GMS Inc. (GMS) on Q2 2023 Results - Earnings Call Transcript
Operator: Greetings and welcome to the GMS Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carey Phelps, Vice President of Investor Relations for GMS. Thank you, you may begin. Carey Phelps: Thank you, Melissa. Good morning and thank you for joining us for the GMS earnings conference call for the second quarter of fiscal 2023. I am joined today by John Turner, President and Chief Executive Officer, and Scott Deakin, 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. Turning to Slide 2, on todayâs call Managementâs 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 Company's filings with the SEC, including the Risk Factors 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 of fiscal 2023 relate to the quarter ended October 31, 2022. Finally, once we begin the question-and-answer session of the call, in the interests 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. JT? John Turner: Thank you, Carey. Good morning and thank you for joining us today. With elevated single family home construction activity, as completions eclipsed starts for the quarter, along with strong multifamily residential demand, year-over-year growth in commercial and a favorable pricing environment, we again delivered record levels of net sales, net income, and adjusted EBITDA for our fiscal second quarter as we continued the solid execution of our strategic priorities. Looking at Slide 3, with comparisons to Q2 of fiscal 2022, here are some highlights of our second quarter results. We grew net sales 24.4% with 24.9% gross profit growth as our teams continued to manage a shifting market mix and inflationary product pricing. Volumes in Wallboard were up 11.6% and we were again pleased to deliver positive year-over-year commercial Wallboard volume growth for only the second time since the start of the pandemic after doing so last quarter as well. The inflationary product pricing environment combined with our continued operating cost discipline, enabled us to improve our SG&A and adjusted SG&A percentages of sales by 50 basis points each. Net income improved 38.7% to $103.2 million, and adjusted EBITDA grew 30.7% to $195.5 million. And finally, adjusted EBITDA margin of 13.7% was up 70 basis points as compared with a year ago, with significantly improved cash flow. Our team's commitment to delivering outstanding customer service, together with the continued execution of our strategic priorities helped drive this success. On Slide 4, we highlight our progress this quarter in advancing these strategic initiatives. First, expanding share in our core products. Although pockets of supply chain challenges remain, our teams continued to work diligently throughout the quarter to ensure product availability and to provide exceptional service for our customers. As a result, we delivered year-over-year organic Wallboard volume growth of more than 11% for the quarter, which we believe outpaced the industry as a whole. We're also seeing success in Ceilings as we delivered organic volume growth in the low single digits with organic sales dollar growth of 13.6% for this category. We remain confident that leveraging our scale and our commitment to exceptional customer service and product availability will help us continue to grow the core business as we move forward. Second, growing our complimentary products, we continued to diversify and profitably expand our offerings, thereby enhancing our value to our customers. During the quarter, we continued to benefit from both higher prices and volumes and grew our Complimentary Product sales by 26.5% in total and 17.8% organically. In particular, some of our larger Complimentary subcategories that are a higher focus of growth for us, including tools and fasteners, the stucco and EIFS product lines and insulation collectively grew 33.4% for the quarter. Third, expanding our platform through accretive acquisitions and greenfield opportunities remains a top priority. So far this fiscal year, including those that opened subsequent to the end of our second quarter, we've opened five greenfield yards and nine AMES store locations. Our pipeline of potential acquisitions remains strong. We continue to actively pursue opportunities to strategically broaden our product assortment and expand our service territory to help us provide added value and best-in-class service to our customers. Finally, our fourth strategic priority is to drive improved productivity and profitability. This is a broad focus across our organization as we continue to leverage our scale and employ technology and best practices that improve both cost and service. Included within these initiatives are ways to enhance the customer experience, making it simple to do business with us. As a result, the percentage of customers interacting with us online grew each month during the quarter. Additionally, we are making it easier and more productive for our teams, providing automation tools to improve, picking, loading, and staging efficiencies, as well as fleet upgrades to reduce idle time, improve fuel efficiency, and promote safe work practices. Building our Yard of the Future to drive greater efficiency and productivity has helped us deliver improved profitability. Overall, I am very pleased with our team's execution. At the heart of our business is our people, our passion for service and our relationships with our customers. With that, I'll now turn it over to Scott to provide more perspective on our results. Scott? Scott Deakin: Thank you, JT and good morning. Looking at Slide 5, net sales increased