GMS Inc. (NYSE:GMS) Q2 2024 Earnings Call Transcript December 7, 2023
GMS Inc. beats earnings expectations. Reported EPS is $2.3, expectations were $2.24.
Operator: Greeting, welcome to GMS Second Quarter 2024 Earnings Conference Call. At this time all participants’ are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a note, this call is being recorded. At this time, I'll turn the conference over to Carey Phelps, Vice President of Investor Relations. Carey, you may begin.
Carey Phelps: Thank you, Rob. Good morning, and thank you for joining us for the GMS earnings conference call for the second quarter of fiscal 2024. I am joined today by John Turner, President and Chief Executive Officer; and Scott Deakin, Senior Vice President and Chief Financial Officer. In addition to the press release issued this morning, we have posted PowerPoint slides to accompany this call in the Investors section of our website at www.gms.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 statement 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 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 second quarter of fiscal 2024 relate to the quarter ended October 31, 2023.
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, whose discussion will be starting on slide three. JT?
John Turner: Thank you, Carey, and thank you all for joining us today. We are pleased to report another solid quarter, which exceeded our stated expectations for net sales, net income, and adjusted EBITDA. Continued demand in commercial and multifamily construction drove volume increases in ceilings, steel framing, and complementary products, all of which helped to offset a more challenging steel pricing environment and relative softness in single-family residential demand. Despite the single-family market, wallboard experienced only a slight overall volume decline, which was offset by continued resilient pricing. For the quarter, net sales were $1.4 billion, net income was $81 million and adjusted EBITDA totaled $168 million.
Cash flow improved again this quarter as we recorded cash from operations of $118 million and free cash flow of $102 million, up 10% and 6%, respectively, from the prior quarter. Net debt leverage improved to 1.5 times from 1.6 times a year ago. Our well-balanced portfolio of products and end markets combined with our team's expertise and the company’s scale continues to provide us with the ability to flex our operations as dynamics in our end markets change. In the near-term, multifamily activity is expected to continue at or near current levels as backlog has work through over the next few quarters. Commercials also expected to continue at its current pace into the spring. And we are optimistic about the sequentially improved levels of activity we've seen in single-family demand.
As the recent easing of mortgage rates, limited supply of existing homes for sale, and favorable demographics seem to be setting up promising conditions for this end market, particularly as we look out into fiscal 2025. Our teams have done a remarkable job so far this fiscal year under challenging circumstances to continue to focus on our strategic pillars, which are highlighted on slide four. First, we have continued to grow in our core products with higher wallboard sales as a percentage of gypsum-associated shipments versus the prior year, reflecting at least in part our strength in serving the nation's largest homebuilders as they too gain share and as they report a more positive outlook. We've also increased share in steel framing according to the Steel Framing Industry Association data and we've continued to gain share in ceilings as evidenced by manufacturing partner disclosures and channel checks.
Second, our team continues to put great focus on growing our complementary products category, which made up 30% of our sales for the quarter and delivered its 14th consecutive quarter of year-over-year growth. We are placing particular emphasis on tools and fasteners, EIFS and stucco and insulation, which collectively continue to grow faster than the overall category during the quarter. Third, expansion through M&A and Greenfield openings continues to be one of our key levers of growth. During the quarter we acquired AMW Construction Supply, a highly respected distributor of tools and fasteners and other complementary products in the Phoenix Arizona market. And we also opened two new Greenfield locations. Post-COVID, we have acquired 14 companies, representing a total of 30 distribution centers and 91 AMES stores, with estimated annual revenues at the time of deal closings of nearly $600 million.
And we've also opened 26 Greenfield locations. We continue to have a promising pipeline of opportunities and an appetite to expand our footprint in key markets where we are under-penetrated, while we also broaden our service territories and product offerings in existing markets. Finally, we're successfully driving improved productivity and profitability throughout the business, reducing complexity costs and becoming more efficient and effective operators with enhanced tools and data to facilitate better decision-making and offerings that provide an overall enhanced customer experience. The benefits of these efforts are evident in the levels of SG&A we recorded this quarter, which Scott will detail during his remarks. Before turning the call over, I want to thank our team for maintaining our high level of performance and commitment to delivering outstanding customer service during the quarter.
