GMS Inc (GMS) 2018 Q2 法說會逐字稿

Good day, and welcome to the GMS Inc. Fiscal Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to [Mark Barbalato], Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us this morning for GMS' earnings conference call for the second quarter of fiscal 2018 ended October 31, 2017. I'm joined today by Mike Callahan, President and CEO and Doug Goforth, CFO. In addition to the 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, 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 discussion related to these forward-looking statements contained in the company's filings with the SEC, including the Risks section in the company's 10-K and other periodic reports and the definitions and reconciliation of non-GAAP measures. Note, the references on this call to second quarter and fiscal 2018 relate to the quarter ended October 31, 2017, and the fiscal year ended April 30, 2018, respectively.

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

Good morning, and thank you for joining us today. We'll begin today's call with a review of our operating highlights, and then Doug will cover our second quarter financial results in more detail. We will then open the line up for your questions.

We had another record quarter of revenue and adjusted EBITDA during the second quarter despite the negative impact of Hurricanes Harvey and Irma. As I mentioned on last quarter's call, we experienced a short-term disruption at our Tejas Materials facilities in Houston. And since then, we also have had several facilities in Florida and other parts of the southeast that were impacted by Hurricane Irma.

But I'm very pleased to say that all of our employees are safe and that none of our facilities or their contents were damaged. However, as a result of the lost shipping days from both of these storms, revenue was negatively impacted in the aggregate by approximately $4 million.

I'm very proud of the response of our management team and employees to these hurricanes. Our team worked very hard to provide superior service to our customers during the very difficult period while many also assisted directly in the disaster relief and recovery efforts in their respective communities.

From a business perspective, natural disasters like this have historically driven accelerated volumes as recovery and rebuilding activity ramps up. In fact, we are already seeing this occur in Houston, where rebuilding activity is in full swing and anticipated to continue for at least 2 years. This will serve as a positive tailwind for our Houston business going forward.

On the other hand, while the damage in Florida was severe, it was mostly wind-related, causing power outages and lost shipping days but will be less of an impact on our business given our focus on interior products.

All that said, I remain confident that our net sales will continue to grow above market and that our operational efficiency initiatives will support adjusted EBITDA margin expansion going forward.

Now as we've discussed on prior calls, GMS has been able to establish itself as the largest distributor of wallboard and suspended ceilings systems in the U.S. as we continue to profitably expand our geographic presence. As of this report, our share in wallboard and ceilings is approximately 14.5% and 17.7%, respectively. Within wallboard, specifically, we have profitably grown our share by 590 basis points since 2010.

Now in my view, our ability to gain share on an annual basis reflects the breadth of our footprint, the balance of our business between end markets, our comprehensive suite of products that covers over 20,000 SKUs and available inventory and perhaps, most importantly, our exceptional customer service, which has really been the hallmark of GMS since its founding over 46 years ago.

As a result, we are able to serve small, medium and large-sized projects out of most of our facilities. In addition, for many suppliers, we have become a critical link to a highly fragmented customer base. Our position, in turn, has allowed us to benefit on multiple fronts, with national scale that drives purchasing advantages over smaller peers, while our local expertise enhances service capabilities to help grow our business through organic market share gains.

Now since going public, we have increased our market share in wallboard by 140 basis points, opened 6 greenfield locations and added 20 locations through 10 strategic acquisitions with the LTM revenues for those acquisitions in excess of $240 million. In addition, we have increased our reported LTM second quarter '18 net sales and adjusted EBITDA by 32.8% and 44.6%, respectively, as compared to fiscal '16. Importantly, we have been able to do this while also enhancing our adjusted EBITDA margin profile, which has expanded 480 basis points since 2012 to 8.1% on an LTM basis.

Now moving to Slide #4. We are confident that we can continue to drive profitable above-market growth across our product categories by leveraging the scale advantages that come with our growing footprint, by harnessing our talented and dedicated employees to continue delivering superior execution through our differentiated service model and by capitalizing on large, diverse end markets through our multipronged expansion strategy.

Now if I can move to Slide 5, let me shift gears and provide a brief overview of our performance for the quarter. Second quarter net sales increased 9.5% year-over-year to a record $648 million. Excluding the negative impact of the hurricanes, net sales would have increased double digits for the 26th consecutive quarter. Robust ceiling volumes, acquisitions and year-over-year price improvements across most of our product offerings were the primary drivers of the growth. Wallboard volumes also increased 4.3%, supported by acquisitions and modest growth in the base business.