to 24.4% year-over-year to $1.4 billion for the quarter. Organically sales rose 22.2% after adjusting out both acquisitions and the unfavorable impact of foreign exchange translation. Adjusting for one additional selling day, year-over-year, net sales increased to 22.5% with daily organic net sales increasing 20.3%. From a U.S. end market perspective, residential continued to lead the way with sales up more than 34%, including greater than 50% growth in multi-family. Single family sales were up 29% year-over-year, while commercial sales continued to show improvement with sales up 17% over a year ago. Wallboard sales of $584.6 million increased 41% or 38.9% on a per day basis comprised of a 28.9% increase in price and mix and a 9.9% increase in volume. Organically second quarter Wallboard sales grew 41.4% year-over-year comprised of a 30% increase in price and mix and an 11.4% increase in volume. And on a per day basis, organic Wallboard sales were up 39.2% comprised of a 30% increase in price and mix and a 9.2% increase in volume. In terms of Wallboard volume, per day multi-family residential gains of 30% outpaced the mid-single-digit volume growth we achieved in single family. Permitting, starts, and quoting activity in multi-family remained active and with longer build cycles in single family, the backlog and demand for this customer segment should remain strong through at least the remainder of this fiscal year and likely beyond. Meanwhile, as with last quarter, year-over-year, our Commercial performance continued to improve. We were pleased to again see expansion in commercial wallboard volumes as compared with the same period a year ago. And in terms of Wallboard price, our average realized price has increased sequentially for the past eight quarters, demonstrating resilience even as we've seen a slowdown in single family starts. For the quarter ended October, the average realized Wallboard price was $474 per thousand square feet, up 8.4% sequentially and 26.3% as compared with a year ago. October's price of $477 per MSF was only slightly higher than the quarter's average, while November flattened further. Conversely, new manufacturer increases are being announced in the market. So while the outlook is mixed and we can't fully predict the degree or timing of market price elasticity going forward, our current near-term expectation is that the rate of our increases will continue to flatten with some sequential declines possible in future quarters. Regardless, given the healthy base of inflation realized thus far, we nevertheless expect year-over-year expansion in Wallboard pricing through at least the end of our fiscal year. Ceilings, tile and grid second quarter sales of $159.6 million, increased 13.3% over the same period last year, or 11.6% on a per day basis, comprised of a 9.6% benefit from price and mix and a 2% increase in volume. Organic sales in Ceilings grew 13.6% to 10.7% of price and mix, and a 2.9% increase in volume. On a per day basis, organic sales for Ceilings were up 11.8% with 10.7% price and mix, and 1.2% in volume. Reflected in these numbers was a sequential price increase of 6.6% for the quarter. Second quarter, steel framing sales of $278.2 million increased 2.3% versus the prior year quarter or less than 1% on a per day basis, where price and mix benefited 7.5% was largely offset by a 6.8% decline in volume. Our second quarter of fiscal '22, excuse me, 2022 featured inflation in availability based dislocation that drove a short-term increase in shipments. Moreover, in this market, we've seen stronger activity in stick-built lower rise structures, which typically call for less steel framing, while large office activities for both new and remodel also remain muted. Organic sales in steel framing were up 2.5% comprised of a 7.9% increase in price and mix partially offset by a 5.4% decline in volume. On a same day basis the trends were similar with steel framing per day sales of 1% organically comprised of a 7.9% increase in price and mix offset by a 7% decrease in volume. As we discussed last quarter, prices for steel framing products had begun to decline sequentially at the start of the second quarter with August prices roughly 1% below July's level. As expected steel framing prices have fallen further since. September fell 4% sequentially, while October fell another 3.5% from there, ending the quarter roughly equal to where the price was in October a year ago. Overall, however, given the tremendous rise in steel framing prices earlier in the year, the quarterly average price for steel framing products for our fiscal second quarter was up nearly 9% as compared with a year ago. Although, again, difficult to predict, our current expectation is for steel prices to decline each month sequentially in the low single digits through the end of our fiscal year, likely moderating a bit as we enter the spring months. Complimentary Products sales of $408.7 million, which comprised nearly 30% of our total net sales for the quarter, were up 26.5% year-over-year as we've benefited from positive contributions from acquisitions as well as improved pricing across the category. Sales in this category were up 24.5% on a per day basis. Organically sales of Complimentary Products rose 17.8% or 16% on a per day basis with the increase coming mostly from price and mix, but with moderately increased volume as well. Now turning to our gross profit during the second quarter, our gross profit of $464.5 million increased 24.9% as compared with a year ago, principally due to our successful pass through of product inflation, continued