Q1 2023 GMS Inc Earnings Call
Greetings and welcome to the J M. S first quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
Finally, what you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to 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 2023.
I'm joined today by John Turner, President and Chief Executive Officer, and Scott Deakin, Vice President and Chief Financial Officer in.
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 G. M S Dot com.
Turning to 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 managements 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.
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 2023 relate to the quarter ended July 31 2022.
Finally, once we begin the question and answer session of the call in the interest of time, we kindly request that you limit yourself to one question and one follow up with that I'll turn the call over to John Turner J P.
Thank you Carrie.
Good morning, and thank you all for joining us today.
The momentum we built during fiscal 2022 has continued into our fiscal quarter first fiscal first quarter of 2023, we again delivered record levels of net sales net income and adjusted EBITDA for the quarter and continued the solid execution of our strategic priorities.
Demand for our products during the quarter remained elevated and our yards and storefronts are busy.
Looking at slide three with comparisons to Q1 of fiscal 2022 here.
Here are some highlights of our first quarter results.
We grew net sales, 35% with 29, 4% gross profit growth as our teams continued to work diligently to pass through inflationary product pricing.
We recorded more than 20% sales growth and double digit organic sales increases in each of our four major product categories.
Volumes in wallboard improved nearly 9%, while ceilings and complimentary products volumes were up low single digits.
The inflationary product pricing environment combined with our continued operating cost discipline enabled us to improve our SG&A and adjusted SG&A percentages of sales by 80, and 100 basis points respectively.
Net income improved 46, 2%, while adjusted EBITDA grew 36, 6%.
And finally, adjusted EBITA margin of 12, 9% was up 60 basis points as compared with a year ago.
Product price inflation active residential construction and then improving commercial backdrop, coupled with our team's commitment to delivering outstanding service drove the solid results.
Amid this near term performance. We also continued to execute on our four primary strategic priorities slide four highlights our progress this quarter in advancing these initiatives.
First expanding share in our core products. Our teams again worked diligently throughout the quarter to maintain exceptional lever.
<unk> levels of customer service and ensure product availability, despite continuing supply chain challenges.
Notably this led to year over year volume growth in wallboard and ceilings with organic revenue growth of nearly 18% in ceilings and over 30% each for both wallboard and steel framing.
We are confident that leveraging our scale and our commitment to exceptional customer service will help us continue to grow the core business as we move forward.
Second growing our complementary products, we continue to diversify and profitably expand our offerings, thereby enhancing our value to our customers during.
During the first quarter benefiting from both higher prices and volumes, we grew our complementary product sales by 25% in total and 11% organically in.
In particular, we are focused on growing some of our larger complementary subcategories, including tools and fasteners.
<unk> and <unk> product lines.
Installation and joint treatment, which collectively grew 35% for the quarter.
Third expanding our platform through accretive acquisitions and greenfield opportunities during the quarter, we purchased construction supply of southwest, Florida, a leading local distributor of various stucco and waterproofing products, principally serving the sarasota market with broader outreach to Tampa and Fort Myers in.
When we opened two new Greenfield yard locations and six aims stores during the quarter.
Our pipeline of potential acquisition targets remained strong and we continue to actively pursue opportunities to broaden our product assortment and expand our service territory to help us provide added value and best in class service to our customers.
Finally, our fourth strategic priority is to drive improved productivity and profitability. This is a broad focus across our organization as we continue to leverage our scale and employ technology and best practices that improve both cost and service for example by the end of this calendar year, we expect to complete the upgrade of all of our U S.
<unk> to the most advanced version of our ERP system, thereby fully setting the foundation for our other yard at the future technology initiatives programs, which are expected to drive further improvements in inventory management warehouse operations e-commerce capability and back office efficiency.
All with the aim to make us a better business partner for our customers and to help us deliver improved profitability.
Overall, I am very pleased with our team's drive this quarter to produce both solid results and move our strategic initiatives forward.
With that I'll now turn it over to Scott to provide more perspective on our results Scott.
