Q3 2025 GMS Inc Earnings Call
Greetings and welcome to the GMS Incorporated Third Quarter 2025 Earnings Conference Call. At this time, all participants aren't a listen-only mode. The question and answer session will follow the formal presentation.
If anyone wants to require Alberta assistance, 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 by the president of Investor Relations. Thank you, you may begin.
Carey Phelps: Thanks, Sarah. Good morning. Thank you for joining us for the GMS Earnings Conference call for the third quarter of fiscal 2025.
Carey Phelps: I'm joined today by John Turner, President and Chief Executive Officer, and Scott Deakin, Senior Vice President and Chief Financial Officer.
Carey Phelps: In addition to the press release we issued this morning, you can find a set of PowerPoint slides to accompany this call in the Investors section of our website at www.gms.com
Carey Phelps: Now looking at 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 Security's Litigation Reform Act of 1995.
Carey Phelps: Ford-looking statements address matters that are subject to risk and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today.
Carey Phelps: As a reminder, Ford Looking Statements represent management's current estimates and expectations. The company assumes no obligation to update any Ford Looking Statements in the future.
Carey Phelps: 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 factor section of the company's 10K and other periodic reports.
Carey Phelps: Today's presentation also includes a discussion of certain non-GAAP measures . The definitions and reconciliation of these non-GAAP measures are provided in the press release and presentation slides.
Carey Phelps: Please note that references on this call to the third quarter of fiscal 2025 relate to the quarter-ended January 31, 2025.
Speaker Change: Once we begin the question and answer session of the call, we kindly request that you limit yourself to one question and one follow-up in the interest of time.
Thank you, Carey.
Good morning and thanks for all for joining us.
Speaker Change: I'd like to begin with review of our third quarter performance, which overall came in below our expectations as we continue to face the challenging macro environment.
Speaker Change: I will then turn my call over to Scott for a closer look at the financial results before concluding with an overview of our outlook.
Speaker Change: As highlighted in our press release this morning, results for our fiscal third quarter reflect the impact of demand conditions that deteriorated meaningfully, starting in December , continuing through the end of the quarter, and through today.
Speaker Change: This ultimately led to reduced sales volumes and gross margin for the quarter versus prior year.
Speaker Change: Uncertainty, general affordability and tight lending conditions combined with an estimated $20 million negative impact from revenue impact, from weather, resulting also from holiday timing, all contributed to project delays and slower activity in each of our end markets.
Speaker Change: which was roughly flat compared to the same period a year ago, including the benefits of recent acquisitions.
Speaker Change: Organic sales declined 6.7% for the quarter. Gross margin of 31.2% for the quarter was slightly down from the 31.4% we reported in our fiscal second quarter.
Speaker Change: Given vendor incentive headwinds and transactional price cost pressure, and was down from 33% a year ago.
Speaker Change: Despite the challenging demand backdrop, outside of steel, pricing generally remained resilient during the quarter, as prices and ceilings continued their notable pace of consistent
Speaker Change: Favorable pricing for insulation and lumber helps offset decreases in other products within our complimentary products category.
Speaker Change: We also recorded price increases on a light for light product basis in wallboard.
Speaker Change: While there have been additional recent manufacturer price increase announcements, given the recent pullback in demand, it is possible that the implementation of these pricing actions may get delayed beyond the typical three to six month absorption cycle.
but it is too soon to speculate.
Speaker Change: Regardless, there are no signs at this point that prices will move backward [inaudible]
Looking at End Market Demand Dynamics, first with commercial
Speaker Change: It's notable that the Architectural Billings Index has been below 15, indicating a month-to-month sequential decline 17 out of the last 18 months.
Speaker Change: As such, our US commercial revenues were down 7.8% organically as compared to last year.
Speaker Change: with activity levels that are expected to remain constrained until lending costs and standards loosened, and greater confidence returns to the economy.
Speaker Change: The Office category in particular, which was our largest commercial vertical prior to COVID, continues to suffer.
Speaker Change: But we believe it also represents a large potential opportunity in the future.
given the shifting viewpoint surrounding in office work.
Speaker Change: To share some perspective, at the end of calendar 2019, there was approximately 160 million square feet of office space under construction.
That compares to only around 40 million square feet today.
Speaker Change: As the return to office movement continues to evolve, we will be ready to take advantage of any improvement in the space for both new and repairing remodel, should have materialized.
Speaker Change: In the meantime, with runways still ahead, well-funded mega projects and those that are not otherwise dependent upon private financing, such as those in public education, health care and infrastructure, continue to dominate the commercial landscape.
Speaker Change: Data Centers, especially, are expected to continue to grow, with one analyst recently estimating a current backlog of seven years of construction at the 2024 Build Rates.
Speaker Change: Separately, one of the leading investment banking and consulting firms for the construction industry projects that data center construction will grow more than 10% through 2026.
Speaker Change: Data centers are attracted business for us as they require both our higher end, more energy efficient core products as well as complimentary products.
Turning to Residential Activity
Speaker Change: Although December housing starts rebounded nicely from November , driven by a 61% month-over-month increase in multi-family, January starts for verse-course, as
Speaker Change: This said, given record high absorption levels for multi-family during the calendar fourth quarter and the continuing need for affordable housing across North America, we are hopeful that we are nearing the bottom of the cycle for this end market.
Speaker Change: Yourbe your comparisons will still be challenged, likely until at least late in the calendar year. But we are optimistic that we will start to see sequential unit growth closer to the end of calendar 2025 or early 2026.
