GMS Inc (GMS) 2017 Q1 法說會逐字稿

Greetings and welcome to the GMS' first-quarter FY17 earnings conference call.

(Operator Instructions)

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

Good morning and thank you for joining us today for GMS' earnings conference call for the first quarter ended July 31, 2016. I'm joined by Mike Callahan, President and CEO, and Doug Goforth, CFO. In addition to the Q1 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 slide 2. On today's call, Management's prepared remarks and answers to your questions may contain certain 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 growth in 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 statement in the future.

Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the Company's filings with the SEC, including the definitions and reconciliations of non-GAAP measures. Note that references to this call to FY17 relate to the year ended April 30, 2017, and references to the first quarter or Q1 relate to the quarter ended July 31, 2016.

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

Thank you for joining us today. I will begin with a quick overview of our Company, highlights from the first quarter, and an update on our recent acquisitions.

Doug will then provide details on our growth strategy, our financial results, and capital resources. After our prepared remarks, we will open up the call for your questions.

If you would turn to slide 3. We had a very strong quarter to start the current fiscal year. We produced our 20th straight quarter of double-digit growth in net sales, with strong results across all of our product categories during our first quarter. We accomplished this while also completing our IPO in June, which builds on more than 45 years of successfully growing our Company into the largest North American specialty distributer of wallboard, ceilings and complimentary interior construction products.

Looking at our Company overall, we expect this success to continue based on our multifaceted growth strategy and the positive momentum we are experiencing in our business. As the largest player in our industry, we serve as a critical link between our suppliers and a highly fragmented customer base. Our national footprint and local market expertise make us a preferred distributer to this extensive customer base.

Furthermore, we serve our growing customer base with an extensive product offering featuring over 20,000 SKUs that allows us to serve as a one-stop shop for customers. Which means that we are able to supply nearly everything that our typical specialty contractor customer needs on a job site. This produces a significant pull-through factor across each of our product categories, which Doug will elaborate on shortly.

Our national scale combined with our wide-product offering provides us with a balanced mix of business across all of our end-markets, which were approximately 60% commercial and 40% residential. This has given us a more resilient demand profile across multiple points in the cycle. With the continued dedication of our talented and highly motivated Team, we believe that we are firmly positioned to continue to expand our footprint and be among the best specialty distributors in the business.

Moving on to our first-quarter highlights on slide number 4. Our first-quarter results continued to outpace the market, with net sales up 21.5% over the same quarter last fiscal year to nearly $550 million.

While acquisitions certainly augmented our growth strategy, our base-business net sales in Q1 were up 9.2% compared to the first quarter of FY16. Despite having one fewer shipping day during the quarter, representing continued strong organic growth as well.

Our net income tripled to $9.2 million during the first quarter over the same quarter last fiscal year, as our margins continued to expand. Gross margin rose 140 basis points to 32.5%, helping to drive Q1 adjusted EBITDA to $45.9 million. Up 34.7% compared to the first quarter of FY16.

Acquisitions accounted for 59% of Q1 net sales growth, mainly reflecting deals completed over the past two years. We expect acquisitions to continue to drive a considerable amount of our growth, building on robust deal activity since the start of FY17. So far, we have completed four acquisitions in FY17 which have added eight locations to our footprint, and I will expand on these recent deals in just a moment.

Finally, I'd like to highlight the fact that following our recent IPO that we completed in June 2016, we benefit from a very attractive capital structure. And we're very pleased to have our corporate debt recently upgraded by both Moody's and S&P.

Turning to our acquisitions on slide number 5. We believe that we are the acquirer of choice in a highly fragmented market, given our employee-centric culture and our strong reputation in the industry. We have a finely tuned strategy to source, purchase, and onboard tuck-in deals in order to quickly realize the benefits of our national scale. We have a dedicated M&A Team, tasked with insuring that each acquisition brings the right cultural fit and is completed within our target range of purchase price multiples.

When sourcing acquisitions, we believe that the large highly fragmented industry works to our advantage. As we seek to acquire leading local distributors as footholds in targeted new markets, to deepen our presence in existing markets, or to expand our service capabilities through strategic bolt-on acquisitions. To date in FY17, we have completed four acquisitions of distributors, representing combined trailing 12-month net sales of almost $135 million.

For context, during the first four months of FY17, we have completed transactions representing nearly two-thirds of the acquired revenue during all of FY16. While several of these acquisitions were quite significant and materially increased revenue on a comparable basis, we would envision maintaining our historical pace of six to eight acquisitions going forward.

