GMS Inc (GMS) 2016 Q4 法說會逐字稿

Greetings and welcome to the GMS Incorporated fourth quarter and FY16 earnings conference call.

(Operator instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Rodney Noseia with Investor Relations. Thank you, you may begin.

Good morning, and thank you for joining us today for GMS' earnings conference call for the fourth quarter and fiscal year ended April 30, 2016. I'm joined by Mike Callahan, President and CEO, and Doug Goforth, CFO. In addition to the Q4 press release issued this morning, we have posted presentation slides to accompany this call in the Investors' section of our website at www.gms.com.

Turning to page 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 that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include those related to net sales, gross profit, and capital expenditures, as well as non-GAAP financial measures such as adjusted EBITDA, adjusted net income and base business sales. In addition, statements regarding potential acquisitions and future greenfield locations are forward-looking statements, as well as statements regarding the markets in which the Company operates, and the potential for growth in the commercial, residential and repair and remodeling or R&R markets.

As a reminder, forward-looking statements represent management's current estimates. The Company assumes no obligation to update any forward-looking statements in the future.

Listeners are encouraged to review more detailed discussions related to these forward-looking statements contained in the Company's filings with the SEC, including the definitions and reconciliations of non-GAAP measures. Note that references on this call to FY16 and full-year 2016 relate to the year ended April 30, 2016. References to FY15 relates to the year ended April 30, 2015, and references to the fourth quarter or Q4 relate to the quarter ended April 30, 2016.

With that, I'll turn the call over to Mike.

Thanks, Rodney. Thank you for everyone joining us today.

I will begin with an overview of our Company and recent highlights. Doug will then provide additional details on our financial results and our capital resources. After our prepared remarks, we will open up the call for your questions.

First, turning to page 3. FY16 marked another year of progress for GMS. We are extremely pleased with the consistent improvement across all of our major product categories throughout the year, resulting in 18% growth in our net sales to a record $1.86 billion which produced a 32% increase in adjusted EBITDA to $150.3 million.

We completed seven acquisitions to end the fiscal year, with 186 well-located branches representing a 20% increase compared to just one year ago. The completion of our IPO in June 2016 was another exciting milestone for our Company, and it allows us to further build on our market-leading positions.

We are the leading North American distributor of wallboard and ceilings. Not just because of our product offering, but because of our differentiated service model. Before we dive into results, I'd like to provide some additional perspective on the strength of our unique business model, our growth strategy, and very advantageous industry position, driving sustained, above-market growth.

First, we are the largest North American specialty distributor of wallboard, ceilings and complementary interior construction products, with an industry-leading market share in wallboard and ceilings. We also have strong positions in a steel framing and other adjacent products, which provide us with a well-rounded product offering to serve our core specialty interior contractors.

Second, we have an attractive industry structure in which we serve as a very critical link between our consolidated suppliers and a highly fragmented customer base. For our suppliers, we provide a national footprint and the ability to make very significant order commitments to expand their reach to our extensive customer base. Furthermore, we have made substantial investments in our equipment, fleet, and expertise to ensure that we execute consistently.

Moving to our third point, our unique service model is made possible by our national scale, with more than 185 branches across 41 states. This gives us very significant benefits relative to our smaller peers in terms of service capabilities, operational best practices, and material sourcing. We combined this scale with our local go-to-market strategy which empowers our entrepreneurial and independent branch managers and personnel to execute in a matter that we believe is far superior to our peers.

Fourth, our extensive product offering is really unrivaled in our industry, with over 20,000 SKUs throughout the organization. And by carrying a full line of wallboard and ceilings along with steel framing and ancillary products, we provide a one-stop shop for customers. Which means we're able to supply nearly everything that our typical specialty contracted customer needs on a job site.

Looking at our broad mix of net sales on the top right of slide 3, in many cases, the contractors who were installing the ceilings are also the contractors that are providing the wallboard installation, the steel and everything else related that goes onto that job site. So combining ceilings with wallboard in our other businesses has a very significant pullthrough factor.

And then finally, in addition to product diversity, we have a very balanced customer and end-market mix. About 60% of our business is in the commercial segment, and approximately 40% is in the residential segment. This has given us a more resilient demand profile across multiple points of a cycle.

Looking at these favorable attributes of our Company, our success is made possible by the dedication of our team. Our workforce is highly motivated, vigorously trained, and greatly incentivized to grow our footprint and be the best in the business.