Speaker Change: For Single Family, despite the considerable well-documented need for housing in both the US and Canada, demand in this end market continues to be negatively impacted by affordability challenges driven in large part by high mortgage rates.
Speaker Change: But also currently hampered by widespread economic uncertainty, heightened by questions around the pace of inflation, and the scale scope and impacts of potential tariffs and other
Speaker Change: The latest builder sentiment numbers, which had been gaining steadily since August on the hope of lower mortgage rates and potential pro-development policies, took a negative turn in its most recent survey, with sales expectations from builders for the next six months declining to their lowest levels since 2023.
Speaker Change: As a result, while we continue to believe that the solid underlying demand fundamentals of the housing market will support longer-term growth, we expect that single-family housing starts will remain muted for at least this calendar year.
with a similar underbuilt and pin-up demand situation.
Speaker Change: Interstrate cuts and other pro-development policies are serving as an economic catalyst in Canada as residential building permit activity ended calendar 2024 on a high note with the total value of permits reaching their highest level since 2017.
In December , building permits there surged 11% sequentially [inaudible]
Speaker Change: Directly, we continue to expect the US to eventually follow suit, particularly if we see similar expansionary efforts to improve affordability and EU development burdens for builders.
Speaker Change: As our team works diligently through this economic backdrop, we remain confident that we have the right strategy in place, which is highlighted on slide four.
Speaker Change: Through our execution of our four strategic pillars to expand sharing our core products, grow our complimentary products category, expand our platform and drive improved productivity and profitability, we see additional long-term growth opportunities for the company and value creation opportunities for our stakeholders.
Speaker Change: Given that we expect the current macro-conditions to continue through the bulk of calendar 2025, we are taking actions to further align and rationalize our operations with the market realities of today.
Speaker Change: As such, leveraging our previous investments in technology and efficiency optimization, we are implementing an additional estimated $20 million in annualized cost reductions.
Speaker Change: which would bring our total annualized run rate of cost reductions to $50 million since the start of our fiscal year.
Speaker Change: Amidst the down cycle in our markets, a bright spot is our ability to continue generating significant cash.
Speaker Change: This, along with our Solid Balance Sheet, provides the foundation to enable the continued execution of our strategic pillars to pursue long-term growth opportunities, while utilizing a balanced approach to capital allocation, ultimately delivering value for shareholders.
Speaker Change: Before turning the call over to Scott, I would like to take a moment to thank the entire GMS team for their continued commitment to providing the highest levels of service to our customers.
even during these difficult market conditions.
Speaker Change: I'd also like to thank our customers and our suppliers who are also feeling the impacts of softening business conditions.
Speaker Change: All-in, we believe that we are well positioned to pivot up or down as demand levels continue to change.
Speaker Change: We believe this flexibility will enable us to capitalize on our opportunities as demand returns. With that, I'll now ask Scott to take you through the detailed results of our quarter.
Scott: Thank you, JT. Good morning, everyone. Starting with slide five, net sales for the quarter were nearly flat compared to a year ago at $1.3 billion.
Scott: While the third quarter is seasonally our softest, as J.T. discussed, activity levels in each of our end markets deteriorated during the last half of the quarter.
Scott: Even more than we had anticipated, as the midweek holidays resulted in almost complete shutdowns with many project sites for the entire two week period.
Scott: Other than for ceilings, which benefited from project mix and the CAMCO acquisition, volumes declined across our other major product categories during the quarter.
Scott: Organically, sales for the company declined 6.7% as compared with the third quarter of fiscal 2024.
Scott: Given continuing market declines and broad economic uncertainty, as JT mentioned, we are implementing another $20 million in annualized cost reductions, including further steps to reduce back of house overhead expenses, and we are consolidating several yard locations.
Scott: We expect to realize the mutual run rate of these savings in our first quarter of fiscal 2026.
Scott: In addition to these cause-production efforts, we are also continuing our subsidiary consolidation program, which we expect will drive additional efficiencies over time.
Scott: Region by Region, we are consolidating many of our U.S. subsidiaries, streamlining our processes and removing organizational complexity to better leverage scale, service or customers, and reduce costs.
Scott: While these consolidation activities are ongoing, the early results are very encouraging.
Scott: We're complete. We are seeing the benefits of data standardization, better inventory management and enhanced pricing and purchasing practices, enabling us to successfully reduce overhead and improve productivity metrics.
Scott: With that, I'll move on to the rest of our third quarter, noting first that we did have the same number of calendar days, selling days year over year.
First looking at our end markets.
Scott: In the U.S., using our organic wallboard results as a proxy. [inaudible]
Scott: Multi-family revenues were down 27% as compared with a year ago, while single-family revenues were up 1.9%, resulting in a total US residential sales dollar decline of 6.4%.
Scott: US Commercial Sales Dollars also fell by 7.8% as compared with a year ago.
Scott: anecdotally, conditions in Canada are more positive, indicative of pro-development policies in that country.
Scott: As an example, after six rate cuts by the Bank of Canada, amounting to a reduction of about 2.25% in total, housing sales data in Ottawa indicate reductions in market inventory, and in Ontario and British Columbia, we've seen a surge in residential construction permits.
Scott: While there is risk that tariff negotiations could hamper these efforts, we are encouraged by these pro-development policies.
Now on a product line basis.
Scott: Wallboard sales dollars of $501.7 million were down 3.6% as compared with the same period last year. Comprised of a 4.9% decline in volume, partially offset by 1.3% increase in price and mix.
