GMS Inc (GMS) 2018 Q1 法說會逐字稿

Good day, and welcome to the GMS Inc. Fiscal First Quarter 2018 Earnings Call. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Rodney Noseia, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us today for GMS' Earnings Conference Call for the First Quarter of our Fiscal Year 2018 ended July 31, 2017. I'm joined by Mike Callahan, President and CEO; and Doug Goforth, CFO. In addition to the first quarter 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 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 that may cause actual results to differ from those discussed today.

Examples of forward-looking statements include those related to net sales, gross profit, gross margins, capital expenditures and market share growth as well as non-GAAP financial measures such as adjusted EBITDA, the ratio of debt to adjusted EBITDA, adjusted net income and base business sales, including any management expectations or outlook for fiscal 2018 and beyond.

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 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 definitions and reconciliations of non-GAAP measures.

Note that references on this call to first quarter and fiscal 2018 relate to the quarter ended July 31, 2017, and the fiscal year ended April 30, 2018, respectively.

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

Good morning, and thanks for taking the time to join us today. Before telling you about our quarterly performance, I wanted to take a moment to recognize our team members in Houston who have undergone such traumatic storm and its aftermath with last week's hurricane.

While our facilities and our equipment were not impacted by the storms and flooding, a number of our associates were severely impacted with evacuations, extensive property damage and the trauma of seeing their entire communities underwater. We are extremely happy to report that none of our GMS family in Houston was lost in the storms. However, there are many in great need.

We've recently set up an assistant fund for our employees to make contributions for disaster relief. And as is typical when it comes to the GMS organization, donations began flowing as soon as I sent out the communication. All of our yards in Houston are back open for business, and we have already begun to take orders for the recovery efforts. And while we have had some short-term disruption, our team at Tejas Materials will be back to normal soon.

We are very proud of the wonderful leadership of our Houston management team and employees, and we will do all we can to assist in the recovery efforts. We wish everyone inside and outside the company that has been impacted by the storm a speedy recovery.

Now turning to Slide #3. We are excited to report that our business continues to grow both organically and through acquisitions while generating record adjusted EBITDA. So let's begin today's call with a review of our operating highlights, and then Doug will cover our first quarter financial results before turning the call back over to me to open the line for your questions.

As we have discussed in our prior calls, over our 46-year history, GMS has been able to establish a preeminent position as the largest distributor of wallboard and suspended ceilings systems in the U.S. With our strong capital position, outstanding employees throughout the organization and strong supplier and customer bases, our business has continued to profitably grow market share and expand our geographic presence. As of this report, our share in wallboard and ceilings is 14.6% and 16.7%, respectively.

I firmly believe that our significant success in all of these areas is based on several factors: first, in looking at our national presence, we have established a very sound geographical balance throughout the U.S. Additionally, our end market diversification between commercial and residential volumes further counter volatility and lead to consistent performance.

These factors, combined with carrying over 20,000 SKUs in available inventory, make GMS an industry leader and a go-to source for superior service. With our national footprint of 209 locations across 42 states and our balanced exposure to new commercial and residential construction, along with R&R, we have the ability to serve small-, medium- and large-sized projects out of most of our facilities.

Many of our smaller peers are more limited in project scope and unable to compete on such a broad scale. And again, our people are extremely dedicated and committed to providing the best service in the industry and it shows in our results.

Since we went public a little over a year ago, we have increased our market share in wallboard by 160 basis points, acquired or opened 23 new locations with LTM revenues in excess of $231 million, increased our reported LTM Q1 2017 net sales by 30% and our adjusted EBITDA by 41% compared to fiscal year '16. As a result, we have expanded adjusted EBITDA margins by 70 basis points in the LTM Q1 2018 period compared to fiscal year '16.

Looking at our results over the past several years, our margins had benefited significantly from profitable growth initiatives. Since 2012, we have grown pro forma adjusted EBITDA at a 41% CAGR through the LTM Q1 2018 period, resulting in 480 basis points of improvement in adjusted EBITDA margin to 8.1%. This has been achieved through a combination of gross margin gains of 360 basis points over that time period, along with operating leverage on SG&A.