I'd also like to highlight that gross margins during the second quarter exceeded 32.5% and expanded on both a year-over-year and sequential basis as we said it would last quarter. This reflects solid volumes and the continued success of our purchasing initiatives undertaken during Q1. While adjusted SG&A as a percent of net sales remained flat versus last year, net income increased modestly during second quarter '18. And lastly, adjusted EBITDA increased 9.5% to a record $54.2 million during the quarter, driven by higher net sales.

Now turning to acquisitions on Slide #6. Acquisitions really remained core to our story, and we remain excited about the quality of our acquisition pipeline. We deploy capital on acquisitions where we can expand into or reinforce existing market positions. Our 10 acquisitions completed since our IPO all fit that mold as they generated an aggregate of approximately $240 million in net sales for the 12-month period prior to the date of acquisition.

Last quarter, we discussed ASI, which closed on August 1. And since then, we've added Washington Building Supply Company (sic) [Washington Builders Supply Company] , which closed on October 2, and most recently on December 4, we made the very complementary acquisition of Southwest Building Materials' wallboard, ceilings and building products business in Amarillo, Texas.

Southwest Building Materials added one branch, which combined with our existing agreements, gives us exclusive ceilings distribution arrangements across Northwest Texas. This deal also added to our already very strong footprint in Texas, which now totals 16 branch locations, with each one building upon deep customer relationships and supported by pricing optimization and purchasing advantages provided by our national footprint.

Our acquisition pipeline remains robust and includes many of the hundreds of fragmented local competitors still representing more than half of the overall market. Many of these smaller peers fit the GMS culture and would greatly benefit from our platform as we look to expand our penetration into existing markets or enter into new ones. We have the capital resources to continue executing on our robust pipeline while maintaining prudent leverage ratios. As such, we expect accretive acquisitions to continue to complement our organic growth moving forward.

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

Thanks, Mike, and good morning, everyone. Beginning with financial results on Slide 7. We delivered record sales and adjusted EBITDA in the second quarter despite the negative impact related to hurricanes.

Starting on the top line, we grew net sales 9.5% to $648 million, which increases in each product category compared to the second quarter of fiscal 2017. We increased base business sales during the quarter by 5.1% year-over-year. Wallboard net sales increased 6.9% to $288.5 million in the second quarter compared to the same period last fiscal year on increased volume and pricing. Wallboard volume improved 4.3%, supported by modest growth in our base business and the variable impact from acquisitions. Wallboard price was up 2.4% year-over-year and essentially flat compared to the first quarter as expected.

Our ceiling sales increased during the quarter by 19% year-over-year to $101.6 million. This includes a 12.9% increase in the base business, driven by robust ceiling volumes, price gains, the benefit from acquisitions and share gains, all of which have aided in further expanding our market-leading position to 17.7% during the quarter.

Steel framing increased during the quarter by 7.4% year-over-year to $103.2 million, including a 2.3% increase in the base business, mainly driven by stronger commercial activity and the benefit of acquisitions, offset slightly by lower steel prices versus prior year. Steel prices were up sequentially from the first quarter. As a reminder, we tend to view steel framing as a lead indicator of demand for our other products.

Our other products' net sales increased 10.2% during the quarter to $154.7 million, driven by base business sales up 6.1%, highlighting the success of our efforts to drive above-market growth in other complementary products. This product category demonstrates the breadth of our portfolio, one of our major competitive advantages, and highlights the strength of our customer relationships and pull-through effects of wallboard, ceilings and steel framing.

Gross margin improved 20 basis points to 32.8% for the quarter compared to the second quarter of 2017. As we discussed on the last call, we experienced some margin compression during the first quarter as the market responded to the announced wallboard manufacturers' price increases for calendar 2017. We have undertaken a variety of purchasing initiatives to adjust for the new price environment, and we are pleased to report renewed strength in our gross margin as we expanded our gross margin 90 basis points sequentially during the second quarter.

This increase from the start of our fiscal year gives us confidence that we will deliver on our previously announced guidance of gross margin in excess of 32.5% for fiscal year 2018. We continue to view this as a reasonable near-term expectation for our gross margin but by no means a ceiling on our potential to drive higher margins over the long term.

We also remain committed to investment in our talent, capital equipment and technology across our business. Adjusted SG&A as a percent of net sales of 24.5% was flat versus the second quarter of fiscal 2017 despite an acceleration of wage inflation, an increase in payroll-related expenses, incremental storm-related costs and expenses associated with our national managers meeting, which we hold every few years.

