Q1 2020 Earnings Call
Good morning, and welcome to Gms first quarter 2020 earnings call.
At this time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host Leslie Kratcoski.
Vice President Investor Relations.
Thank you Mr. Carsky you may begin.
Thanks, Claudia and good morning, everyone and thanks for joining us this morning.
I'm joined today by John Turner, President and CEO , and Lindroth, Chief Accounting Officer, and interim CFO . In addition to the press release issued this morning, we posted presentation slides to accompany this call in the investors section of our website at Gms Dot com.
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 Companys filings with the SEC, including the risk factor section in the company's 10-K and other periodic reports.
Today's presentation also includes a discussion of certain non-GAAP measures the definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides.
Please note that references on this call to the first quarter fiscal 2020 relate to the quarter ended July 30, Onest 2019 with that ill now turn the call over to John Turner.
Thank you Leslie.
Good morning, and thank you for joining us today.
I will begin today's call with a review of our operating highlights and then turn it over to lend to cover our financial results in more detail.
I'll then conclude our prepared remarks with some of my initial thoughts on our path forward. Following my first four months here at Gms.
We are off to a strong start to fiscal 2020 as we remain focused on leveraging the foundation of our business and positioning Gms for long term growth and profitability.
We achieved record net sales results in the quarter, which increased 8.9% year over year. This growth was broad based across each of our product lines with growth of 7.5% in wallboard, 11.4% and ceilings, 2.1% and steel framing.
And 13.6% in other products.
Organic net sales increased 3.4% with just over 5% organic growth in the United States, partially offset by about a 10% year over year organic sales decline in Canada.
In the United States. The team delivered record results as we continued to experience healthy residential and commercial end markets with solid demand.
While the commercial markets are also solid in Canada, we continue to experience the impacts of the significant slowing in single family housing, particularly in the greater Toronto area.
Based on our current read the timing of a recovery in the Canadian single family housing market remains uncertain.
However, similar to the United States, the fundamentals contributing to long term Canadian residential construction demand remained sound, including strong household formation and population and economic growth.
For now we remain focused on what we can control and our Canadian team is executing very well in a tough environment.
Nonetheless, our long term strategic rationale for last year's acquisition of the largest distributor in Canada remains extremely compelling.
While gross margin improved year over year, we did experience an increase in adjusted SGN as a percentage of sales.
This was due to some continued cost pressures as well as reduced operating leverage in Canada.
But also because we are making investments in initiatives aimed at advancing our next phase of growth and success.
Adjusted EBITDA increased 11% to a record $83.6 million for the quarter and we realized an adjusted EBITDA record margin of almost 10%.
As previously announced we acquired heart acoustical in drywall supply in the quarter, adding three locations in South Texas.
We also opened two greenfield locations, one in Manchester, New Hampshire, and the other in Wichita Falls, Texas, we remain committed to disciplined expansion of our geographic footprint through accretive acquisitions, and greenfield openings balanced with our debt reduction priority.
With that I will turn it over to lend to provide more detail on our financial results for Q1, Thanks, John and I would also like to thank you all for joining US today, we were pleased to deliver a strong first quarter highlighted by record net sales and adjusted EBITDA performance looking at slide four we great net sales, 8.9% to $847.2 million, including 3.4% organic growth year over year.
The modification in our calculation of organic net sales growth as described in our earnings release. This morning is in response to this feedback from the investment community as well as our fee that including sales from acquisitions, such as Titan. After the first anniversary of the acquisition date is more appropriately reflected in organic net sales growth on a year over year basis.
As a point of reference that 3.4% organic growth we are reporting today for the first quarter under our new methodology would have been 5.1% under the previous methodology, which would have excluded tightened sales from organic net sales for all of fiscal twin.
Our sales of wallboard were up by 7.5% compared to the same period last year, including 3.5% growth on an organic basis, which included a volume increase of over 4% and less than a 1% decrease in price.
Our first quarter ceiling sales increased by 11.4% year over year or 8.3% on an organic basis. This organic growth included price increases of approximately 5% and higher volume of approximately 3%.
