available liquidity under our revolving credit facilities.
You'll recall that as or precautionary measure to increase cash on hand, and financial flexibility at the start of the pandemic.
We drew down approximately $87 million under our revolving credit facilities during the quarter excuse me during the fourth quarter fiscal 2020.
During quarter, one we repaid approximately $44 million of these borrowings and repay the remainder of his precautionary draw in August.
Our net leverage was three times as of the end of the first quarter relatively consistent with 2.9 times as of the ended the fourth quarter fiscal 2020, <unk> compared to 3.7 times as of the end of the first quarter fiscal 2020.
Our balance sheet remains healthy and in terms of the overall stability of our capital structure, a 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.
Thanks Scott.
Turning to slide seven.
While we continue to carefully monitor and address market developments, we remain committed to our strategic growth initiatives, which guide our long term management of a very attractive business with significant long term growth potential.
As a reminder, our growth priorities include expanding share in our core products, particularly me in geographies, where we're underpenetrated.
Growing select other product opportunities outside of core products, diversifying and profitably expand our product offering.
Developing the platform to recruit of acquisition and greenfield opportunities, while maintaining balanced progress in debt reduction.
And leveraging our scale and employing technology and best practices to deliver a best in class customer experience.
Well as increased productivity and further profit improvement.
In terms of acquisitions and new market expansion, we have returned to an active stance and pursuing deals and in advancing our greenfield expansion.
Near term, we are realizing benefits from the execution of all of these strategies, which have a quipped us with not only meaningful scale and technology advantages, but with balanced product geographic and end market portfolios all of which should serve to enhance our performance in this current environment.
For example, growing share in our core products and Underpenetrated geographies is increasing our scale advantages.
Focused emphasis on our offering of other complimentary products enabled us to grow that segment of our business. This quarter, despite the challenging environment and further diversifies and balances our product portfolio.
Platform expansion from both acquisitions in Greenfield locations as not only enhanced our scale, but has also provided further product and market and geographic diversification, including market leadership across both the U.S. and Canada.
Technology deployments, such as our E Commerce and fleet optimization and logistic software has enabled us to not only better serve our customers, but to achieve increased productivity through operational excellence.
Finally.
Since our last update to you in June current external forecast remained married with respect to both residential and commercial construction.
The outlook for residential construction has improved on the other hand consensus forecast for commercial activity, our little changed and still suggest a difficult environment.
Looking ahead to the second quarter, we do anticipate further commercial weakness from what we experienced in the first quarter.
Moreover, there is also one less selling day in Q2 of this year than last year.
This is expected to present, a more challenging year over year second quarter sales comparison to what was an all time quarterly record last year.
In terms of profitability the year over year gross par comparison, which was 33% in Q2 of last year will be more difficult than was the case in the first quarter.
Taking these factors into consideration, we believe it prudent to targeted decremental adjusted EBITDA margin within the range of 10% to 20% for the second quarter fiscal 2021.
With the expectation that we will see some benefit from improved residential start numbers in our third and fourth quarters, we're optimistic that year over year sales comparisons should be less challenged in the back half of our fiscal year.
As we conclude our focus remains on controlling what we can we have taken and intend to continued to take the necessary actions to optimize our operations and align our business with demand.
I'm confident in our team's ability to to continue to address challenges and leverage opportunities quickly and nimbly.
We firmly believe the foundation, we have built that gms, coupled with our strong liquidity and ability to generate cash healthy balance sheet market leadership and ongoing commitment to our strategic growth priorities positions us well for the duration of this period and for long term success.
Operator, we're now ready to open the call for questions.
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Our first questions come from a line of Matthew Bouley of Barclays. Please proceed with your questions.
Hi, This is actually Kim on for Matt today.
So the first question I wanted to ask was on the margin side.
Yeah, we'll continue to outperform commercial do you expect a significant mix impact as a result of this.
I think on the wallboard side, we certainly expect they had an impact a little bit but as we've stated in the past the profitability of the two are similar because the lower cost to deliver.
But the gross margin itself is actually a little bit lower on the residential side, you're seeing the mix in ceilings.
Steel and we expect Thats continue.
We are very happy with our other product category performance in spite of commercial weakness.
We don't see any reason why that shouldn't continue.
And so in general I think that what we.
What we were able to do here in the quarter I see the trends continuing.