So looking briefly at our scale advantage on Slide #4. I'd like to reinforce a couple of points that put us in a very attractive position nationally. Our suppliers and customers choose to work with GMS because of our differentiated service model that drives market leadership in the majority of the regions that we serve.

Looking at our wallboard business, over the past 6 years, we have profitably grown our market share by 600 basis points in wallboard to 14.6% of the total board shift over the June 2017 LTM period. We are confident that we can continue to drive above-market growth across all of our product categories through our multipronged expansion strategy as we capitalize on the strength of our large and diverse end markets. Our dedicated employees collectively have a significant stake in the continued success of our company, which is strongly aligned with our efforts to drive superior execution throughout our organization.

Turning to first quarter highlights on Slide #5. Net sales increased 16.8% year-over-year to a record $642.2 million, achieving double-digit gains for the 25th consecutive quarter. First quarter sales benefited from price gains in each product category, stronger end market demand, particularly in commercial and the contribution of successful acquisitions.

In our base business, net sales increased 7.8% on the strength of higher end market demand, cross-selling initiatives and new branch openings. Acquisitions completed over the past 2 years contributed the remaining half of net sales growth during the quarter.

Net income increased approximately 67.4% to $15.3 million or $0.37 (sic) [$0.36] per share during the first quarter of fiscal 2018. And on an adjusted basis, net income increased by 10.9% to $19.7 million or $0.47 per share compared to the first quarter of fiscal 2017. This improvement was largely driven by higher net sales, which drove improvement of approximately 15% in both gross profit and adjusted EBITDA.

We are growing our business and completing acquisitions with a sharp eye on preserving a strong balance sheet with improving leverage metrics. During the past year, through a combination of favorable refinancing efforts and accretive adjusted EBITDA gains, we have reduced our net debt to LTM pro forma adjusted EBITDA to 2.9x, representing a 0.5 turn improvement from 3.4x compared to the prior year quarter. I think the key takeaway is that we have the balance sheet strength to continue advancing our growth strategy.

Now turning to acquisitions on Slide #6. Our acquisitions remain core to our story. We deploy capital on acquisitions where we can expand into new markets or reinforce our existing market positions. Our 8 acquisitions completed since our IPO all fit that mold, adding a combined $231 million of trailing 12-month net sales to our business on a pro forma basis.

Most recently in August, we made the very complementary acquisition of ASI Ceilings and Building Products business in Eastern Michigan. ASI added 3 branches, which brought us exclusive ceilings distribution arrangements in 3 local markets. This deal also added to our already strong footprint in Michigan, a state we just entered in 2016, which now totals 16 branch locations, with each building upon deep customer relationships and supported by the pricing optimization and purchasing advantages provided by our national resources.

Our acquisition pipeline remains robust with hundreds of fragmented local competitors, which still represent more than half of the market. Many of those smaller peers fit the GMS culture and platform and facilitate our objective to either expand in existing markets or enter into new markets. We have the capital resources to continue executing on our acquisition pipeline while keeping to our target range of purchase price multiples improving leverage ratios. As such, we expect accretive acquisitions to continue to supplement our organic growth moving forward.

And with that, I will turn the call over to Doug to further discuss our financial results and capital resources.

Thank you, Mike, and good morning, everyone. Beginning with first quarter financial results on Slide 7, our first quarter performance puts us on track for fiscal 2018 to deliver another record year for both net sales and adjusted EBITDA, and a higher margin than fiscal 2017. We're winning new business, sourcing accretive acquisitions and taking advantage of solid demand.