strength in residential market demand, improved commercial sales and incremental gross profit from acquisitions. Gross margin of 32.5% increased to 20 basis points year-over-year with strong margins in Complimentary Products and better than expected margins, which were up slightly year-over-year in steel framing as our teams remained focused on inventory management and diligent project quoting amid the environment of declining steel prices throughout the quarter. As we have previously shared, while we managed the business toward towards an EBITDA level of profitability to account for mix and cost of execution, we traditionally operate at or around 32% gross margin and believe this to be a reasonable near-term expectation as well, even as we see a slowdown in single family demand ahead. Turning to Slide 6, operating costs increased this quarter, particularly in items such as labor, fuel and given robust activity and strong performance incentive compensation. Regardless, as has been the case in recent quarters, product price inflation and the resultant increases in both revenues and gross profit dollars have outpaced these pressures. Therefore, adjusted SG&A as a percentage of net sales for the second quarter improved 50 basis points as compared with a year ago to 18.9%. All in adjusted EBITDA improved $46 million or 30.7% to $195.5 million for the quarter. Adjusted EBITDA margins improved 70 basis points year-over-year to 13.7% for the quarter, representing an incremental margin of 16.4%. Now, turning to Slide 7, providing the foundation and support for the continued execution of our strategic priorities is our capital structure and balance sheet. At quarter end, we had cash on hand of $124.2 million and $293.8 million of available liquidity under our revolving credit facilities. Our net adjusted EBITDA debt leverage at the end of the quarter improved to 1.6 times, down from 2.4 times a year ago. During the quarter, we recorded significantly improved levels of cash flows. Supply chain constraints have moderated. Cash provided by operating activities during our fiscal second quarter was $107.3 million compared with a use of $2 million a year ago. Free cash flow was $96.5 million for our fiscal second quarter compared with a use of $11.3 million for the same period last year. Capital expenditures of $10.7 million for the second quarter compared to $9.3 million in the prior year quarter. For the full year of fiscal 2023, we continue to expect capital expenditures to be roughly comparable to those of fiscal 2022 at approximately $40 million. All considered, we expect to generate full year free cash flow for fiscal 2023 of approximately 60% of adjusted EBITDA on an expectation of marked relative strength in the second half of our fiscal year. Finally, a note on our share repurchase activity before I turn the call back to JT. As part of our previously announced upsized share of purchase authorization, during the quarter, we repurchased approximately 601,000 shares of common stock for $25.8 million compared to $195,000 shares repurchased for $9.3 million during the prior year quarter. As of the end of October, we had 161.2 million of repurchase authorization remaining. Going forward, we will continue to align our capital allocation to our four-pillar strategy, balancing investing in our strategic initiatives with paying down debt and opportunistically leveraging favorable market conditions for share repurchases as they arrive. With that, I'll nw pass the call back to JT to provide some perspective on our broader end markets and our outlook for the third quarter. John Turner: Thank you, Scott. Turning to Slide 8, despite the challenging macro environment and the developing slowdown in new single family housing permits and starts, building activity and demand for our residential products has been strong through the first half of our fiscal year, which has helped us deliver outstanding results. That said, while we expect continued strength in multi-family, as well as some continued recovery in the commercial market, we also expect a decline in single family demand for our products to further materialize in the coming months. We are preparing accordingly and in our single family business, which makes up roughly a third of our overall business and about half of our Wallboard revenues. We will feel demand pressure. However, our backlog of work in process remains and the specific timing, extent and duration of this decline is uncertain. Moreover, we believe we are well positioned to weather this expected slowdown. We have the benefit of a balance split between commercial and residential revenues and the ability to flex to meet the demands of each customer segment. Also, in recent years, we have successfully expanded our product offerings to better serve all of our customers, including growing our Complimentary Products segment, whose revenues we estimate to be roughly 60% commercial. And in terms of execution, the improvements we've made in enhancing the productivity and efficiency at our yards and across our business have made us better operators. With variable performance based incentive compensation and other activity driven costs, currently making up a large portion of our G&A, we are confident that we will be able to flex as the business requires. On the pricing front, inflation is moderating across all categories. We expect steel framing to continue its deflationary trend and ceiling grid will likely follow suit. As Scott discussed, we also expect the pace of Wallboard price increases to slow, but still expect year-over-year