Got it. Thank you that's helpful. On and then what are you seeing on tenant improvement.
Given that you called that out.
Potential weak spot.
Shown any improvement as people kind of head back to work.
Not yet.
Okay got it thank you for lunch.
Thank you Ashley.
Thank you. Our next question it's come from the line of Trey Grooms with Stephens. Please proceed with your question.
Thank you good morning JT Scott.
Hi, Craig good morning.
So.
First I want to maybe CP can expand on your comment about.
Expecting or maybe seeing further.
Commercial weakness, so ceilings and and steel organic volume, both down double digits and taking out the.
Impact of one less day.
Is that the domain that you're expecting a deceleration.
From that level that we saw in one Q.
Or any more color you can give us around that.
Yeah, I don't think it's much different than we talked about last quarter, although it's becoming more clear now that commercial is certainly going to be weaker as we move through the balance of calendar year.
And likely won't strengthen until we get into you know later in calendar 2021 on the other hand I think.
That was accused of being somewhat bullish on the residential side. After the last call and I think I'm, probably more excited about it now than I was then so I think that offset as we mentioned here our comments.
You know is likely to happen later in the years, we get as we begin to roll over these starts numbers that are happening as we speak but the degree of those offsets to what is yes. It continued deceleration of steel and ceilings expected deceleration of steel in ceilings I can't tell you the degree of that.
Celleration really out much further than we're operating right now, but I wouldnt expect it to slightly deteriorate through Q2, and then we'll get on the phone again, and we'll talk about Q3, when we have little bit better visibility into it.
Okay. That's helpful. Thank you for that and.
With the.
SDMA leverage that you guys.
Achieved.
And and Scott you mentioned, a few things that were drivers there, but you also.
Mentioned the headwind there that you had the 50 basis points headwind on from from price.
What is your thoughts around SGN, a the kind of sustainability there.
You know.
At least for the leverage.
When you know when you've got volumes that are probably going to be challenged on one side of the business and to Q wallboard volumes might not be as good as what we can see later just given the timing.
In the lag with with starts or how should we be thinking about the SG a nice side of things.
Look I think all the discipline that we've been maintaining in the business over the quarter. We would expect to continue with that we're really pleased with what we're seeing on the logistics side of it the warehouse and delivery side of things. The we've been able to flex wages labor materials repairs those types of.
Thing really well.
As you look forward into the Gionee side of things I think we're really discipline. There obviously, we'd expect to maintain what we're doing on things like travel entertainment meetings all of those kinds of things the more truly discussed this discretionary kinds of things that we'll be doing so.
Maintenance there is going to be important to us I got a key part of the way they run the business some of the quarter.
Obviously as you indicated though we do have some softer revenues in terms of the air cover that the net of that is that we don't expect a whole lot of leverage go into the next quarter, but we should be.
Pretty solid just in terms of our ability to weather the sales decline in that environment.
Okay and.
If I could just sneak one more in on.
The housing comment earlier.
80 that you made around.
And was down in the quarter volume was down kind of residential volume was down in the quarter.
But that it and it did and it improve and.
Any more color you can give us on that.
It sounds like an improved through the quarter in into August or you kind of in positive territory, there yet and.
It sounds like it's it's expected to ramp up even further as we get through this quarter, but just any more color on the trajectory.
Yeah, I mean, we entered the quarter kind of low single digit volume exited the quarter.
Much even lower single digit volume declines and now were maybe getting almost flat on a year over year basis.
You know currently in.
I think that that trend I mean, it's hard to imagine that trend isn't going to continue and eventually flip to a positive.
With the starts numbers that we've seen so.
If we could if we could get another three to six months of robust starts numbers.
Obviously, what they start they'll finish for the most part residentially and will be supplying it. So I think I think we remain positive.
In that trend.
Okay. That's it for me thanks, guys I appreciate it.
Thanks, Trey extra.
Thank you our next question.
Steven Ramsey with Thompson Research Group. Please proceed with your question.
Good morning, maybe I'll start with the other segment can you go into a little more detail on what drove growth in this category, while the other products.
You know did go down steeply maybe go into a little more detail on.
Your comment that you expected.
Trends just to kind of sustain.
Growth out of that category.
Well I think my comment regarding sustaining growth is really more along the internal performance of the organization not so much tied to the external.
Environment and that is that we had our foot on the accelerator on other products for quite some time.