Looking at the top line for the quarter, we grew net sales 16.8% to $642.2 million, with double-digit increases in each product category compared to the first quarter of fiscal 2017. We increased base business sales during the quarter by 7.8% year-over-year. After adjusting for calendar fluctuations and shipping days, organic sales grew approximately 6.1%. That said, the timing of the July 4th holiday on a Tuesday in calendar 2017 essentially resulted in 2 fewer shipping days for that 4-day holiday weekend or roughly the same number of shipping days year-over-year. Therefore, the actual base business results are more representative of our momentum this quarter as compared to the per-day growth figures we provided.

Wallboard net sales increased 13.3% in the first quarter compared to the same period last fiscal year on higher wallboard volume and price. Base business wallboard volume improved 3.7% supported by modest growth in new residential, new commercial and R&R activity. Wallboard price was up 1.3% year-over-year to $311 and stable compared to the fourth quarter of fiscal 2017.

In our commercial-focused products, our ceiling sales increased during the quarter by 15.5% year-over-year, including a 10.6% increase on a base business basis as ceiling tile volumes saw good pull-through demand from higher grid activity in recent quarters. Both ceiling grid and ceiling tile also benefited from improved year-over-year pricing.

Steel framing increased during the quarter by 24.1% year-over-year, including 10% on a base business basis, mainly driven by stronger commercial activity and price gains along with the benefit of acquisitions. Higher activity in steel framing is particularly encouraging, given that this business typically serves as the leading demand indicator for our other products, including wallboard.

Our other products net sales increased 19.8% during the quarter. The pull-through factor from cross-selling initiatives was again evident with base business sales up 10% year-over-year. This product category demonstrates strength of our one-stop shop solution of ancillary products for our customers and also shows the significant pull-through force of wallboard, ceilings and steel framing sales along with price optimization efforts on certain products.

Gross margin decreased slightly by 60 basis points to 31.9% for the quarter compared to the first quarter of 2017, primarily due to higher cost material purchases in wallboard, along with a shift in product mix. While lower year-over-year, our first quarter gross margin was in line with our expectation that we communicated on our fourth quarter earnings call. On that call, we noted that we expected gross profit margins to decline sequentially in the first quarter of 2018. First quarter gross profit margins ultimately did decline sequentially but ended up coming in at 31.9%, which was at the top end of our expectation.

This decline was due to elevated levels of volatility in wallboard pricing early in our first quarter as the market responded to the wallboard manufacturers' 2017 price increase. To that point, in June, a detailed assessment of our consolidated May results prompted us to immediately undertake a variety of purchasing initiatives to better match our purchase cost to the prevailing price environment that we believe had peaked for the current calendar year.

As these initiatives took hold and began to roll through our P&L, gross margin improved each month sequentially throughout the quarter. This upward trajectory allows us to enter the second quarter of fiscal 2018 very confident in our ability to deliver gross margin of 32.5% for the full fiscal year 2018, which as we have said before, we believe, is the fair near-term expectation but certainly not a ceiling on future profit potential of our business.

Furthermore, during the quarter, our investments in equipment, technology and branch talent helped drive higher gross profit dollars while also delivering an improvement in SG&A as a percent of net sales, which we expect to continue. Adjusted EBITDA increased 14.8% to a record $52.8 million during the quarter on higher net sales. Our adjusted EBITDA margin of 8.2% was down slightly from the prior year period, primarily due to the temporary gross margin pressure I just discussed, which just outweighed improving operating leverage.

At July 31, our net debt to LTM pro forma adjusted EBITDA stood at 2.9x, consistent with 2.9x at April 30 and down from 3.4x year-over-year. Liquidity in the business remains strong with $20 million of cash on hand and $320 million available on our credit facility as of July 31.

Given the strength of our business over the past year, in June, we took an opportunity to refinance our first lien term loan. We expanded the borrowing base by another $100 million to $578 million and used the additional net proceeds to pay down $94 million on the ABL facility. We also extended the maturity by 2 years to 2023 and reduced the interest rate by 50 basis points. Including our prior refinancing activity during the fiscal second quarter 2017, since our IPO, we've reduced our interest rate on our term loan by 75 basis points while expanding the borrowing base by $200 million.

