GMS Inc (GMS) 2022 Q4 法說會逐字稿

Greetings. Welcome to the GMS Fourth Quarter and Full Year Fiscal 2021 Earnings Conference Call (Operator Instructions)

At this time, I'll turn the conference over to Carey Phelp, Vice President of Investor Relations. Carey, you may begin.

Thank you, Rod. Good morning, and thank you for joining us for the GMS earnings conference call for the fourth quarter and full year fiscal 2022. I am joined today by John Turner, President and Chief Executive Officer; and Scott Deakin, Vice President and Chief Financial Officer. In addition to the press release issued this morning, we have posted PowerPoint slides to accompany this call in the Investors section of our website at www.gms.com.

Turning to Slide 2. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today.

As a reminder, forward-looking statements represent management's current estimates and expectations. 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 Risk Factors section in the company's 10-K and other periodic reports. Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note the references on this call for the fourth quarter of fiscal 2022 relate to the quarter ended April 30, 2022. (Operator Instructions)

With that, I'll turn the call over to John Turner. J.T.?

Thank you, Carey. Good morning, and thank you all for joining us today. At the end of April, we capped off an all-around remarkable fiscal 2022, achieving record levels of net sales, net income and adjusted EBITDA for both the fourth quarter and the full fiscal year. Our team's ongoing success in navigating elevated inflation and supply chain constraints amid strong residential demand and our commitment to provide high levels of customer service helped drive this record-setting performance.

Looking at Slide 3 and going into more details of our fourth quarter results. We grew net sales 38% with just over 40% gross profit growth as our teams continue to do an outstanding job passing through higher pricing across our product portfolio. We recorded more than 20% sales growth with double-digit organic increases in each of our 4 major product categories with volume gains in wallboard, ceilings and complementary products. Net income improved 126.7%, while adjusted EBITDA grew 69.1% and adjusted EBITDA margin of 12% was up 220 basis points from a year ago. As expected, as we saw supply chain improvements, particularly in steel, we brought down inventory and drove significantly improved free cash flow of $191.6 million, which was 124% of adjusted EBITDA compared with 80% of adjusted EBITDA a year ago. And finally, during the quarter, we continued to expand our platform, opening 6 new greenfield locations and 3 new AMES stores.

Turning next to Slide 4 and our full year highlights. Both net sales and gross profits grew just over 40% for fiscal 2022 as compared to the prior year, principally on the pass-through of increasing prices throughout the year. For each of our 4 product categories, we achieved more than 25% revenue growth with positive year-over-year increases in volumes. The inflationary pricing environment combined with our continued operating cost discipline enabled us to improve our SG&A and adjusted SG&A percentages of sales by 260 basis points each. Full year adjusted EBITDA margin of 12.2% represents a 250 basis point improvement as compared with a year ago. Our strong balance sheet and liquidity position enabled us to continue to drive growth through numerous greenfield openings and acquisitions during the year.

Moving to Slide 5. This highlights our fiscal 2022 progress in advancing our 4 primary strategic priorities. First, expanding share in our core products. Our teams worked diligently throughout fiscal 2022 to maintain exceptional levels of customer service and ensure product availability even through periods of tight supply. We recorded year-over-year volume growth in each of our 4 product categories for fiscal 2022, despite continuing relative softness in commercial demand, and we recorded organic revenue growth of roughly 20% for both wallboard and ceilings for the year.

As a leader in the markets we serve, our customers have come to rely upon the benefits our scale provides to secure the products they need, which we expect will continue to help us gain share as we move forward. Second, growing our complementary products. We continue to diversify and profitably expand our offerings, thereby enhancing our value to our customers. During fiscal 2022, we experienced double-digit year-over-year growth in complementary products each quarter with full year net sales growth of 28% as a result of both price increases and higher volumes.

Our teams are diligently working to drive growth in this category. For example, in certain regions, we have added specialists and dedicated locations to help drive sales in certain products, such as tools and fasteners, exterior envelope and roofing in Canada. In addition, we are revamping some compensation incentives to better align with our goal of growing this product category. As a result of these initiatives as well as our strategic platform expansion activities, our teams delivered double-digit revenue growth for nearly every product line within our complementary products segment.