Scott: Organically, third quarter wallboard sales were down 7.4%, with an 8.8% decline in volume, partially offset by 1.4% increase in price and mix.
Scott: Multi-family wallboard volumes led the organic decline with volumes down 31.4%
Scott: Commercial law board volumes were down 9.4% and single family law board volumes were down 3.7%.
Scott: The average realized World Board price for the quarter was $479 per thousand square feet, which was up 1.3% as compared to the prior year period.
Scott: Although end-market mix drove the net of price and mix down just slightly from the end of our physical second quarter, on a like-for-like basis, prices were up marginally on a sequential basis.
Scott: Given escalating costs to manufacture wallboard and relatively solid industry capacity utilization, even under softer market conditions, all of our major wallboard manufacturing suppliers have announced price increases.
Scott: However, as JT mentioned, given the soft demand conditions and uncertainty in the macro environment, it is too soon to know how successful the adoption of these increases will be in the near term.
Scott: For now, given the economic backdrop, along with the normal timing of three to six months for price increases to reach our customers, we are assuming only a very slight sequential improvement in a like-for-like law board product pricing for our fiscal quarter.
For ceilings, including acquisitions, sales were up 16...
Scott: 6.7% decrease in volume given the restrained commercial activity, but price and mix increased 11.1% driven by an out performance of higher cost or contextual specialties products.
Scott: The stronger results in our ceilings product category continue to be driven by commercial projects such as those for data centers, health care and education, which are not as reliant upon private financing.
Scott: I'll also note that on top of the normal pricing action that we would expect for ceilings, due to the steel content within suspension grid and other ceilings materials, the largest manufacturer in the space has announced product specific price increases for their metal products as well.
Scott: Steal framing sales were down 11.6% for the quarter, a year-over-year price deflation drove a 6% decline in price and mix, as volumes also declined 5.6%.
Scott: Organic lease, the old framing sales were down, 17.9% with a 15.1% decline in volume, and a decline in price and mix of 2.8%.
Scott: While steel pricing was down 2.3% sequentially, tariffs and the resultant inventory management practices are widely expected to drive future steel price increases.
Scott: However, because this is impossible to know the timing and extent of these increases over the supply chain impact, we are assuming roughly flat sequential improvement off of the quarter-ending price for steel framing.
Scott: Volumes are expected to increase sequentially, consistent with normal seasonality as we move off of declines in late December and January .
Scott: Complimentary product sales of $398.6 million for the quarter grew 5.3% year-over-year as we continue to invest in this margin of creative category, representing its 19th consecutive quarter of growth.
Scott: Sales decreased 4.3% on an organic basis due primarily to the soft commercial and multi-family conditions, partially offset by some improvement in pricing.
Our team remains focused on driving road and complimentary products.
particularly for tools and fasteners, Ethan Stucco in insulation.
Scott: These subcategories benefited from our recent acquisitions and collectively grew faster than the overall category at 8.6% for the quarter.
Scott: Now, Turn to Slide 6, which focuses on this quarter's profitability.
Scott: Gross Margin was 31.2% down a hundred and eighty basis points as compared to 33% a year ago.
Scott: Gross margins contracted across all major product lines as compared with the prior year period, driven mostly by weak demand and continued year-over-year price and cost pressure, predominantly in wallboard.
Scott: Relative to our previously provided expectations, however, the cold drivers of our margin were largely aligned with relatively stable price and cost dynamics yielding consistent transaction level margins.
Scott: However, we did receive less vendor incentive income during the quarter than expected due to weaker volumes and wallboard and steel towards the end of the calendar year.
Scott: Additionally, inventory adjustments and the negative impact of a relative shift in sales mix with softer sales of complimentary products than forecasted.
Scott: Further contributed to the overall margin compression as compared to our prior expectations.
Scott: Selling General and Administrative Expenses were $310.8 million for the quarter, up from $295.7 million.
Scott: of the $15.1 million Euro Rear Increase, approximately $24 million related to recent acquisitions.
$4 million related to higher than usual insurance claim development.
Scott: and $1.2 million related to an increase in severance costs, primarily associated with the previously disclosed cost-containment actions.
Scott: Organically, despite the headwind of unfavorable weather and holiday timing related inefficiencies, we fully offset these increases in other inflationary pressures with lower overall operating costs.
Scott: Reflective of the realized savings from the previously disclosed cost reduction actions and reduced activity given the changes in demand.
Scott: SGNA expenses a percentage of net sales increased 120 basis points to 24.7% for the quarter, compared to 23.5% for the prior year quarter.
Scott: In what is typically our seasonally slowest quarter, R results for Q3 were further impacted by several unusual items.
Scott: including greater than normal operational disruptions from winter weather and midweek holidays, along with higher than usual insurance claims development, which together contributed 70 basis points of leverage.
Scott: General Operating Cost Inflation, principally from higher rent expense, also contributed 70 basis points of
Scott: One-time cost, primarily severance related to the restructuring efforts, negatively impacted the STNA leverage by 20 basis points.
Scott: And finally, net product price deflation with steel declines more than offsetting wallboard improvements was also unfavorable to 2SGNA leverage by 10 basis points.
Scott: Adjusted SGNA expenses a percentage of net sales of 23.9% increased 100 basis points from 22.9%.
. . . . .
Scott: During the quarter, given the softness stemming from high interest rates and other economic factors impacting the markets our aims business serves, we recognize a $42.5 million non-cash goodwill impairment charge.
Scott: We recorded a gap net loss of $21.4 million, compared to that income of $51.9 million in the prior year period.
