Q1 2022 GMS Inc Earnings Call
Greetings and welcome to the Gms incorporated first quarter fiscal 2022 earnings conference call and webcast. At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce Carey Phelps Vice President of Investor Relations. Thank you you may begin.
Thanks Daryl.
Good morning, and thank you for joining us for the Gms earnings conference call for the first quarter of fiscal 2022, I'm joined today by John Turner, President and Chief Executive Officer, and Scott Deakin, 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 Dot Gms dotcom.
On slide two.
On today's call management's prepared remarks and answers to your questions 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 SEC, including the risk factors section in the company's 10-K and other periodic reports.
Today's presentation also includes a discussion of 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 the first quarter of fiscal 2022 relates to the quarter ended July 31.2021.
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 call I'll turn the call over to John Turner J T.
Thank you Carrie.
Good morning, and thank you all for joining us today.
We hope that you have had an enjoyable summer and that your families friends and colleagues are remaining safe and well.
If you move to slide three the.
The strong momentum we had exiting fiscal 2021 continue through our first quarter with net sales topping $1 billion for the first time in our company's history.
Moreover, through outstanding execution, and our intense focus on delivering superior customer service our team capitalized on continued strength in the residential market and inflationary pricing environment and solid demand for our core and complementary products, resulting in strong profitability.
Specifically, we delivered record levels of net sales net income and adjusted EBITDA with sales up meaningfully in each of our four reporting product categories.
We realized higher than expected gross margin of 32, 2% as year over year increases in ceilings and steel framing and complimentary products, partially offset pressures on wallboard margins principally due to the timing of our pass through a supplier pricing actions.
Continued cost discipline and the outpacing of product inflation relative to operating expenses enabled us to improve SG&A and adjusted SG&A as a percentage of sales for the fifth quarter in a row, while at the same time, we maintained the customer focus that continues to differentiate gms in the market.
As a result, adjusted EBITDA margin improved to 12, 3% 200 basis points over last year's first quarter.
Also contributing to our strong start to fiscal 2022 was our continuing platform expansion activities enhancing our product offerings and broadening our service territories in numerous geographies.
There's no question that we are still living in dynamic times with continued strength in the residential market contracting the lingering softness in commercial.
Despite supply chain disruptions in the inflationary environment, the residential market remains strong and future indicators of sustained growth are mostly positive while some builders in the near term temporarily pause construction as material cost skyrocketed and labor was constrained others continued to build.
Solid demand for both new and existing homes continues as evidenced by the reporting from publicly held builders and the National Association of Realtors.
And the outlook for relatively low interest rates remains intact.
In commercial we have seen promising activity in certain sectors, such as those projects supporting education, and government technology health care and smaller retail and office tenant improvement.
New and repair and remodel activity for larger office space and hospitality remains muted in many markets as developers are facing higher material cost and many large office tenants have not yet submitted their return to office plans contributing to the holding pattern in these projects.
Looking forward. However, the architectural billings index have posted six consecutive months of increased billings as well as growth in inquiries, which have been broadly distributed across the country.
Similarly, our internal measures of bidding and backlog are starting to improve but the timing and the reality of these quotes turning into projects is yet to be fully seen.
Of course this growth follows 11 months a material decline in this indicator and put in place nonresidential spending has yet to show growth on a year over year basis since the start of the pandemic in March of 2020.
This said the architectural billings index has always been the benchmark for future commercial activity and continued strength will eventually lead to a commercial recovery.
On the supply side across our end markets product availability continues to be constrained in many areas. Notwithstanding our scale has been a key competitive advantage and our results. This quarter are indicative of our relative ability to secure and deliver product.
Our team continues to navigate challenges as we provide the outstanding level of customer service that is foundational and distinctive for gms.
<unk>, we continue to reposition our resources to capture demand, where it is strongest demonstrating the agility of our capabilities and business model.
And operationally, we have effectively partnered with our suppliers and customers to ensure delivery and fulfillment.
Moving on to slide four our strong quarterly results were also representative of our continued focus on the execution of our strategic priorities.