And we have momentum now and I expect that continue really the.
The other product category.
Anything related to residential is doing well and we don't expect that to a to stop.
Great and then maybe on Canada, just what drove growth.
In in that.
The RFP any particular segment or region and do you think it is a sustainable into Q2.
Yes so.
Couple of things one.
Our business in Western Canada, as I've mentioned in the past is more reflective of kind of a home center environment and the Cobot 19, I think the phenomenon. We've all seen now is the home improvement phenomenon is one of the many different changes suicidally and we are certainly in position to take advantage that have been additionally, cash.
I had gone through our housing slung prior to cobot ER and.
The demand remains pent up and I think that you're seeing some snap backs coming out of it I don't know how long that might last but we certainly see good near term trends.
In Canada, and our team up there has done a very very good job positioning us to.
To be ready to capitalize.
In this moment, so continue to do well in Canada.
Great and then and then last one from me high level on be urbanization driving are being one of the drivers of housing growth housing starts that we're seeing of the as we move from maybe a world where homes are more spread out and even.
Offices.
Potentially moved to kind of a hub approach less centralized big offices.
Does that change your strategy for acquisitions in Greenfields going forward that is maybe the layout of homes and commercial construction a evolved over the next few years.
Well I mean, the reality is you know as we mentioned before we're pretty well balanced were 55% commercial and 45% residential doesn't mean, we're that everywhere. So when we talk about one of our growth initiatives, meaning stronger in our core product mix, it's being it's becoming balanced everywhere and not by shrinking one category, but be might be coming so.
Stronger in the other category so I.
I think acquisition wise.
The reality of that is it's pretty much whitespace related and but yes. Obviously, we would you know we think that the ability to service residential is very important to us going forward, particularly in the near term and so acquisitions in it.
In around that.
You know makes sense.
Excellent thanks to the color.
Thank you. Our next question is coming from the line of Keith Hughes with true Securities. Please proceed with your question.
Oh. Thank you just a question about pacing it.
Give us an update through.
And last reported it looks like July may have fallen off mortgage talk what organic growth looked like in July and even into August.
Sure.
Yeah, we decelerated a little bit on a year over year basis.
But we continue to improve sequentially.
End of July so tale of two stores honest, Scott probably has the details.
A year over year across say the four months even into August we were in the ballpark of.
So Florida have to six.
For each of those months sequentially positive July was down a tick.
Versus the prior month, but really not months much. So I'd say, we're fairly consistent across those four months.
And that's sort of negative four to four to up to six that would you are correct.
Yes, Sir.
Okay.
I guess final question.
Okay.
And at this point are we still have.
Yeah.
I am not several more quarters would appear it would appear I mean, we're still seeing some deflation, albeit less in the very near term, but it looks like it is bottoming as we speak at least what we can see.
In the market it looks like it's bottoming as we speak.
Okay. Thank you.
Sequentially I would have to go back and really look at last years I think even we think it's going to be a little bit better than this we said seven this quarter I think we thought maybe it's going to be a little better than that.
As we move forward, but not not a lot probably year over year, but sequentially. We think it's it's coming to an end.
Okay. Thank you.
Thank you. Our next question is coming from the line of Kevin Hocevar Northcoast Research. Please proceed with your question.
Hey, good morning, everybody.
Hi, Kevin.
You mentioned in terms of gross margin it seems like the July quarters, historically since you've been public.
As always has the lowest gross margin quarter of the year and so would you expect it sounds like maybe in the next quarter it might be tough to reach that 33% growth margin that you saw last year, but would you expect gross margin.
For the balance of the year to be.
Better than the July corridor.
It was there anything in July that.
Hi quarter that.
This year would be different than that.
I mean, we were 33 in Q2 last year 33, three in Q3.
Again 32 five in this last quarter I think we'd be looking for the remainder of the year to be much more consistent with Q1 of this year versus like the higher levels, we were out last year.
Okay got you.
And then in terms of M&A it sounds like.
Mentioned in his prepared remarks, returning to a more active stand so curious.
On that in Greenfield.
What the.
M&A pipeline looks like and also.
Look like you closed a couple branches in the quarter.
Here is what the Greenfield.
Outlook is as well.
Yes, so we in the quarter the let's let's talk Greenfield first we have six to eight identified greenfields all good markets all complimentary opportunities for us to expand where we already have a presence so.