favorability in pricing during our third quarter for Wallboard, ceiling tiles and Complimentary Products. With this as our backdrop as highlighted on Slide 9, for our fiscal third quarter, we expect to deliver total net sales growth in the mid-single-digit range, most of which we expect to be organic and inflation driven. Gross margin percentage consistent with a year ago, and with our long-term trend around 32% and adjusted EBITDA margin should approach last year's level of 11.7%. I am pleased with the commitment and determination demonstrated by our team as we continue to deliver solid results. Over the long-term we are confident that our scale, breadth of product offerings and our demonstrated capability to service commercial, single family and multi-family customers positions us well and are continuing to execute against our strategic objectives will deliver value to our shareholders. Thank you for joining us today. Operator, please open the line for questions. Operator: Thank you. Our first question comes from the line of David Manthey with Baird. Please proceed with your question. David Manthey: Yes, hi. Good morning everyone. Three quick questions here. First off, what percentage of U.S. MSAs do you have a presence in today? Second, if you could talk about multi-family, what the mix of Wallboard and overall GMS sales are multi-family? And then finally, what percentage of customers and revenues come to you via online channels? Thanks. John Turner: Sure. From an MSA perspective, outside of New York City, we really are in all of the balance of the top MSAs in the country and also the state of Utah. So we're not in New York City. We're really not in the state of Utah. Outside of that, we're in all the top MSAs in the U.S. And in Canada, other than Montreal and the Eastern provinces, we are in all the major MSAs in Canada, so fairly well balanced. So we think that our multi-family mix is about 15% of our Wallboard sales and about 10% of our overall sales David. And then, what was the third question? Online sales? David Manthey: Right. What percentage of your customers use online channels and, and maybe what percentage of your revenues, sorry, what percentage of your revenues are coming via online? John Turner: So from a revenue perspective, pretty small, but from a usage perspective pretty good. I'll give you some color on that. So it is, it's a B2B process. So we began the journey in e-commerce to specifically improve service. And so what happens is, our large customers tend to place orders in their own systems and send them to us, but once we get those orders, we get a lot of activity from an automated perspective. So I'll give you an example. Of our top 100 customers, over 80% of those customers are signed up with us online, and 60% of those 80% consistently use the system month-to-month. So we have a pretty good number of our largest customers using our system. Of our total customer base we have about 40% of our customers signed up, and about 50% of those customers use us on a regular basis. And that last number I gave you of 40% of our customers signed up, that's any customer that has an open account with us, that has done any sales with us in the last 12 months. So it's a very broad base of customers. So we have fully 40% now of that very broad base of customers signed up. And again, of those customers about 40% to 50% use us consistently every month. And what do they do? They primarily, they check orders, they check inventory availability, they check pricing, and they check shipment activity as well as we've talked in the past about our picture delivery capability. So after delivery they check our pictures on site to ensure that the products are there and that they're ready to dispatch labor. So we have a lot of activity going on in e-commerce, but from an actual order receipt and revenue generation, it's still fairly small. Although our accounts receivable now is up to north of $65 million on a monthly basis is coming through our e-commerce system. Again very good numbers considering our large customers are not going to pay that way. Our large customers are going to use their automation in their own systems to pay us. So we, we feel pretty good about the traction we've got going on there. David. David Manthey: Got it. Thanks jt. John Turner: Absolutely. Thank you. Operator: Thank you. Our next question comes from line of Trey Grooms with Stephens Inc. Please proceed with your question. Trey Grooms: Hey, good morning everyone. Thanks for taking my question. Nice job in the quarter. John Turner: Thanks, Trey. Good morning, Trey. Scott Deakin: Good morning. Trey Grooms: So if we could touch on commercial, so commercial sales up for, I think it was the second quarter in a row. You mentioned an improving commercial landscape for the near-term. First off, if you could maybe speak to where you are seeing relative strength and weakness on the commercial side and looking forward, what kind of visibility do you have there and how are you thinking about the commercial demand more kind of in the medium term, should that continue to hold up relatively well, or are you kind of bracing for a potential slowing on that side as well? John Turner: No, I think that the headlines are just starting, right? If people are already worried after one month of the VABI being below 50, I mean we're going to give that a little more time. I think we feel like the commercial market is going to remain relatively flat low single digits in the medium term Trey. And the big drag there is still office, right? Office is just not coming back. And, and that's