Third, expanding our platform through accretive acquisitions and greenfield opportunities. For the full year, we invested approximately $350 million to purchase 5 specialty products distributors, most notably, Westside Building Materials, one of the largest independent distributors of interior building products in the U.S. with locations in California and Nevada; and AMES taping tools, the leading provider of automatic taping and finishing tools and related products to the professional drywall finishing contractor. AMES, in particular, was an important and margin accretive addition to our complementary product offerings. Also, during fiscal 2022, we opened 13 GMS greenfield yards. In some cases, expanding our service territory, while in others, we enhanced our product assortment within an existing GMS market.

And since its purchase, we opened 5 new AMES stores during fiscal 2022, plus 5 more after the end of April. Finally, our fourth strategic priority is to drive improved productivity and profitability. We are continuing to leverage our scale and employ technology and best practices to ensure that we deliver a best-in-class customer experience, providing our customers with the ability to easily transact with us, implement automated orders, check delivery status and received proof of delivery notifications and photos, all make us a more valuable partner. Moreover, internal initiatives that the customers don't necessarily see, but certainly enjoy the results of are helping to drive further operational efficiencies. For example, we are equipping our yard workers with automation tools to improve picking, loading and staging efficiencies, thereby improving delivery turnaround and customer wait times.

We've implemented important fleet upgrades to reduce idle time, increase fuel efficiency and promote safe work practices, and we are arming our sales teams with tools to easily access customer and product data to enhance execution and the overall customer experience. In short, we are building the GMS yard of the future to improve efficiency, productivity and profitability while delivering greater value to our customers and stakeholders.

As we kick off fiscal 2023, despite some uncertainties in the broader economy, which I will discuss later in this call, we have a solid backlog of residential demand, providing confidence in our near-term outlook. And while we do expect some longer-term softening in residential, we remain committed to the successful execution of our strategic priorities. With that, I'll now turn it over to Scott to provide more perspective on our results. Scott?

Thank you, J.T., and good morning. While affordability continues to be pressured by the recent rise in interest rates and continuing operating costs and product price inflation, residential construction activity as well as commercial sentiment remains relatively strong. As with the first 3 quarters of our fiscal year, solid residential demand coupled with an inflationary pricing environment and our commitment to ensuring product availability and outstanding customer service drove our results as we closed out fiscal 2022. While supply chain constraints continue to disrupt and extend project cycle times, our teams have done a remarkable job supporting and providing value to our customers.

Looking at Slide 6. Net sales increased 38.2% year-over-year to $1.3 billion for the quarter. Organically, sales rose 28.9%. Adjusting for one less selling day year-over-year, net sales on a per day basis increased 40.4% or 30.9% organically. From an end market perspective, both residential and commercial fourth quarter sales in the U.S. were up nearly 40% organically year-over-year. Wallboard sales of $491 million increased 30.3% in total and 32.3% on a per day basis, comprised of a 27.7% increase in price and mix and a 4.6% increase in volume. Organically, fourth quarter wallboard sales grew 26.5% year-over-year, comprised of a 24.9% increase in price and mix and a 1.6% increase in volume.

Multifamily volume growth remained very high in the mid-teens, outpacing single-family or supply chain-related delays again help volume growth to the mid-single digits. Commercial activity in wallboard improved sequentially. So while we still saw year-over-year declines in the market, our volumes were only down in the mid-single digits as compared to the double-digit declines we had experienced during each of the first 3 quarters of fiscal 2022. Our average realized wallboard price has increased sequentially for the past 6 quarters, and given another round of recently announced manufacturer increases, we expect this trend of higher sequential wallboard prices to continue for at least the remainder of calendar 2022.

For our fourth quarter, the average realized wallboard price was $416 per thousand square feet, up more than 5% sequentially and up 26.5% from the fourth quarter of last year. Moreover, on strong underlying volume, wallboard pricing has gone up since then to $435 per MSF for May.