These transactions include deals in both new and existing markets. Further augmenting our balanced mix of business across our end-markets, which exemplifies our acquisition framework and our deal track record.

During the first quarter, we purchased Wall & Ceiling Supply and Rockwise, each located in the western US. With strong reputations for quality service, resulting from a deep rooted customer-driven approach. Making them an excellent fit for the GMS family.

More recently, in August, we acquired Steven F. Kempf Building Material Company. A leading supplier to professional contractors in the greater Philadelphia metro area with a very similar product offering as GMS. Steven Kempf was a very unique addition, operating out of one branch which is roughly three times the size of our average distribution yard in terms of square feet and revenue. The entire Steven Kempf Building Materials team joined GMS, and together, we expect to continue to grow our presence in the Philly and the Mid-Atlantic region.

Earlier this month, we made a very strategic entry into the south Florida market with the addition of Olympia Building Supplies, a leading regional supplier of wallboard and related construction products. Olympia scaled up its loyal customer base rapidly during the past decade, and its seasoned operating team was prepared to partner with GMS for the next step of their evolution. This deal serves as a very natural extension of our existing strongholds in central and northern Florida to now give us coverage of the entire state, which we believe includes some of the most attractive markets in the nation.

Frankly beyond these transactions, our targets remain the smaller competitors which represent the majority of the $11-billion market that we serve. We had the capital resources to access this robust pipeline that will continue to supplement our strong organic growth.

So in summary, we believe our solid financial results and recent acquisitions reflect GMS' very unique culture, our strategy, and the favorable operating environment in our industry. We are confident that we will continue to be successful in the years ahead, given our growing scale, our expanding capabilities, and the promising opportunities ahead. Now I'll turn the call over to Doug to further discuss our growth strategy, our first-quarter financial results, and our capital resources. Doug?

Thanks, Mike, and good morning, everyone. Beginning with our top-line performance on slide 6. Our strong track record of executing profitable growth continued in the first quarter. We increased net sales 21.5% year over year to $549.8 million, reflecting our multifaceted approach to outpacing the market growth rate. We expanded our market share organically in the first quarter through our service capabilities, product offering, commitment to safety and entrepreneurial culture.

Additionally, our low-risk approach to opening new branch locations in familiar markets or markets adjacent to our existing operations also contributed to our progress. These combined factors helped drive our first-quarter base-business sales up 9.2% year over year, despite one fewer shipping day.

Acquisitions, as Mike just outlined, remain core to our strategy and continue to drive further top- and bottom-line improvement as we source, purchase, and integrate deals. Our diverse end-market exposure continues to provide us with a wider access to project activity, and help us balance our long-term upside. In the first quarter, residential demand continued to outpace commercial activity in many markets, which particularly benefited our wallboard and other product categories.

Still on slide 6, we provide a detailed breakdown of our base business and total sales growth by product, which shows positive performance across our entire product offering for the first quarter. Our wallboard volumes increased a robust 20% in the first quarter compared to the first quarter of FY16, including 8.8% base-business improvement. This drove wallboard revenues up 19.1% year over year.

We had modest improvement in wallboard price compared to fourth quarter last fiscal year, which was in line with expectations following three quarters of essentially stable price. Price was softer compared to prior-year quarterly, partly tied to lower prices in the second half of calendar 2015 before modest increases taking effect this past spring. We expect a stable price environment through the end of calendar 2016, and remain optimistic for additional price gains in calendar 2017.

Our ceiling sales increased by $7.4 million or 9.3% year over year, including 3.4% on a base-business basis. And steel framing increased $17 million or 25.3% year over year, including 6% on a base-business basis.

Ceiling and steel framing sales are primarily driven by commercial construction activity. Both of these product categories benefited from improved year-over-year prices.

Our other product net sales, which includes joint compound, tools and fasteners, insulation, and various other construction products, showed strong growth in the first quarter. Improving 34.2% year over year, or 22.9% on a base-business basis. I'll expand on this impressive growth on the next slide. Overall, we are pleased with our results across each product category, which is driving margin expansion in our business.

On slide 7, we provide some context on the importance of our one-stop-shop strategy. GMS is one of the few national specialty distributors that are offering a complete package of complimentary product offerings to interior contractors. As such, we provide a one-stop-shop solution for customers, which means we are able to supply nearly everything that our typical specialty contractor customer needs on a job site.