Scott: A higher effect of tax rate also contributed to the decline in net income, given the non-deductibility of the good will charge.
Scott: We still expect our normalized cash tax rate, excluding the impact of acquisition accounting and certain other deferred tax amounts, to be in the 26.5 to 27% range for full year physical 2025.
Scott: Adjusted EBITDA of $93 million decreased 27.3% year-over-year and adjusted EBITDA margin declined from 10.2% to 7.4% this quarter.
Now, continuing to the balance sheet on slide seven.
Scott: On January 31st, we had cash on hand of $59 million in $469.7 million of available liquidity under our revolving credit facilities.
Scott: Following the acquisition of Camp Goh, Yvonne, and R.S. Eliot, coupled with share of purchase activity in an increase in capitalized equipment leases.
Scott: Along with lower year-over-year adjusted EBITDA, our net debt leverage was 2.4 times at the end of the quarter, up from 1.5 times a year ago.
Scott: Cash, provided by operating activities for the quarter, was $94.1 million, compared to $104.3 million in the prior year quarter.
Scott: We also generated a significant level of free cash flow of $83.1 million, which was 89% of our adjusted EBITDA for the quarter, the highest third quarter level of performance we've ever had for this metric since the start of COVID.
Scott: This compared to $94.1 million, which was just over 70% of adjusted EBITDA in the prior year quarter.
Scott: For the full year fiscal 2025, we now expect free cash flow to total approximately 60 to 65% of adjusted EBITDA.
Scott: We also, on a non-operating basis, generated an additional $12.5 million in cash flow from the sale of the installed insulation business.
Scott: We currently expect the capital expenditures will be approximately $45 to $50 million for full year fiscal 2025.
Scott: During our fiscal third quarter we were purchased 445,000 shares of stock for $39.3 million at an average price of $88.31 per share.
Scott: In January 31st, there was 218.4 million dollars of share of purchase authorization remaining.
Scott: Looking forward, we expect to maintain our balanced approach to capital allocation, as we intend to continue to invest in the business, pay down debt and opportunistically leverage favorable market conditions to repurchase shares, while ensuring our continued ability to complete strategic emanate transactions to help drive long-term growth in the business.
Scott: With that, I'll turn the call back over to J.T. who will start on slide 8.
Thank you Scott.
Scott: Given today's rapidly evolving macro backdrop, featuring an abundance of uncertainties.
Scott: It has been and will continue to be particularly difficult forecast in the near term, but I will share with you our expectations based on what we are currently hearing from our team, our suppliers, our customers and other industry sources.
Scott: With no apparent near-term catalyst to reverse course, the challenging demand backdrop we experienced during the last half of our fiscal third quarter is expected to continue through the end of our fiscal year in April , and most likely beyond.
Scott: As such, here's what we are currently expecting for our physical fourth quarter results, which will have one left-selling day as compared with the prior year period.
Scott: All volume and price mix projections I will provide are on a per day basis.
Scott: Starting with organic world war growth, using our US business as a proxy, where we experience a strong prior year comparison across all end markets, and with weather disruptions and soft activity levels that continue through February .
Scott: We expect our fourth quarter single family volumes to be down high single digits versus the prior year period.
Scott: Multi-family wallboard volumes are expected to be down about 35% as compared to the all-time high level of multi-family volumes we experienced during the fourth quarter of fiscal 2024.
Scott: Commercial well-bored biomes are expected to be down around 20 percent. Again, as we anniversary, our strongest commercial quarter since before COVID
Scott: As a result, including Canada, total organic wallboard volumes are expected to be down mid-teens and total wallboard volumes including acquisitions are expected to be down low-teens for the quarter.
Scott: Because of implementation timing and because demand levels have significantly deteriorated since our manufacturing partners issued their most recent price increase announcements, we are not at this time assuming any meaningful price lift in our fiscal fourth quarter.
Scott: However, given the structural changes we've seen in the wallboard space as a result of rising input costs and relatively high capacity utilization, we are expecting continued resilience and wallboard pricing on a like for like product basis.
Scott: In total, we expect Wallboard price and mix to be flat to up slightly from the fourth quarter of a year ago with positive pricing offsetting what we expect will be unfavorable mix.
Scott: In ceilings, with the anniversary of our CAMCO acquisition on March 1st, we expect 4-4 volumes per day to be roughly flat year-over-year with a slight low single-digit increase in price and mix.
Scott: For steel framing, soft conditions in commercial and multi-family activity are expected to hold back demand. As a result, volumes for our fiscal port quarter are expected to be down low double digits.
Scott: and while Rolls-Steel pricing is already up significantly this calendar year as a result of trade policy changes.
Scott: The true impact for framing steel in our markets remains to be seen.
Scott: Therefore, for now, we have assumed stable sequential prices and expect for a quarter-price in-mix for still framing to be down low-double digits as compared to the same period a year ago.
Scott: Finally, net sales for our complimentary products are expected to be roughly flat with the fourth quarter of fiscal 2024, with acquisition gains offsetting declines in organic volume.
Scott: All-in and a show on slide nine, we expect our fiscal fourth quarter net sales to be down high single digits as compared with a year ago, with organic sales down low double digits.
Scott: While we continue to work to improve growth margin, transactional price cost pressures remain, and demand headwinds will continue to put vendor incentives at risk in the near term.
Scott: Therefore, we expect Rose Margin for our fiscal fourth quarter to be similar to what we reported for our fiscal third quarter, had around 31.2%
Scott: Finally, adjusted EBITDA for the quarter, the expected being the range of $100 to $110 million with EBITDA margin that should improve sequentially to around 8%.