Ceiling, tile and grid fourth quarter sales of $148.9 million, increased 22.7% year-over-year and 24.7% on a per day basis, comprised of a 20.9% benefit from price and mix and a 3.8% increase in volume. Organic sales and ceilings grew 17% with 19% of price and mix and a 2% decrease in volume as declines in Canadian sales due to the timing of certain larger projects offset increases in the U.S. Fourth quarter steel framing sales of $276.9 million increased 93.3% or 96.3% on a same-day basis as steel price and mix increased 101.8% with volumes down 5.5%. On an organic basis, steel framing was up 81.6%, comprised of a 92% benefit from pricing mix, partially offset by a 10.4% decrease in volume. Labor delays, inventory unwinding within the contractor pipeline and project mix along with a tough comparable period last year, all contributed to this decline.

While commercial quoting activity remains solid, project execution remains constrained by labor availability. Complementary product sales of $371.8 million for the quarter grew 27.9% year-over-year or 29.9% on a same-day basis as we benefited from positive contributions from acquisitions as well as strong pricing across the category. On an organic basis, sales of complementary products were up 11.1%, with the increase coming mostly from pricing mix with increased volume as well. As J.T. mentioned earlier, complementary product sales, which comprise nearly 30% of our total net sales for the quarter and full fiscal year is a category that we are actively seeking to grow.

We took a step forward in this regard with 3 acquisitions and numerous organic initiatives over the last year. Breaking this category down a bit further. For the full year of fiscal 2022, our 5 largest product groups were insulation at 19% of the category, tools and fasteners at 18%, joint treatment at 15%, lumber at 13% and finally, stucco leaves is at 9%.

Now turning to our gross profit during the quarter. Our gross profit of $412.8 million increased 40.5% as compared with a year ago, principally due to our successful pass-through of product inflation, continued strength in residential market demand and incremental gross profit from acquisitions. Gross margin percent for the quarter came in better than expected at 32% as steel prices remained higher than initially anticipated. As a reminder, during our last earnings call, we indicated that we had assumed steel prices would decline 5% sequentially. However, among other factors, the war in the Ukraine and the relative importance of that region to the raw materials market contributed to steel prices remained flat sequentially.

Our 50 basis point year-over-year improvement in the fourth quarter gross margin was due to our successful pass-through of product inflation, continued strength in residential market demand, improved mix and benefits from margin accretive acquisition activity. From a product line standpoint, year-over-year gross margins were up in 3 of our 4 product categories as steel and ceiling prices remained strong and complementary products benefited from our recent margin accretive purchase of AMES. Meanwhile, as it has been the case throughout fiscal 2022, wallboard gross margin saw moderate compression on $6 supplier incentives and the continued lag in realization sales price pass-through on persistent, progressive increases from suppliers.

Turning to Slide 7. As it's a common theme across most industries, we are seeing operating cost inflation, particularly in items such as labor and fuel. Plus, we saw increased general delivery expenses and higher incentive compensation driven by our robust levels of activity and strong results this year. However, price inflation on the product side, result of increases in both revenues and gross profit dollars, have outpaced these pressures. As a result, adjusted SG&A expense as a percentage of net sales for the fourth quarter improved 170 basis points year-over-year to 20.2%.

Adjusted EBITDA improved $63 million to $154.2 million for the quarter, up almost 70% as compared with a year ago. Adjusted EBITDA margin improved 220 basis points year-over-year to 12% for the quarter, representing an incremental margin of 17.7%. For the full year, GMS realized incremental EBITDA margins of 18.5%.

Slide 8 highlights our attractive capital structure and solid balance sheet, which provides the foundation and support for the execution of our strategic priorities. At quarter end, we had cash on hand of $101.9 million and $330.7 million of available liquidity under our revolving credit facilities. We have no near-term debt maturities, and our net adjusted EBITDA debt leverage at the end of the quarter improved to 1.8x, down from 2.5x a year ago. Cash from operating activities for the fourth quarter was $199.5 million compared with $84.8 million in the prior year period, and free cash flow was $191.6 million compared with $72.8 million a year ago.

These increases in cash flow were primarily due to our improved operating results and a release of inventory held in prior quarters to ensure product availability and manage price inflation amid what was then an environment of even tighter and less reliable supply. As a reminder, we expect through the cycle longer term free cash flow in the range of 40% to 50% of adjusted EBITDA. Capital expenditures of $7.9 million for the quarter compared to $12 million in the fourth quarter of fiscal 2021, which was higher due to a real estate purchase made during the prior year period. Full year capital expenditures were $41.1 million compared with $29.9 million in fiscal 2021. We expect for fiscal 2023 capital expenditures to be roughly comparable to those of fiscal 2022.