This all-around improvement in our base -- in our balance sheet and leverage metrics is a testament to our profitable growth strategy, and we're pleased that the rating agencies have taken notice as evidenced by Moody's recent upgrade of GMS in July.

Regarding cash flow, during the first quarter of 2018, our operating cash flow improved $36.5 million to $5.9 million, which was largely influenced by improved working capital turns and lower cash taxes. The uptick in first quarter CapEx to $5.5 million was primarily related to fleet and equipment purchases at the beginning of the fiscal year.

Now let me turn the call back over to Mike for some closing comments.

Thank you, Doug. As we look to fiscal year 2018, our efforts will be geared towards delivering another record year of adjusted EBITDA at a higher margin year-over-year by capitalizing on healthy demand trends, executing on our attractive acquisition pipeline and generating additional SG&A savings. And that fiscal year '18 expectation fits within the context of our longer-term objectives for our company, which I will now discuss.

In our base business, we expect to continue to grow approximately 2% faster than the market through organic share gains and the addition of 3 to 5 greenfields per year, which have always been the lower risk instrumental part of our organic growth story and really have been since the very beginning of our company.

We also plan to continue to supplement base business growth with acquisitions by executing on our strong deal pipeline at attractive multiples and similar average deal sizes as in fiscal 2017. To that point, on a pro forma basis, including acquisitions, sales increased to approximately $2.45 billion for the 12 months ended July 31, 2017, representing approximately 25.1% growth compared to the 12 months ended July 31, 2016.

Our cash flow dynamics remain favorable as we plan to generate additional cash by growth in adjusted EBITDA while preserving low CapEx levels and appropriate working capital ratios. We still expect our fiscal 2018 capital investments to be approximately $12 million to $14 million for the year.

And finally, we are well positioned to continue to strengthen our balance sheet and drive our net debt to LTM pro forma adjusted EBITDA towards our long-term target ratio below 2.5x. With these objectives in place, we are confident in the strength of our company and the ability to deliver on our full year goals.

And in closing, we are extremely pleased with the consistent improvement across all of our major product categories, which continue to build upon our strong track record of profitable growth. The dedication of our team, our national scale and differentiated service model, along with a proven acquisition strategy, continues to drive superior performance. Coupled with our comprehensive product offering, balanced end market exposure and efficiently managed operations, we believe we have a very attractive growth and adjusted EBITDA margin opportunity in the coming years.

And as we look to the full year fiscal 2018 and beyond, our position as the leading specialty distributor in our very strong capital base should help us accomplish profitable growth for the company and for our shareholders. We're very excited about where we are today and we look forward to updating you on our progress in coming quarters.

And with that, operator, we are now ready to open up the call for questions.

(Operator Instructions) And we'll go to our first question from Bob Wetenhall with RBC Capital Markets.

I wanted to start by asking, Mike, what's driving the big share gains? And is there any way you can provide some more color on your commentary in the press release about stronger commercial activity and your thoughts on what's happening in coastal Texas and the Florida markets?

Well, I mean, generally speaking, Bob, our activity levels in commercial had been very strong. In fact, recently, I've read a recent Dodge report where commercial activity is up, I think, 6% as of July. And as I look at our activity levels across the board, I mean, our quote activity and our backlog position is generally very, very strong. The only soft pocket, I think, we have seen thus far has been on the kind of the multifamily category, although frankly -- and certainly in some of the markets, we're talking about here, particularly in Houston, that's going to be an interesting dynamic going forward. The Class A office space continues to be a good segment for us in terms of backlog and quote activity and that's pretty much across the board. And so I know there was some noise earlier in the year about some softness in commercial, but frankly, we're just not seeing it and I think some of the things that Doug alluded to in terms of steel volumes indicates further business down the road.

And could you just tie that in with your share gain strategy and how that's going to impact volumes?

