GMS Inc. (GMS) on Q4 2021 Results - Earnings Call Transcript
Operator: Greetings. Welcome to GMS fourth quarter fiscal 2021 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero from your telephone keypad. Please note this conference is being recorded. At this time, I’ll now turn the conference over to Leslie Kratcoski with Investor Relations. Leslie, you may now begin. Leslie Kratcoski: Thanks Rob. Good morning and thank you for joining us for the GMS earnings conference call for the fourth quarter and full year of fiscal 2021. In addition to the press release issued this morning, we’ve posted presentation slides to accompany this call in the Investors section of our website at GMS.com. John Turner: Thank you Leslie. Good morning and thank you for joining us today. I’d like to take a minute to recognize the outstanding contributions that Leslie had made to GMS over the last several years. Leslie has led our IR function with professionalism, class and dignity, and has advanced our relationships across the spectrum of the investment community. She also has been a key member of our leadership team and has been a consistent source of calm and strength throughout the years, and in particular this last pandemic year. She has been instrumental in the development and execution of our strategic goals and I think we all recognize that our IR capability is light years ahead of where we were when she joined us. Thank you Leslie. All of GMS wishes you well in retirement. I am excited now to welcome Carey into our IR role and our team. We are very lucky to have found a capable professional so familiar with our space and our investment community. Scott Deakin: Thanks JT, and good morning. Before presenting our detailed results, I’ll note that the comparisons of our fourth quarter fiscal 2021 results to the prior year includes comparisons to March and April 2020. These periods featured widespread shutdowns and far ranging uncertainty, resulting in arguably the most difficult and drastically impacted months for us during the COVID-19 pandemic. While these dynamics were considered in our previously communicated fourth quarter outlook and clearly had a favorable impact on our year-over-year growth rates, it was the outstanding execution by our team and their commitment to our customers that drove our outperformance. Specifically looking at Slide 5, net sales for the fourth quarter increased 20.9% to $932.2 million, exceeding the outlook of low double digits provided in our Q3 earnings call. These gains collectively resulted from strong residential end markets, favorable pricing across product categories, the acquisition of DL Building Materials and, as noted, COVID-related weakness during the prior year quarter. From an end market perspective, in the U.S. for example, residential sales showed considerable strength and were up double digits on both higher volume and price, while commercial sales, which have continued to be sluggish from a volume perspective, were up mid-single digits due to higher pricing and significant COVID-19 related volume weakness last year. Excluding $15.8 million in acquisition-related revenue and $13.7 million of favorable foreign currency translation, organic net sales increased 17.1%. As there was one more selling day in the fourth quarter of fiscal 2021 than in the same period a year ago, net sales and organic net sales on a per-day basis were up 19.1% and 15.3% respectively. John Turner: Thank you Scott. If you’d turn to Slide 9, while our tactical execution in fiscal 2021 was necessarily focused on overcoming the unprecedented challenges of the COVID-19 pandemic, we nonetheless remained relentlessly committed to our strategic growth priorities of expanding share in core products, growing our complementary products offering, platform expansion, and improved productivity and profitability. Our fiscal 2021 progress on these four initiatives is evident on several fronts. First, expanding share in core products, particularly in geographies where we are underpenetrated, specifically our actions which were well underway prior to the pandemic to redeploy resources and increase penetration in residential construction in those geographies where we traditionally had less exposure, enabled us to generate higher wallboard volumes year-over-year and provided an offset to the continued softness in commercial construction. In ceilings, we bolstered our distribution network throughout fiscal 2021, securing additional arrangements in several new markets while strengthening existing arrangements in several others. As such, we believe we continue to expand share in both the mineral fiber and architectural specialty segments of the market, as evidenced by our sales levels compared to available market data. Next, to diversify and profitably expand our product offering, we are focused on growing select complementary product opportunities outside of core products. Our multiple initiatives in both the U.S. and Canada are bearing fruit, as evidenced by 10.6% year-over-year growth in this segment in fiscal 2021 with positive year-over-year growth four quarters in a row despite the negative impacts of the COVID-19 pandemic. Third, we are expanding our platform through accretive acquisitions and greenfield opportunities