First expanding share in our core products, particularly in geographies, where we are underpenetrated during.
During the quarter each one of our core products delivered strong net sales growth and positive volume growth demonstrating our team's success in growing our reach and customer base.
Second growing our complementary products to diversify and profitably expand our offerings.
With strength in products, such as tools insulation joint treatment and lumber, we recorded 27% sales growth for the quarter in our complementary products, marking the fifth consecutive quarter of growth in this category.
Third is our platform expansion, we are expanding our platform through accretive acquisitions, and greenfield opportunities, while maintaining discipline in managing that leverage during.
During the first quarter, we made significant strides in expanding our reach and enabling enhanced service to our customers with the opening of five new Greenfield locations and the completion of two important acquisitions.
Notably on July one we added west side building material to our distribution network, including nine locations in California, and one in Las Vegas, expanding our presence and reach into critical and previously underserved markets.
Westside recorded roughly $200 million in sales for calendar year, 2020, and appears on pace to exceed that number in 2021.
Also during the quarter as further expansion of our complementary products, we acquired architectural coatings distributors of specialty <unk> and stucco operation and providing a platform for further expansion in the northeast, Ohio market. This transaction provided us the opportunity to advance our exterior envelope capabilities in that part of the country.
Even with a slight pause in M&A activity at the outset of Covid. We have added 35, new locations to our footprint and just the last few years.
Looking forward, we maintain a robust M&A pipeline with a focus on opportunities that create shareholder value.
Building materials continues to be a highly fragmented industry with opportunities to enhance our complementary product offerings deepen the scale of our core products and reach customers beyond our current service territories, our strong balance sheet and liquidity position provides us the ability to continue to pursue both organic and inorganic opportunities.
<unk>.
And the fourth pillar in our strategic priorities is to leverage our scale and employ technology and best practices across the business to drive improved productivity and profitability.
We are driving purchasing efficiencies enhancing our pricing practices, providing improved transactional efficiency and effectiveness for our customers and supplying our team with the tools and data to make informed business decisions all with the intent of improving our value proposition for all stakeholders. These.
These efforts are focused on lowering our cost of doing business delivering superior service or both.
With that I'll now turn it over to Scott to provide more perspective on our financial results for the first quarter Scott.
Thanks, J T and good morning.
Looking at slide five net sales increased 29, 8% for the quarter to just over $1 billion.
Rising 23, 2% organically.
This exceeded our expectations for the quarter as we benefited from continued strength in the residential market and heightened inflationary trends in the marketplace.
Adjusting for one less selling day year over year net sales increased 31, 9% with daily organic net sales increasing 25, 2%.
From an end market perspective in the U S. For example, residential sales showed considerable strength up more than 30% on both higher volume and price while commercial sales, which were also up double digits as continued to be sluggish from a volume perspective, but we're up overall on higher pricing.
Wallboard sales of $391.0 million increased 18, 9% or 14% on an organic basis.
Comprised of a 12, 5% increase in wallboard price and mix and a one 5% increase in volume or three 3% on a per day basis.
Overall on a per day basis, wallboard sales increased 28% with volume gains reaching five 5%.
Together with 15, 3% price and mix.
On a unit basis contribution from acquisitions and strong residential volume more than offset lower commercial activity.
Given recent supplier pricing actions, our average realized wallboard price has gone up sequentially. Each month since last September with our first quarter fiscal 2022 average of $356 per thousand square feet.
Up eight 4% from the fourth quarter and up 14, 5% from the first quarter of last year.
Having received notice of additional impending manufacturer price increases we expect this upward trend to continue at least into the second quarter.
Ceiling tile and grid sales of $139.0 million increased 24% year over year, and 16, 8% on an organic basis.
Comprised of 13, 2% of price and mix and three 6% from higher volume.
On a per day basis net sales of ceilings were up 22, 3% year over year with five 8% realized through volume gains and the benefit from acquisitions.
Steel framing sales of $199.0 million increased 77, 6% as steel prices were up more than 70% as compared with a year ago.