Thats the you know that strategy is.
He is going to continue what we closed were basically operations that that you know through different acquisitions, and and legacy things Didnt make sense in the near term. So just just a couple.
Of those.
Acquisitions, our pipeline was good before Kobin and we pause it and now Weve and positive in the pipeline has good postcode. It so I would expect to see some activity you know.
Over the next you know two to three to four quarters for sure on that front.
Thank you very much.
Yep.
Thank you. Our next question some from a line of David Manthey with Baird. Please proceed with your questions.
Thanks, Good morning, everyone.
Hey, good morning.
First off on in your comments.
In the prepared remarks, Jay to you mentioned that residential starts will help the revenue trends in the third and fourth fiscal quarters and I think you made a comment about less challenged sales comps in the back half of the year was that a comment.
That pertains to residential exclusively it sounds like you're also implied in that non res.
May be a weakening which I guess, both lines, who knows what the intersect, but with that comment specifically related to residential.
It is primarily related to two residential.
You know I think that we believe Q2 could could be the bottom as a direct result of that recovery in residential.
For Us I hope.
You know most of the commercial forecasts are showing down eight 910 for the year some of them in low double digit some of them at five so kind of all over the board, but you get that consensus into that eight nine I think we're kind of in the heart of it.
In that regard.
But I do think when you look at the July numbers. If the July starts numbers were to repeat.
And then in August and then in September we start seeing those kinds of numbers.
Then you are.
Our Q3 in our Q4.
I will be will be much better than than otherwise that's for sure.
Okay.
Alright, and last quarter, you had mentioned you expected ceiling volumes to be down, but pricing higher and with ceiling prices down slightly here this quarter, which is pretty unusual for you I I assume some of that was grid pricing, but one other factor behind the lower ceiling prices and is that.
Temporary or onetime deal or could that be a medium term headwind.
Yeah, I know, we've seen ceilings prices not down, but I mean, I'll, let Scott I guess, the headline there down a little bit, but there's some I think you've got it right. It's really on the grid side versus the trial side, if you cut it about right.
Okay.
And so I guess as long as steel remains a headwind that could be a headwind.
And then just the final question for Scott could you just give us the number of selling days in the second through fourth.
Good quarters of the fiscal year, two so we have those.
Now we're just we're.
Were down one in Q2 offline Q3 and down one again, just just the opposite ever.
Were up one in Q2 Q.
Q3.
And.
No one sort of down one down one of one no doubt one down one up on over the course over the next three quarters for a net down one for the full year.
Got it thank you.
Thank you. Our next question has come from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, this is actually Chris.
Mike Thanks for taking my question.
First question I, just want to go back to the incremental EBITDA commentary for next quarter, the 10% to 20% I would.
Thought with this quarter to that.
Come in slightly slightly above that range. So just curious to get your thoughts on from the moving pieces, there and weather and starting with the cost take out you saw unless you know your comes back in a quarter or or some other onetime items that we should be be aware of in terms of that.
No I mean it.
It's a slightly deteriorating topline, it's one less selling day exacerbating that problem and it's a normalized gross margin versus a very difficult comp in the previous year.
And that map means tend to 20% decremental SG nay will stay under control for sure.
Got it.
And then just for my second question anyway, you could parse out that.
The series and commercial how that looks and new construction versus our and our.
What's your outlook.
I'll, let Brian.
No. It's unfortunately right now it's really it's really difficult you know, it's a very different it's a weird time, it's hard for us and as we're going to need to put a couple of one quarters in the bank before we understand.
That a little bit better all of it is challenged I mean, the pipeline we're doing for the most part is a lot of new and a lot of remodel that have already started.
So.
You know the traditional refit in office refit and those types of activities that we would be doing in this in this in this normal busy time of the years, that's not happening.
So I think both are equally challenges quite frankly.
Yes at the moment I think longer term, you'll start to see some remodel come back and I think that as people really come back to work and occupy office space will start season.
So some pickup in that but you know with it with hospitality restaurant and office being has challenged as they are those are all.
Robust remodel tight markets just not happening at the moment.
Got it very helpful. Thanks, guys.
There are no further questions at this time I would like to turn the floor back or Leslie Kratcoski for closing comments.
Thanks, everyone for joining us today as always a replay of this call will be available shortly on our web site and we appreciate your interest in Gms Good day.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.