Now moving on to our growth strategy on page 4, we have a strong track record of executing a profitable growth strategy. We have grown sales to $1.86 billion in FY16 from $881 million in 2011. Representing a compound annual growth rate of more than 16%.

During that same a five-year period, we've grown adjusted EBITDA to $150 million. Representing a CAGR of more than 50%, excluding the pro forma impact of acquisitions and significant operating leverage on our established platforms.

We outpaced the market growth for the fifth consecutive year as we continued to capture core market share gains, open additional greenfield locations and complete accretive acquisitions. In wallboard, we have gained approximately 450 basis points of market share since 2011, and we believe that we remain well positioned to continue to outperform market overall.

Looking more closely at these growth drivers, we are growing our market share organically through our service capabilities, our product offering, delivery expertise, and our entrepreneurial culture. We further differentiate ourselves through exceptional customer support and a focus on safety.

Our ability to raise the bar with these elements creates a very significant barrier to entry for a lot of our peers. We also have a number of initiatives such as our retail showrooms, our GMS Expo, and our national accounts initiatives that we expect will drive additional demand in the future.

Beyond these best practices, we've also successfully grown our business by opening new locations, or greenfields as we call them, in adjacent markets. These provide a low risk growth avenue as we typically will open new locations in existing but remote markets to improve logistics, expand our product offerings, and of course, attract new customers.

Historically, greenfields have generally been accretive to earnings in year one, with just over a two-year payback on our initial investment. We've opened 28 greenfield branches between FY11 and FY16, including five branches opened in FY16.

On the acquisition front, we view ourselves as an acquirer of choice and have a very robust track record of completing acquisitions. In fact, approximately 40% of our growth has come from acquisitions in greenfields in the past five years. We have a highly fragmented base of over 400 local and regional distributor peers, which provides a very solid pipeline of consolidation opportunities, and I will expand on acquisitions in a moment.

Commercial and residential market growth contributed to our growth during the past several years, and we are optimistic that they on a continued upward trend. Housing starts and non-residential construction starts remain well below prior peaks, and the backlog of underinvestment in R&R provides additional potential upside as we move forward.

And finally, our success in growing our sales and volumes is driving sustained margin improvement on our effectively controlled cost base. Our investments in IT, our Yard Support Center and simply doing a little more, a little better each day have helped us to add over 500 basis points of margin improvement over the past five years.

Turning to acquisitions on page 5. As I mentioned, we believe we are the acquirer of choice in a highly fragmented market. We have a very finely tuned a strategy to source, purchase, and onboard tuck-in deals in order to immediately realize the benefits of our national scale. We have a dedicated M&A team to ensure that each acquisition brings the right cultural fit and at the right purchase price.

In FY16, we completed seven acquisitions with a combined trailing 12-month net sales of $208 million and a total of 25 branches. This included deals in both new markets and existing territories across a variety of products and end markets. Specifically, I'd like to highlight three of these deals that exemplify our acquisition framework and our deal track record.

In April 2016, we purchased M.R. Lee, a well established and premier drywall supplier in the greater Chicago area. M.R. Lee has built a very loyal customer base over the past 30 years through its versatility and ability to tackle any job, from single-family remodeling projects in the suburbs to high-rise projects in major urban centers. This transaction combined our deep resources with their entrepreneurial spirit to create a stronger, local leader.

In February of 2016, we entered the New England market through the acquisition of Robert N. Karpp Company, one of the largest wallboard specialty distributors in New England. Karpp had been operating as a family business in New England since 1979. The partnering of Karpp's very deep local relationships with GMS' national support and supplier network was a very natural fit, and the integration is progressing smoothly.

And in January of 2016, we closed on Gypsum Supply Company, marking our entrance into the Michigan and northwestern Ohio markets with the addition of 11 locations. GSC had a number of favorable attributes, including a diverse product offering similar to ours, regional market dominance, decades-long relationships and very in-depth local market knowledge. This combination brings great value to us, and the business is transitioning well onto our platform.

And beyond these transactions, we believe we have the potential to access a robust acquisition pipeline that will continue to supplement our strong organic growth. Coupled with the fact that we had no presence in roughly half of the top 100 US MSAs, we believe we have a significant long-term opportunity for our growth trajectory.