On an organic basis steel framing was up 68, 7% comprised of a nearly 68% benefit from price and <unk>, 8% on increased volume.
On a per day basis steel framing sales were up 84%, including a 9% increase in volume, including the benefit from acquisitions.
Okay.
Sales of complementary products from which we place increasing emphasis internally as one of our primary drivers of growth grew 27, 4% to $323.0 million for the first quarter as we benefited from positive contributions from acquisitions continued strength in our Canadian business with strong pricing in certain.
Product categories.
On an organic basis sales of complementary products were up 18, 1% with daily net sales up 29, 4%.
Gross profit of 300 to $43.0 million increased 28, 9% over a year ago as gross margin performance performed but excuse me gross margin performed better than expected coming in at 32, 2% or 30 basis points behind last years level.
Price cost dynamics, principally related to the timing of the implementation of price actions with a notable driver of this performance.
Turning to slide six.
Adjusted SG&A expense as a percent of net sales improved 200 basis points year over year to 22% and significant product inflation outpaced increases in operating costs.
All in all first quarter adjusted EBITDA of $129.0 million was 54, 2% higher than a year ago.
And adjusted EBITDA margin improved 200 basis points year over year to 12, 3% for the quarter, representing an incremental margin of 18, 8%.
Several points higher than our earlier projections.
Slide seven references our cash flow dynamics during the quarter as well as our balance sheet and liquidity position.
As is typical during our first quarter, we recorded a use of cash from operating activities and free cash, albeit at a heightened level in this environment.
These amounted to $76.0 million and $90.0 million, respectively. As we worked to ensure product availability among amid an environment of Titan unless reliable supply.
And as we proactively manage inventory levels in certain product GAAP product categories for further manufacturer price increases were expected.
The significant increases we had in our revenues during the quarter also drove a use of cash related to accounts receivable.
Looking ahead, we do expect to generate improved levels of free cash flow, particularly in the back half of the fiscal year. As these dynamics normalize which is also typical of a normal quarterly cadence.
On a longer term basis, we continue to main our through the cycle objective of generating free cash flow in the range of 40% to 50% of adjusted EBITDA.
Capital expenditures of $14.0 million compared to $11.0 million in the prior year quarter. We continue to expect full year fiscal 2022 cash capital expenditures to total approximately $30 million to $35 million.
As of July 31, 2021, we had cash on hand of $49.0 million and 300.
Third $60.0 million of available liquidity under our revolving credit facilities.
Our net debt leverage at the end of the quarter was two seven times down from three times, a year ago, but up slightly from the end of fiscal 2021, principally due to the funding of our west side acquisition on July one.
Our balance sheet remains healthy and our liquidity position affords us ample resources to continue pursuit of our strategic priorities.
Now, let me turn the call back over to J T. Before we open the line for questions.
Thank you Scott.
We are off to a great start in fiscal 2022.
Before making my closing remarks, I'd like to highlight how we believe the second quarter is shaping up.
Despite some delays by builders, we expect to see continuing solid demand in residential and for our complementary products.
Plus price inflation is expected to continue across many of our product lines.
As a result, we currently expect to generate year over year net sales growth for the second quarter of approximately 30%.
Lately up sequentially from what we saw this quarter.
In terms of profitability given the expected continuation of pressured price cost dynamics, we expect second quarter gross margin to decline sequentially to around 32%.
Meanwhile, we expect continued favorable operating expense coverage, yielding an incremental adjusted EBITDA margin in a range of 15% to 20%.
Looking further out we remain confident in the steps we are taking to ensure further and sustained growth. There is fundamental support for continued strength in the residential market with favorable demographics, historically low interest rates and low levels of inventories to service the demand.
While the timing of the return of larger scale office projects is uncertain, we are seeing favorable activity in other areas of our commercial business. We also expect the current inflationary trends to continue through the balance of this year given.
Given these dynamics, we intend to remain agile and deploy our resources to align with the highest value opportunities.