Scott: These expectations for our fourth quarter are not indicative of what we believe the company's capabilities are in a normalized environment.
Scott: We remain optimistic about future growth as we work through the current uncertainty that we are seeing at this point in the cycle.
Scott: Start's activity across all of our end markets suggests that, given typical lag times for our products to deliver, absent broader impacts that might come from recent policy implementations, we should be nearing the bottom of the cycle, positioning us well for the end of calendar 2025 and moving into calendar 2026.
Scott: In the meantime, we are taking actions to address the headwinds in front of us, and we are making significant strides toward becoming a wiener organization.
Scott: Through our subsidiary consolidation efforts, investments in technology, deployment of best practices and cost reduction efforts, we are enhancing the overall efficiency of our operations.
Scott: Additionally, we are generating significant levels of cash flow, allowing us to maintain a solid balance sheet.
Scott: We expect our business to be well positioned when the demand environment improves.
Scott: I would like to thank our dedicated team once again as we navigate these challenging times.
Scott: With that, I will ask the operator, please open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue.
Speaker Change: for participants using speaker equipment and maybe 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 pull for your questions
Speaker Change: Our first questions come from the line of David Matthew with Beard, please proceed with your questions.
David Manthe: Thank you, good morning. As it relates to steel, last quarter, I think you said you were saying month-to-month improvement and then Marine Aware and Clark-Petrick announced...
10% April price increases
Assuming that tariffs would augment those higher prices even further.
David Manthe: I'm just trying to challenge you on the flat expectation for steel going forward. Shouldn't the weakness that you experienced recently be resolved in the next. Just, um...
David Manthe: A few months or a quarter as we go forward, what are your thoughts on that?
Speaker Change: Hi, Dave. Good morning. I think you're right. We're already into the first week of the second month of the quarter. So I don't think we're going to experience a lot of inflation in March and April . [inaudible]
Speaker Change: I certainly think that if the tariffs are in place and what we're seeing from lead times...
Speaker Change: Robesfield, Lee Timeser Out to 13 weeks, I think recently, I think we will see inflation, but it's probably going to be post this quarter. There could be a little bit in April , but I don't think it'll be all that meaningful. As you know, we have a pretty good book of business already, you know, pre-sold.
Speaker Change: in the commercial space with a lot of protection. And I also think that people like Clark and Marina, where, et cetera, had plenty of inventory on the ground in this environment, where you're seeing, you know, demand down 20%. So I think that it will come through the supply chain. It's probably just not the next six weeks.
Okay, thanks for that.
Speaker Change: Second, as it relates to the April quarter outlook, I think you did a pretty good job about outlining what you're thinking there, but in broad strokes.
Speaker Change: Are you essentially thinking that we're just going to straight line third quarter for the most part and the trend you're seeing in February into the April ?
Speaker Change: Quarter, and I think Scott said that the next 20 million run rate of cost reductions hits fully in the first quarter of fiscal 26. I wanted to make sure I'm on that fact as well.
Speaker Change: Yeah, we can confirm the second point. What I would tell you is that we believe that on a year over your basis, we're kind of entering into what should be the bottom of this quarter and probably into fiscal.
Speaker Change: Q1, based upon all the starts information we've seen, the calendar Q4 commercial and multi-family starts were pretty bad.
Speaker Change: and we're not seeing the offset we'd all hope for, you know, middle of last year, the offset and single family just isn't materializing and, you know, we could get surprised with a really strong spring selling season, although I don't think early indications are that that's materializing.
Speaker Change: and so I do think this quarter we're in, well quarter we just finished really deteriorated pretty significantly late December through January , February moves sequentially as we would expect but no big recovery at all and now we're moving you know this month first few days
Speaker Change: Pretty weak but sequentially as you would expect so I think we're pretty much last quarter and we just reported quarter that we're in probably our fiscal first quarter the bottom and then we're going to start to see improvement on a year of your basis from there not growth on a year of your basis but improvement.
Speaker Change: Until we get to the end of this calendar year, you know, 25 and 26, you know, late 25, 26 is shaping up pretty good as all this demand just keeps getting pushed out. But at the moment, this is probably the bottom of this cycle, next couple of quarters.
Speaker Change: And I'm a $20 million, yes, we'll get the full run rate of that in the first quarter with maybe a third of it in this fourth quarter, but definitely in the implementation phases of that Solsea, the full maturation of that in the first quarter.
All right, appreciate it guys. Thank you
Thank you.
Speaker Change: Thank you. Our next questions come from the line of Keith Hughes with truest securities. Please proceed with your questions.
Keith Hughes: Thank you. You notably moved your expectations down in commercial. I know that's for the fourth quarter of guy but it seems like it's going to continue for the rest of the year.
Keith Hughes: Down, I was 20% versus something with single digits last time. What specific sectors do you see deteriorating from your last view? It's a pretty substantial reduction?
Keith Hughes: You know, I think it's a combination of the fact that we're rolling over all-time record wallboard shipments in the commercial space since COVID.
Keith Hughes: And by the way, we still never got back to volumes. I'm talking about volumes now. We still never got back to co pre-COVID volumes. So this peak is lower than the previous peak. Retail is absolutely dead. Private financing project, dead, office is dead.
Keith Hughes: And the high rise, there's a combination of multi-family in our commercial as well that's the high rise mixed-use stuff Now the high rise mixed-use stuff is really soft.