Finally, before I turn the call back to J.T., Reflecting our board's and management's confidence in the strength and future prospects of our business, we announced this morning that our Board has approved an expanded share repurchase program under which the company is authorized to repurchase up to $200 million of our outstanding common stock. Historically, we used the share repurchase program principally to offset equity-based compensation grants. Going forward, given current market -- excuse me, given current valuations, we expect more activity with regard to our stock repurchases and as we continue our commitment to drive long-term shareholder value with a disciplined capital allocation strategy that balances investing in our organic growth initiatives, pursuing accretive M&A transactions and opportunistically leveraging favorable market conditions for share repurchases as they arrive.

J.T., your final remarks before we open the line for questions.

Thank you, Scott. We are pleased with the record performance our team achieved for the fourth quarter and full year fiscal 2022, during what could only be characterized as extraordinary times with supply chain constraints, lingering effects of the pandemic, unprecedented inflation and external geopolitical factors, all influencing the broader economy.

So looking at Slide 9, despite growing macro uncertainties, the fundamentals supporting our near-term outlook remains strong. We continue to see high levels of residential activity currently hindered by isolated challenges within the market to secure enough labor and product to meet that demand. Our scale and supplier relationships help us in this regard and provide a competitive advantage for our team. A gap between housing starts and completions provides confidence for the remainder of calendar 2022 as builders need to complete their backlogs of already started homes while favorable demographics in an undeveloped industry provides support for the longer term.

To be clear, affordability impacted by rising interest rates coupled with inflation and geopolitical concerns does create an unknown as we look beyond this calendar year. However, we remain optimistic about our near-term outlook and the future of GMS. While residential may face some pressure later in the year, we are continuing to see signs of improvement in commercial construction. Office R&R, which traditionally is an important demand driver for GMS, remains subdued and presents opportunity for incremental growth.

The investments we've made over the past several years have helped position us well for not only the near-term supply and demand dynamics, but more importantly, for our long-term success, including opening 25 greenfield locations since the start of fiscal 2020, enabling us to provide enhanced customer service and offerings and added efficiencies within our existing markets. We also added 12 strategic acquisitions during that same time period, all while keeping our net debt relatively flat from Q4 2019 to Q4 2022 and reducing our net debt leverage from 3.6x to 1.8x at the end of fiscal 2022.

Our M&A and field teams have done a remarkable job, identifying value-added opportunities to drive growth in our product lines, diversification of our offerings and expansion of our service territories. We've made crucial investments to modernize and upgrade our fleet, adding essential safety features to protect our employees and customers and also, importantly, providing some risk management benefits, plus our fleet upgrades help us control our fuel consumption and improve the overall efficiency of our field and yard operations.

Finally, other technology investments like those that I mentioned at the start of this call to automate much of the customer experience as well as the behind-the-scenes work within our yards and support functions are making us more productive and better operators. All in all, we believe we are well positioned with a balanced mix of products and expertise to serve both commercial and residential customers, allowing us to flex our efforts according to the demands of each market.

With that as our backdrop, our current expectations for our fiscal first quarter are shown on Slide 10. Based on the continued strength we expect in near-term residential demand, we currently expect to generate year-over-year organic sales growth in the low 20% range or approximately 30% total net sales growth, inclusive of our already completed acquisitions. And we expect first quarter gross margin to be generally consistent with that of the prior year, using the assumption that steel prices will pull back modestly while wallboard prices should increase sequentially, each in the low to mid-single digits.

We again expect product price inflation to exceed inflationary and accelerated activity driven increases in operating expenses. Therefore, we expect incremental EBITDA margins to moderate to roughly 12%. Over the long term, we are focused on leveraging our scale, our extensive product portfolio, our expertise and ability to serve both commercial and residential customers, our platform expansion activities and our commitment to delivering best-in-class service to drive growth and bring value to all of our stakeholders.

Thank you again for joining us today. Operator, we are ready to open the line for questions.