Our sales of steel framing increased 2.1% year over year, but declined 8.8% on an organic basis due to an approximate 5% increase in volume, which was offset by declines from price and mix totaling approximately 6%.
Sales of our other products, which consists of insulation joint compound full stucco mpus and various other complimentary products continued to grow increasing 13.6% in the quarter.
This product segment now comprises almost 30% of our total sales on an organic basis, we saw a 3.1% increase in this category.
And we continue to focus on growing this highly profitable and complimentary product segment.
Gross profit in the first quarter increased almost 12% to 274 million. This was the result of higher sales, both organically and including the positive impact of acquisitions as well as $4.1 million of noncash purchase accounting adjustments recorded in the prior year related to the Titan acquisition.
Our gross margin of 32.3% improved 80 basis points from 31.5% a year ago, primarily due to net favorable price cost dynamics tightened purchasing synergies and the prior year purchase accounting adjustments.
At this time, we are maintaining our gross margin guide of 32.2 for fiscal 20.
Turning to slide five adjusted EPS DNA expense as a percentage of net sales was 22.6% compared to 22.4% in the prior year quarter.
The 20 basis point increase in adjusted SGN eight was the result of several factors.
First of all we experienced reduced operating leverage in Canada, and continued cost pressures across the business, including some related to weather in the quarter.
Additionally, we made some initial investments and business initiatives to support sales growth and operational efficiencies.
Our investment in six Greenfield in the last two quarters also impacted operating leverage as these locations take some time to ramp up.
These impacts were partially offset by increased efficiencies from the company's cost reduction initiatives undertaken over the last 12 months.
Moving on to adjusted EBITDA, We delivered 83.6 million of adjusted EBITDA in the first quarter up 11% year over year, our adjusted EBITDA margin was 9.9% as a percentage of sales up 20 basis points from the 9.7 a year ago.
Turning to slide six.
Free cash flow this quarter was a use of $18 million. It's typical for our first quarter to have a use of free cash flow, but this compares favorably to use a $52 million a year ago.
This improvement is primarily a result of a $26 million increase in cash from changes in networking capital and $10 million of higher net income after adjustments for non cash items.
At the end of the quarter, our net debt to LTM pro forma adjusted EBITDA was 3.7 times, which was down from 4.2 times as at the end of the first quarter of fiscal 19. Following the closing of the Titan acquisition and up slightly from 3.6 times at the end of fiscal 19 as a result of the use of cash in the quarter that we just discussed.
We intend to continue to de lever to positive free cash flow generation anticipated for the full fiscal year.
And our balance sheet remains quite healthy with $24 million of cash on hand, and 296 million available under our ABL facilities, resulting in substantial liquidity for our business.
Additionally of our total long term debt approximately 80% is not due until the year 2025, now let me turn the call back over to John before we open the line for questions John .
Thank you William.
Once again, we're very pleased with our strong start to fiscal 2020, we continued to expand our market leading position and our balanced product portfolio.
Our diversified exposure across commercial and residential new and repair and remodel construction markets also continues to be an advantage.
Our dedicated team throughout North America continues to embrace our strong entrepreneurial culture and drive outstanding performance for our customers suppliers and our shareholders.
One of the things that attracted me to Gms was that our prospects for growth are significant and after my first four months here I'm, even more convinced that's the case.
As we move forward, we are committed to advancing this next phase of growth and success.
We will seek to capitalize on the meaningful organic growth opportunities across our platform.
We also intend to continue to enhance and expand our geographic footprint through both greenfield locations and accretive acquisitions balanced with our debt reduction priorities.
At the same time, we're also confident we will continue to leverage our scale and employ best practices to deliver further profit improvement.
The team and I will be working diligently to execute on these initiatives and we will be sure to keep you updated on our progress.
Operator, we're now ready to open the call for questions.
Thank you.
We will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question is from Mike Dahl with RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Good morning, Mike Hi, Mike.
And John Congrats on.
First first earnings call here.
Just wanted to pick up on your commentary that you left off with.
And it sounds like significant growth focus here, if we look at the results for the quarter SDMA is still a bit elevated.
Keeping the gross margin guide unchanged. It seems like you're you may be a little tilted towards focusing on growth, but just wanted to ask you on that.