the driver of our steel framing decline as well right now in volume. So that's the one, kind of elephant in the room is just the office component. The balance of the commercial space is continuing to do just fine. I mean, it really, almost everything else is either flat or up. Education's flattish, hospitality's been showing some real positives just recently, but the other trends have been more positive, but office is the one that we're still waiting for recovery on. Scott Deakin: And so our internal pipeline and our internal checks as well as external checks with our larger commercial contractors basically would tell us that we're going to be flat to up slightly over the course of the next quarter or two. Trey Grooms: Got it. Okay, perfect. That's super helpful. And then you guys have been very acquisitive over the last, well, for as long as I've known you guys. And so I guess the question is, as we see some kind of slowing on the horizon, especially on the residential side, how are you thinking about M&A? How are you, what's your appetite there? Do you kind of, do you feel like it's appropriate to kind of take the foot off the gas some now or do you continue with the current strategy or just how are you approaching M&A and what's your appetite there? And then I guess as part of that leverage is in a very nice place right now. I've seen you guys take it up higher than this on, for the right deal pointing to the Canadian acquisition you did a few years ago. But how are you also kind of thinking about the leverage with that backdrop as well? Thank you. John Turner: Well, I'll start with just the appetite for M&A. Nothing has really changed other than our valuation today is not where we'd like it to be. And our objective has always been to acquire at or better than our current valuation. And then enjoy the synergies internally that we bring to the new company or the new acquisition. So that's been a little bit of a headwind. Valuation expectations on the seller's side still appear to be a bit inflated. And then of course, you got risk out in the next six to nine months across the board. So it's hard to pay with the anticipation of any kind of upside in growth. So all three of things make us a little more cautious than we normally would be. All that being said, continue to have great relationships with sellers and our pipeline and constantly are having conversations with them. And we would expect to have some things happen over the course of the next couple of quarters, although not strategically, right? Nothing huge. Today in the pipeline I donât think we have that kind of risk appetite. So in the midterm, weâre going to do what we just did this last quarter. Weâre going to generate a bunch of cash. Weâre going to continue to pay down a little bit of debt, and weâre going to continue to use the authorization that we have in stock repurchases. Scott Deakin: Yes. Trey, to your point about leverage, weâre down at 1.6 now. As you noted, when we did the Titan acquisition, we showed a willingness to go above three to be able to get something of that level of strategic importance done, but we did it only with the expectation that weâd be able to very quickly get that down below based on the combined cash flows of the companies, and we did that. So weâve always been clear that we will continue to be pursuing those larger types of opportunities as well as the medium and smaller ones. And if something like that presented itself and it had the strategic benefits, and we thought we could be able to bring that leverage down relatively quickly, we would definitely do that. Trey Grooms: Okay, thanks again for taking the questions and all the color. Good luck. John Turner: Thanks, Trey. Operator: Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Michael Dahl: Hi, thanks for taking my questions. As just as a follow-up, when youâre thinking about the resi piece of your business, obviously you see the kinds and the starts permits, Iâm sure you see the builder order trend. So whatâs going into the funnel is quite a bit smaller than whatâs coming out of the funnel as builders kind of pushed their year-end deliveries. Do you have a way of kind of quantifying or looking at what percentage of the homes under construction are still pre-Wallboard installation phase or anything like that, that helps you kind of gauge when this slowdown will actually more materially impact you over the next couple of quarters? I know you say little visibility maybe at year-end, but if you could just go into a little more detail on other things youâre looking at or more granular data, that would be great. John Turner: Yes, I mean we have all the macro data that you do. And so we have the full pipeline of backlog calculated on a divisional level or an MSA level. We have some data available to us thatâs provided by outside services, but mostly we rely internally on our own checks with our team, but also with our big customers that are doing that work. And so we do have a pretty good view of that. Now our big customers, generally speaking, theyâre operating in terms of the next month to two months, to three months in residential. So theyâre not really giving us exact numbers out four, five and six, but they do give us kind of anecdotally what their thinking is happening. So we do have that. So on a division-by-division basis, we have that. Itâs interesting at the moment, what weâre starting to experience is a little bit of, Iâll call it, bifurcation in certain markets in that you have the West Coast as an example. Theyâre eating through the backlog fairly quickly because there