(Operator Instructions)

Now our first question is from the line of Trey Grooms with Stephens.

This is actually Noah Merkousko on for Trey Grooms. Congrats on the strong results.

Thank you, Noah.

So I wanted to dig in on the wallboard pricing, make sure I heard everything right. You all gave some -- sounded like positive commentary. So wallboard price is expected to improve sequentially throughout the balance of the calendar year. Does that assume -- maybe just help me understand how you're getting confidence in that? Does that only assume the most recent manufacturer price increase? Or do you need to see more from them? And then just given all the concern on the residential side with the potential slowing, how do you kind of match that with your expectation for continued improvement in wallboard pricing?

Sure. Noah, just last week and early this week, we've seen manufacturer price increases. Manufacturers are running capacity at high levels and demand remained strong. I think one thing to focus on that we look at is completions and completions ticked up in May, I think, $1.465 million, but that's still significantly below starts. Single-family completions and starts balanced out for the first time in May, so we didn't see any new single-family added to the backlog, but there's still quite a backlog in single-family with multifamily being very strong. I mean, clearly, at the moment, it's going to be more difficult to get price increases as builders are nervous about what's going to happen over the course of the next year as we all deal with higher interest rates.

All that being said, I think there is real inflation that the manufacturers are dealing with. So we're going to be pushing back on our manufacturers to some degree, but we're also going to be having to take price increases. And so that's why we really believe wallboard pricing will remain not only stable, but will probably continue to increase through the balance of the year, at least through the next quarter or 2. And you can already see, we gave you a May number with significant acceleration coming out of our fourth quarter.

The other thing to keep in mind, as we've talked about throughout the last year, is that we've got a little bit of a lag in terms of our realization of price on wallboard as we work with in particular large national homebuilders around the realization of those, and that catch-up effect will be part of the dynamic as well.

Got it. That all makes sense. And then shifting gears a little bit for my follow-up. I was hoping you could give a little bit more color on your expectations for nonres, at least as we look to the balance of this calendar year. I think you mentioned seeing positive signs. Is that an end market that we could see growth come next quarter? Or is that still push a little bit out? And then again, with the uncertainty in the macro backdrop, are there any cautionary signs that you're seeing in nonres or projects may be getting pushed to the right than you would otherwise have expected?

I think the recovery is muted because of the increase in costs in the channel for sure. I don't think rising interest rate is going to help that dramatically for sure, obviously. Being a little facetious there. I would tell you that there's a -- the biggest issue in the commercial space today is labor, and that's what we hear all the time. The delays in projects is really based upon the ability of all of the trades to do their work, including our trades that we support. But clearly, there are many trades up in front before we get there that are labor constrained. All that being said, as we mentioned here in our notes, but also over the course of the last 4 quarters, we've seen sequential improvement every quarter in volume into that channel with the exception of steel in the last quarter.

We did also mention that commercial R&R, large office R&R remains muted. It's a big driver of our steel business, and we will see if that materializes a lot of theories around that regarding back to the office, et cetera, and what happens with that. We're seeing good tenant improvement work, small tenant improvement work, individual tenants improving their spaces. And then, of course, you have the macro indicators like the ABI, that are again positive, I think, 16 months in a row of a reading north of 50. So a tremendous amount of design activity out there and architectural billings activity out there that I would expect we should start seeing some improved commercial about now.

I think this was about as late in my previous comments. If you go back 2 or 3 quarters. I think we were talking about calendar Q2 of 2022 is probably when we could expect to see the materially improving commercial market really based on the ABI and some of the other forecasts like the AIA consensus, et cetera, which we'll get another reading, I think, at the end of this month. And hopefully, everybody is current on that so we can get a good feel for what the consensus forecasts are, but I think we're rather another week or 2 away from that, but I'm not expecting it to be a negative reading.

Our next question comes from the line of Matthew Bouley with Barclays.

I guess just back to the topic of residential, it sounds like J.T., you're speaking about some clear sort of visibility to the near term. As you mentioned, the backlogs are still long, but clearly, some of the starts data has started to roll a little bit. And I'm sure you've heard everything from homebuilders in the past couple of weeks. How do we think about sort of the timing of how all that might make play into your business? Should -- I don't want to put words into your mouth, but is it the kind of thing where this backlog sort of fuels the balance of calendar '22? Or should we see some of this more recent trends perhaps manifesting for you guys. Earlier than that, how are you guys kind of planning for all that to end up rolling up to yourselves?