while maintaining balanced progress in debt reduction. During fiscal 2021, we opened six new greenfield locations in the U.S. We also acquired DL Building Materials for approximately $40 million, providing entrance to the important Ottawa-Gatineau market in Canada. These moves enabled us to extend our geographic presence to four new and attractive markets, including our first location in the Province of Quebec. At the same time, with the strength of our free cash flow, we reduced our net debt by over $75 million in fiscal 2021. Our momentum in platform expansion continued into May when we announced the signing of a definitive agreement to purchase Westside Building Material, one of the largest independent distributors of interior building products in the U.S., for $135 million. This exciting combination which through 10 locations expands and enhances our presence in multiple California metro areas and marks our entry into the Las Vegas market, is expected to close next month. Finally, to ensure that we deliver a best-in-class customer experience while continuing to drive productivity and further profit improvement, we are leveraging our scale and employing technology in best practices. We made significant progress in the deployment of our ecommerce platform in fiscal 2021 with most of our subsidiaries driving growth in customer accounts, online payments, and proof of delivery, and our further deployment of business intelligence capabilities is putting actionable, real time data and insight into the hands of our field leaders. Finally, our 100 basis point improvement in adjusted SG&A margin and 50 basis point improvement in adjusted EBITDA are a testament to our successfully driving profitability. Before making my closing remarks, a few thoughts about our first quarter outlook. We currently expect to generate year-over-year sales growth of approximately 20%, similar to what we realized in the fourth quarter, as we expect a more difficult year-over-year comparison to be largely offset by higher benefits of pricing on net sales. In terms of profitability, we expect a continuation of pressured price cost dynamics, particularly in wallboard. As a result, we currently anticipate realizing a gross margin similar to the 31.5% realized in the fourth quarter and, coupled with SG&A leverage, an incremental adjusted EBITDA margin in the range of 10% to 15%. Looking further out in fiscal 2022, the trajectory of inflationary pressures and supply constraints as well as the effect of those on our results in later quarters becomes more difficult to forecast; nonetheless, we believe there is a fundamental support for continued strength in residential construction, and while timing remains uncertain, early but encouraging indications of improvement in commercial construction are emerging. Turning to Slide 10, in closing, GMS is well positioned for the long term. As the North American market leader in the distribution of specialty interior construction products, we enjoy significant scale advantages, employ a differentiated service model, and embrace an entrepreneurial culture. All three combined are enabling us to successfully execute for all of our stakeholders. At the same time, our strong free cash flow generation, balance sheet and liquidity provide not only near term advantages in what remains a very dynamic operating environment, but enables us to pursue the long term growth opportunities that make this business so attractive. I am confident that our team’s continued drive to execute the business and our strategy positions us to generate value for our shareholders well into the future. Rob, we are now ready to open the call for questions. Operator: Our first question today is coming from the line of Keith Hughes with Truist Securities. Please proceed with your questions. Keith Hughes: Thank you, a couple questions. First on your commentary on commercial demand and some of the positive signs, when do you think--some of the bid activity you’re discussing, when do you think that will actually show up in a meaningful shift in the shipments? John Turner: Well, the larger projects, Keith, are still out probably into calendar 2022. We’re starting to see some remodel activity kick in and we’re hearing from other participants in the market, not necessarily in our exact space but other participants in the market, that they’re seeing their pipelines fill back up from a remodel perspective, and then you’re seeing that with the ABI and Dodge just came out with their momentum index and the Dodge starts numbers look to be improving, so I think the larger projects are probably still in ’22. But as you know, two-thirds of our business is remodels, so we think that we might see some green shoots here later in our fiscal year, maybe Q4 of our fiscal year. Keith Hughes: Okay. Regarding your revenue expectation for the July quarter, the first quarter, how much will the acquisition add to that, if at all, the Westside acquisition, or is that going to be too late to be meaningful? John Turner: We’re not--we didn’t put any numbers in here yet for Westside, so what we’re giving you is ex-Westside for the quarter. Keith Hughes: Okay. Final question--I’m sorry, go ahead? Scott Deakin: I was just going to add, in the release we talked about