We have demonstrated our flexibility and expertise in supporting all of our end markets and believe that we are well positioned as demand dynamics progress in the coming quarters. With that I will turn the call over to Scott.
Scott Deakin: Thanks JT. Good morning everyone. Starting with slide five, I'll now provide some further perspective on our second quarter results. Net sales for the quarter decreased just slightly year-over-year to $1.4 billion as steel price and mixed deflation of more than 30% drove an $85 million reduction in net sales. Single-family demand softness was also a headwind, while robust activity levels in both our commercial and multifamily end markets with volume increases in steel framing, ceilings, and complementary products were a favorable offset. Our recent acquisitions, including EMJ, Tanner, Blair, Home Lumber, and AMW, also contributed positively to our quarter results. Organically, sales were down 3.1%. From a U.S. end market perspective, multifamily sales dollars grew 9.3% year-over-year, while single-family sales dollars declined 10.3%, resulting in a total residential sales dollar decline of 5.7%.
Commercial sales dollars in the U.S., on the other hand were roughly flat as increased sales volumes were offset by the noted steel price deflation. As we highlighted last quarter, many of our regional markets are continuing to experience favorable commercial demand with active projects underway are scheduled to start in the coming quarters across nearly all sectors. For example, we expect to participate in the Tampa Airport expansion, multiple new hospitals and other medical facilities, student housing and other higher education facilities, a new casino, several manufacturing facilities, a number of mixed-use residential projects, and even some tenant build-out projects in the office space. While financing is tight and could become a headwind for the commercial end market, we are capitalizing on the attractive level of demand that we've been seeing currently.
Now, looking at our second quarter results for each of our product segments, wallboard sales dollars of $585.2 million were roughly flat with a year ago, while multifamily and commercial wallboard volumes were up 17% and 6.5% respectively. Single-family wallboard volumes declined 11.4%. Overall wallboard volumes were approximately flat, with resilient prices that remained steady with a year ago, again reflecting the realities facing wallboard manufacturers, which are high input and production costs, a lack of excess capacity, and increasingly pressured access to synthetic gypsum. Organically, second quarter wallboard sales were also roughly flat with a prior year period comprised of a 1% decline in volume and a 0.7% increase in price and mix.
For the second quarter, the average realized wallboard price was $476 per 1,000 square feet, up slightly from both a year ago and sequentially from our fiscal first quarter. Given this continued resilience and pricing, we now expect roughly flat sequential wallboard price and mix through the end of our fiscal year. Second quarter ceiling sales of $175.3 million increased 9.9% year-over-year, comprised of an 8.5% increase in volumes and a 1.4% benefit from price and mix. Organic sales and ceilings grew 7.2% with a 5.8% increase in volumes and a 1.4% benefit from price and mix. Second quarter steel framing sales of $232.1 million were down 16.6% versus the prior year quarter as deflationary pricing drove a 30.7% decline in price and mix, while volumes increased 14.1%.
Organically, steel framing sales were down 17.4% with a 30.5% decline in price and mix, partially offset by a 13.1% increase in volume. While steel framing has been a headwind over the last year, raw material pricing has increased with the underlying commodity indices for coal-rolled and galvanized up nearly 50% per ton since the low point this fall. Additionally, lead times continue to extend with inconsistent availability regionally. Accordingly, we have received multiple notices of upcoming price increases from our manufacturing partners. Given what is traditionally a four to six month lag post commodity index change, we currently expect steel prices to continue to be pressured in the third quarter before flattening out sequentially in the fourth quarter and then turning positive on a sequential basis during fiscal 2025.