Again, here we are at almost the end of June. So I would say that the balance of the calendar year should be busy, I don't. November, December could drop off, but usually that's a time when builders are trying to close out their homes also to help close their years. And I feel like there's still enough backlog. I mean even last week, I think we're going to pull forward some demand. You saw the increase in the mortgage applications for purchase went up 8% last week on a week-over-week basis. There's an increase in adjustable mortgage demand, went up to 10% of the mortgage applications are now adjustable rate mortgages.

So I think you're going to see a lot of that going forward as people try to get in front of some of these rate increases. And again, I think if you looked at Lennar's (inaudible). Lennar's are going to close 68,000 homes. That's what they said they would close before and that's -- they're saying, they're still going to close for their fiscal. I think KB Home yesterday came out with a pretty strong report, quite frankly, and that was through April -- or excuse me, through May. So they had started to experience where a little bit of demand destruction. I don't want to be wearing rose colored glasses and say, we're not going to see the continued reduction in starts because I think there will be some cautiousness. But I also want to point out that, again, that completions number is what matters for us and that completions number just got to $1.4 million this last month that was reported. So I think starts would have to drop precipitously from here to really create a big volume probity in our industry.

Now it could certainly happen, and we could have a pause during that period of time. Probably we'll be looking at this time next year, the home building season, we'll be talking to you about the end of April next year at this point. And that's probably when whatever manifests itself in starts between now and then is probably when we'll be talking about seeing whatever that dip is and how deep that dip might be. But for the balance of this calendar year, I think we feel pretty comfortable with the residential backlog.

Got it. That's very helpful color there. Second one, I might have missed it in the opening remarks, but just on ceilings and pricing there, I think we've seen some larger price increases from suppliers there as well given everything going on in the raw material backdrop. Can you guys speak a little bit about sort of your thoughts on ceilings price as we go through the year, some of the stickiness of that and just how you guys are going to operate around that?

Yes. So I think there's 2 pieces to it to -- keep in mind, obviously, there's a grid element to it, and then there's the tile and the AES piece of it. We see some decline on the grid piece just following sort of the underlying dynamics of the raw materials and steel. And so sequentially, you'll see a little bit of a decline that's factored into our Q1 number. As far as the tile and the AES piece of things go, that part of the market has been typically more mature in terms of its ability to put price increases out in the market and have them stick, and we would expect that, that generally -- that trend generally going forward as well. So we don't see as much decline there. It's not going to be significant. It's not going to be the higher levels of increases we've seen over the course of the last fiscal year across all of our product lines, but the traditional more moderate increases, we would expect those to continue.

The next question comes from the line of Mike Dahl with RBC Capital Markets.

It's actually Chris Kalata on for Michael. I just want to revisit the your thoughts around pricing power in wallboard. Obviously, you expect continued strength and you saw strong pricing through May to June. When we think about demand -- resi demand decline (inaudible) materialize, calling the first calendar first half of calendar 2022. How are you guys thinking about industry pricing power in that environment and your ability to hold basically robust pricing gains you've been saying on that?

I guess it's all going to depend upon the degree of decline in activity in home building, right? If it's a moderate decline, if you see a 10% reduction, again, I had to keep beating that same dead horse around completions. But if you see a -- I mean we were at 1.8 million starts in April. So if you see 1.4 million starts, that's a fairly significant drop. 1.3 million starts from the peak back to 2019, early 2019, late 2018 levels, I think multifamily is going to continue to be pretty robust. However, because there's still huge rising rents out there, and there's still that underlying demand for housing. But let's say, home starts got to 1.2 million, 1.3 million and you're completing 1.2 million or 1.3 million.

You're completing 1.4 million now. So you're a 10% reduction in total demand. I don't see that as being anywhere near the kind of driver that we would have seen, let's say, mid-decade last year where there was 30%, 40% of excess capacity from a manufacturer's perspective. You might be sitting on 10%. Right now, there's very little capacity. I mentioned it in my comments that we're actually seeing service problems in wallboard in certain places based purely upon availability of the product to shift what we're shipping today. So there are some issues in and around capacity in the wallboard industry when it comes to geography, particularly. There were over -- the demand is higher than capacity in certain places in the country.