With that backdrop, and the investments that you're likely to make.
To continue the growth here, how should we think about margins and call. It that the near to mid term and I'm thinking just EBITDA margins and whether or not we kind of plateau here.
Well, let me address the discussion around the investments first off and kind of a focus on growing the business.
We will remain balanced in the way, we do our investments as far as our organic approach versus an accretive acquisition approach, but internally we're investing in sales specialist in some of our other product categories in particular around architectural specialties in ceilings as well as tools and accessories.
And we have a nice little business called tool source warehouse, which were expanding as we speak as well. So we have some investments that are going into some of the product categories that are very profitable for us and that we're kind of in our infancy in and a lot of ways. So that's kind of some of the investment.
Behind the the growth initiatives. Additionally, we have ongoing technology initiatives to drive both productivity and service to our customers. So we have a logistic software implementation that is underway. We have what we call direct which is the automation of our b to b relationship with our customers online and then we are now just beginning to roll out a upgrade to our ERP is the same ERP that were honest just moving everybody to a single instance, so thats a little bit of spending that's going to go on as we go forward.
Im going to go ahead, and let land talk about what we expect from a margin perspective, but I'll reiterate our guide of 32.2 on the gross margin I think there are topline sales are probably going to be similar.
We've got good momentum so I wouldnt expect the end market seem fine.
So that's kind of where I'm going to leave it and I'll turn it over to Linda Yes, absolutely, yes, Mike I'd like to add to what John says and to respond to your question about the 10%.
To 15% incremental adjusted EBITDA margins, we do plan to be at 10% or higher.
Going forward in terms of our gross margin guide of 32 to we've talked about that as being a prudent guide in the past, we obviously will strive to do better.
And then with respect to operating leverage how much we get depends on our performance in our Canadian business. It also depends on the mix of sales growth between volume and price obviously depends on the timing of efficiencies with respect to our initiatives. We do plan to seek areas of getting additional operating leverage.
So does that does that respond to your question.
Yes, it does.
Yes. Thank you for all the detail on those.
And then just shifting gears, obviously, there are a lot of things going going on and going right for your business. One of the things that has been top of mind for investors, though that some of the dynamics around wallboard and wallboard pricing.
Specifically yourselves and your public peer are one of your public peers on the distribution side or are showing a much more mild pricing declines than the manufacturers have shown could you just comment on what you think is driving that is that just a timing differential or has something shifted in terms of your ability to keep price, while achieving a better.
Purchase price from from the Oems.
And just how to think about that dynamic and what you're seeing there. Thanks.
Well, Mike as you know.
We pride ourselves in being a service leader and so we believe that we get paid for that.
We have a fairly complex mix of business and so across those end use commercial and residential markets.
We feel like we are not in a position to give up a tremendous amount of price at the moment.
At the same time, you can see by our growth that we are very much focused on maintaining and growing our share in the market and I think we're in I think we're in a very good place right now.
Okay, great. Thank you.
Absolutely. Thank you Mike.
Our next question is from Keith Hughes with Suntrust Robinson Humphrey. Please go ahead.
Thank you.
The question is on the us business kind of give us a view on the old same store sales calculation what that would look like are you seeing any substantial regional variations within that 5% number one part of the country carrying are lacking.
First the average.
Hi, Keith.
The same trend thats been that's been going forward, you're looking at the coastal regions the southern regions.
Our stronger and the center part of the United States is a little softer we've done some things in our business in the middle of the country very proud of what our team has been able to accomplish there.
The to improve their business slightly but generally speaking its coastal from the northeast all throughout the southeast to the south and backup the West coast. Those are the strongest parts of the business.
And.
His come.
I guess as you look at your commercial backlog.
Is that are you seeing any signs of weakness on.
Quotation bid activity things of that nature and commercial.
Not yet commercial still remains very strong.
Solid pipeline final question.
Okay, and I guess.
Final question.
In Canada.
At what point, what month quarter. However, you want to do it.
Where do you reach the point, where Canada started really turning turning down on it where do you anniversary. It I guess my question.