Moreover, as we stay focused on executing daily in this unique environment. We also remain committed to our four key strategic objectives to deliver value to all of our stakeholders in the long run.
Gms is well positioned now and for the future our scale best in class customer service and entrepreneurial culture set us apart and differentiate us in this market with a strong balance sheet substantial liquidity in our history and expectation of strong cash flow generation, we are squarely focused on servicing our customers.
And driving shareholder value.
Operator, we are now ready for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. As a reminder, we ask that you. Please limit yourself to one question and one follow up question. One moment. Please while we poll for your questions.
Our first question is coming from the line of Trey Grooms with Stephens. Please proceed with your questions.
Hey, good morning, everyone, J T Scot and Carey hope you're all well.
Thank you Barry and good morning.
So I guess first off could you could you talk a little bit about the puts and takes around the wallboard volume in the quarter.
You point out Reds being pretty good in non res continues to be a drag but.
Wallboard volume being up one 5%.
If you look at some of the industry manufacturer kind of volume, we saw and granted I know there is differences in timing and that sell in not sell.
All through.
And geographic Theres, a theres a lot of moving parts. So I guess, if you could maybe help us unpack that.
The wallboard volume.
In the quarter of one 5% the kind of the puts and takes sure.
First of all on the.
The wallboard manufacturer data rate Youre looking at a Q2 number that included April so that's a little bit different versus our timing.
But from a purchasing perspective, we feel very like our share our share is right in line and we are gearing up for the for our busier season going forward.
You know on a daily basis, three 3% is kind of the same story, we've been telling which is very strong residential and weak commercial.
We're about 14.15 months into the into this pandemic and the larger commercial projects have been pushed.
They continue to be pushed.
There is a lot of inflation out there and a lot of projects that Hasnt started don't really need to start.
All that being said, we think that's going to get a little bit better but in essence, you are looking at double digit residential volume growth and high single digit commercial volume declines and Thats kind of where we've been through this whole cycle.
We're also rolling over what I would tell you as the previous year quarter on the commercial side, a little stronger because bouncing out of the shutdowns in April.
Youll remember that commercial projects that were already going the May June July quarter last year, we shipped a lot of a lot of wallboard before it started to decline a little bit again on the commercial side. So we kind of have that comp going to by three 3% on a daily basis is kind of right in line with where we've been.
A slight bit lower possibly because residential also wasn't quite as strong on the volume side as it had been this quarter with a little bit of that hiccup you heard some of the builders talk about delaying talk about building differently to try to make sure. They understood their cost et cetera, et cetera, and we felt a little bit of that but at the end of the day.
I think we feel like we're pretty pretty much right in line when it comes to wallboard with the market.
Perfect.
That's what I needed. Thanks for the color there J T and then.
On the margins I mean, the EBITDA margins are are coming along very nicely here.
Even despite some some headwinds youre talking about on the price cost front, especially around wallboard.
And with the additional pricing Hasnt been announced in wallboard from the mainland.
From some of the manufacturers out there for September.
Whats your thought around price cost over the kind of more medium term I know what you guided to in <unk> with the Incrementals overall.
But.
How are you thinking about it how about that part of the business or that part of the equation. When we're looking at a little bit further out.
Because I can understand it takes some time to kind of catch up with.
But some of this pricing, especially as quickly as we've seen it move higher so any color around that would be great.
I think that I sound like a broken record here now for this through this price increase period with wallboard and that it's three to six months to get it through the market I think you can see in our absolute pricing.
We're putting it into the market, but again like I mentioned last quarter.
We need to be a good supplier to our customers, we need to be fair with our customers.
And so.
We're not trying to make our customers.
<unk> cost that they can't pass through on their projects and so here. We go again with another September October price increase.
I think we had thought possibly this last one might have been the end.
Of it based upon what the demand situation look like plus the fact that there's four or five of them already in but here. We go again, so we will probably have the same lag and eventually when all the price increases stop we'll catch it and then your margins will normalize in wallboard at that point in time.
Alright fair enough I'll pass it on thanks for the color take care. Thanks, Craig Thanks, Jay.