So we're having to move things a little bit further. Overall, there's enough capacity, but I think we're getting close to it today. So again, if housing completions drop 30%, well, then we could be having a different discussion. But if they drop 10%, could there be some declines in the price? It could. Could it flatten out a little bit? It could. We're pretty high levels right now. I guess the only other thing I would say is that there is, again, that underlying inflation at the manufacturing level where I think gas prices and you look at some things that they're dealing with from starch and transportation and natural gypsum versus synthetic gypsum, et cetera, I think there's still some forces that would probably keep prices up versus 2017, 2018 levels.

Just to remind you of the mechanics of our -- the P&L, all the inbound freight is in cost of sales for us. So to J.T.'s point around gas, it's not only natural gas from a manufacturing standpoint, but it's deal and all the logistics costs that go into the equation as well. That only supports what the manufacturers are doing with regard to their pricing, whether additional increases, including the current one will be received by the market and accepted by the market as one point. But in terms of being able to support certainly at the current levels, those underlying cost dynamics are part of the equation as well.

Understood. That's helpful. And then just for my second question, turning over to steel. You guys -- your outlook calls for some modest decline in steel the year-over-year increases have remained robust. So anyway you could help us think about kind of the magnitude of year-over-year price mix increase we should expect in 1Q? And then regarding that, the volume declines you saw this quarter, you attribute some of that to project delays. Should we think of that as a continuing drag on volumes through the calendar half of second half of this year? Or is that kind of more temporary?

I'll speak to the price aspect of it and J.T. can cover the volume piece. There is still -- even with a decline in sequential pricing, there is such a -- still such a high level of increase versus the prior year. The fourth quarter U.S. organic, just as a proxy for things, we're still talking in the 40s in terms of the overall price increase there. We do expect some sequential declines over the course of the coming quarters. As I indicated, we've got some expectation for that in this first quarter, both in terms of underlying steel as well as grid in the sort of LSD range is what we're thinking about. That's probably something that we'll see in coming quarters as well.

Could it be more significant than that? Yes. But based on the discussions we've been having with those in the field based on just the underlying supply chain dynamics leading into what we see from our suppliers directly, we think that's a pretty reasonable expectation for now. But it could -- given how high it's gone up, it could ultimately be a little bit more significant than that than what we're reflecting, as I say, in the LSD sort of range over the next couple of quarters.

From a volume perspective, I do expect steel to continue to be a little bit challenged at least into the next quarter. If we see a recovery in that larger R&R, office R&R, I think then we might see that flip. The other issue is, we're just going to roll over big numbers because of our strategy last year, which we talked about, which was, we used the balance sheet. We used our ability to get steel and we loaded up on inventory when the supply chain had extended to 10, 15, 20 weeks on availability. Well, that's back down to a week today. So as we're unwinding that inventory, which you saw in the quarter, which we said we would do generate really strong free cash flow last quarter. I do think that, that we'll probably see steel declining 5% in volume maybe quarter-to-quarter even into the second quarter. And then we'll have to kind of take a view of what it looks like after that.

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

First off, setting volume aside for a second, it seems we could see an environment where product prices fall, which, of course, would drive fewer GP dollars. But even in that environment, I would think that hourly and salary components of your labor costs will remain structurally higher going forward. Could you discuss relative to your total SG&A cost stack, approximately how much of that is variable compensation or incentive compensation today versus what that might have been, say, 2, 3 years ago?

I don't have it, Dave, in specific percentage terms for you. What I can tell you is -- we covered a little bit of this in the commentary. Incentives in general were a significant part of our cost structure in this last year, both on the sales side. In general, incentives for all of the increased activity and candidly higher levels of profitability, we had that, that was definitely a factor. And what I can tell you is, in terms of our leverage dynamics over the course of this last quarter, bonus and incentives were by far the biggest driver. We did have some increases in general salary wages, contract labor, particularly in operators, as an example. Fuel costs were a big part of that, both activity based as well as inflationary based.