Im going to let Atlanta answer it because I don't think I was here when that started okay. So yes go ahead, Len I'd say comps get easier in the back half of the year, Keith with respect to Canada.
For the back half of your fiscal year or calendar, yes fiscal yes, sorry fiscal Q3.
Which would be the kind of calendar beginning in 2020 on a calendar basis is that correct.
Yes, correct.
Okay, all right thanks very much.
Thank you Keith.
Our next question is from Kevin All server with Northcoast Research. Please go ahead.
Hey, good morning, everybody.
Good morning, and good morning.
I wanted to revisit so with the gross margin guide, 32.2% for the year. If I look back historically July has always been your lowest gross margin quarter of the year and and you eclipse that number this year.
32.3%, So I guess I want to get a sense for still going with 32.2 for the year.
Is there anything that would cause that then to come down the balance of the year and kind of bucked the normal seasonal trend of that going higher.
Or but like you said theres, maybe some conservatism baked in there I just wanted to have a better understanding of.
Is there something that is going to drag that down or.
Any clarity provide there would be helpful.
Yes sure on the 32 to Kevin We believe the best just a prudent guide I don't see anything coming at us that would drive that down in the balance of the year and like we discussed we continue to may not maintain that guidance. We believe that is prudent we will strive to.
Not to beat that.
Okay got you and John I think you mentioned to an earlier question something along the lines of topline.
Sales remaining similar just wanted to get some as we look ahead, we want to get some clarity on that.
What that is in reference to is that the 9% sales you grew this quarter or is that you grew it looks like base business volumes were up in that 3% to 5% across the different categories is that an expectation that you expect going forward just any color you can provide on as we look at the topline going forward.
What we can expect.
Yes, Im speaking, mostly towards our organic number so I would expect low to mid single digit type growth on the on the organic side of volume not not 100% convinced yet on what's happening with steel pricing and or really the wallboard situation, but I think from a volume perspective, the pipeline looks low mid single digits.
Okay, all right. Thank you very much.
Our next question comes from Michael Wood with Nomura Instinet. Please go ahead Sir.
Good morning, this is Ryan going on for Mike.
Just three for 3.4% organic growth.
Can you talk about how you think that performed against the industry.
In other words, we were able to achieve your one or two points of growth above market.
You know I don't think we have all the numbers yet, but we think we're growing above the rate of the market slightly.
I don't think 3.4% is dramatically greater than the market, but I do think we are doing better.
Organically.
Our mix of steel business in the quarter was definitely something that.
Dragged us back on the top line, a little bit, but I think on a volume basis were better and our wallboard volume was certainly better than what we think the industry is performing at at the moment.
Okay, Great and then you called out favorable price cost in the quarter are you able to quantify this and then what's your expectation for that for the balance of the year.
Yes, so I would.
As you know we don't provide the gross margin by product category I would provide a little bit of color and say that our steel gross margin was down.
Due to the fact that we are selling to higher priced inventory price declines were particularly market in the month of July 5th steel business.
And wallboard was was up.
That provide that that bit of color.
Great. Thank you.
Our next question is from Matthew Bobby with Barclays. Please go ahead.
Hi, Good morning, this is actually Christine to on for Matt.
My first question actually on ceilings I was wondering noting that price was a positive contribution of about 5% in the quarter. What is your expectation on the ability to continue to push price of the segments.
I would tell you it's pretty dependent upon the mix of what we sell we're very focused on driving a higher value through our ceilings business with architectural specialties again, I mentioned, a little bit of investment there as well on salespeople and engineers in that space.
But I think that that's about normal and so maybe a little robust for us for the quarter, but I wouldn't expect it to change dramatically going forward.
Got it thank you and then.
Just going forward how are you thinking about your strategy, maybe a little bit more color on your strategy for tuck in acquisitions and greenfields throughout the rest of the year.
Potentially more color on Twoq.
Well as we mentioned, we're we're disciplined in our approach we're focused on de levering the business, but when the right opportunities in the right markets. The end to end some sort of significant strategic component come along we're certainly going to continue to do acquisitions I would expect them to be mostly small tuck ins and greenfields are really expansions of our business in major markets, where we already are they are not going to be standalone greenfields in markets, where we're currently not so they tend to ramp up a little bit faster, but as you can see even in this quarter with six of them over the last two quarters. There is a little bit of an SGN a impact forum. So we'll continue to do about what we've been doing.