the size of that acquisition, we were talking about maybe a month of sales within that accretive to that 20% we already talked about. Keith Hughes: Okay. Then the accounts receivable was up a good bit year-over-year. If you could talk about that, what’s going on there. Scott Deakin: I think it’s just really the overall trend of the business being up as much as it’s been. Collections have been really good, bad debt expense has been really tempered and tamed, so we haven’t seen any increases there. It’s really just the dynamics of the cycle of revenue that we’re facing. I don’t think it’s anything to be concerned about. It’ just really related to what we’re seeing on the demand side. Keith Hughes: Okay, thank you. Scott Deakin: I’m just going to add to it, overall if you look at our overall working capital as a percent of sales, we’re still in that same 17%-ish range that we’ve been operating at, so the netting across accounts receivable, inventory, accounts payable, etc. is all consistent with prior trends. Keith Hughes: Okay, thank you. John Turner: Thanks Keith. Operator: Our next question is from the line of Mike Dahl with RBC Capital Markets. Please proceed with your questions. Chris: Hi, this is Chris on for Mike. Thanks for taking our questions. John Turner: Sure. Chris: Just touching on the margin outlook for this year, obviously expecting some additional pressure this next quarter, but I was wondering if you could maybe give us some additional color on your thoughts around the moving pieces, whether it be price costs or the residential mix pressures and how that evolved through the year, and whether you SG&A would be able to provide enough of an offset to keep gross margins moving higher this year. John Turner: Your last question was, would SG&A help our gross margins move higher this year? I think you mean -- Chris: EBITDA-- John Turner: Yes, EBITDA margins. Chris: EBITDA margins, yes. John Turner: Our team has done a fantastic job and I think we’re well positioned from a cost perspective to continue to do that moving forward. There’s some inflationary pressures out there - obviously fuel is more expensive than it was prior year, we expect labor to tighten up through the year as well. But all that being said, our guys are really doing a great job, our whole team is very productive, and we’ve invested heavily in technologies and other things to help us be better from a productivity perspective. I think we will continue to do well on the cost side. I think that the reason we don’t talk much out beyond this quarter from a gross margin perspective is the fact that we’re dealing with some interesting environments for inflation with steel doing what it’s doing, and originally I think a month or two ago, maybe steel would settle back down towards the back half of the year. Now, we’re hearing maybe that’s not going to be the case. In wallboard, the industry just announced and implemented another increase in June, so we continue to chase that, and that’s really--you hear us talk sequentially - I mean, sequentially our pricing is up really nicely and it’s continuing into this quarter. The issue is that so is the pace of price increases from the manufacturers, so if that settles down a little bit, I think like we said last quarter, we fully expect to catch back up and end up with a gross margin that’s closer to our long term average. But at the moment, we’re just chasing things up on that side, so I think that we’re doing a nice enough job on the bottom to keep making improvements over time, and we’ve stated the long term objective is to breach the 10% number on an EBITDA basis, and I think that everyone here is aligned in that objective. Chris: Got it, that’s helpful. Then on the sales guide for next quarter, the 20%, any way you could help us with the building blocks there in terms of what’s being driven by volume and price and what’s your assumption behind residential versus commercial growth? Scott Deakin: Similar to what we saw in this last quarter, you’re going to see a pretty heavy influence in price and mix. I’d say in the ballpark of probably 75% of that on an order of magnitude basis is going to come from price and mix, and then the remaining portion of it is combined volume and FX, which of that is probably two-thirds volume, just as rough building blocks and orders of magnitude of the drivers. Chris: thanks for that. Operator: Thank you. Our next question is from the line of Matthew Bouley with Barclays. Please proceed with your questions. Matthew Bouley: Hey, good morning. Thanks for the question. Congrats on the results. Can I ask about pricing power, and I guess in residential specifically because clearly manufacturer price increases are pretty widespread here in wallboard, and you’re passing price along, although it sounds like there’s a bit of a lag. To the extent the big builders are trying to leverage their purchasing and you got smaller builders just facing challenges across the basket of building materials, are you finding that the receptivity to your own passing of price is sufficient effectively? Thank you. John Turner: Well I mean, it’s sufficient. We’d like it to be faster, how about that? Sufficient, I would say in that we still believe that once the price increases settle out, that