have been less supply chain disruptions. The land developers were able to deliver the lots, et cetera, et cetera. We get into the Southeast as an example, particularly Florida. Youâre still having product availability issues there. And so the cycle times for the bills are still longer. And youâve got some land issues, some land development issues down there that are slowing builders as well. But youâre also hearing the builders now start talking about the fact that the buyers that are out there are all interested in spec homes. They want quick closings. So we are seeing activity, at least to whatever the expectation of sales are youâre seeing a lot of builders reflect that in their strategy into next year. So a long-winded answer, but we have a pretty good view, and itâs usually incorporated into the outlook, well itâs always incorporated into the outlook, quite frankly, and we break it out in a bunch of ways internally and so far, weâve been pretty good at it. Although I would tell you, itâs getting more complicated. Michael Dahl: Yes. Okay, thatâs helpful. And my second question as part of this, thereâll also be a follow-up. But when weâre thinking about the 3Q guide in terms of total growth going from the 20s to mid-single digits, youâve articulated some of the moving pieces certainly, but maybe a little more detail. When you say timing of single-family demand slowdown unknown, but will materialize. So do you expect -- is the expectation that your single-family resi business is down year-on-year in volume terms in the third quarter? And then on the pricing side, very helpful color on some of the sequential trends and October trends in the ceiling grid and the steel. If those sequential declines continue as you expect, what does that mean for the year-on-year declines that youâre expecting within your third quarter guidance? John Turner: I would tell you that Wallboard, weâre still expecting to have a slight growth in Wallboard volume but still really strong pricing on a year-over-year basis, so high double digits really in total revenue growth from a Wallboard perspective. Ceilings, possibly in revenue we had a very, very strong third quarter last year, winter season last year in Ceilings. So weâre going to comp that as well, but itâs probably down low single digits. And steel based mostly on the same trends weâve already been experiencing just the reality of the steel prices year-over-year; we are lapping now the high point in steel. I should have made that Commentary a little earlier to you all, but I think you probably know it already anyway. But this is the high point in steel pricing as November, December, January was the peak of steel pricing last year. And so thatâs probably going to be down in that, I donât know, 15% to 20-ish range plus. And so you mix all that together with Complementary and you get that mid-single-digit revenue guide. Carey Phelps: Mike? Operator: Thank you. Our next question comes from the line of Jeff Stevenson with Loop Capital Markets. Please proceed with your question. Jeffrey Stevenson: Hi, thanks for taking my questions today and congrats on the nice quarter. John Turner: Thank you, Jeff. Jeffrey Stevenson: So you guys saw strong Wallboard volumes during the quarter, which came in ahead of the industry. And I just wanted to know kind of what were the primary drivers of that above industry growth? And can you talk about as well how volumes trended throughout the quarter? John Turner: Well, I think the efforts weâve put in over the last several years, weâve talked about it many times of being more focused on the builder business as a company over the course of the last three to four years, not that we were big, and I said it before, not that we anticipated the post-COVID balance and the extreme success in single-family. But the reality is we were focused on doing more of it, and that came to fruition and here we are, unfortunately, peaking when inflation hits and now the rates are up, and now weâre going to go from peaking into whatever is going to happen to us next year. But I think that thatâs really the biggest driver is really the success on the single-family side. The other piece of it, of course, is we still were -- even though weâve had all the success in single-family, weâre probably still more weighted in Wallboard to commercial than the industry is. And so the whatever the commercial recovery is weâre experiencing low to mid-single-digit recovery in commercial at the moment, thatâs a help for us as well. And multifamily is just a strong period. I mean -- itâs not a huge, as I mentioned earlier, right, itâs not a massive part of the business, but itâs growing 20% or 30%. So thatâs certainly a tailwind. Jeffrey Stevenson: Right, right. No, that makes sense. And then I appreciate your comments on your commercial business. That was very helpful. But during the earnings season, thereâs been some talk of a slowdown in discretionary nonresidential renovation work given delayed projects. Have you seen any signs of this in your Ceilings business? And if so, do you believe there just delayed or canceled? John Turner: I donât see any activity in office growing. I just donât see it happening. And so thatâs -- Iâm assuming thatâs primarily what youâre talking about when it comes to Ceilings to how itâs a huge driver of it. But weâre not seeing transportation projects delayed, airports, those types of projects are still happening. Main Street commercial is happening and still doing well. Hospitality is going to be fine. Health care is strong, but office is not. Itâs just not happening. We talked