Thanks, J T. Good morning, looking at slide five net sales increased 35% year over year to $1 $4 billion for the quarter Org.
Organically sales rose 24, 1%.
From an end market perspective, both residential and commercial first quarter sales in the U S were up more than 27% organically year over year.
Wallboard sales of $521 $6 million increased 33, 7%.
Comprised of a 24, 8% increase from price and mix.
In an eight 8% increase in volume.
Organically first quarter Wallboard sales grew 31, 6% year over year comprised of a 25% increase in price and mix and a six 6% increase in volume.
Multifamily volume gains of nearly 30% outpaced mid single digit single family volume growth.
And we were very pleased to see for the first time since before the pandemic began.
Commercial volumes in wallboard grew for the quarter, both sequentially and year over year on improving commercial activity levels.
Our average realized wallboard price has increased sequentially for the past seven quarters for.
For the quarter ended July the average realized wallboard price was $438 per thousand square feet.
More than 5% sequentially, and almost 23% as compared with a year ago.
As residential starts have slowed in recent months, we anticipate a slowdown in the pace of price increases going forward, but at this point do not anticipate a marked decline.
July levels were consistent with the quarterly average and August was trending higher.
Ceiling tile and grid first quarter sales of 100, the $167 $3 million increased 21, 2% over the same period last year.
Apprised of an 18, 1% benefit from price and mix and a three 1% increase in volume.
Organic sales in ceilings grew 17, 8% with 15, 3% of price and mix and a two 5% increase in volume.
First quarter steel framing sales of $274 $9 million increased 41% comprised of a 47, 3% benefit from price and mix, partially offset by a seven 2% decline in volumes.
On an organic basis steel framing was up 34, 6% comprised of a 44, 5% benefit from price and mix, partially offset by a nine 9% decrease in volume.
Despite otherwise improving quoting and shipping activity labor.
The labor delays inventory unwinding within the contract pipeline and project mix, along with a tough comparable period last year all contributed to this year over year decline.
More broadly speaking however, on a sequential basis commercial wallboard ceiling tiles and ceilings grid volume were all up on a per day basis.
I'll steal commercial volumes were essentially flat as the number of suburban stick built developments underway a number of large office high rises.
While steel stud pricing has remained more resilient than previously expected.
As anticipated earlier this year prices for this product have begun to decline in the second quarter.
With August falling roughly 1% below july's level.
Although difficult to predict our current expectation is for this to continue with monthly sequential declines likely in the low single digits.
Through at least the start of calendar year 2023.
Complementary product sales of $395 $8 million, which comprised 29% of our total sales for the quarter were up 24, 6% year over year as we benefited from positive contributions from acquisitions as well as strong pricing across the category.
On an organic basis sales of complementary products were up 11, 2% with the increase coming mostly from price and mix with moderately increased volume as well.
Now turning to our gross profit during the first quarter.
Our gross profit of $434 $7 million increased 29, 4% as compared with a year ago.
Principally due to our successful pass through of product inflation continued strength in residential market demand and incremental gross profit from acquisitions.
Our gross margin percentage for the quarter came in at 32% consistent with both the prior year and prior quarter.
While we manage the business toward EBITDA level of profitability to account for mix and cost of execution, we traditionally operate at.
Around this level of gross margin and believe this to be a reasonable expectation going forward as well.
Turning to slide six.
The operating cost inflation, we experienced at the end of fiscal 2022 continued this quarter with particular pressure in items, such as salaried hourly and contract labor as well as fuel.
Delivery expenses and incentive compensation were generally higher driven by a robust level of activity and strong results this quarter.
However, as has been the case product price inflation and the resultant increases in both revenues and gross profit dollars have outpaced these pressures.
Therefore, adjusted SG&A as a percentage of net sales for the first quarter improved 100 basis points.
As compared with a year ago to 19, 2%.
Adjusted EBITDA improved $46 $9 million to $175 million for the quarter up 36, 6% as compared with a year ago.