Well, I'd say, certainly, a lot of those projects that Mike alluded to, particularly some of the larger specialty-type stuff, where they're doing airport-type work or a lot of those new stadiums, stadium remodelings, et cetera, even multifamily, that type of work tends to -- the larger players in the space tend to get a larger share of that business than some of the smaller competitors that Mike alluded to. So we certainly believe that we get more than our fair share of that type of business throughout the country. And there is other areas in the country that we're really strong in, particularly the Pacific Northwest, et cetera, that are just going like gangbusters both on the commercial and the residential side. And again, those are markets that we're really strong in. So I mean, our footprint is really favorable to where a lot of the activity and a lot of the cranes are right now in the country.

Got it. And any preliminary thoughts on the situation in Houston, how that will impact GMS? And if there is some sort of unfortunate event in Florida with Hurricane Irma, are you positioned for that?

Well, I mean, I guess, addressing the Houston situation, we're still sorting things out, although our operations are up and running. All 3 of our operations in the greater Houston area are operating. The volume of material that is going out the door candidly is significantly higher than you would normally experience. I mean, there's -- numbers have been thrown around and I don't -- it's anecdotal at this point, but I can tell you that we're having hard time keeping anything in stock, and that includes wallboard, plywood, related building products, and we're literally shifting ceiling tile by the pallet load or -- is being picked up in many cases. So the R&R balance there, I mean, just trying to quantify the magnitude of what's coming is hard to do at this point. But I think it's safe to say that we will have significant increase in volumes in that market as we try to recover and rehab the not just single-family but commercial and everything has been devastated by the storm.

And it will be on a sustained basis.

Yes.

This is going to be going on for a long time in Houston. And the other thing people need to consider is similar to Katrina, when that happened, the -- first of all, many of you guys have noted obviously, that gives a boost to the volume not only on wallboard but the other products, including ceilings. But also a lot of people ended up relocating and creating demand in other markets, and we're not necessarily saying you're going to see as much of that as you did in Katrina, but certainly, you could probably have a fair amount of people in Houston relocating to other parts of Texas that's going to drive additional demand there as well.

And as far as Florida goes, I actually got an update this morning before the call from our SVP of Ops. And we're currently positioned to shut down operations on Friday. In some -- in many -- all the South Florida operations certainly will be battened down and waiting for the storm. We, in many cases, will be moving equipment and assets to more centrally located parts of the state to try to avoid any storm damage. And obviously, currently, they're having issues relative to gas and water and the like already. So we'll see. And I guess, Tampa as well is on high alert at this point. So that's a GBD item, but we're trying to do everything that we can to protect our folks and to kind of secure the operations and see what exactly happens with Irma because I guess, right now, it's still kind of unpredictable, but it's certainly a very scary storm.

Yes. To Doug's comments about a lot of pull-through on the demand side, it's obvious that wallboard pricing held up sequentially. Does this create a more positive environment for product pricing going into next year?

It definitely provides more support.

That'll be great.

And just one quick one. Doug, you mentioned the 32.5% gross margin. And I was curious, at 31.9% first quarter GM, can you just walk us through the cadence of the year, how we should think gross margin will move?

Thanks, Bob.

Yes. I mean, as we mentioned, we're not going to get specific by quarter but our expectation is 32.5%. That's what we believe we're going to deliver for the fiscal year. And certainly, we're not satisfied with that number. So we're working on ways to further expand that for the year, particularly as we enter into fiscal '19. I certainly believe that when we enter into fiscal '19, we're going to be at a higher run rate than that 32.5%. Obviously, we would have to be just to get to 32.5% for the full year, you have to be running higher than 32.5%.

The next question comes from Mike Dahl with Barclays.

Clearly, sad and unfortunate circumstances in Houston, so happy to hear that at least the -- your employees and their families are safe. Sticking with some of the comments in response to Bob's questions about focusing more on kind of the inventory positioning as it relates to your position in the rebuild process. You mentioned it's hard to keep anything in stock. Can you give us a sense of kind of how you're planning to manage inventory? And any initial conversations you've had with suppliers to kind of gauge availability of supply of critical materials?