about discretionary remodel in office; weâre just not seeing that yet. And I think that building owners just have to wait and see what happens from an occupancy perspective or they have to decide to compete one or the other and neither of those things will happen to that. Scott Deakin: Iâd say as well, Jeff, in commercial, some of the dynamics you talked about have really been going on for the better part of 18 months in terms of longer quoting cycles, rebidding kinds of activity, reengineering of quotes as inflation factors have been accounted for, et cetera. And ultimately, thatâs extended the entire commercial process. So those kinds of things youâre talking about are not a recent dynamic. Theyâve been something weâve been dealing with for the better part of 18 months or so. Jeffrey Stevenson: Great, thank you. Operator: Thank you. Our next question comes from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question. Steven Ramsey: Hi, good morning. Maybe to start with on the commercial, I mean, the Complementary side of things, growth rates, very strong and very favorable compared to the other three groups and seems to be very strong in relation to pricing being the major driver. As we get to the other side of pricing being such a driver for the three core groups, will we see complementary take up a much stronger percentage of total sales? John Turner: Yes. I mean, I think weâve talked about it in the past that if you were to reduce and remove the steel inflation over the course of the last year plus, our complementary business is approaching 40% of the mix. So all that being said, thereâs some inflation in Complementary as well. Itâs been less there than it has been in some of the other categories, but there is definitely still inflation there in Complementary. But Complementary will continue to be a focus and should over the long-haul, be a larger percent of our overall business. Steven Ramsey: Okay, helpful. And then one more on Complementary with margins up in the quarter, you called it out as a driver to gross margins. Can you talk to the drivers of that? You also talked about AMES? Is that a major contributor? And do you see margins improving in the next several quarters? John Turner: AMES is a driver. We donât see margin improving, but we donât see any reason the Complementary margin would be declining. So our margin guides always include the entire business. But yes, AMES as Scott called out, right, incremental gross margin from acquisitions, AMES is a great company, continues to operate at very high gross margins, a wonderful part of our business now. And in general, our Complementary business has leveled off, letâs say, at much higher margins than we would have thought. And some of that is the mix of products that weâre able to sell as we talked about, particularly tools and fasteners, EIFS and stucco, and insulation were up 30% plus versus the whole at what I say, 26.5% or something in that neighborhood. So weâre gaining traction in a good mix of Complementary Products as well. Steven Ramsey: Excellent, thank you. John Turner: Thanks, Steven. Operator: Thank you. Our final question this morning comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Elizabeth Langan: Good morning. You have Elizabeth Langan on for Matt today. I was wondering if you could talk a little bit about how youâre thinking about SG&A going forward, kind of how youâre thinking about cost leverage as residential volumes come down and maybe you still continue to see that strength within commercial. But how should we be thinking about costs within that basket and maybe how that relates to your plans for spending on like productivity and automation? Scott Deakin: So Iâll kind of work backwards and I'll really start with how we managed the business during the early days of COVID when there was a lot of uncertainty out there. We really took a lot of actions very quickly in a very focused way to manage the cost of the business. And I think you certainly saw that in our results in terms of the incrementals we were able to -- and decrementals we were able to manage. We took some pretty tight actions there. And I think the learning from that is we would do that again. Specifically to your point on automation and some of the things weâre doing around the Art of the Future that is one area that we did not skimp on. We continue to focus on those strategic investments, both in terms of CapEx as well as spending. So I think you would see us do that again. Bringing your question all around and full circle to the types of things weâd be focused on in this environment, we're actually fortunate right now that weâve got a higher level of what I would call actionable types of things that we can affect in this environment if we saw a marked downturn. For example, incentive and bonus compensation is relatively high because the business is doing well. If that were to shift at all, weâd be able to move that down. We have other variable expenses like fuel, like maintenance, like those types of things that are truly activity driven in the business that would flex really nicely. And then also in this environment with being quite busy, our levels of contract labor, for example, are relatively high. So weâd be able to take actions on that before we got into the types of things that would be a little bit more difficult to affect. But again, looking back at how we handled the business during the early days of COVID showed a lot of discipline in how we manage those costs, and I think you very much see us do that again. Elizabeth Langan: Okay, thank you. Thatâs really