Our sales of ceilings, wallboard and steel framing create a significant pull-through force for each other and many of our other complimentary products. This favorable dynamic combined with certain pricing improvements, retail show rooms, acquisitions and other initiatives such as expanding our residential installation sales, drove our product net sales up 34.2% in the first quarter of FY17 versus the year-ago period.

Looking at our margin expansion on slide 8. Our investments in the yard support center, technology and branch talent to support expanded activity is favorably impacting margins. Gross margins expanded 140 basis points to 32.5%. This improvement was primarily driven by ongoing price optimization efforts and streamlined purchasing initiatives to fully leverage our national purchasing power. All product categories had more favorable margins, and we also benefited somewhat from favorable product mix.

Higher gross profit dollars more than offset operating expenses at the branch level to grow adjusted EBITDA by 34.7% to $45.9 million, benefiting from improved gross margins on stronger sales. Our adjusted EBITDA margin of 8.4% was up approximately 80 basis points from the prior period, and up slightly from 8.3% in the fourth quarter of FY16. We expect to grow our business based on our investments, and leverage our SG&A over time to drive additional EBITDA gains.

I'll note, our adjusted EBITDA in the first quarter and moving forward no longer includes the pro forma contributions from acquisitions for the period prior to the date of acquisition. First quarter adjusted EBITDA margin of 8.4% is based on $45.9 million of adjusted EBITDA, which purely reflects base business plus earnings from acquired entities beginning from the date of acquisitions. However, we will continue to share our LTM adjusted EBITDA on a pro forma basis for a better view of our run rate adjusted EBITDA.

Turning now to our capital structure on slide 9. Our leverage at July 31 stood at 3.4 times following the use of IPO proceeds along with cash on hand to fully pay off our former $160 million second-lien term loan, which eliminated approximately $12.4 million of annual interest expense. The 3.4 times represents a significant improvement from 6 times leverage ratio as of April 2014.

Liquidity remains strong, with $9.8 million of cash on hand and $132 million available on our credit facility as of July 31. As mentioned previously, both Moody's and S&P recently upgraded our corporate debt based on their view of growing US construction activity and our improved credit metrics. We remain committed to improving and preserving our financial flexibility.

Operating cash flow is seasonal, with the first quarter typically having the highest cash outflow, followed by stronger cash generation during the balance of the year. We had operating cash outflow of $30.6 million in the first quarter compared to $18.4 million in the prior-year quarter, with roughly $34.8 million of additional working capital to support growth in sales.

First-quarter CapEx remained below 1% of sales, and we continue to expect to range from $8 million to $10 million going forward. Consistent with approximately $8 million of CapEx in FY16.

In summary, we're excited by our strong momentum to start the year and well positioned to continue delivering on our growth objectives. Integrating successful acquisitions, and leveraging our platform to drive expanded margins and returns. And now I'll turn the call back over to Mike for his closing remarks before we take questions.

Thanks, Doug. Again, thank you all for joining us today. We're in the early stages of our life as a public Company, but we have a very long history as a private Company. And we believe that we have the right strategy, products, and industry position, all held together by a very talented Team that has helped us get to where we are today. While organic growth rates continue to exceed the market pace and we're confident in our ability to continue that trend.

Looking to the remainder of FY17, we expect our effective operating strategy and our expanding footprint, combined with the better macro fundamentals should continue to drive significant improvement in sales. We plan to accomplish this while further expanding our margins to grow adjusted EBITDA.

We are pleased with our progress and the dedication of the entire GMS family, which is driving this continued success. We sincerely appreciate your interest in our Company and being with us today. Thank you very much. Operator, we are now ready to open the call up for questions.

Thank you

(Operator Instructions)

Our first question comes from line of Bob Wettenhall with RBC Capital Markets.

Good morning.

Hey, Bob.

Thanks for the great detail. I was hoping you could explain, I'm a little confused and just be gentle with me. It seems like you had a weather headwind, and you also had one less day this quarter and you still put up really good sales numbers. Which would suggest that on an organic basis, you have a lot of momentum. And I was hoping you could step me through how that's unfolding.

And also what's going on quarter to date since the end of the quarter, has that momentum continued? I might be off thinking there's momentum. But given the lack of one less day and the weather headwind, it really suggests that organic demand is pretty robust.