Keith Hughes: So those are really the areas that are dragging us down right now. You know, health care is flat, public education is, you know, okay, data centers are great.
You know, still.
Keith Hughes: So, it's really a combination of the deterioration some of those earlier, those other projects I talked about and the fact that we're rolling over, you know, the all-time strength in the fourth quarter of last year.
Keith Hughes: So I guess you're 30 on an annualized basis, the 30 million is fully in that probably kicked in. I don't know July , I guess maybe it was August
Keith Hughes: Probably, so this quarter, as you can see this quarter, our organic costs were actually overall lower than previous year.
So...
Keith Hughes: It's fully in in this quarter, that 30 million annualized run rate, and that started in that July , August time frame, August putt saying, so you can expect that to continue until we anniversary that.
Keith Hughes: and then the 20 million kicks in on top of that really at the end of this quarter. A little bit this quarter with full maturity of it into the first.
Speaker Change: First, I mean, is that, I mean, we look in 12 to 15 million a quarter. I know it probably moves around. It's not a good average.
Across the entire 50.
Speaker Change: Yes, that's from all right. No, it's not lumpy. I mean, or super lumpy is kind of what I'm getting to.
Speaker Change: No, it should be pretty well. I mean, it should tie to our standard seasonality, but it should be, it should be like you're talking about 12 to 15 every quarter. Okay, thank you.
Thank you.
Speaker Change: Thank you. Our next questions come from the line of Brian Biros with Thompson Research Group. Please proceed with your questions
Today, good morning. Thank you for taking my questions.
Speaker Change: on feeling pricing seems to be a standout product of the quarter, price mix, super strong there. I think you've talked in the prepared remarks about the mix aspect. Can you expand on that dynamic a little bit, if that was maybe timing of a large project and more of a one-time aspect?
Speaker Change: or maybe there's something more systemic across the entire market that's in a mixed shift.
Speaker Change: I mean, we've been focused on architectural specialties for three or four years now. We've talked about it multiple times and our sales teams continue to become more successful in closing that work.
Speaker Change: So, I think that you'll continue to see that trend. This last quarter is particularly strongly, we're a couple of large projects in the quarter, but I don't see any reason why that's both an industry trend and an internal trend.
Speaker Change: So as a total percent of mix going forward, if the projects that are creating the demand remain the same, which are things like these big airports, a lot of airport activity out there, you need to read about all the airport remodels, etc. A lot of those types of projects are ceilings related.
Speaker Change: And so, I think we're doing a great job as a team of closing those.
and being able to supply that architectural specialty. So,
Speaker Change: I don't think that trend is going to reverse, I think it's going to stay the same as we go forward because both the industry is moving more towards architectural specialties and we are following the industry and trying to actually be better and gain share in that area. Thank you.
Speaker Change: Turner said, and then on, I guess further on wallboard pricing, it seems like you only need a little bit of volume growth, maybe low single digits to see a better pricing backdrop.
Speaker Change: Pricing backdrop, or do you need kind of volume, low single digit growth across all three end markers at a consolidated level to really provide a solid backdrop for pricing?
Thank you.
Speaker Change: About the industry is, we don't participate to a significant extent in residential repair and remodel, but that is roughly 20% of the volume in the wallboard industry.
Speaker Change: as a new single family and multi-family continues to struggle on a year-over-year basis. That R&R, residential R&R business will improve, so from a total capacity utilization perspective, that's a bright spot for the manufacturers.
Speaker Change: My view is that it's more challenging obviously to take price in an environment where you're in a deteriorating, deteriorating volume situation.
Speaker Change: But we're in the middle of the gray area of that right now, as we speak, trying to go out and make that happen.
Speaker Change: How successful will be? I guess we really don't know because it's just the first week of March and it's really just happening now. So it's very difficult to give you an idea of that. But we did say I think fairly competently, we don't see wallboard pricing backsliding.
Speaker Change: and so we would love to see some growth in the industry. I think if you look at the Starts Forecasts,
Speaker Change: This year, next year, and the year after, those forecasts are very...
Bullish!
Speaker Change: So, we think that there is certainly over time an inflationary environment for wallboard.
Speaker Change: We'll just add that volume increases across any of the three end markets will be beneficial to price and the dynamics therein.
Speaker Change: We've talked about before that the leverage impact of single family is the biggest driver given the consumption of all board and single family versus the other end markets.
Speaker Change: Thank you. Our next questions come from the line of Trey Grooms with Stevens. Please proceed with your questions.
Hey, good morning. Thanks for taking my question.
Speaker Change: So, guide 4Q, calling for 8% EBITDA margin, sounds like, you know, price cost is going to continue to be a headwind.
Speaker Change: At what point do you expect, you know, to see maybe a bottoming out on the price cost
Speaker Change: And then, you know, is there opportunity at some point to kind of see some catch up there and what kind of distance that we need to see in order for that to you to be able to to do that?
Yeah, Trey, nice to talk to you this morning. I think.
Speaker Change: There's an important dynamic at the moment that Scott mentioned and that is that we are applying back-to-price.
Speaker Change: And this next quarter we're still expecting the clawback price in spite of the negative makes impact when it comes to wallboard.
what's
Holding it back is going to be our volume incentive.
Speaker Change: Income as it looks like this is going to be a very difficult quarter shaping up for a more difficult year and so that component is what's holding us back and letting us not improve the 31.2% sequentially gross margin.
That's cross wallboard and steel primarily, those two product categories
David Manthe: It's not really a price issue at the moment, as well steel has certainly been but we would expect as Dave mentioned earlier that post this quarter.