we will again achieve the types of gross margins that we’re used to. On the other hand, it’s never sufficient to be trailing prior year margins, so I think that it is the market, based upon what we’re showing sequentially in absolute pricing, and remember our pricing is also a blended mix of all of our board, so you’re having the negative impact of the residential mix in that price as it inflates, so we’re still showing really nice sequential improvement and continuing into this quarter. So the answer to the question is, we’re seeing it happen, we’re certainly leading it in that respect, and we’re also being good partners with our customers. I mentioned that, I think on the last call, and I’ve mentioned it in several other individual calls, we have to be good partners with our customers. They also have to have the ability to plan their business and they have to have the ability to plan their pricing, so fortunately we are strong enough to be able to weather a month or two of increases before we pass them along, but that’s in essence the pace that this is happening in - you know, three months, six months, it’s all--you know, the pricing is in. Matthew Bouley: Got it. No, that’s really helpful, JT. Second one on the gross margin side, the mix impact specifically just with better resi versus commercial, any ability to put some numbers or just elaborate on that, just what that headwind looks like? Obviously what I’m getting at is to the extent some of these green shoots you’re seeing in commercial do manifest in better volumes later this year, into calendar ’22, what the benefit to the margin would be from commercial recovery. Thank you. Scott Deakin: I think we’d speak to in generalities. Obviously we gave you some indication leading into this quarter that we were going to be down that roughly point, based on some of those dynamics we were seeing. We were talking about it being consistent for the first quarter. Generally as we talk about margins, we generally try to guide towards EBITDA as being the better indicator between resi and commercial, because the operating dynamics of serving the commercial versus the residential market, so on balance as that starts to--as commercial starts to come back, we might see some general improvement on it. Given the timing JT talked about, that’s not likely to be a significant first quarter impact, but as you go later in the year, you’ll start to see a little bit of improvement on the gross margin side offset by higher operating costs to still get to a solid and positive EBITDA number overall. I know those are generalities, but those are some of the dynamics that we’re facing. Matthew Bouley: Got it. No, that’s helpful. Thanks Scott and thanks JT. John Turner: Thanks. Operator: Our next question is from the line of Kevin Hocevar with Northcoast Research. Please proceed with your questions. Kevin Hocevar: Hey, good morning. Nice quarter, everybody. Wondering if you could comment, on the SG&A side you guys called out, I think, 160 basis points of--260 basis points of leverage, 100 basis points due to kind of operational cost containment and another 160 due to favorable leverage to pricing, so I’m wondering if you can kind of give us some color on how this evolves. Obviously it seems like pricing continue to have momentum, so does that even get better, that 160 basis points that’s benefiting from pricing as wallboard, steel, all these other things keep seeing more pricing flow through. Yes, just trying to think about how to think about that SG&A leverage potential here this year. Scott Deakin: The best way to do it is to--if you focus on what JT talked about in terms of the relative drivers of growth, it’s a little bit different, a tougher compare quarter-over-quarter on a volume basis, but we’ve got higher pricing drop-through on that, so if you take that leverage impact, if we’ve got sort of 100, 160 order of magnitude this last quarter, you factor in a little bit more pricing into the first quarter, I think you’ll see the relative impact of that drop through in what we’ll see in the first quarter. Generally on an operating basis, we’re still seeing tight discipline on the operational side of our expenses. We’re seeing some increases in fuel, we’re seeing some, as expected, increase in compensation costs, salary costs, those types of things as people come back into the workforce to support what we’re seeing on the revenue side, and then we’re seeing some things, some operational expenses in things like insurance and the like. But generally, we’re still keeping that tight discipline on our expenses on the operating side, so they have the--that favorability from a leveraging effect on the price side should be pretty strong and positive going into the first quarter as well. Kevin Hocevar: Okay, and then I know product supply has been constrained, lead times are extended on--all over the place. How has that--is there any improvements being seen in just product availability, or is it just as tight as it’s been for the last several months? John Turner: Well certainly in steel, I think it’s actually going to get a little worse as we move our way through the summer, and then hopefully it frees up a little bit as we get into the fall. Wallboard is about where it has been. I guess I