Hey, Bob it's Doug. Absolutely. Just some association numbers which came out for the second quarter which is something we compare ourselves to. We were about 600 basis points higher than their number, so roughly 2X the growth that they showed for the second quarter. So while we don't -- certainly there was some weather, particularly in Texas, but that comes every year. It's been a little unusual in Texas for the last couple of years, but it's really going to have to be really I think severe particularly winter weather up in the Northeast for us to really talk about that on any quarters moving forward. So we feel good about our momentum.

We did have one less shipping day, so we actually had one less day not only of sales but actually to cover our fixed costs as well. So that's somewhat impactful on the SG&A side as well. But we feel good about that momentum. We're looking forward to reporting our second-quarter numbers when we release that for the earnings. So it's volume is robust, the manufacturers are out there with expectations talking about volumes of 8% which we believe are quite reasonable. And we expect to continue to grow faster than that on the wallboard side.

So that's very encouraging. Could you touch on what's going on in price volume activity in ceilings?

Well as we've talked about in the past, the volume obviously in terms of ceilings has been relatively flat. But we continue to get price appreciation, as we've talked about before. With the price increase announced in August, and that's rolled out, and we frankly would anticipate another price increase in calendar 2017.

But the volumes are up. But obviously they don't grow anywhere near as quickly as the wallboard volumes. But fundamentally, we would anticipate continuing improvement in that arena, predominantly with price.

That's encouraging, and if I could just sneak one in before hand it over. I've noticed a pretty notable step up in deal size in your M&A activity, and I was trying to understand. Do you expect the M&A targets you're looking at to continue increasing in size that's having a notable effect on your top line? Is this something that you're going to continue to pursue larger acquisitions?

And maybe, Doug, if you could just talk for a second too about what's going on with -- if you're growing your M&A program, how are you managing your debt and capital structure? I noted there were some rating actions recently pertaining to your credit ratings, so kind of a two-part question. Thanks for all of the color, and good luck.

Thanks, Bob. I'll address the acquisition size. The two recent deals, Steven Kempf and Olympia, definitely in terms of the average transaction size in the past were significantly larger. I can't really say that our strategy is to gravitate towards larger deals. We were just very fortunate to be able to have the opportunities to partner with these two companies, and the market fit, and frankly the cultural and chemistry fit was just ideal.

But we're still going to run anywhere from six to eight transactions a year. Some are going to be larger than others, some are going to be smaller tuck in or bolt-ons. But we haven't really adjusted our strategy as to targeting larger deals. The main thing is to find gaps in our market offering and our footprint, and what companies that are out there that are leading distributors that would consider partnering with GMS. So we were just very fortunate in these two instances. But frankly, with all of the acquisitions to have these folks come into the fold, but there's no real shift in strategy there.

Yes, I would actually add to that. The two most recent ones, Kempf and Olympia, were actually our fourth and fifth largest acquisitions that we've done. So it's not necessarily recent, it's just the timing of them.

Yes, I would agree.

In terms of our capital structure, obviously that's something that we are looking at all the time and developing strategy on and discussing it closely with our Board. The debt markets, particularly the term loan markets, are pretty robust right now. So we believe there's an opportunity for us to go out there and raise some additional term loan debt, near term, and so we're looking at that. And what we would expect to do is take those proceeds and use 100% of the net proceeds to pay down our ABL borrowings to give us some more dry powder to continue to go with the acquisitions using operating cash and ABL.

Well done, good luck.

Thanks, Bob.

Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

Thank you. I guess first to follow up on Bob's question, as you talk, and specifically in the commercial markets, to your customer base as they look at their project pipeline going out six, nine months. I know they get a little bit of a look. Are they seeing accelerating, decelerating type of booking and quoting activity, any sort of feel there would be great.

Well it's interesting, Keith. Good morning, by the way. We just had a call yesterday with our VPs and did a divisional, a division by division break down. And I would say generally speaking, the backlog and quote activity is still pretty robust. We've gotten a couple of pockets here and there that we may see some business coming off the table. I would say there's are a little bit of softness in spots in Texas, for example. But generally speaking, as I look at our backlog, the quote activity and the outlook going into 2017, we're still very optimistic and have got a lot of quotes that are out there. And frankly, we're quoting escalators on those quotes too. So that's my answer to that.

I think generally speaking, if you look at the markets, I would say the Pacific Northwest is still very strong. The southeastern market has got a lot of activity across the board, and then the Mid Atlantic area is still very robust as well. So yes, I think activity levels and our outlook is still very upbeat.

Thank you, that's very helpful. And then -- GMS on the SG&A question, as you know, the SG&A results. You've had some elevated spending there, we saw that in the fourth quarter as well. Can you just remind everybody on the call what you're spending on? And as you start anniversarying the higher spend, will that come down to under revenue growth at some point in the future?