Okay, great. Thank you.
Our next question is from David Manthey with Baird. Please go ahead.
Yes, hi, good morning.
First of all morning, David Yes, good morning earlier in the call you had mentioned a 10% EBITDA and I didnt quite catch it. If you are referring to an expectation for a record level of 10% if you're referring to a contribution margin could you clarify that.
Yes, sure. So we we always strive to be at 10% that's been our that's been kind of our stated goal and we believe that that 10% adjusted EBITDA margin continues to be a good goal. What I was referring to is the guidance with respect to the 10% to 15% incremental margin that we've also provided US guide on on previous calls and we continue to adhere to that as well.
Okay sounds good.
And then in terms of the growth we've been seeing here in the last few quarters.
Three four or 5% kind of volume growth and price mix seems to be waiting a bit how do you think about those dynamics relative to the 10 to 15 is there a revenue.
Organic revenue growth.
Target that you need to achieve in order to get in that 10 to 15 window. How do you think about the stall speed here.
Well I would tell you that.
Yes, obviously in the in the near term, we need to maintain a reasonable growth level that low single digit type organic growth level and we don't see any reason why we wouldn't be able to achieve that kind of a level to achieve the flow through that we are talking about obviously, if there is a significant change in the end use markets. Then we'll have to adjust but we don't see that in the near term.
Yes, Okay and then.
Yes, I'm sorry.
Yes, low lit, yes, we will have to achieve the low to mid single digits and then like we discussed that 32 is a prudent guide we hope to see that.
And then with respect to operating leverage we talked about.
The fact that we're seeking team look for operating leverage as through the balance of the year.
Okay, and then last question on Canada can you discuss specifically what actions you've taken up there in terms of Rightsizing that business today.
To improve the profitability, even if the growth just sort of flattens out from from going down right now.
Sure I was just there and I can tell you that our team has done a fantastic job I was there last week weve reduced our headcount over 13%.
In that in the in Canada at the same time weve strengthened relationships with a lot of the customers.
It's unfortunate what we're going through up there in single family with the balance of the business being pretty strong.
The commercial and multifamily markets high rise multifamily in the greater Toronto area look very good.
Our team is executing exceptionally well, it's very soft in the primaries.
In single family soften GCA in single family and little soft on the West coast and single family as well.
But we've done everything we think we know how to do to reduce our costs, but also kind of ignite again, a little bit of an additional organic growth engine up there and I'm comfortable that that team is positioned for the long term, we're going to do very well in Canada over the long term.
Appreciate it thank you.
Welcome. Thank you.
Our next question is from Trey Grooms with Stephens. Please go ahead.
Hi. This is normal accounts go on this morning for Trey Grooms, how you guys doing.
Good morning, Great how are you.
Oh.
So first question kind of talking about what you've seen on wallboard volume and pricing trends in August .
It sounds like pricing has been relatively stable.
Has that continued in August .
Yes it has.
All right. So only year, yes, so let me give you a little bit more context on a year over year basis, our sales per day were higher in each month in the quarter and we see that positive momentum continue into August . In addition, our salesforce sequentially higher stable each month during the quarter and we see that continuing into August .
Got you that's helpful.
And then just a quick follow up here from a price cost standpoint is it fair to say, you're pretty well caught up there and then any color on expectations for the remainder of the year be helpful.
I think we are caught up.
I think steel remains a little bit under pressure just because I think for the balance of this year due to the rate of decline is definitely slowing.
In steel just the raw material itself you can see that if you look at the commodity market, but still really seems to be the only the only place that may have a little more slippage everything else seems very stable.
All right. Thanks, guys I'll pass it on.
There are no further questions registered at this time.
I would like to turn the conference back over to Leslie Kratcoski for closing comments.
I'd just like to thank everyone for joining us today, a replay of the call will be available shortly on our website and as always we appreciate your interest in Gms Good day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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