would say that throughout this entire series of supply chain disruptions, really all kinds of products, right, I think that you’re seeing the leaders in the space be able to weather the storm and get the products that we need to support our customers. You’re also seeing us use our balance sheet in a way that allows us to have product available for our customers - that’s what they would expect. When we talk about scale advantages, these are the times to leverage that and to use that and to demonstrate to your customers what you mean by that, so I think that we’re doing a pretty good job, and I think that anything we’re experiencing, I would expect others to be experiencing it in a worse way. So while I don’t see it getting a lot better, I don’t see it getting a lot worse other than maybe steel, and steel is just going to continue to extend, the lead times are going to just continue to extend and the price is going to continue to go up, at least through the summer. Kevin Hocevar: Okay, got it. Thank you. John Turner: Thanks. Thanks Kevin. Operator: Thank you. The next question is coming from the line of Trey Grooms with Stephens. Please proceed with your questions. Trey Grooms: Hey, good morning. Thanks everybody. John Turner: Hi Trey. Trey Grooms: First one from me is on the wallboard pricing, it’s sequentially up nicely. Scott, you gave us a number there for the end of the quarter - I think it was $329, and I’m sorry if I missed this but did you guys give us any--or could you give us maybe a little more clarity around how you’re thinking about the next couple of quarters on wallboard pricing? I mean, there was this June increase that you talked about, you’re implementing the April now, so I guess is it fair for us to assume that from a pricing standpoint on wallboard specifically, that we could see something similar continue from a pricing standpoint over the next couple of quarters as you work these through and kind of catch up on that front? Scott Deakin: We talked about the average for the quarter at that $329 number. I can tell you we ended the quarter at $333, so progressively working up over of the course of the quarter and, I think just given all the dynamics, you can expect that into May and June, we’ve seen further increases from there. It’s probably premature to give you anything - frankly, we don’t know exactly how it will shake out past this quarter and into future quarters, but all of the same dynamics are continuing and, to the prior question and JT’s answer to it, the acceptance of the market around it, the continued resolve from the supply side in driving those actions into the marketplace continue to be there, so I think we’ll see those trends along those general lines of progression continue. Trey Grooms: Okay, fair enough. Then I guess on the complementary, I mean, this has been a big focus of yours, but clearly outperforming there. Can you talk about where you’re seeing specific strength, market share gains within that category there of complementary? John Turner: Well, we’ve been very strong in Canada and in the U.S. Lumber, and fire-treated lumber in particular, commercial lumber packages, believe it or not, while commercial is down, it’s still something that we’ve been focused on here in the U.S., so in lumber we’ve experienced not only nice unit growth but, of course, the very, very high pricing that’s gone on in lumber over the course of the last year. Insulation, we continue to do better in insulation. We’ve had a focus on residential insulation, although we can’t get as much as we can sell, quite frankly. That’s one of the areas that’s more supply constrained than anything. I guess the good news for us is it’s still in total not a massive number for us, but we continue to try to build that business and we’ve been doing very well in insulation. Roofing in Canada, great performance by our team in roofing up in Canada as well, and then tools and accessories, we continue to push hard to be the choice of the--to supply tools into our tradesmen’s hands, our smaller contractors and even the larger contractors that are in the tool buying business, the accessories buying business, things like fasteners and screws and all of the finishing pieces that have to go into what we sell. All of that is doing very well, so I would just give you those categories as the primary drivers. Trey Grooms: All right, thanks JT and Scott. Thanks for the color, and Leslie, congrats on the retirement, and Carey, congrats to you too. Look forward to working with you again. Thank you. Leslie Kratcoski: Thanks Trey. Operator: Thank you. Our next question is from the line of David Manthey with Baird. Please proceed with your questions. David Manthey: Hi, good morning everyone. Most of my questions have been answered here, but maybe you could address the supply and demand dynamics within some of the non-res categories that you’re thinking about. JT, you mentioned the outlook for steel over the next six months, and I’m just kind of wondering what your assumption for demand trends are in that outlook. Then on the ceiling side, is there any chance that we see one of these situations where everyone assumes that there’s not going to be great demand and then inventories are thin, and demand comes back and there’s supply