As examples, in May, we acquired Wall & Ceiling Supply in the Seattle market. And just last week, we acquired RockWise, a distributor of wallboard and related products in Arizona and Colorado. These two acquisitions to kick off FY17 add a combined to four locations, with total trailing 12-month net sales of $35 million and adjusted EBITDA after operating synergies of $4.5 million and reinforced the tangible strength of our deal pipeline.

In summary, the very unique culture, strategy, and environment that I discussed today is evident in our history of positive financial results. Given all of the tools and the products that we have, we are confident that we are going to continue to be successful in the years ahead. Now I'll turn the call over to Doug to discuss our financial results and our balance sheet. Doug?

Thank you, Mike, and good morning, everyone.

Beginning with our top line performance on page 6. We continue to see very strong new commercial and residential construction markets, resulting in record sales in FY16. Overall, our effective operating strategy and strong footprint combined with better macro fundamentals have driven significant improvement across our sales.

Our strong momentum continued into the fourth quarter of FY16, with sales up 30% compared to fourth quarter 2015 to deliver a full year of exceptional performance. Acquisitions accounted for approximately half of our growth in the fourth quarter and approximately 60% for the full year, complementing solid organic growth.

For the fourth quarter and FY16, net sales increased across all product categories. Driven by stronger commercial and residential activity, market share gains, and the favorable impact of acquisitions. On the bottom half of slide 6, we break out our base business and total sales growth by product which shows positive performance across the board for both the fourth quarter and FY16.

We experienced relatively consistent end-market trends throughout the year, with an acceleration during the fourth quarter. So I will focus my additional color by product category on the full year for efficiency.

Total sales for FY16 increased 18.3% to $1.86 billion, including 7.6% growth of our base business, with the remaining growth attributable to acquisitions. Importantly, we measure base business performance using a base period which excludes the net sales from any acquisitions made since the beginning of fiscal fourth quarter 2014.

In our largest category, wallboard, sales grew 21.3%, driven by wallboard volume of 2.84 billion square feet which increased 22.1% over prior year. Helped by greater end-market demand, market share gains, and acquisitions. Higher wallboard volume more than offset flat prices, which came in line with expectations.

Our year-over-year wallboard pricing comparisons primarily reflected a seasonal shift in material cost inflation. Due to most Gypsum manufacturers pushing the timing of their annual price initiatives from January to April to coincide with the stronger spring construction season. On a sequential basis, our fourth-quarter wallboard price was essentially flat compared to the prior two quarters.

In ceilings, this category is primarily non-residential focused and a very good business for us. We have strong market position nationally, and price tends to be more resilient through the cycle despite a quite moderate pace of demand improvement. For FY16, ceiling sales were up 6.6% or 3.1% on a base business basis.

In steel framing, we also have a firm market position and it's nearly all non-residential. In FY16, higher volumes benefited from greater commercial activity and acquisitions which was partially offset by market softening and steel prices which put downward pressure on steel sales throughout FY16.

Our product sales which include joint treatment, insulation, tools, fasteners, and other complementary products tend to trend in line with overall sales given their complementary nature to wallboard and ceilings. We continue to see strong growth due to pricing improvements, retail showroom growth initiatives, and acquisitions.

Moving to our financial results on page 7. Overall, the news is very positive. Gross profit of $594.1 million for the year increased 22.7% compared to FY15, resulting in margin improvement of 120 basis points to 32%. This was good progress driven by the ongoing price optimization efforts and streamlined purchasing initiatives to leverage our national purchasing power.

All product categories had more favorable margins, and to a lesser extent, we benefited from favorable mix. Q4 gross margins increased 180 basis points to 33.1%, primarily the result of better product margins, coupled with the timing of some favorable cost savings unique to that quarter. Excluding these temporary cost savings, fourth-quarter gross margin was essentially flat sequentially compared to Q3, which is more consistent with our current margin profile.

Significantly higher gross profit dollars more than offset higher SG&A costs to deliver adjusted EBITDA of $150.3 million for FY16, representing an increase of 32% compared to FY15. For the fourth quarter, we increased our adjusted EBITDA by 46.8%, also led by higher gross profit dollars. Our tailored SG&A investments in our Yard Support Center, technology, and branch talent to support expanded activity are paying off with overall EBITDA margin improvement.

During 2016, we incurred additional costs to rejuvenate our fleet with safer and more productive units, along with some corporate infrastucture build out to become a public company. We expect to grow our business based on these investments and leverage our SG&A over the time to drive additional EBITDA gains.