Adjusted EBITDA margin improved 60 basis points year over year to 12, 9% for the quarter, representing an incremental margin of 14, 8%.
Finally as related to the income statement the company's effective tax rate increased during the quarter to 26, 4% from 24, 6% in the first quarter of fiscal 2022.
Accruals booked in anticipation of expected Canadian tax law changes.
For planning purposes, we now expect a 25, 5% cash tax rate.
Full year fiscal 2023.
Slide seven highlights our attractive capital structure, and well positioned balance sheet, which provide a foundation and support for the continued execution execution of our strategic priorities at.
At quarter end, we had cash on hand of $106 $6 million and $272 million of available liquidity under our revolving credit facilities.
We have no significant near term debt maturities and our net adjusted EBITDA debt leverage at the end of the quarter improved to one eight times down from two seven times a year ago.
We recorded a first quarter use of cash from operating activities of $4 4 million as compared with $75 $1 million used in the prior year period as we built inventory last summer to ensure product availability during the supply constrained conditions at that time.
Likewise, our free cash use for the quarter of $15 3 million compared to use of $81 9 million a year ago.
While use of cash is seasonally at its highest in the first quarter.
As the supply chain constraints of them have moderated cash flow has improved.
Capital expenditures of $10 $9 million for the first quarter compared to $6 $8 million in the first quarter of fiscal 2022.
For the full year fiscal 2023, we continue to expect capital expenditures to be roughly comparable to those of fiscal 2022 at approximately $40 million.
All considered we now expect full year free cash flow for fiscal 2023 to exceed our previously communicated long term through the cycle expectation of 40% to 50% of adjusted EBITDA.
Finally, before I turn the call back to Jay T. Because we announced in June our board approved an expanded share repurchase program and as such we opportunistically ramped up our share repurchase activity during the quarter.
We repurchased approximately 516000 shares for $23 8 million.
Compared to 85000 shares repurchased for $3 9 million during the prior year quarter.
Going forward, we intend to employ a disciplined capital allocation strategy to drive shareholder value the balances investing in organic growth initiatives.
Pursuing attractive M&A transactions paying down debt and opportunistically leveraging favorable market conditions for share repurchases as they arise.
At quarter end, we had $187 million remaining under the current repurchase authorization.
J T will now provide some perspective on the broader end markets and review our outlook for our fiscal second quarter.
Thank you Scott.
Turning to slide eight.
It's an interesting time in our business with significant contrast between the solid levels of activity, we are experiencing today versus the headlines and latest housing metrics, indicating a likely slowdown, particularly in the single family market.
While total housing starts are retreating from their recent highs there remains a significant backlog between starts and completions.
Depending on the availability of labor and materials should keep us occupied through at least the end of this calendar year as the industry works to close that gap.
While we believe there remains a fundamental residential under build that will continue to drive longer term demand in the near to medium term single family homebuilding completions will likely soften after the current backlog is reduced.
The degree timing and duration of this slowdown is yet to be determined.
That said there is reason to be encouraged both for the upcoming quarter and when looking at our business over the long term with longer build cycle times, then for single family multifamily starts activity remains robust with active construction likely for the next several quarters. Despite the reality of higher interest rates and overall affordability of housing.
Demand for residential accommodation is still elevated.
And the multifamily builders are working to fulfill that need.
Also while we expect wallboard pricing actions to flatten as volume growth moderates and homebuilders adjust to a slower starts environment.
<unk> constraints and inflationary dynamics at the manufacturing level suggested pricing should be stable at least into early calendar 2023.
Our Gms business model provides confidence as well we have the product array and expertise to serve as the single family multifamily and commercial markets.
Just as the residential business helped to build the pandemic driven gap in commercial construction, we are seeing commercial improvement as residential starts begin to decline.
With a balanced split between commercial and residential revenues are broadened geographic footprint and expanded product offerings, we are well positioned to meet the needs of all of our customers.
So while we are facing some macro uncertainties and we'll soon rollover the benefits we gain from prior periods of significant product inflation, we remain confident about our position as the market's economic realities progress.