Complementary product sales of $428.3 million for the quarter grew 4.8% year-over-year, as we benefited from positive contributions from acquisitions. Organically sales of complementary products declined 1.4%, reflecting pricing pressures in lumber and volume declines in our Canadian roofing and lumber product lines given the currently soft residential demand. As we've discussed in previous quarters, we are especially focused on our tools and fasteners EIFS and stucco, and insulation product lines where we are leveraging significant opportunities to share best practices across our operations and drive growth in these areas. For our fiscal second quarter, these lines grew 10.6% in the aggregate. Now turning to slide six, which highlights our profitability for the quarter.
Gross profit of $458.6 million decreased 1.3%, compared to the prior year quarter. This decline was nearly entirely driven by market deflation and steel pricing. Gross margin of 32.3%, compared to 32.5% a year ago, just slightly ahead of our expectations for the quarter. Volatility in steel pricing and realization of purchasing incentive tiers were the principal factors in both comparisons. Selling, general, and administrative expenses increased $21.9 million during the quarter to $300.9 million, including an increase of $12.6 million related to recent acquisitions in our newly opened greenfield locations. Excluding these expansions, we were very pleased that the remaining increase in SG&A expenses lagged our consolidated increase in sales volumes, even as our high cost to serve end markets led the way in our volume growth for the quarter.
I would like to thank our teams for their discipline in controlling costs and driving inefficiencies out of the business. Our right sizing of the business last winter, coupled with efficiencies gained from ongoing productivity initiatives, enabled us to achieve these favorable SG&A results. SG&A as a percentage of net sales was 21.2% for the quarter, an increase of 170 basis points from 19.5% a year ago, with 120 basis points of the difference due to steel price deflation, 30 basis points due primarily to increased labor costs, mostly associated with the higher level of commercial and multifamily activity levels we experienced during the quarter, and remaining 20 basis points due to recent acquisitions in Greenfields. Adjusted SG&A expenses as a percentage of net sales of 20.6% was also up 170 basis points from the prior year quarter.
All in, and with 16.7% higher interest expense, net income decreased 21.5% to $81 million for the quarter, or $1.97 per diluted share, compared to net income of $103.2 million, or $2.41 per diluted share a year ago. Adjusted EBITDA of $167.6 million decreased $28 million, as compared with a year ago. On single-family demand pressure, steel framing price declines, and the activity-based operating cost increases in the quarter, adjusted EBITDA margin decreased to 11.8%, compared to last year's second quarter level of 13.7%. Now, shifting to our balance sheet, which is highlighted on slide seven. At quarter end, we had cash on hand of $76.5 million and the $823.7 million of available liquidity under our revolving credit facility. We have no near-term debt maturities and our net adjusted EBITDA debt leverage at the end of the quarter was 1.5 times, compared to 1.6 times a year ago.
Cash generation improved again this quarter. Cash provided by operating activities was $118.1 million, compared to $107.3 million in the prior year period, while free cash flow for the quarter was $102.1 million, improved from $96.5 million a year ago. Year-to-date, we've generated 19% more free cash flow than a year ago, and with relative strength of cash flows in the second-half. For the full-year, we expect free cash flow generation to be between 50% to 60% of adjusted EBITDA. Capital expenditures of $16 million for the quarter, compared to $10.7 million a year ago. We now expect that for the full-year fiscal 2024, capital expenditures will be approximately $55 million. In October, our Board of Directors approved an expanded share repurchase program under which the company is authorized to repurchase up to $250 million of its outstanding common stock.
This expanded program replaces our previous repurchase authorization. During the quarter we repurchased approximately 689,000 shares leaving $241.3 million of authorization remaining as of the end of the quarter. We are well positioned with a solid balance sheet with no near-term maturities in our capital structure. We expect to continue to balance investing in our strategic initiatives, including additional M&A opportunities with paying down debt and opportunistically leveraging favorable market conditions for share repurchases. I'll close my remarks today with thanks to our team for again successfully delivering solid results amidst ever-changing market conditions. I'll now turn the call over to JT for a review of our outlook starting on slide eight.