helpful. And then I was also wondering, following up a little bit on the Complementary side of things is a larger part of your business now, and that has kind of been a point where there have been a lot of acquisitions. Is that an area where you expect youâll continue kind of building out those offerings there? And are there any other spots within the business where you think maybe thereâs a different vertical you eventually want to enter? Scott Deakin: Yes. Thatâs -- I appreciate you raising that. Thatâs very much something we have been talking about. And as JT was talking about some of our pipeline activity, our pipeline still remains very full, both on the core products as well as those Complementary areas. And while weâve got some near-term pricing kinds of dynamics and valuation kind of dynamics weâre thinking through, all of the things that we do, both in terms of thinking through our opportunities strategically, working on the relationship building and driving the pipeline development is very much focused, and weâve got a widening of the aperture in those areas, particularly those three areas that JT focused where weâve seen some higher-than-average growth in our Complementary tools and fasteners, EIFS, those types of things. Weâve got a lot of really promising activities going on there. So I think youâll see activity from us, both in the core as well as the Complementary going forward. Elizabeth Langan: Thank you. Operator: Thank you. Ladies and gentlemen, this concludes our question-and-answer session and does conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.GMS Ratings Summary
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GMS Inc. (NYSE:GMS) Q1 Fiscal 2025 Earnings Overview
- GMS Inc. reported an EPS of $1.93, missing the estimated $2.11, and revenue of approximately $1.45 billion, below the expected $1.48 billion.
- The company's price-to-earnings (P/E) ratio stands at approximately 13.92, indicating moderate investor confidence.
- Challenges such as increased costs and steel price deflation have led to a miss in earnings and sales estimates, alongside a year-over-year decline in margins.
On Thursday, August 29, 2024, GMS Inc. (NYSE:GMS), a key player in the distribution of wallboard and suspended ceiling systems, reported its earnings before the market opened, revealing an earnings per share (EPS) of $1.93. This figure fell short of the estimated $2.11, indicating a discrepancy between expected and actual financial performance. The company's revenue for the period was approximately $1.45 billion, also below the expected $1.48 billion. This report marked the beginning of the fiscal year 2025 for GMS, setting a tone of financial scrutiny as the company navigates through its operational challenges and market expectations.
The earnings call, as detailed by Seeking Alpha, featured key company participants including Carey Phelps, Vice President of Investor Relations; John Turner, President and CEO; and Scott Deakin, Senior Vice President and CFO. The presence of analysts from notable firms such as Stephens, Baird, and RBC Capital Markets underscores the investment community's interest in GMS's financial health and strategic direction. This level of engagement reflects the market's anticipation of how GMS plans to address its current financial challenges and leverage opportunities for growth.
GMS's financial metrics provide a deeper insight into the company's market valuation and financial health. With a price-to-earnings (P/E) ratio of approximately 13.92, GMS's shares are trading at nearly 14 times its earnings over the last twelve months, suggesting a moderate level of investor confidence in the company's future earnings potential. The price-to-sales (P/S) ratio stands at about 0.62, indicating that investors are paying 62 cents for every dollar of sales, a metric that offers perspective on the company's valuation relative to its revenue generation. Additionally, the enterprise value to sales (EV/Sales) ratio of roughly 0.91 and the enterprise value to operating cash flow (EV/OCF) ratio of approximately 12.46 further elucidate the company's valuation in relation to its sales and operating cash flow, respectively.
Despite witnessing improving volume trends and benefiting from favorable pricing, GMS faced setbacks due to increased costs and steel price deflation, as highlighted by Zacks Investment Research. These challenges not only led to a miss in both earnings and sales estimates but also contributed to a year-over-year decline in margins. The financial figures and ratios, such as the debt-to-equity (D/E) ratio near 0.88 and the current ratio sitting at about 2.31, reveal a moderate level of debt relative to equity and the company's ability to cover its short-term liabilities with its short-term assets, respectively. These metrics are crucial for investors and analysts in assessing the company's financial stability and operational efficiency amidst the reported challenges.
In summary, GMS's first-quarter fiscal 2025 results reflect a mix of improving and challenging factors that have impacted its financial performance. The detailed financial metrics and the engagement of key company participants and analysts during the earnings call provide a comprehensive view of GMS's current financial health and strategic direction. As the company navigates through increased costs and market fluctuations, its financial ratios and market valuation metrics will continue to be key indicators of its ability to adapt and grow in the competitive distribution market.
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.