With that as a backdrop, let's.
Let's turn to our near term outlook on slide nine.
For our fiscal second quarter, we expect.
Total net sales growth of roughly 20% most of which will be organic.
Our gross margin percentage to be generally consistent with that of Q1.
And adjusted EBITDA margin of plus or minus 12, 5%.
I am pleased with the commitment our team has demonstrated since the beginning of the pandemic and its associated supply chain disruptions to keep us moving forward during constantly changing circumstances.
Over the longer term, we are confident that we are well positioned our scale the depth and breadth of our product portfolio.
Our commitment to serve both the residential and commercial construction markets markets exceptionally.
And our expertise across all project types anchors, our ability to continue to grow profitably and provide value to all of our stakeholders.
Thank you for joining us today.
Daryl we are ready to open the line for questions.
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<unk>, please while we poll for questions.
Yes.
Our first questions come from the line of Keith Hughes with Truest. Please proceed with your questions.
Hi, Thank you I wanted to dig into your comments on commercial a little more you talked about wallboard being up year over year.
Are you getting a sense from your customers, which part of commercial is the strongest right now education.
Hospitality office, whatever just any sort of feel that would be great.
Yes, Hi, Keith.
I think most of our customers are telling us that the only segment that is not.
Accelerating at this point would be the large in town office high rise.
Remodel <unk>, new general commercial hospitality is improving of course off a very low base education remains.
<unk> healthcare remains strong so pretty much every segment other than office large office, we are seeing in the general commercial area at the smaller tenant improvement work.
<unk>.
And around retail doctors' offices, dentists et cetera at that type of that type of tenant improvement work is definitely happening.
And in the summer you had some more price increases from suppliers commenced notably ceilings. I believe is also a wallboard.
Could you just kind of comment on what do you think the success of those on Christian there'll be kind of in future quarters here.
Yes, I think that ceilings is passing through as we speak it's definitely taking.
I think that the last wallboard increase.
<unk> is going in as we speak as well.
Okay.
It's not as easy as it was obviously to get to get those increases.
And we just mentioned here in our commentary we expect the pace of those increases to definitely slow.
As we go forward.
But so far so good everything that we need to do we're doing I think it's demonstrated again this quarter with our gross margin dollars being almost equal to.
The growth in sales so we're pushing it through.
And the.
The steel you're still comments earlier volume was down there could you just talk again, what's going on in volume and steel.
Related directly to that office commentary I just gave you.
All of US at large office remodel work is in new is driven by steel. So what we're seeing is it's still hanging in there with volumes are down they're not they're not down terribly.
But at the end of the day, that's the largest consumer of that type of product is that commercial high rise.
Okay, Alright, thank you very much.
Thanks Keith.
Thank you. Our next question is coming from the line of Jeff Stevenson with loop capital. Please proceed with your questions.
Hi, Thanks for taking my questions Congrats on the strong quarter.
Thank you Jeff good morning.
Morning.
How should we think about wallboard organic volume growth as we move through the back half of calendar years do you believe that strong completion with square.
Commercial demand will continue to drive kind of a mid single digit organic piece or a low single digit run rate still the right way to think about it.
Probably closer to mid single digits with the environment that we're in today and the completions rate that we're at now the industry is busy.
We're busy and I would think mid single digits is appropriate for wallboard volume.
Okay great.
And then I was just wondering if you could provide an update on the current bidding environment has there been any slowdown in any of your end markets as we move through August or or is everything kind of similar levels for kind of what you saw earlier this summer.
Okay.
<unk>.
The activity level that we're actually shipping has accelerated a little bit.
The bidding level commercially is still.
Say moderately strong.
Really low growth there, but still growth in commercial as it recovers very slowly mainly due to that.
<unk>.
Lack of all of that office I just.
Mentioned to Keith.
And then of course residential we've only gotten really one data point here in July with the starts.
We're going to come down we will have to keep our eyes on that but there is still today. When you look at that starts data. It's the highest levels of under construction activity between single family and multifamily is still going on as we speak.