shortages? Anything you could help us in terms of that supply and demand dynamic as we roll through the summer? John Turner: I mean, I still expect commercial--we see commercial down in volume . This quarter, we’re still rolling over kind of that COVID effect, but as you go forward, as we mentioned, we expect the whole comp to get harder on a volume basis because the recovery was beginning coming out of COVID, but those products are primarily commercial from a volume perspective. If we see any growth at all, low single digits, probably still the opportunity to see some decline in low single digits, but the prices are definitely up with steel being up dramatically, and going to continue to be up dramatically, lead times extended on steel. I don’t think--you know, swing a point or two around zero and that’s probably what you’re looking at for volume for the next couple of quarters, anyway, and then improving after that. As far as ceilings go, boy, if we had a big explosion in demand, it’d be spectacular, but you’ll have to ask Armstrong and USG if they’re prepared because from an inventory perspective, we’re not off the gas. I mean, we’re on the gas on inventory, we want to have it, and we want to be able to sell it and fulfill our customers’ needs right now, so we’re not in a position where we would be caught, let’s say, in a bad way from an inventory perspective. As Scott said, as a percent of sales, total working capital is right about where we’ve kept it over the years, and even with higher sales, so we’re going to continue to focus on that and be the best distributor, supplier to our customer base and try to make it a little easier on them as they go through. You can imagine if it’s difficult on us trying to get material, imagine how difficult it is for the contractor to get material right now, so we’d like to be the guys helping them. David Manthey: Okay, thank you. Second, when you talk about the pressured price cost dynamics, I understand the dynamic environment that we’re in right now, but what does the glide path look like? I mean, how long do these commodities have to stabilize in price for you to catch up on the gross margin side? John Turner: Well, we’re pretty much caught up on everything other than wallboard, so if you were to decompose our gross margin, we’re really okay everywhere other than wallboard, and wallboard’s not really all that terrible, it’s just we’re selling less of it as a percentage of sales than we are selling everything else. As I’ve said before, it’s three months to six months, three month probably on the commercial side, closer to four to five to six months on the residential side to push it all the way through, but if you look at what Scott just said - $333, I think our Q2 last year was $308 and now we’re exiting at $333, that’s a fair amount of increase, and I think you’ll continue to see us move on that kind of trajectory until the increases stop. When those increases stop, three months to four months later, you’ll probably see us be right back up into the normalized gross margin range as we get the price into the market. I don’t see any big impetus to have the prices reverse dramatically in wallboard; on the other hand, steel is a commodity and lumber is a commodity that moves around a lot more aggressively, let’s say. I can’t tell you what’s going to happen with lumber and steel, but I certainly think at some point in time the steel situation will resolve itself and you’ll see that price come backwards. Not in the near term. David Manthey: Yes, all right. Sounds good, thanks JT. John Turner: Thank you. Really appreciate it. Operator: Thank you. At this time, I’ll turn the call back to Leslie Kratcoski for closing remarks. Leslie Kratcoski: Thanks everyone for joining us today. A replay will be available on GMS.com shortly, and as always, we appreciate your interest in GMS. Thanks a lot, and have a good day. Operator: Thank you everyone. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.GMS Ratings Summary
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Stephens Lowers Price Target on GMS to $95 Following Recent Earnings
Stephens analysts reduced their price target for GMS (NYSE:GMS) to $95 from $112, while maintaining an Overweight rating on the stock. The analysts explained that GMS’s recent earnings release has increased uncertainty regarding near-term pricing dynamics in the wallboard distribution sector.
Although manufacturers have had some success with price hikes earlier this year, GMS has experienced delays in passing these increases on to its customers. This situation is expected to improve in the coming months, potentially mitigating the negative impact of product mix as residential demand is anticipated to surpass commercial demand in the near future.
Additionally, fluctuating steel prices are creating short-term margin pressures. Despite discussions about possible price increases, current guidance assumes that steel pricing will remain subdued. Although the immediate outlook does not appear particularly promising, the analysts believe that the pricing environment for GMS will improve in the upcoming quarters. Following a recent pullback, they also noted that GMS’s valuation is among the most attractive in the building product distribution sector.