During the second quarter of fiscal 2018, adjusted EBITDA increased 9.5% to a record $54.2 million during the quarter, driven by higher net sales. Our adjusted EBITDA margin of 8.4% was flat from the prior year period, with a slight improvement in gross margin offset by a slight increase in SG&A expenses.

Turning to Slide 8. At October 31, our net debt to LTM pro forma adjusted EBITDA stood at 2.9x, consistent with the prior quarter and down 0.5 turn from 3.4x last year. Our liquidity remained strong, $19.8 million of cash on hand and $322 million available on our ABL facility. As a result, Standard & Poor's upgraded GMS' corporate debt in November to BB- from B+.

Regarding cash flow, during the first half of fiscal 2018, we generated $28.1 million in operating cash flow, which was largely influenced by higher earnings and improved working capital turns. CapEx in the first half of fiscal year increased to $8.6 million, primarily related to fleet and equipment purchases. We still expect our fiscal 2018 CapEx to be $12 million to $14 million or less than 1% of LTM pro forma sales.

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

Thanks, Doug. In closing, we delivered a solid 5.1% organic revenue growth in 2Q compared to second quarter fiscal '17. We also expanded gross and adjusted EBITDA margins by 90 basis points and 20 basis points, respectively, on a sequential basis.

Our third quarter is off to a good start as underlying demand remains solid, pricing is stable and we continue to execute well against our growth strategy, all of which should drive above-market net sales growth in the second half of the fiscal year. We expect that our growth strategy, coupled with improving gross margins and expected SG&A leverage in the second half of the fiscal year, will help us deliver another record year of adjusted EBITDA.

Our fiscal year 2018 expectation fits within the context of our longer-term objectives for the company, which I will now discuss. In our base business, we expect to grow approximately 2% faster than market, which based on our conversations with our suppliers and customers, is expected to grow low single digits in the near term within our fee end markets.

We expect that our above-market growth will be driven by organic share gains and the addition of 3 to 5 greenfields per year, which have always been a low-risk, quick-return part of our organic growth story. In fact, in November, we opened a new Olympia branch in Port St. Lucie, Florida and anticipate opening a total of 4 new branches this fiscal year.

In terms of pricing, we're obviously a bit early in predicting how the pricing environment will unfold for next year, but we would expect that the bulk of any price realization from the previously announced wallboard manufacturers' price increases for 2018 will positively affect our fiscal '19 results.

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 prior years. Our cash flow dynamics remain favorable, and we plan to generate additional cash by growing adjusted EBITDA while preserving low CapEx levels and appropriate working capital ratios. 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 goal of a ratio below 2.5x. Now with these objectives in place, we are confident in the strength of our company and our ability to deliver on our full year goals.

And with that, operator, we are now ready to take some questions.

(Operator Instructions) And we'll take our first question from Mike Dahl with Barclays.

Mike, I appreciate the comments there around kind of the construct of how you view the business, not just near term but long term. And clearly, you've had a track record of delivering on the above-market growth, over time. It did seem like in this quarter, specifically, base business growth on the wallboard volumes was a bit light, even if we look at kind of the impact you outlined for the storm. So I was wondering if we could just get a little more color there on what you see. Was there anything specific to your business? Or did you see this as a broader market issue, on wallboard? And kind of how to think about the potential for reacceleration going forward?

What I would say, Mike, for the remainder of this year, I would say that we kind of looked at the 2% above growth rate as kind of an annualized number. If it -- business might have been a little bit spotty in the quarter, but I would say that from where we sit right now, we're very confident of kind of a reigniting of that growth rate for the second half of the year. That would be -- that's kind of the way we're looking at it, and we think that's a reasonable range for the remainder of the year.

Yes, Mike, this is Doug. Just to elaborate, I mean, we still feel good. The main indicators in markets with new residential and commercial are still well below historical norms. We've got some markets that we're seeing some real strength in, particularly our Northwest division, which is Virginia on up into the Boston market -- yes, the Northeast, very strong there. And we saw a little bit of a slowdown in the Pacific Northwest, but there is a huge backlog of business there that we've already booked. And in a lot of cases, some of those projects have been delayed because of labor constraints, but we're expecting that to accelerate. And then also, our Southern division, which includes Texas as well as Georgia, that's recovering from the storm, so we expect some pretty solid volumes out of that over the next 2 years, particularly Texas. So just those 3 areas alone are more than 50% of our business and really upwards to 60% of our business if you throw in California, which has also been pretty strong for us.