Well, I mean, I think the manufacturers are all going to be highly supportive of anything we need to do in order to build up a higher level of stock. I mean, we've had some preliminary conversations about securing short-term overflow warehouses, perhaps for what I would call the higher turn products that we know are going to be in high demand. I'm sure space like that will be difficult to locate, but I still think it's something we need to consider. We -- I recall back when we had the terrible tornadoes in Joplin. We set up -- we essentially set up an operation there to be able to service that market and help the rebuilding efforts there. So in some respects, I can see doing the same kind of thing here. But our management group down in Texas and our Vice President, who coordinates that area of the country, I'm sure were already in extended conversations with a number of suppliers about what we might have to do to be able to facilitate that process.

I mean, we're very comfortable that we're going to be able to service our customers' needs, particularly our larger customers. We've already been in detailed discussions with them to make sure they recover. I mean, actually things are going in Houston as Mike alluded to. We really started operations back last week. We opened up with a skeleton crew on Thursday, and those guys have pretty much worked, have been working every day since then. A lot of the products that we're having the most difficulty with are the other -- the complementary products, particularly ceilings. I mean, we've got school districts, et cetera, coming in picking up ceiling tiles by the pallet load, things like that. So wallboard obviously -- there is a fair amount of production capacity in Texas and the surrounding states. So there was one location that shut down for a period of time due to the storm, but they're open up back now. So we're not really concerned -- too concerned about that, but we are staying close to the situation.

Okay. And is there anything, I guess, to that point, anything in the conversations that would suggest clearly with Katrina, we were in a fairly tight utilization situation at peak housing or heading into peak housing, this is -- maybe there is a bit more spare capacity on the wallboard side but anything to suggest that we could see a situation like we saw 12 years ago where we're really on an allocation basis? Are you hearing anything from that initially from the manufacturers?

I really can't say that we've heard anything to that extent yet, Mike, that could happen, but at this point, we're not having any conversations about allocation there.

Got it. And then shifting gears a little bit, I think, going to ceilings in the quarter. Doug, I think you mentioned that both volume and price were positive. Was hoping you could give us a little more color and split those 2 and give us a sense of what volume versus price was.

Price was about 3% to 4% and the rest was volume. And then on steel, it was about 2% and the rest was volume.

And we'll take our next question from Keith Hughes with SunTrust.

A couple of quick questions for you. The -- on your wallboard volume in the quarter, we've seen many quarters when you've come in pretty far ahead of the industry numbers. This looks a little more in line and I know you can't really gain share every quarter, but was there anything specific in the quarter that prevented you from potentially selling more wallboard volume?

Nothing specific, Keith. We definitely believe that we passed on a certain amount of business due to price. I mean, we're okay with that. But we look at it more on a -- on an annual basis, particularly on an LTM basis. And if you look at it LTM on June, we still outgrew the market by 270 basis points. We did have a pretty tough comp the second quarter of last year, we were at 13% organic growth, which was 2x what the Gypsum Association did. So we had kind of tough comp rolling off, but we don't think there is anything specific for this change with our business.

Okay. And if you look at August across the entire business, has the cadence of business -- maybe ex amount of Houston, has the cadence of business changed either positively or negatively?

Pretty consistent.

Yes, the business remains pretty steady.

I'd agree.

Okay, final question. You had nice SG&A leverage in the quarter. Is the leverage we saw here, would we see the same amount or rate, if you will, for remainder of this fiscal year?

Well, obviously, keep in mind that the third quarter is our trough quarter, so SG&A tends to -- is a higher level of sales for that quarter. But we expect to continue to put up leverage, and as we've talked about on previous calls, actually believe that's going to accelerate in the second half of the fiscal year.

You're referring to as a percentage of sales, correct?

Yes, yes, Keith.

And we'll take our next question from Luke Junk with Baird.