This is Doug, Keith. Definitely, we expect that to come down longer term. What we've been investing in, and we talked about it on the fourth quarter as well, and we've also seen some headwinds is first of all, starting with logistics labor. Particularly our delivery crews, with CDL drivers, there's been some definite inflation there. We have to hire and fight to retain the best people in that market, so there's a lot of people trying to poach from different companies so we have to address that. We've also had, because of the ongoing shortage of drivers, there's a lot of overtime involved to meet demand as well. So that's also driving higher labor costs within the logistics area.

We've also been investing in our fleet, although this is a lesser headwind than the labor is. But we're -- been upgrading our fleet through operating leases of the ABLs on that, and that's something we're pretty much getting to an inflection point where we are in a steady state. We've been doing that over the last couple of years, so its been rising over the last couple of years and we think we're almost at a stable state on that. So I would expect over within 12 months, you're going to start to see us generating some meaningful leverage on the operating side.

Okay. Final question on the three acquisitions that were done post close of the quarter, if can you give us any idea of what the price paid for those were?

For the?

For the acquisitions. The last three.

The last three? (multiple speakers) So we provided the last two acquisitions, I think we've disclosed that. I think we had all four of them disclosed in the actual earnings release there, Keith. Just let me check it real fast. So we had for about $26 million for Rockwise and Wall & Ceiling, and about $76 million for Kempf and Olympia.

Okay, all right. Thanks very much.

You bet.

(Operator Instructions)

Our next question comes from the line of David Manthey with Robert W. Baird.

Thank you. Good morning, guys.

Hey, Dave.

First, do you expect any change in your relationship with USG following the sale of L&W? And if you can just talk about how you see channel dynamics playing out over the next several years here, including any implication for the pricing environment?

Well, as Jim Metcalf alluded to on their call, there obviously was a little bit of channel conflict. And I think the way that I look at it is a win-win for us and for USG, candidly. Our hope is that we would continue to expand our business base. USG has always been a very valuable partner of GMS, even with L&W. And going forward, we would expect that relationship to continue to grow. In fact, we've had a number of opportunities recently that we're talking about potential expansion. So the future is bright relative to USG.

As far as the dynamics in the marketplace, with the acquisition of L&W by ABC. ABC is a fabulous company, and we would anticipate just like they've grown to run a very, very good business there. They will continue to run L&W the way they've always run their business, which is very prudently and very successfully,

So what the impact on the market and pricing and the like, I can't really speak to that. I can tell you what our strategy and our approach is going to be, which is to try to enhance and improve price where we can. But I actually think we're sitting at a pretty good position frankly with the recent changes.

Okay, thank you. And second, could you discuss where you think the mix of other products could ultimately go? For example, if you look at a typical job, I know there's no typical job, but if you looked on average what percentage of other products would be included in an average job. And then if you could talk about what percentage of your locations currently carry a full complement of products, and maybe for how long they have carried those?

Well I would say the other product revenue, if you look at our product mix, and we talk a lot about the fact that it's a balanced product mix. The other product revenues really go almost in lock step with wallboard sales and other products. So I think that relationship and what you're looking at in terms of that area of the business will continue to grow as we expand our wallboard sales and related products.

And as far as our existing operations, the bulk of our yards carry the full complement of products. Now what you may have at a given market is perhaps a concentration center, so to speak. Where some of those products are redistributed out of a primary hub to maybe some of the satellite operations so that they can carry less of a full line perhaps, so you kind of concentrate that inventory at a main base.

And probably a good example of that would be [EIFS], the exterior finishing systems. But fundamentally, all of our operations -- so you could have regional differences, a little nuances perhaps in maybe a western market might have a different mix perhaps than one in the east. But fundamentally, our yards are all focused on selling the full complement of the product offering.

We did have some tailwinds, particularly in other product sales. So as we mentioned in the prepared remarks, we had significant base business growth there, and that was the result of some initiatives that have been going on at a number of our subsidiaries. But over time, I would expect that, again as Mike mentioned, to track closer to wallboard revenue growth as opposed to continue at that same type of pace.

Okay, thank you very much.

Sure, thanks, Dave.

There are no further questions at this time. I'd like to turn the call back over to Mr. Mike Callahan for closing comments.

Well I just want to thank everybody for participating in the call today, and we look forward to talking to you again next quarter. Thanks very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.