Yes, but Houston operations are running 6 days a week, so I mean, as an example. So yes, we're pretty optimistic on the back half of the year.

Got it, that's helpful. Just to be clear, when you talk about that, I guess, the comment was 2% above-market annualized and the market's, low single digits. So do you think you can get back to a mid-single-digit base business growth in the back half of fiscal '18?

Yes, yes, I think we can, absolutely.

Okay. Second question is around SG&A, and appreciate that there were some headwinds there with the storms as well. And I think this was -- at least in our model, we had expected to start to see some leverage. I know you're still saying that you expect better SG&A trends in the second half. Can you give us a level of magnitude on how we should be thinking about SG&A and what else kind of went into the flatter performance in 2Q?

Well, we still expect leverage to accelerate in the second half, which is consistent with what we've been saying in the last couple of calls. Specifically to the second quarter, some of the items I called out, particularly around payroll-related costs, which includes not only insurance but workers' comp as well as a national managers meeting that we had, just those items which I consider to be nonrecurring or a little bit over 20 basis points on our revenue for the second quarter. And then the actual storm impact, that's $4 million in lost revenue. We figure that cost us about $900,000 in adjusted EBITDA, which is about 14 basis points on the adjusted sales numbers. So certainly, we don't expect that to repeat itself in the second half of the year, so we'll get back on track, leverage-wise.

Okay. And last one for me, just around the M&A environment. You've completed a few now year-to-date, or a couple now year-to-date. I think it's -- the cadence has probably come down a little bit compared to where you were running last year. But you've clearly broadened the footprint a lot and then deepened some of your local market positions with some of the recent deals. So is there any additional color you can provide on whether it's geographic focus for the remainder of this year and heading into '19, new geographies or where you'd like to continue to build your market positions locally? Any color on that would be great.

Well, and as you've seen before, Mike, the map, and you look at the -- where we are and where we're not, there's some significant expansion opportunities. I mean, I think the Amarillo acquisition is a good example. We've got a significant footprint in Texas, but there's still a lot of markets in that area where we do not have operations. So I would say that we really are primarily interested in finding companies that kind of share our culture and the service orientation, and that is really the primary driver. But I think if you look at the west, certainly, if you looked in -- on the map in the New England area, I mean, there's a lot of pockets where we have no presence at all. So we kind of take the opportunities as they present themselves. And this business can be a little bit lumpy. You kind of have clusters of acquisitions that kind of come together and then you may have a little bit of a lull. But -- so I can't really point to a specific geography, but we do have very active conversations going with a number of significant players in these markets. And that really has not changed at all in the last couple of years. I mean, it's still a pretty steady pipeline of 15 to 20 opportunities at varying stages that you're talking about at any one time.

And has the seller response or conversation changed at all over the past 6 or 12 months just in terms of as they've seen you expand, as they've seen some of your competitors expand? We've talked about this in the past, but are you hearing anything differently or seeing anything differently on multiples as you speak with sellers?

Not really on the multiple front. I do think there's a heightened awareness, I guess. I mean, if you look at our company and a number of our competitors that are out there looking at opportunities to grow their footprints as well, I think a lot of the independents are probably sitting up and taking note and trying to figure out who they want their dance partner to be, ultimately. And so I think that's going to continue as we continue to see further consolidation in the industry.

We'll take our next question from Bob Wetenhall with RBC Capital Markets.

Looks like you guys have been busy since August.

We have.

Are you talking about August of 2017 or 2014?

Now, it seems like you hit the accelerator pretty hard on the M&A side. So look, what I wanted to understand is, do you have an update where you are in terms of integration operationally? You covered the pipeline pretty good. What's your thoughts about the ability to integrate effectively and kind of really pull synergies out?

Thanks, Bob, it's a good question. Actually, all of our acquisitions have been integrated into the companies and the systems, and that even includes Southwest, which we announced and just closed on Monday. That's a single location that our [Cal-Chem Materials Company] acquired. So we're really excited about that. As we talked about in terms of realizing the synergies, the majority of which come on the purchasing side, that's at day 1. On day 1 when the materials start coming in under our programs, we start to realize those benefits. They'll turn their inventory, typically, in 30 to 45 days, so you'll immediately, in that second month of operations, start to see the impact on their margins. We feel really good about it and we also feel really good about the work that our integration teams have been doing to get these guys into our systems.