I'll note, consistent with the registration statement filed in connection with our IPO, our adjusted EBITDA figures include the contributions from acquisitions from the predecessor period of acquisitions as of the date of each respective acquisition. Consistent with our definition of adjusted EBITDA in our credit agreements.

That said, our adjusted EBITDA margins exclude the predecessor acquisition periods to be consistent with our presentation of net sales. In other words, our 70 basis point improvement in adjusted EBITDA margin to 7.4% for FY16 is based on $138.2 million of adjusted EBITDA.

Turning now to our capital resources on page 8. With the development of our IPO proceeds, we further strengthened our balance sheet and improved our credit metrics. We used the net proceeds from the IPO together with cash on hand to repay in full $160 million plus accrued and unpaid interest under our 7.75% second lien facility.

Following this action, our pro forma net debt on a trailing 12-month basis adjusted EBITDA stood at approximately 3.2 times as of April 30, 2016. Looking at the longer-term trend, even after investing our $200 million in acquisitions, we improved our leverage from 6 times as of April 30 to 4.3 times as of April 30, 2016. Which reflects our ongoing commitment to improving and preserving our financial flexibility.

Operating cash was essentially flat at $48 million in FY16 compared to FY15, with roughly $7 million of additional working capital to support growth in our sales. [CapEx], which is typically less than 1% of sales, was $8 million and we expect it to range from $8 million to $10 million going forward.

In February 2016, we exercised the $100 million accordion [feature] on our AVO facility which increased the facility from $200 million to $300 million. With our improved liquidity and ample capital resources, we believe that we are firmly situated to continue capitalizing on the long-term upside in construction end markets and pursuing select accretive acquisitions. Looking more broadly at our progress, our organic growth rates have consistently exceeded the market pace, and we're confident in our ability to continue that trend.

Overall, our effective operating strategy and expanded footprint combined with the better macro fundamentals should continue to drive significant improvement in sales. We are well positioned to accomplish this while further expanding our margins, as we benefit from favorable product mix and core margin gains as we leverage our cost base to grow adjusted EBITDA. And now, let me turn the call back over to Mike for his closing remarks.

Thanks, Doug. Again, thank you all for joining us today.

We are extremely excited to be operating as a public company. We're the leading specialty distributor of wallboard and ceilings with significant scale advantages, and a clear strategy to continue to outperform the market. We have unique culture and a very dedicated team that has helped us get to where we are today.

Now we've grown into that position over 45 years under one consistent motto, you can never go wrong doing the right thing. And we will stick to that guiding principle as we further build on our multiple levers to drive above-market growth, including market share gains, opening greenfields, and accretive M&A to deliver higher EBITDA. We're extremely excited about the opportunities ahead of us in FY17 and beyond, and we sincerely appreciate your interest in our Company.

Thank you very much, and, operator, we are now ready to open up the call for questions.

Thank you.

(Operator Instructions)

Mike Dahl, Credit Suisse.

Thanks for taking my questions, and congrats on the first quarter out of the gates. Doug, wanted to ask a little bit more about some of the cadence through the quarter and taking on wallboard specifically, both from a volume and price standpoint.

And so price, first, obviously, there was an increase in the market in April. And just wondering if you could give us any color on how your price trended through the quarter and anything more recent as far as May and June?

Sure, Mike. I will let Mike chime in as well.

In terms of pricing, as we talked about, it's relatively stable over the last few quarters for us. And to this current quarter, we've seen a slight uptick in pricing. On a demand basis, volumes have remained extremely strong.

You all saw how strong first quarter, calendar quarter, was for everyone and obviously you see that in our results for the fourth quarter ended April as well. Trends volumes have continued to trend up. We haven't seen a drop off.

I know there was some expectation that maybe there will be a drop off, particularly after an extremely strong first quarter. We have not seen that, and we feel very good about where we are at right now.

Okay. Thanks. And then shifting gears to the ceiling side. It looked like, I think at least relative to our expectations, ceilings came in a bit light.

So could you also talk a little bit about price volume and ceilings that you were seeing through the quarter? And also how you're thinking about obviously with some of the steel costs moving now against you, how pricing is trending and what price actions you're taking on some of the steel side of both ceilings and your framing business?

