GMS Inc. (NYSE:GMS) Q2 2023 Earnings Call Transcript

GMS Inc. (NYSE:GMS) Q2 2023 Earnings Call Transcript December 8, 2022

GMS Inc. beats earnings expectations. Reported EPS is $2.79, expectations were $2.34.

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 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.

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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?

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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.

Q&A Session

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.