Maybe give us a little flavor, then, for kind of the financial impact in the second half of these acquisitions and kind of what that does for top line and EBITDA, just ballpark.

Well, that will continue -- the numbers have been very similar to what we've announced, and we've got -- if you look at our supplemental materials, it shows what the trailing 12-month revenues were, with the exception of the last 2, and combined, those 2 locations are about a little over $10 million in revenue on an LTM basis. But there's a lot of upside opportunity to actually expand those locations because they were as much logistic plays for us as they were adding additional great platforms into the company.

Got it, that's helpful. And I was hoping -- you mentioned that steel stud is always a leading indicator, and you had titanic growth in the base business in ceilings, which we weren't expecting. Can you talk about what's going on that's driving this growth and if there's any benefit from product mix, which is driving up sales in ceilings? It's kind of so strong, it's an anomaly, and we're hoping to get a better framework for understanding why the growth is so robust.

Well, I'd tell you, when we have our divisional calls every month, the one consistent theme is the activity level in terms of commercial backlog. And I'd tell you, the other thing that drives the ceilings piece, and we've talked about this before, our folks in the field really, really drive their businesses. They're -- ceilings is not something you can just kind of put in a warehouse and hope that it sells itself. You've got to go out and actively promote it. You've got to develop technical expertise and, really, product knowledge is extremely critical. And so I think our ceilings specialists throughout the country, particularly in these larger metro markets, they just drive the heck out of their business. And they're in the field, they're a go-to source for product knowledge, and I think it's reflected in the kind of growth that we're experiencing. Plus just the fundamental commercial activity level. We feel very positive about our current backlog position and the activity level for the next -- for the last half of the year here.

So you're seeing a combination of good demand. You've gained share in wallboard. Are you also picking up share in ceilings then, too?

Yes. Yes, we are.

That's pretty sweet. And then just final question. How do we think about product mix impacting both top line growth and kind of profitability as we move into next calendar year, especially if ceilings becomes a larger contributor to the revenue mix?

Well, even though at ceilings, we've been growing for over a year now at double-digit rates, we're not really anticipating a major shift in our product mix. Wallboard has been holding pretty steady at about 45%, 46% of sales. At least near term, we don't see that changing significantly.

We'll go next to Luke Junk with Baird.

First question. Thanks for the comments on the commercial backlog. It sounds like that's been pretty consistent. Would you say there's been much of a change there, or the comments that we've heard relative to folks being booked out well into calendar '18 and whatnot still holding that business that you're seeing?

No, I think that's pretty consistent, Luke. We spend a lot of time with the guys in the field talking with them about what you're saying, what their activity levels are. And we've got a number of commercial contractors, drywall subcontractors that essentially are booked for the entire calendar '18 and looking to '19 at this point. And that's becoming more of a theme. So I think it's a pretty consistent story.

And then can you just remind us how that business breaks down between new construction and R&R work on the commercial side?

It's 75%, probably...

I'm sorry, what business? What business are you talking about?

Yes, just your commercial business, in general, breakdown between new construction and R&R work, just from a demand driver standpoint?

Yes, we don't really have a good breakdown of that number. I mean, overall, we're 60% commercial, 40% residential. The main -- on the wallboard side of the business, a little bit over 60% of that is driven by residential, and that would be both new residential as well as R&R. And then, of course, steel and ceilings are almost 100% commercial.

Commercial.

Okay. And then, just relative to your comments, both on the call here and in the press release, about gross margin and SG&A leverage in the back half of the year. Just to put a finer point in that, would that translate to low double-digit kind of incremental EBITDA margins in the back half?

Well, for the full year, it's still our expectation to put up incremental double-digit EBITDA on a full year basis.

We'll go next to Trey Grooms with Stephens Inc.

I guess, the first question I've got is on the outlook that you guys were talking about earlier around the overall market growth, low single digits in the near term. Is that really for the overall business? I mean, it seems conservative, especially on the wallboard side, with the backdrop of storms and overall improving demand and some of the leading indicators that you discussed. So the question is, is that -- kind of low single-digit market growth in the near term, is that overall? Is that -- would you expect any outperformance on the wallboard side or the ceilings side? Just any comments around that.

Trey, it's Doug. I believe, actually, what Mike said was low to mid-single-digit growth.

For the wallboard, in particular.

Well, and I would say, overall.

Yes.