Thank you. Our next question is coming from the line of David Manthey with Baird. Please proceed with your questions.
Thank you good morning, everyone.
J T I'm interested in.
Made a comment in the slides regarding supplying teams with data to make more informed business decisions I'm wondering if you could just outline a few of those for us.
Sure we've been investing in SG&A and Scott brought quite a bit of proficiency in that area with him when he got here and I'm, a big proponent of that as well from my history and background, but a lot of work internally on our systems to be sure that we can access data after all of these acquisitions over the years.
And we've made quite a bit of progress on that and so we have a we.
We use Microsoft power bi and for our sales teams now we have a fully functioning.
This intelligence tool.
Our sales leaders and our sales people can access mobily they can get it on their phone and get on their iPad. They can get it on their on their laptop.
And they can really understand their mix of business their customer mix.
Icing situations margin situations et cetera, and make more informed decisions. We continue to provide information we've.
We've talked about before our structure is kind of a center led Federated model. So our view is provide the very best information that we can solid analysis to our teams and allow the people on the street that are right in front of the customers to make those decisions. So really that's what we're talking about and pretty excited about the continued improvement in our <unk> group.
And the expectation of better better information for people in the field going forward. Just one other example that Dave as well operationally in terms of the use of our fleet. We're now capturing real time data in terms of essentially the cost of the shipments we're making so we can understand the relative profitability.
As we go forward and factor that into our pricing decisions are quoting activities et cetera, and that data is really meaningful captures not only fueled with maintenance costs logistics costs all of that really gives our.
Our operating teams and those who are quoting business a lot more of a.
Understanding of what's going on with regard to the logistics of the business.
Okay. Thank you.
Second.
<unk> outlined the dynamics on the wallboard side in terms of the.
The price increases and then the catch up that you experience.
Could you share with us any thoughts on that.
Steel I think steel prices have kind of flattened out here I don't know structural steel is the same but.
Could you just talk about that dynamic as we look forward to next quarter, what your expectations are there.
Sure I think that.
You are talking about.
Rolled coils kind of stabilizing and we're seeing that as well, but we as an industry are still trailing.
By several months the inflation and the actual raw material is headed to the formers and so we expect another quarter of inflation.
Similar to this one and we've experienced sequentially through the quarter.
That inflation and so.
It is kind of baked into those numbers, we've given you for the next quarter, but we think steel in our particular case, probably has at least a quarter or maybe two quarters left in it depending on what happens with the raw material from where it is right. Now now we don't we're also studying that raw material situation and discussions with mills in.
People familiar with that industry, we don't see a lot of deflation coming anytime soon although with the eventuality is at some point in time steel.
Steel will revert to some some mean.
But perhaps there's a little bit different environment than there used to be in steel as well, but.
For now it's the next couple of quarters. We think is just going to be kind of a continued steady inflation in steel.
Very helpful. Thanks, very much.
Thank you.
Thank you. Our next question is come from the line of Mike Dahl with RBC capital markets. Please proceed with your questions.
Hi, This is Chris <unk> for Mike Thanks for taking my questions.
Going back to the pricing commentary and your comments on being fair to fair to your customers.
Have you seen are you expecting to see any pushback from them.
From price increases given given that magnitude that's been coming through the channel.
And between your residential on your <unk>.
Commercial customer mix is there is there any notable variation between between pricing power.
Well, there's always pushback.
Regardless and a price increase situation I do think that there is some weariness out there in wallboard for sure.
We just keep.
Every quarter, we're going out there and having to take additional pricing and that's very difficult for people to plan with.
The commercial side, it's a little easier because we can quote unquote with escalators based upon the expectation of when that project might be happening.
But on a day to day basis and on the residential business in particular builder business in particular.
They're buying a house everyday right multiple houses everyday and so they've had to try to bake those prices in going forward and that's where it's a little more difficult and that's where we'll get majority of the pushback and again, we can we can just wait we'll have to wait and see how this one comes in.
And how much pushback there is in the marketplace.