David Manthe: Nothing changing, we're going to see steel pricing, you know, inflate [inaudible]
and it could be fairly significantly, right? [inaudible]
David Manthe: We don't know yet. But that's really what's holding us back. Conditions that will change that is volume growth.
David Manthe: in the end markets. To the question that was just asked prior and Scott's answer at the end is really the most pertinent answer, which is a decent recovery in single family.
We'll really support Wallboard.
David Manthe: Steel needs multi-family and commercial construction, but what it really needs is it needs automotive and it needs some of those larger categories of consumption, structural steel, etc. And when you look at it, some of these commercial forecasts, Dodge.
David Manthe: Struck Connect, etc. If you believe they're 25, put in place, and you believe they're 26, put in place, I think at that point in time you're gonna see some pretty big structural steel demands.
David Manthe: and if we get rate reductions, short-term rate reductions, that's going to, that should help with the automotive component as well. Just feels like the whole economy is being pushed out from a demand perspective based on high rates a year or so.
David Manthe: Yeah, and now writes a lot of uncertainty every day, right? This is, you know,
David Manthe: I believe over the course of the next six months, we'll see where we're going to be from an uncertainty perspective. I think it'll be clear.
David Manthe: The fog will lift within six months, but it feels like this is our bottom into the next couple of quarters, what we just experienced, which...
David Manthe: Maybe there was more weather impact. I don't know. There was a lot of weather impact for sure, but it just doesn't feel like weather was more than 10 to 15% or 20% of what we've experienced. It just feels like those end markets are now deteriorating and getting into the bottom. [inaudible]
David Manthe: And I understand all the puts and takes around the volume discounts and so forth. But with my question about timing, and I didn't mean to...
David Manthe: You know, be redundant here, but my question is more around
David Manthe: Those things don't seem like they're changing anytime soon from a volume standpoint. Pricing is going to hold in.
David Manthe: But when we start to see a bottoming in the next couple of quarters from a demand standpoint, is that enough volume to shift that?
David Manthe: to where you can begin to benefit from those things, or at least them not be a headwind to you purely from a you know volume standpoint in the discounts you would receive they're combined with flat assume pricing. [inaudible]
David Manthe: Yeah, I mean, I think so. I think if you look, if, you know, again, barring anything that changes based on today's...
Speaker Change: You know, kind of strange policy situation that we're going through. If you look at what the builders are talking about for late in the year, I think everybody's talking about a late recovery.
Speaker Change: That will be enough to be pretty inflationary, I think, and that will be enough to help us get a price to push through the market.
Speaker Change: Okay, and then the long-term guide, clearly, you know, this isn't, as you mentioned, this normal time necessarily, but long-term guide has been for 10% EBITDA margin that was the
Speaker Change: What was stated, I believe, a few years ago as a long-term EBITDA margin guidance. Is that still the expectation here for the business is something in that double digit range? [inaudible]
Speaker Change: Yeah, I mean, I think we're going to hit nine somewhere around nine this year, even with this crappy forecast for this next quarter. We're still going to hit nine. So longer term, we're definitely north of ten, particularly coming out of this environment with the more lean nature of our business.
I would expect ten plus to be very reasonable.
Yup, and last one.
You know, [inaudible]
Speaker Change: If you put through, I mean, I know the holiday timing, whatever, wasn't really unknown.
Speaker Change: and then you had this weather in January , but if you can kind of cut through the weather, can you try to quantify maybe, you know,
Speaker Change: The underlying demand trend through January and then here, is it kind of fair to say that February has been trending?
Speaker Change: Similar to the kind of per day organic volume guide that you've given for.
Speaker Change: with the current quarter. Yeah, I mean, mid-bass sound, volume, etc.
Yeah, I mean, February's in the books.
Speaker Change: into the guide, right? So, yes, I mean, we're just not seeing good conditions in the market whatsoever.
and I think the surprise is the single family.
Speaker Change: Component, really. I think multi-families probably a little worse than we thought at the bottom. I think we got through the backlog a little earlier than we thought we did. We're still hearing in the market. Everything's being postponed, everything's being delayed, a lot of backlog that's not being built out.
Speaker Change: on the multi-family side, you know, and there's a lot of plans in place to start when interest rates adjust, so we're hearing that from all the developers, for sure, but the bigger surprise is just the pullback...
Speaker Change: in single family, which I think you can see that in the starts numbers through the fourth quarter. And now that's our expectation is, you know, we're going to be shipping those those fourth quarter numbers here this quarter.
Speaker Change: Yeah, I guess my question was that the mid-teens, the volume down mid-teens...
Speaker Change: in wallboards specifically. Does that assume a further deterioration from February , or is that kind of what we were seeing in the month of February ? Just trying to gauge your outlook for that if it's going to worser, is it kind of stabilizing at a bad level? [inaudible]
Speaker Change: It's kind of stabilizing where we are. I mean multi-families that's probably going to be a tiny bit worse.
Speaker Change: and then it was, but really January February , we're extrapolating that out and we've gone back and we've really correlated to starts rates across the entire business again and we feel like the January February run rate is probably what we're going to experience in the forecast.
Got it. Okay. Thanks for answering my questions for your questions.
Speaker Change: Thank you. Our next questions come from the line of Matthew Bouley with Parklays. Please proceed with your questions.
Anika Delakia: Good morning, this is Nika Dahlagia on format today. Thanks for taking my questions.
Thank you for your question.