Low to mid-single growth. And as we talked about earlier on the call with Mike Dahl, we think that mid-single-digit growth on an organic basis is certainly a realistic and sustainable number for us. I will give a proviso, third quarter of last year was a monster quarter for us. We had, I believe, 15% organic growth third quarter of last year, so...

That's a tougher comp.

Yes, a very tough comp coming up in the third quarter.

Right. And that's why I was kind of -- you mentioned the mid-single-digit earlier. Maybe I misunderstood, but I thought that, that was for you guys and that would include the 2% faster than market growth. Maybe I misunderstood. Okay. So next question for me is, some of the manufacturers out there, we're getting reports that some of them have been putting folks on controlled distribution in some of these storm-hit markets and given the spike in demand there. Can you talk about -- I mean, are you guys seeing that at all? I don't know if you can talk about that or not. And if so, how widespread is that geographically, in your opinion?

Well, that's a good question, Trey. Actually, what started off as kind of an isolated situation in terms of controlled distribution, we're seeing on a much broader basis. We had a call just 2 days ago with our divisional VPs, and pretty much across the board, you're looking at 1 to 2 weeks delivery leads for the board getting to the yards. And there have been -- and if you're trying to get significant excess amounts based on your historical purchasing patterns, you're going to have a hard time getting it right now. So it's a pretty -- it's pretty tight supply conditions. And particularly, the specialty products, like the glass mat products and things such as that, are even more difficult to get because there's just pressure on the glass products and all. So it's pretty tight conditions right now.

And is -- so has the lead time expanded materially today versus kind of what it has been normally for this time of year?

Yes. Yes, it has. I would say, compared to 4, 5 months ago, it's a materially different environment.

All right, that's helpful. And then last one for me. And I know you've mentioned it briefly earlier around pricing. But as you look, with all the manufacturers out with increases on the wallboard side from -- or most of them for January and then kind of the expectation for continued pricing in ceilings, from where we stand today, given the backdrop of everything that we've talked about thus far on the call, what's your guys' gut feeling for pricing traction in this year as we look into -- or excuse me, as we look into '18 versus maybe if we were sitting in this seat a year ago looking into price increases that had been announced?

I really would have to say that the pricing environment -- or pricing outlook, rather, is -- I think there's a lot of traction there. If you talk to every manufacturer about paper costs, for example, which have, certainly year-over-year, have risen radically, and there was no real significant realization to speak of last year. And I think that when you combine that with the product availability that we just talked about, I would say that the traction under this price -- now where it settles in, as I said in my remarks, it'll be a while before we know where it finally settles in. But every single manufacturer that we talk with is adamant about recovering costs and dealing with the inflation that they're having to confront right now. So we're certainly quoting jobs with escalators and price increases going into '18, I could tell you that.

We'll take our next question from Kevin Hocevar with Northcoast Research.

Wondering if you -- back to the controlled distribution stuff. I was wondering if you could comment on how you're planning on managing inventory levels ahead of those wallboard price increases. And how have you historically managed it? Do you typically try and build some inventory ahead of that? And how does the controlled distribution affect your ability to do that compared to, say, prior price increases?

Well, I mean, our strategy, ideally, would be to be able to purchase inventories and build inventories candidly between the fundamental demand level that we're dealing with, coupled with controlled distribution. It's pretty tough to build inventory right now. We built a little bit, but it's difficult to attain right now just because of all the different factors that are out there. So in effect, we're pretty much selling what we're buying at this point, for the most part.

We're turning almost 15x right now.

The inventory's turning -- wallboard inventory's turning 15x, so it's going in one end and out the other.

Okay, got you. And then with the -- could you comment on how the wallboard volumes trended throughout the quarter? Because I believe the Gypsum Association data had volumes up about 1% in the calendar year third quarter. And then manufacturers had a pretty positive commentary about October, I think some were saying high to double-digit type volumes once the dust settled post the hurricanes. So wondering if you can give any comment on how that trended throughout the quarter and how things have gone so far in November.

Well, on a calendar quarter basis, if you're comparing the Gypsum Association, so they were up about 1% for North America and we were essentially flat. So it's rare for us to have a quarter where we're not above Gypsum Association numbers. So -- although, we have seen that before. It happens occasionally. On an LTM basis, we're still over 200 basis points above the Gypsum Association reported numbers, and we expect to continue to get back to that number, near term. So that -- in terms of our growth for the fiscal quarter, obviously, we were impacted, most of that $4 million impact was in the month of September. So we actually saw a very large acceleration in October, the last month of the quarter in our volumes. It's actually continued in November. Our November sales pace is just, on a daily basis, is about the same as it was in October. There's fewer shipping days in November due to the holidays, but the sales pace just remained strong.