For it but you asked for the differential it's a little it's a little easier to quote higher prices out into the future for commercial than it is for builder.
Building work.
Okay.
Understood I appreciate the color there.
And just for my second question.
How much of an improvement if at all are you seeing on the product availability side or general kind of supply constraints impacting your business.
I mean inventory stepped up quite a bit this quarter, but obviously inflation and M&A could be distorting that so just any color on what youre seeing in that part of your business.
Yes, I think that through the quarter the situation improved in wallboard I think there was a little bit of a soft patch in wallboard.
And there is multiple discussions around it did R&R slow down a little bit with the <unk>.
In the beginning with people going back to work.
And that R&R capacity found its way into our channel.
There is some discussion around the builders, having slowed down a little bit commercial still being soft, but we feel better about wallboard availability for sure. There is still some specialty products that are really really difficult anything thats class based.
Still very very difficult for the whole industry to get their hands on.
In wallboard, but but we did go ahead and use our balance sheet and load up in expectation of.
The quarter and of course additional pricing actions as well so we want to make sure. We've got the inventory at the right cost for our customers on the steel side lead times have stopped extending but they are still extended so youre still looking at extended lead times in steel.
Today, and so there's not really a lot of relief in the supply chain and steel.
And depending on the other product category complementary products installation is really difficult right now lumber has certainly freed up quite.
Quite a bit as you can see and as evidenced by the price of lumber.
Installation I would say probably call installation out as still being really really constrained.
Other than that.
Ceilings manufacturers doing a great job getting the products that we need grid is has now become available as well as some steel hit hit the grid producers as well so.
I wouldn't say anything other than glass products and installation those are still acute issues in steel I think we're learning to live with 710.
<unk> week lead times.
Understood that's very helpful and congrats again.
Thank you Chris.
Okay.
Thank you. Our next question is come from the line of Sam <unk> with Raymond James. Please proceed with your questions.
Good morning, J T. Scott how are you great.
Great Sam Sam Good morning.
And again I would like to again reiterate terrific quarter, especially on the pricing side goodness cut.
A couple of clarification questions if I could.
Scott Where's the current wallboard price running for you right now here August September versus the $356 average in the first quarter.
We ended the quarter at $33.0
So the previous pre bats, as previous quarter. We ended this quarter at $3, 70% more seats or excuse me 270.
So we exited 330, and we exited $73.0
And here in August I am guessing its higher than that.
Yes marginally.
We're not we're not at that price point, yet and we're not a price increase yet so marginally.
Got it and then my second.
Quantification of qualification question.
The 30% growth that youre expecting in the second quarter, how much of that is organic volumes expected to grow where are they expect it to grow based on the fact that the.
The wallboard and the steel framing volumes R. R.
A bit softer of late.
Hello.
A couple of three components, you've got the volume piece you got the.
The price piece and then you've got acquisitions acquisitions are probably in the ballpark of $70 million to $75 million.
<unk>.
The volume piece was relatively soon and most of it is really coming from price on a sequential basis sort of on a year over year basis.
Can I ask where you would see growth in volumes and where you might not see growth in volumes in the second quarter.
I think that we're going to be coming from residential because there's going to be the principal driver. We don't expect the commercial side to be coming back certainly in the second quarter.
But from a product category standpoint.
Well ceilings and steel are obviously more aligned to the commercial side. So I think that's.
Going to be the driver there of wallboard is split across the two so similar to what you saw in this last quarter.
Roughly the residential piece was offset by the commercial piece on a one for one basis. So I would expect that to continue.
Very helpful and again terrific print.
Very well done.
Thank you Sam.
Thank you. Our next question is come from the line of Keith Hughes with <unk>. Please proceed with your questions.
Thank you question is on the ceiling price mix.
Hi.
Or was there any specific situations, particularly on mix.
This quarter, a little bit of an outlier or is this something we're going to see for the near term.
Keith Youre hitting on something there that's pretty good for us and I talked about data a little bit earlier as well our architectural specialty sales are really have been very strong and we've been focused there now for.