Since the great recession last month and this month basically the same numbers of total units under construction. So there is a lot of activity happening.
<unk> still today.
Got it thank you.
Thank you.
Thank you. Our next question is coming from the line of Steven Ramsey with Thompson Research Group. Please proceed with your questions.
Good morning, maybe just to start with we're hearing more feedback.
Generally dealers not replenishing inventory in various products can you talk about how you think about replenishment given the unfinished homes dynamic along with declining starts and how that plays out through the rest of the year.
Sure.
The good news for US is that the primary product that we're selling into new residential courses wallboard in wallboard turns at 12% to 13 times. So for us it's almost a adjust in time activity.
And in the industry is still pretty tight, particularly.
East of the Mississippi.
Is it still pretty tight so in that respect, we're still buying and turning our wallboard very quickly.
Our steel products of course, as we're seeing this slight decline and we've been unwinding that since really the tail end of last calendar year as the supply chain and steel had stretched quite a bit and now is as much better we're still unwinding steal a bit, but we've been bringing that inventory down and we're being relatively cautious.
I think in our purchases of stocks deal.
So we're well aware of the likelihood of that slow pace of.
Continuing.
A reduction in our selling prices, but also reduction in our acquisition cost and so we're being careful not to load up on inventory and of course. The end market volume is is declining somewhat although sequentially as Scott pointed out its flat sequentially.
Okay very helpful and then thinking about the higher free cash flow conversion this year maybe.
This topic is related to my first question, but can you talk through the drivers of the higher free cash flow conversion clearly Q1 was better year over year, but how do you think about this playing out over the next few quarters.
I think there you're exactly right. It's very related last year was a <unk>.
Big year of cash consumption as we were getting ahead of pricing increases we were building inventory to make sure we have supply for our customers. There was general disruption in the markets and we carried more on our balance sheet because of that inflation was also a factor is some of that relatively unwind. We ultimately will have higher cash flows.
And this year than what we had last year.
As we talked about already in the first quarter better than last year and that was even with as we've talked about over the course of last year higher incentive compensation that was accrued for that ultimately was paid out in the first quarter.
That was a draw on cash and so with that behind US ultimately, we should be very strong from a cash flow standpoint.
Helpful. Thank you.
Thank you. Our next question is come from the line of Trey Grooms with Stephens. Please proceed with your questions.
Good morning, and thanks for taking my question. This is actually known brick house go on for Trey.
Hi, Noah good morning.
So my first one.
Just wanted to get a little bit of clarification, because it looks like in the slide you're calling out.
Flattening in wallboard prices for next quarter.
I think you said you saw prices move a little bit higher in August and the manufacturer price increase is gaining traction. So maybe if you could just clarify.
There for next quarter.
Yes.
Slide says.
That it is going to go up a little bit more we expect to have a continuation we are seeing wallboard pricing now move higher sequentially.
Through this quarter.
Then again like we said we expect it to flatten.
As we go through the balance of the year some of that dynamic was speaking to what we ultimately see from the market.
Our case to your point, which we appreciate you staying staying close to US we do have that lag effect that will drive a little bit of benefit into Q2 and then.
Generally given the fact that we're starting to see some <unk>.
Demand softening a little bit on the single family market, we see the pace of the increases with the market has been seeing over the course of the last year, some starting to sequentially flatten.
Got it that makes perfect sense and then following up on that.
Does that outlook contemplate any positive mix shift from.
Do you see commercial growth outpace residential.
Not in the near term I mean residential is still going to is still very strong as I pointed out that backlog is.
I mean, some people estimate that backlog of 400000 single family houses.
That's four or five months of completions at todays rate with net with no new starts coming into the pipeline behind it which is not not obviously going to be the case so in.
In the near term, we still anticipate very strong residential volumes in multifamily is very strong as Scott pointed out in his commentary 30% growth.
In wallboard and in multifamily so.
I think in the near term, we will still see the mixed stay right about where it is.