Okay. And then, final question, on the tax rate, it looked like it was -- you were typically 41.9%. I think this quarter, and the adjusted tax rate was below that. So wondering how we should think of the tax rate for the year. And also just kind of bigger picture, I know there's talk of tax reform and things have changed every day. But given your tax rate and primarily U.S. exposure, it seems you guys are -- have potential to benefit a lot if there is any tax reform. So I know it's tough to really say much at this point, but wondering if you have any comments on that as well.

Sure. One thing I'll point out, we're still providing that adjusted net income and adjusted tax, which is effectively our cash effective tax rate, and that's at 38.5%. So we've made some real improvements in that over the last couple of years. And we actually just finalized our tax -- our federal tax return for the year and filed that, just recently filed that so we adjusted that. So we're certainly expecting that lower corporate tax rates that are currently under discussion are going to benefit us in a significant fashion, particularly as it comes to earnings per share perspective. I actually went back and looked at our earnings per share numbers retroactively for, I think, the fiscal '17 results and kind of did the math at 20%, although I understand they're talking about 22% today. But at that 20% rate, we would be looking at an impact on our EPS of almost 30%. So it's significant for us. Now obviously, from a cash flow perspective, we would more likely than not shift purchases from -- shift our equipment from leasing to buy. But even that, considering the tax savings that we would get from both the rate and the immediate deduction on equipment, even though we would use some cash, it would really be insignificant, less than 1% of our sales. Now again, that's based on the current stuff, though. We're not putting out guidance.

We're not going to handicap the vendor.

Or anything like that. The numbers have changed -- the numbers are changing hourly. But again, we expect significant benefits if they are able to pass something similar to what they currently have in reconciliation.

We'll go now to Matt McCall with Seaport Global Securities.

This is Reuben Garner, on for Matt. So just a clarification on Trey's question about the controlled distribution. You mentioned that's on a much broader basis now and 1- to 2-week delivery or lead times to the yards. Can you just clarify, is that just in the markets impacted by the storms? Or when you say broader basis, does it hit some of your other markets in the Northeast or Midwest or Pacific Northwest?

No, yes, I'm sorry if I wasn't clear on that. It actually is, on a broad base, just throughout the country. I mean, it affected markets, including Atlanta, the non-Texas markets, the Midwest, the Far West and Northeast. I mean, all of the markets, for the most part, particularly the major metro markets are experiencing tightness of supply.

And there's also a lot of specialty products that has even longer lead times. I mean, some of the special materials have pushed out even further.

How temporary do you think that 1- to 2- -- I think normally, it's what, a few days. How temporary do you think the 1 to 2 weeks is? Or is that kind of what happens when you get utilization rates for the manufacturers up into the 80-plus percent range?

Well, I think that's a good observation. I think when you talk about effective capacity utilization, I mean, a lot of the manufacturers will tell you that they're running in the low 90%. Not in terms of theoretical capacity, but what they can actually produce with the labor and the shifts that they've got currently running. So when you start getting above 85%, 90%, availability becomes an issue and, frankly, price goes up as well. So based on where they're sitting today, and while there may be a little bit of capacity being added here and there, we don't see any big seismic shifts in capacity being added to the market.

Okay. All right, very helpful. And then your outlook of low to mid-single digits, near term, I assume that's kind of maybe the second half of your fiscal year. Can you talk to us about maybe your end market expectations, resi versus commercial within that outlook? And maybe -- tax reform was brought up. Maybe what your thoughts are or what customers are telling you about if there is indeed tax reform maybe on the commercial side could you see -- what kind of acceleration would you expect from a demand perspective?

Doug and I can kind of tag team this. As far as the segments, I think we talked about before, there's no doubt that the multifamily business has softened somewhat throughout the country, although we still have some decent activity in multifamily in pockets. But I would say that where multifamily has perhaps slipped, we're seeing better single-family activity. It's almost like it's making up the gap. So that's kind of how we see the upcoming, really, 2018 has probably picked up in single-family housing, in which we obviously have a big presence in. At the same time, the commercial activities we touched on before, the quote activity, the backlog, what we're seeing in steel pricing and steel volumes tells us -- and, frankly, talking to the customers is that the commercial activity is going to be very, very strong in '18 and going into '19.