First question. Just wondering, regarding the wallboard pricing initiatives that we've discussed, just wondering if you could give any more color in that regard. I'm wondering, is there something that would -- should be viewed as more onetime in nature, helping to adjust being relative to the price discovery process with pricing going into the market? Or would you expect maybe that there could be some lasting benefits from these initiatives?

Well, on the cost side, I believe you're talking about our purchase costs, I mean, that's a fluid process. Our purchasing teams in the divisions are always working on different opportunities to further enhance that and expand our margins. So it's ongoing. But of course, you negotiate prices every year going into the next calendar year, so we expect that process to start relatively soon. We do expect that manufacturers come late this year, will be coming out with price increase notices, and we'll start working on programs with them as part of that process.

And our view is that for the remainder of the year, I mean, it's generally stable in terms of pricing. Everything is kind of settled in.

In terms of our sales price, yes.

And then second, ceiling pricing, I know you'd mentioned last call that there is some 10% type increases out there for the August time frame. Now that we're kind of seeing those start to get into the market, any sense for market reaction, chances of some of that sticking? I know it's kind of a nonprecedent level of a price increase for the ceilings products.

I think the pricing environment is really going to -- is settled in. It'd be fairly consistent with what it's been in the past, which is 3% to 5% per year. I mean, there's been some shifts from some of the manufacturers on the 10%. But I -- it's still a critical business for us and you're going to see consistent price gains year in and year out.

(Operator Instructions) And we'll go to our next caller, it's Mike McCall with Seaport Global.

This is actually Matt McCall. So what's the -- you iterated the 32.5%, Q1 was a little bit better. I'm just looking at the puts and takes. You're still targeting the same number but did -- for instance, did the purchasing initiatives kind of work out the way you expected? Sounds like you -- the belief is that price seemed to peak in June, I mean, I'm just trying to think of what changed if anything because it sounds like Q1 came in a little bit better, was there an offset to that upside that kept you in that 32.5% range?

Well, part of it, Matt, was our turns actually accelerated. So we actually turned inventory for the quarter at 15x, which is up from the 14 that we've been running, which is really good. 15 is even better. So that enabled us to turn some of that higher cost inventory a little bit faster than we anticipated. So that was certainly part of it. And there was also some one-off opportunities that we were able to take advantage of, particularly in July to pick up some slack in certain markets where there was some opportunity for us to buy some product at volume, which is only going to accelerate our margin growth in August. So -- but otherwise, pretty much business as usual.

Okay. All right. So no big changes. And the other question I had. Mike, I think you mentioned the temporary locations and also in the storm areas and maybe the need for efforts to get products from other geographies to source those markets. Are there anticipated temporary costs, temporary expenses that could impact near-term results even though the top line is going to perform better, you could have some offset on the cost and expense lines?

Yes, that's a potential, but the reality of it is, at this point, we're not talking about anything specific in terms of -- I mean, given the size of our facilities and where they're located strategically in the market, it may be that, that's not even necessary. It's more of a speculative thing on my part as to whether or not that's something we might consider. But -- and even if you were to do an overflow facility, it would be very low cost, typically minimal people and equipment is literally a place to hold the inventory and probably take it off a truck or a railcar and dispatch it directly to a job site -- so that -- again, that's a very preliminary on our part.

Yes, more likely than not, it would be taking advantage of some reload opportunities that we can partner up with some business partners of ours. We've already identified a couple locations south of Houston that have that potential should we need them. I mean, our locations particularly the downtown Houston yard is actually huge. It's almost 100,000 square feet. It's actually an old factory from World War II that used to make tank parts there. So we can do a lot of business just out of that one facility, and then we have 2 other facilities of about 40,000 square foot each. So we're not sure we even need it.

Yes, I would agree.

And that concludes today's question-and-answer session. I would like to turn the call back over to Mike Callahan. Please go ahead.

Well, thank you, everyone, again for joining us for the call today. And we look forward to talking with you about our performance in future quarters.

Ladies and gentlemen, this does conclude today's call. Thank you for your participation, and you may now disconnect.