Alright, I think we've been talking about it for well over 18 months. So there is definitely a little bit of a mix impact there, but otherwise it's just your grid your inflation and grid and then the.
The higher higher value Tayo projects.
So that can ebb and flow as you know, but the only real strategic change there as we expect to continue to do very well with architectural specialty ceilings.
That sounds like share gains because there is that what youre, saying.
It is in that category based on the not the only public information. We have obviously is only one public company that reports their of their mix and architectural specialties, we are growing.
So.
I would venture to say that if you extrapolate that we're hoping certainly we're growing our share in that space and anecdotally everywhere. We go and we talk to our sales teams. It would appear that we are we are gaining some share in architectural specialties.
My final question is on complementary products. This has been a.
Great growth story for you of the organic growth number is there any way to break out how much of that is volume and how much is price and that there's a lot a lot of products. In there was there any sort of steel you can give us on that.
Yeah.
70, 80% price right now probably right now, we're saying kind of order of magnitude I think you're right. I mean, there are so many different product lines. So many different skus to be able to get at that with any real clarity, but on an order of magnitude basis Thats about right.
Okay. Thank you very much.
Thanks Keith.
Thank you our next questions come from the line of Steven Ramsey with Thompson Research Group. Please proceed with your questions.
Hi, good morning.
Good to.
Get some more color on the SG&A leverage very impressive.
Maybe can you talk to what's driving that in Q1, what key measures youre taking in the next few quarters to keep this going if it's.
Specific discipline or just purely the volume and price leverage strategy sales off of the cost base.
So.
Most of it by far is the fact that we've got the air cover from a product inflation standpoint, covering the product cost and the only real increases we've had some related to fuel.
<unk>.
Incentives that you might find out in the field from a sales comp bonus standpoint, just associated with the performance.
Some slight inflationary pressures in some of the operating cost, but if you really strip that out.
We're really delever.
Deleveraging is actually pretty minimal on an operating basis, which I think speaks to the discipline, we're continuing to maintain obviously through COVID-19.
We took some pretty proactive measures put in place some real discipline on how we're managing the business from an operating basis and we're keeping with that as we go through this so and we'll continue to do that into the second quarter and the rest of this year, but most of what we're seeing in the ballpark of 270 basis points is really bad.
Initiated from that product inflation, covering our operating expenses.
Okay, Great and then one comment I wanted to circle back on you guys discussed pricing fairness to customers.
Petitor actions do you think similar to yours in this or just focus on fairness is that allowing you to gain some share.
Well over time, I think trying to be the best compass.
Company, we can be for our customer base is always the best there is always the best thing and will earn us will earn us the loyalty that.
That we have in so many cases today I can't comment directly on whether or not that is matched by our competitors.
I think that.
We have pretty good competitors for the most part out there and I think everybody is trying to do the right thing in this environment.
Sure.
I don't think anybody wants to take and saddle.
The contractor with the cost that they can't pass through and so that's really the in wallboard. That's really the struggle is how do we how do we get that done and how do we continue to communicate and constantly bring our contractor customer base up to speed on what's happening with the with wallboard prices, So and Thats why I talked about exhaust.
And in fatigue, a little bit.
It's just it gets difficult.
Six conversation now.
Every other month.
It just gets difficult for everybody to have that conversation, but I don't think were doing anything dramatically different in that regard out in the market.
But I think overall, our philosophy is to do the right thing.
And you can never go wrong doing the right thing.
Something we always talk about so kind of our general philosophy when it comes to running the business.
Great. Thank you.
Thank you Steven.
Thank you. Our next question is coming from the line of Kevin Hocevar with Northcoast Research. Please proceed with your questions.
Hey, good morning, everybody and nice next quarter.
Wondering if I could ask on the gross margin front.
I think I believe last quarter, you guys guided to gross margins being kind of stable sequentially.
Which I think was 31, 5% in Europe.
You were about two months into the quarter at that point and you ended up you posted 32, 2%. So it came in well above expectations. So I am curious what changed in that last month that kind of allow gross margins to top.