I mean, we definitely believe, based on the rates that are being discussed, particularly with the larger multinational companies, even bringing back cash overseas, that they're going to be putting that to use not only on equipment but offices, a lot of R&R work, if not new expansion and stuff. So there should be a reasonably large impact on commercial activity.

For our next question, we'll go to Stephen East with Wells Fargo.

This is Truman Patterson, on for Stephen. Just wanted to dig into your gross margin commentary a little bit. It had a nice 90-bp jump quarter-over-quarter. In the press release, I believe you guys left guidance unchanged at 32.5%. But then, Doug, I believe, in the commentary, you might have said over 32.5%. Could you just elaborate on that? And also, could you talk about the gross margin progression throughout the quarter by month?

Yes, sure, Truman. I mean, we expect to do a little bit better than 32.5% for the full fiscal year, so that's what my comments were specifically. I mean, in the first quarter, we were at 31.9%, so obviously, that's just math. But based on everything we see today, prices are holding stable and we expect them to remain stable through the balance of the calendar year should enable us to do that. In terms of margin progression, it was reasonably balanced through the quarter. We talked about on our last call that we had pretty much gotten the margins up to where they needed to be. In the first quarter, they went up every month and fairly significantly, obviously, and it stayed pretty steady since then.

Okay, okay. And I know you guys have kind of touched on the M&A environment and the pipeline and everything, but I'm going to ask it a little bit differently. Given the tax reform more recently over the past, we'll call it, month or so, have you really seen any change in the sellers' behaviors at all? And do you think this tax reform might change their behavior in the future as well as your expectations for kind of the valuations going forward? Because, inevitably, lower tax rates typically make an earnings stream worth more.

We haven't seen any changes in seller behavior. Pricing expectations are pretty much steady to where they've been for the last few years. But we do think that if this legislation passes, it will actually have a positive impact on people who are considering selling. I mean, most of the people that we're buying from have a set expectation of how much they want to walk away with when the deal closes. And honestly, we've had some deals because we have been very disciplined in our approach to pricing and what we will pay for a business. There've been some opportunities that we just couldn't close the valuation gap, so we believe that this will help.

Yes, I would agree with that. Absolutely. I could see some doors that might have been closed in the past reopening, for sure, if it goes through as they're discussing today.

Okay, okay. Fair enough. And whenever I'm kind of digging through your acquisition history, it looks like they have a pretty healthy EBITDA margins that are -- post synergies, that are pretty accretive to your company, overall. Could you maybe just walk us through some of the trade-offs between how you guys -- you're greenfielding a new branch versus making an acquisition?

Well, greenfields certainly carry a lot less risk. They're in markets that we're already in or just adjacent to an existing market, so we know them very well, we know the customers, the suppliers, et cetera. And typically, we're moving in there, it's a logistics play, and we can go in and find a facility that we can lease on a short-term basis, typically 3 years with a couple of renewal options. And we'll already move an existing base of business in there to start with and put some working capital in, some used equipment. I mean, you're typically talking about an investment of maybe $1 million, most of that being working capital, some leasehold improvements, and we'll get that back in under 2 years. And within 5 years, it's going to look like a full line branch. So that's certainly less risk than an acquisition. But from an acquisition point of view, we've done 26 now since August 2013. We talked about integrations earlier. We -- the team has gotten really good at that and we've been pretty successful. There's been a few of those that in hindsight, we would have handled differently. But our track record is pretty good. And as you talked about, the LTM dollars as well as the adjusted EBITDA are really healthy. So they've been very accretive to our business, and we expect that to continue at that same 6- to 8-a-year rate. Timing can be a little lumpy, but we feel good about it. We're going to have a busy second half of the year.

This concludes today's question-and-answer session. At this time, I'll turn the conference back to Mr. Mike Callahan for any final remarks.

Thank you, operator. As we look to the remainder of fiscal '18 and beyond, we feel really good about our position as a leading distributor with a very strong capital base that should help us accomplish profitable growth in a low-risk, more efficient manner. Our seasoned team, our national scale and our differentiated service model, coupled with our proven acquisition strategy, really do position us well to continue to provide best-in-class service to our customers. Our product offering, balanced end market exposure and track record of execution gives us a high level of confidence in our ability to grow net sales and adjusted EBITDA above the trend in the coming years. We're very excited about where we are today, and we look forward to updating you on our results in the coming quarters. So thanks, everybody, for joining us today, and we look forward to speaking to you again next quarter. Thank you.

This does conclude today's conference. Thank you for your participation. You may now disconnect.