Well, Mike, this is Mike Callahan. As we've talked about before, the growth in ceilings is certainly a much lower growth rate than what we've seen relative to wallboard. However, we still have seen some growth in our volumes and in our share in ceilings. It's kind of a lag factor based on commercial activity versus residential, and we frankly expect that to continue to grow, albeit at a slower pace, mid-single-digit pace, probably.

The steel situation has gotten -- is obviously very different over the last three or four months. We have experienced double-digit percentage increases the last couple of months, and anticipate another one coming. So our current position as it relates to steal is to quote escalators in the work that we are quoting, and we anticipate this to continue for the near term.

I don't necessarily think this is going to be a permanent condition. It will probably flatten out at some point over the next six months, a year, I don't know, but and be more stable. But right now, I would say that we're definitely dealing with an escalating price environment on steel.

And we turn steel pretty quickly, about nine times a year as we've talked before and our guys are pretty quick to start pricing off of replacement costs.

Right.

We feel good about what's going on in the steel market.

Great. And just so -- to tie it back to some of your comment, Doug, around margins. So taking all this together, some of the movements on both price and costs, you're saying that we should expect gross margins to be around 2% going forward, at least through this coming quarter?

At least on a short-term basis, yes.

Okay. And then sorry if I could sneak one more in. I think the gross margin then was a nice upside surprise in the quarter, but then just given it will trend a bit lower in the next quarter.

SG&A seemed like it was a bit more of a step up than we would have thought. So is there anything that you're doing as far as or were there any things around timing of some of those investments in the fourth quarter that roll off early in 2017, or how should we think about trajectory for SG&A?

Well in terms of our SG&A, as we talked about, we've been making some investments, particularly out in the branch with new equipment which runs through our lease expense and also we've been investing in people and stuff. From a corporate perspective, we think we've pretty much leveled off at where we need to be.

There may be a slight increase in some of the public company related costs, particularly around additional audit fees for an integrated audit for stocks purposes, some Board related expenses. But we expect to make that up with incremental sales and margins on that side.

On the branch side, we're probably about 12 months, maybe 12 to 18 months away from getting at an optimal level of where we need to be on the equipment side. Our guys are very -- since their compensation is essentially tied to profitability, they are very careful with investments that they are making, particularly with equipment.

So they are pretty much -- we're not investing in equipment unless we have the incremental business to go along with it or we've simply just got to replace some of our older fleet with the safer more productive stuff. But we certainly expect that to level out in the next 12 to 18 months.

Mike, as we talked about before too, keep in mind, part of this is still use the word rejuvenation. This really is a replenishment of the fleet to bring it up to a standard, for lack of a better word. Because we did go, during the downturn, with minimal investment in fleet.

So a lot of this, this 12 to 18 month catch up is just that. I think it will get us to a level, a normalized level in terms of fleets.

But we were also doing this throughout 2016, and really part of 2015 as well. So that's reflected. We've had a steady increase over the last couple of years, particularly around lease expense.

Right. Okay. That's helpful. Thanks and good luck.

Thanks, Mike.

Bob Wettenhall, RBC Capital Markets.

Good morning. Doug, just walk me through again what you were saying about the cadence of wallboard volumes and pricing through the April quarter? Because I know the price increase went into effect April 1, and then your quarter ended at month end. I know your comment was sequential pricing.

And then it sounds like you had some other stuff in gross margin, the 33% is an awesome number. Just trying to understand what else is in there and how to think about the pre-buy dynamic going into the quarter, and how -- it sounds like Mike is very bullish on demand right now. How do we think about volumes and price during the balance of 2017?

Well, wallboard pricing specifics in the quarter was pretty stable throughout the quarter. So we ended up at around [$3.05] per [1,000], a little bit over $3.05. And that was pretty much where it was the whole quarter.

We did not see a spike up in April. And the price increases actually started coming in from some manufacturers the later part of March, and other guys earlier in April.

So there was no pre-buy -- we certainly did not do any pre-buy, although we suspect that there was some industry pre-buy just based on the volume, the huge volume run-up that the Gypsum Association reported for the first calendar quarter. Then starting really in May, we started you see a gradual increase in our price of volumes that have held up have increased every month since this calendar year.

We continue to see that in June with volumes continuing to go up, not down. And again, we talked about price. I don't want to be too specific, but we've seen a slight improvement, particularly on a sequential basis.

Would that be like a low single-digit improvement?