Speaker Change: So first, I just wanted to go back to the cost, so looking at this incremental 20 million, are these more structural in nature, or do you think we could see them return as one volumes recover? And then should we think about the 50 million annualized as a run rate in the coming years?
Speaker Change: Yeah, I think he would consider a probably half of it structural and half of it would be volume related. We will certainly be...
Speaker Change: Very conservative and putting it back so it wouldn't be an immediate need but certainly we are adjusting for expected volumes and part of that are people that would be involved in servicing the delivery of those orders.
Speaker Change: and Trucks and things like that, so there's a component of it for sure that's volume related that we're forcing out and then a component that's structural.
Speaker Change: I'm going to give you half and half based upon the work we've done over the last six months.
For more information visit www.FEMA.gov
Speaker Change: That's helpful, thanks. And then second, I guess just looking at M&A into other product categories, you guys mentioned complimentary. Are there any specific verticals to call out and then what leverage would you be willing to get to?
Yeah.
In this environment...
Speaker Change: We've stated in the past that one and a half to two and a half times kind of leverage guide.
Speaker Change: I think that's probably still what we'll do so we don't have a ton of room at the moment at being at 2.4 all that being said if there was a good strategic opportunity and we always have those.
We would consider it.
Speaker Change: There's nothing imminent, and so what I'm hoping is, of course, and that's three to six months, what we see is exactly what I'm thinking we're going to see, which is a bottoming, allowing us to be more comfortable in the M&A environment.
Speaker Change: We talk a lot about East, Stucco, installation and tools and fasteners and that remains our main focus for M&A in the complimentary category.
Speaker Change: I would just add, in terms of a little piece of it,
Speaker Change: As we talked about, we are generating a lot of cash. We have been active on the share of purchase front. I think you will likely see us temper that a little bit in favor of more debt reduction in this environment. Just give them some of the uncertainty out there, but it won't be a significant shift, but that should help us.
Speaker Change: You know, free up some capital to continue on the acquisition path as well [inaudible]
Thank you. Good luck.
Thank you.
Speaker Change: Thank you. Our next questions come from the line of Mike Dahl with RBC Capital Markets. Please proceed with your questions.
Speaker Change: This is Chris Onfer Mike. Just going back to commercial and the outlook for next quarter, could you help?
Five more color around the new commercial versus R and R.
Speaker Change: Split within that down 20% sales guide for Wallboard, and then when you think about your backlogs today, does that suggest that these magnitudes of declines are going to persist for the foreseeable future?
Speaker Change: I mean, I can't give you exact numbers. We've talked about the trending over the course of the last, you know, a couple of years with the decline in office activity that new construction has been a much bigger component of our commercial business than it used to be.
Speaker Change: We used to be two-thirds remodel. I think we're estimating today where we're north.
Speaker Change: We're roughly 50-50 now new. I think it's even trending more new today because of the data center activity that's out there versus repair and remodel. We mentioned in our prepared remarks that the Office space could be something that unlocks.
Speaker Change: over the course of the future, not the next six months most likely but certainly with people returning to work we would expect to see returning to the office anyway we would expect to see remodel activity ticked back up and office was always the biggest component of remodel activity commercially
Speaker Change: So I know that's not giving you an exact number, but I would say we're probably moving more towards, you know, a 60-40 mix of commercial new versus remodel.
Speaker Change: And again, that's really part of the guide to today's truth. We see no improvement in office going forward and no real improvement in commercial R&R and really we're relying almost all on new near term, near term.
I don't know if I answered your question.
Speaker Change: I appreciate that. And then just on wallboard price costs and your comments around you know
Speaker Change: Pricing, taking a little bit longer to pass through versus the three to six month norm. When you think about price cost this year, is your expectation that you'll see kind of temporarily worsening price costs as you get through the year, just given the
Speaker Change: that dynamics around price and potential increases on the OEM side or your callbacks enough to kind of keep price costs more neutral.
Speaker Change: Yeah, we'll be able to keep it neutral. It's our view.
Okay.
Appreciate it, Collar.
Speaker Change: Thank you. Our final questions will come from the line of Kurt Yinger with DA Davidson. Please proceed with your questions.
Great. Thanks and good morning.
Speaker Change: We will be fully complete by the end of calendar 2025.
Um...
Speaker Change: and most of the operational improvements come from the ability to have our data consolidated, so it's really around purchasing. There's a chance around pricing to improve. Beyond, as we recover the end markets, that's the first most important thing. Beyond that, we will have better visibility into our complementary category in particular.
Speaker Change: and some of the pricing dynamics there and hopefully we can find ways to optimize and we've already seen some of that.
Speaker Change: But also we have the ability to leverage the divisional, inventory situation, account receivable situation, and we're seeing a lot of working capital benefits.
Speaker Change: which in some respects is why we think we can do 60-65% We're going to do it.
Speaker Change: free cash flow conversion from EBITDA. Originally I would tell you that was because a lot of good work is going on in this area now because the market is slowing and we are slowing.
Speaker Change: And we naturally do a lot of good cash generation as things slow down and we pull the balance sheet down. Some of it's more that than it is the good work going on in the consolidation. But also there's a cost-out component of it as well, just back a house efficiency.
Speaker Change: And just to add for clarity, the end of calendar 25 is really about the data standardization element.
Speaker Change: Progressive and Evolutionary from that Spain point and even the divisions who started down this path are still learning and advancing on that every day so there's there's more to come from that there's more to come.
Okay, thank you, appreciate color.
Speaker Change: Thank you. We have reached the end of our question and answer session. And with that, that does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Enjoy the rest of your day.