John Turner: Thank you, Scott. Our end markets remain dynamic. Permits and starts on U.S. multifamily structures have declined, but a solid backlog remains and is expected to deliver year-over-year growth, albeit at declining rates, through at least the end of this fiscal year. Commercial, while solid with improved volumes over a year ago, has still not yet returned to full pre-COVID levels. And the most recent put-in-place figures support a continuation of the activity levels we've been experiencing, at least in the near-term. Meanwhile, the single-family market in the U.S. appears poised for a rebound in the coming quarters, with recently declining mortgage rates and a fundamental demand for new housing given the supply shortage of existing homes for sale.
And for our Canadian business, the news is even more encouraging as we've seen improving starts levels and government-backed programs to promote immigration and population growth that are providing a stimulus to housing, setting up nicely the prospect of several years of residential growth. With that as our backdrop, let me move the expectations for our third quarter. First, looking at wallboard, as I said at the start of the call, the backlog in multifamily is still expected to be relatively strong for the quarter and should continue to provide positive year-over-year growth. We expect multifamily wallboard volumes to be up mid-teens, as compared with a year ago. Commercial too should do well with wallboard volumes in that end market expected to be up mid-single-digits.
Single family wallboard volume is expected to be down low-single-digits, a marked improvement in year-over-year comparisons. In total, we expect wallboard volume to be up mid-single-digits, with price mix flat to down just slightly from a year ago, as single-family residential reverts to a more normal component of our mix. As we've reported, pricing for wallboard has remained steady in a relatively balanced capacity environment. Additionally, continued investment is required by our manufacturing partners to adjust to the declining availability of synthetic gypsum. As such, we expect continued relative stability and wallboard pricing for the remainder of our fiscal year with the potential for increases as the single-family market recovers. In ceilings, for our fiscal third quarter, given our expectation of continued solid demand in our commercial end market, including encouraging prospects for increases in remodel projects as indicated by our backlog and channel checks, we expect a mid to high-single-digit increase year-over-year in ceiling volumes with price and mix up low-single-digits.
For steel framing, demand should remain solid with volumes expected to be up low-double-digits, as compared with a year ago. Pricing will continue to be challenging for our fiscal third quarter with expectations of sequential improvement as we move into the year end. As compared with the third quarter of fiscal 2023, price and mix for steel framing is expected to be down nearly 25%, which will again impact our net sales, SG&A leverage, and other financial metrics for the quarter. We expect to see solid growth in our complementary products as we continue to focus on expanding our sales of these offerings. For our fiscal third quarter, our complementary products year-over-year sales growth should be up high-single-digits to low-double-digits for the quarter.
Given all these expectations we anticipate total net sales for our fiscal third quarter to be up low-single-digits, as compared with a year ago. Gross margin will likely be consistent with last quarter, and adjusted EBITDA is expected to be in the range of $123 million to $127 million for the quarter. Overall, we expect another solid level of performance for the third quarter. And as we approach the end of calendar 2023 and look ahead, we have reasons to be optimistic. First, although multifamily in the U.S. will slow down once the backlog is worked through, given the fundamentals underlying and supporting housing demand, coupled with an improving interest rate outlook, we expect improving sequential trends in single-family through the balance of our fiscal year and likely beyond.
Commercial too is expected to continue to do well for the time being. While tighter lending standards may cause an air pocket in demand at some point next calendar year, activity levels are solid for now and we believe easing within the credit markets will drive expansionary improvements. All in all, we believe that we are well positioned, with flexibility built into our operations to pivot our efforts as demand levels change in our end markets, which we are confident will help us to continue to drive growth and profitability as we deliver long-term value for all of our stakeholders. I'd like to close out our call today by thanking our customers, our suppliers, teammates, and shareholders for your continued support. And I'd like to wish you all a joyous holiday season.
Operator, please open the line for questions.
Operator: Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Trey Grooms with Stephens. Please receive your questions.
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