To come in much better and then and then.
And then it seems like the exit rate would be better but the guidance for the second quarter is that gross margins come down so I'm curious.
I'm curious your thoughts there too on what would cause that to then whatever help the <unk>.
This most recent quarter kind of reverse out next quarter.
So what do you got a lot of moving pieces going on with regards to the with regard to gross margin you got inventory timing, you've got commercial timing mix.
<unk> realization et cetera, all of those things are constantly moving pieces I'd say the maybe the principal one that was the difference for our outlook at that time versus now.
We've been going on in the steel and the dynamics there.
And how quickly that inflation has been coming on and the associated inventory dynamics says you take product out of inventory and ship. It all those kinds of timing kinds of considerations are probably the biggest factor in large part.
We work to try to factor those things in but that steel inflation has been.
No its been pretty high over the course of that time period, and I'd say that was the biggest determined.
Got you, Okay, and then on the just quickly on the inventory front.
It looks like they were up 67% in the quarter do you know how much of that is in <unk>.
Units.
Versus pricing.
It's hard to fully nail that down I can tell you that if you look at just the general trends, we're pretty comfortable that we're still staying in that kind of range that we've been talking about the 17% to 18% sort of range.
What youll see a little bit of ticking up in the near term here, but that should equalize itself out.
The coming months until the remaining part of this year.
Okay, Alright, thank you very much.
Thank you Kevin.
Thank you. Our next question is coming from the line of Matthew Bouley with Barclays. Please proceed with your questions.
Hi, This is Ashley Kim on for Matt This morning.
So just going back to the gross margins should we think about the pricing offsetting more of a dollar for dollar basis.
Or do you expect to eventually get some margin there as well when it flows through.
Yeah.
Well I. Thank you all.
We've talked about kind of a long term view of gross margin 32, and a half somewhere in that range right. So we're not that far away from what we think is the normal long term margins for the business on the gross margin side can we do a little bit better over time, possibly depending on product mix and what we do with our complementary group.
For sure.
Yes, as you as you chase it up right when it levels off we would expect it to begin to catch up a little bit.
Has it leveled off and we and we get it out into the marketplace in wallboard on the other side on steel to Scott's point we.
We've done a fantastic job our team in the field has done a fantastic job of communication with the customer base to ensure that they understand what's happening and that we price products appropriately and so on the steel side, we're already kind of approaching what I would say is at peak.
As as it was mentioned earlier with steel.
Raws kind of leveling out you could have the opposite impact there.
As well so I wouldn't think that I don't want to give anybody any kind of indication that the long term gross margins at the moment based upon what our product mix is and our strategies are is going to be much above 32, and a half I do think there is other parts of the business that we can continue to work on we've talked about that longer term EBITDA goal being north of 10 of course was there right now with some unique.
Circumstances, but for full year above 10, I do think.
We're on our way to being able to do that.
Okay, and then can you just speak more about your progress on E. Commerce has it had any notable efficiencies just because.
Just given the constrained supply chain backdrop that we're seeing today.
I'll talk a little bit about ecommerce kind of our strategy is to automate the.
The relationship with our customers have with us today.
From order entry if they'd like to all the way through repayment and really try to in the middle there is a lot of noise in the middle that goes on with.
Phone calls and emails about Where's my order Hasnt been delivered et cetera that automation is all happening now.
Are we getting we're getting a lot of uptake in the use of that middle portion and then also in the payment of there.
Bills, so that part of e-commerce, coming along really well order entry itself. We continue to hear from our customers that they're happy to set up a PDF or theyre happy to generate an automatic purchase order because that's what their systems do and they're not really very interested in going in and through.
<unk> that order the smaller players are certainly interested in doing some of that.
But the larger player certainly are not but the larger players are absolutely using the system now to manage their account with us and so we're seeing that get better and better.
Every month.
Okay. Thanks for the color and congrats on the results.
Thank you Ashley.
Thank you there are no further questions at this time with that we do appreciate your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
Have a great day.