Yes.

And through that, could you make -- very low, de minimis. But what would you say about ceilings relative to wallboard volume?

Well actually in the fourth quarter while we may have been lower than the consensus numbers, we actually had organic growth of about a little under 6.5% for the fourth quarter. And that was primarily mix and volume. There were no price increases in our fourth quarter.

Now there are some price increases scheduled for this summer. In fact, in August on core products there are some price increases coming, and again, we like price increases. So we expect to pick up some incremental margin from that.

That's great help with the gross margin. I know you guys had some one-time public company costs as part of the IPO process. Can you give us a little help thinking about the trajectory of SG&A spending and -- you're obviously getting some sales leverage, I know there's some one-time costs that roll off. How should we be thinking about that for 2017?

Well if you go back and you look over our history in talking about sales and particularly adjusted EBITDA, we've for every incremental sales dollar that we've had we've generated low double-digits incremental EBITDA. And we certainly expect to continue that trend.

And then once we level off on some of these SG&A investments, you could see it trending higher than that, based on some of our performance over maybe three years ago. We start to see higher incremental dollars falling to the bottom line.

Got it, and just one final one. Other products was up almost 40%, which is an awesome growth rate. Any color what's driving that, and is that likely to revert towards more normal levels going forward? Thanks, guys. Good luck.

Thanks, Bob.

Thanks, Bob. Well that's a fourth-quarter number, so obviously that 40% includes acquisitions. On a base business basis, it was about 22%. And that category for us trends very close to wallboard so you should see close.

It's up a little higher, so if you did have some favorable price increases in some of the products. That's a category for us that includes joint cement, stucco, tools and fasteners, insulation. So it did have a little bit more price momentum with some of those categories than you saw with wallboard.

Keith Hughes, SunTrust.

Thank you. Two questions. One, going back to the ceilings business. April, May, or excuse me, May, June, what kind of volume trends are you seeing in that business, volume and pricing trends?

And then second question, I know you did two at deals here very recently, foundation did a big deal a couple weeks ago. Just talk about the M&A climate, how willing folks are to sell? Is there acceleration going on here as the industry consolidates?

Okay. Thanks, Keith. In terms of ceiling volumes, it's been fairly consistent with what we've been seeing and what the industry guys have been talking about for the last year.

Although for us, it was up in the fourth quarter again, and there was some special projects in there, some larger type projects that helped to drive that number. But that's pretty much the trend that's continued with ceilings so far into this current first quarter, similar to what we've seen over the last 12 months.

So you're saying the 6% you saw was elevated with some projects were back down to low- to mid-single digits. Is that the trend?

For ceilings?

For ceilings, yes.

In terms of volume, I was specifically talking about volumes where that 6.5% has some product mix, et cetera.

Okay. How about the M&A question?

Well, hey, Keith, this is Mike. The M&A pipeline is a surprisingly still very full. I think what's going on in our industry right now is there is a growing feeling amongst a lot of the independent distributors that really in order to long term be successful, it requires significant investments in new equipment.

An average articulating [move] motor is over $300,000, probably closer to $325,000. And you combine the equipment requirements with the need for enhanced IT, and frankly, broader product offerings and the like, I think a lot of the independents are coming to the conclusion that it would be better to align themselves with a national footprint distributor. And candidly, I think our approach in maintaining the local brands, the local identities and really perpetuating these outstanding companies and brands that have been in place for, in many cases, 30 and 40 years, that's got a lot of appeal. And so, certainly, my own personal efforts as well as the M&A team and our Chairman of the Board, we are constantly involved in talking with additional target companies. And it's really -- it's not a matter of growing to a certain number of branches or necessarily being in each and state, we just want to maintain our focus on a being the best quality distributor in the industry.

So, we are excited. There's a lot of opportunities ahead of us, and we've got a very active discussion line right now with a number of targets.

Okay. Let me just make one final then. You pulled out commercial. You called it out as a positive in the earnings release. In the fourth quarter, was that coming from new construction or remodel activity within commercial?

That would be both for us. As you know, we've spent a lot of time on the R&R side based on the Armstrong ceilings line, the USG ceilings line, a lot of our commercial products. So it's really both to be honest with you.

Okay. Thank you very much.

Thanks, Keith.

Trey Grooms, Stephens.

Good morning, guys. This is Drew Lipke on for Trey. Congrats on a good quarter here. And I promise I will keep this to just two questions.