Alright, perfect. Thanks for taking my questions and I'll leave it there. Thanks.
Thanks Noah.
Thank you. Our next question is coming from the line of Mike Dahl with RBC capital markets. Please proceed with your questions.
Hi, This is actually Chris calling in for Mike. Thanks for taking my questions.
So I want to touch on capital allocation I was hoping you guys could.
Can you talk through your willingness to re lever in the current environment to capitalize on any potential M&A opportunities out there and also maybe take the time to talk through kind of what the pipeline looks like today, and where private multiples private deal multiples are trending currently.
Absolutely we've been very clear I think in the past of our target is sort of somewhere in the two 5% to three kind of range.
We have indicated willingness for particularly strategic opportunities that we'd be willing to go higher than that.
In an interim period, if we believe the combined cash flows of the entities would bring that back down quickly.
But generally the pipeline is very active it's very full.
We clearly from a standpoint of evaluation as you think about <unk>.
Earnings of these companies relative to valuations in the marketplace valuation discussion, we're having to be a little bit more creative as we think through some of those types of things, but the pipeline is full and active so we would fully expect to from a capital allocation standpoint, as we said in some of the prepared remarks strategically our prime.
Consideration is towards continuing to be a consolidator in the space and we will be doing some other allocation to organic activities organic growth. The capex, we talked about roughly $40 million range. This year.
Pretty good number going forward as well and then we're doing our share repurchase activity to take advantage of some of the opportunistic valuation that we see in our own.
Share price.
Got it thanks for that and then just for my follow up in the past you guys disclosed what the exit rate was on wallboard price.
Maybe if you could do that for this quarter relative to the 438, you guys saw pretty average.
I think we talked about July exiting at about the quarterly average and we talked about August trending up a little bit don't want to share that number specifically at this point, but it was trending up a little bit.
Understood appreciate the color.
Thank you our last question comes from the line of Matthew Bouley with Barclays. Please proceed with your questions.
Okay.
Hi, Elizabeth Lane on for Matt and Thank you for taking the question.
I was wondering just kind of jumping back.
The flattening.
You mentioned the sequential unsafe.
Could you give us an idea of the capacity constraints that you're seeing.
I expect that will go throughout the year.
Do you have a view on how.
When and how that might fall to bottom line.
I think.
We kind of put in our comments that we're not.
Clear on exactly what the degree residential single family slowdown will be yet I think in this next quarter, we will get two or three more reads on that.
We still see a very large backlog and like I mentioned the under construction units is at a peak from the great recession. So we're talking a peak in the last 12 years, it's going to take.
A while for that to unwind.
As it unwind the degree of this interest rate cycle. The degree of single family slowdown and we'll have to see if it's if it.
Ends up being a deeper trough than we would anticipate right now and what that might do for capacity availability, but right now the capacity is tight the east coast is exceptionally tight.
I don't see that changing.
Certainly through the balance of the calendar year and well into 2023, I don't I don't see that changing and then the degree of the commercial recovery that we might see also as we mentioned this is the first quarter year over year, we're seeing commercial volume growth.
While commercial is not anywhere near the same size from a consumption perspective. It is improving so that also may likely fill that gap.
Okay. Thank you.
And kind of switching to gross margins here.
Could you talk about maybe a little bit of gross margin cadence throughout the year.
It's about a 30 K C.
Reasonable expectation medium term.
We inform that youre thinking about.
What would have to happen for us to see that.
Sure.
We don't expect to go significantly lower in fact, we indicated.
Our history from a gross margin standpoint.
<unk> operates within a pretty narrow band, we really run the business from the standpoint of balancing gross margin against operating expenses two to focus on EBITDA level of profitability.
<unk> is the operating costs the mix of business between residential and commercial et cetera, but on balance as we look across the mix of products that level that we're operating at today, you may see a little bit of variation quarter to quarter, but it is a pretty good indication of the.
The level of gross margins that are consistent.
Consistent reflection of our business.
Thank you.
Thank you we have reached the end of our question and answer session. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.