First that I had, looking at your ceilings business and you talked about the lower growth profile there. It looks like suspended ceilings have been losing some share somewhat to open plenum through this non-res recovery. I'm curious if you guys could talk about what you're seeing there, how that might impact your ceilings business, what you're doing to address that secular shift? And do you participate in any kind of movement to open plenum if that is what we're seeing?

Well the growth trek on ceilings, as we talked earlier, is definitely slower and there has been a move towards a lot of open plenum space. There's no question about it. But when you look at the installed base of product that is out there that has to be replaced at some point, the institutional work, the office buildings and the like, there's still a significant market opportunity there.

And then, frankly the manufacturers have really spent a lot of energy in developing new architectural products. The architectural specialty type products that are going to go a long way to maybe melding new technology and new looks with open plenum, whether it's acoustical clouds, whether it's alternative products that will blend in with maybe some of those new directions.

As we've always said, ceilings is a real integral part, whether it's the institutional commodity ceiling, the higher end 2X2, 4 x 4 or the architectural specialty products. So we're still very much convinced that this is a line of business that we are going to remain committed to.

Great. That's helpful. And then sticking on the commercial piece, can you talk about any variability you're seeing from both geography and then by end market, whether between commercial, office, healthcare, education?

Generally speaking, I would say that in most of our major metro markets, we are extremely busy. If you look at places like the Pacific Northwest, the Southeastern markets, going into the mid-Atlantic areas -- look at the number of tower cranes in an area like Seattle, Bellevue, that kind of thing, there's a great deal of activity in most of our metro markets.

You have some isolated softening perhaps, maybe in areas that might be related to the oil patch. But we really have not seen any significant shrinkage as far as that goes. So it's been a pretty robust level of activity across the board.

Got it. Thanks, guys.

Thank you very much.

Dave Manthey, Robert W. Baird.

Good morning, thank you. Looking at the base business growth in 2016 overall and the differentials here in growth rates, so the 10% growth in wallboard and other categories versus about 3% in ceilings and steel framing. Does that have any implications or tell us anything about relative strength in residential versus non-residential broadly?

Well, ceilings we've talked about and that's definitely been growing at a slower pace than the other product categories. Steel, the steel growth, particularly in the base business is more about the decline in steel prices that we saw throughout really calendar 2015. What we look at is the hot dip galvanized price per short ton.

And in 2015, that was down over 30%, and then it started to recover in January of this year. And in the last couple of months, it's really spiked up. It's up over 60% from where it ended 2015.

So last year was steel. We were battling the price declines, although we did actually expand our margins and the volumes was up significantly. So that was impacted by the negative price, but now we've got some tailwinds on the price side.

So there is no real differential that you're seeing in the strength of your business between residential and non-residential broadly?

No, the steel business is extremely strong. Again, on our overall, our business is 60% commercial. So it's a big chunk of it.

Right. Doug, you mentioned moving from the fiscal fourth quarter into the first quarter that you did not see a drop off in the pace of business, and you cited that you were seeing year-over-year growth. Since we don't have a lot of historical data and you've got acquisitions moving in and out, could you give us any help in thinking about historical trends as you move from fourth quarter to first quarter, first to second, et cetera, the sequential changes from quarter to quarter as you move through a year of the base business?

In terms of the base business, our first and second quarters from a seasonality perspective historically have always been our strongest quarters. And then the third quarter, that's the trough quarter, normally, on the base business.

You get into the -- it's wintertime, so even though our business is interior, you still have some slowdown. You have got to be able to get to jobs, et cetera. So that's typically the trough period.

And then this year we did benefit from a mild winter, really, throughout the country or at least milder than it normally is. And while we don't believe that pulled through any business, we just believe that really allowed a lot of people to catch up on business and keep their current pace maintained.

Yes, do you have any quantification of those? Can you talk about what is the average quarter-to-quarter change tends to be through a year? If you don't have it in front of you, we can follow up afterwards.

Sure. I don't have that in front of me, but we can do that.

Okay. All right. Thanks, guys.

Thanks, Dave.

Thank you. I will turn the floor back now to Mike Callahan for closing remarks.

I just want to once again thank everyone for participating in our call today. As I said, we are very, very excited about the future of that lies ahead of us here and we appreciate your interest in our Company and look forward to talking with you all again soon. Thank you very much.

Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.