And then we saw some just general increases as we continue to move past a lot of the restricted types of things we were doing pre COVID. We had a little bit more training. We have a little bit more travel, those types of things. And the other dynamic I'd factor into it as well as you heard in our discussions a lot of commentary about all of the things we're doing around greenfields. A lot of greenfield activity that take a little bit of time to get seeded for those new locations to really gain some traction, and that's part of the dynamic as well. So hopefully, that gives you a little bit of color on what we're seeing on the SG&A side.

Yes. Okay. And second, it seems like we've been talking about nonresidential stability and a potential upturn to this point. And I know the comps got tougher here, but do the year-to-year trends you're seeing in steel and ceiling volumes concern you at all relative to future nonres activity?

It's interesting because ceiling volumes have actually been found. I mean we had volume growth in ceiling. Steel is the one that is at the moment soft, and it's really a mix of projects is what you're seeing. So right now, we're doing a tremendous amount of multifamily that's actually stick build, and so what you're not saying is, you're not seeing the towers, the huge towers going up in multifamily. What you're seeing is, you're seeing that low-rise multifamily everywhere. And so we're supplying that, but we're not supplying any steel into those projects. And really, until we see a significant either that dynamic, I think steel could be relatively flat from a commercial perspective. Next 2 quarters, I expect to be -- like I mentioned, I expect probably volumes to be down a little bit over the next couple of quarters and then kind of flattish after that, unless we see that big office R&R and/or large-scale condo multifamily improve. The balance of the commercial space, if you can look at it in the put-in-place numbers, other than hospitality and office R&R, those are the 2 that have really been hit and stayed down. Everything else is kind of coming back, and the backlogs are pretty good in commercial at the moment, and we're seeing it in our wallboard trends. So it's a little bit of a disconnect from historical where you ship steel and then you ship wallboard to go up on that steel, a little bit of a disconnect based on the project mix that's out there today.

We said in our opening comments as well that commercial in prior quarters in the fiscal year, we're actually double-digit year-over-year declines in the fourth quarter based on the sequential improvements that narrowed to a single-digit decline. Still down, but on a momentum basis improving from what it was earlier in the year.

Our next question is from the line of Steven Ramsey with Thompson Research.

Maybe to start with the complementary sector, organic growth, mostly driven by price you said. Were volumes comparable to the other core products? And then thinking about the decline in lumber prices and how you shared the magnitude of lumber as a percentage of total sales, how is that impacting the Q1 guide and the expected growth in that segment aside from lumber?

Admittedly, our data around complementary is a little bit more difficult to give you a quite the level of visibility to price versus volume on complementary. But basically, our expectation is, it's roughly 70%. The trends we've been seeing is roughly 70% price and 30% volume growth. So when you say comparable to the other products, the other products have varied within them, but generally, that's an indicator of sort of what we've been seeing there. You want to take the lumber?

Well, lumber, so I think lumber was $29 million total revenue for the year. So on $4.5-plus billion, we did $29 million in total revenue in lumber. So it's almost like a...

Inflation adjusted piece.

Inflation adjusted piece of it. Well, it's really a Canadian issue for lumber. So I would expect our Canadian -- which we actually have in our numbers here. Our Canadian numbers are going to be a little bit difficult for the first quarter, which is also a result of a strike that happened in Toronto, which I'm sure you guys are aware of, a 5-week strike in Toronto. It's going to put us back a quarter or 2. Again, lumber up and down in Canada is more meaningful, but for us in total, I don't expect it to be material.

That's $29 million to $30 million number J.T. talked about, really it was very front-end loaded in terms of the fiscal year and that progressively came down as we've all seen the lumber pricing come down. So flattish to a decline from fourth quarter to first quarter is what we've got factored into our actuals as well as our outlook.

And I should point out that of those complementary products, really the key focus in those complementary products on a organic basis, it's really insulation. And then if you would talk about the ability to do both organic and M&A, it's in tools and fasteners and heaps and stucco. And then lumber is an organic effort, and it's really limited pretty much to Canada. We do not have a major lumber effort underway in the United States.

Right. Okay. Helpful. And then thinking about the $200 million buyback authorization, maybe just a little more detail on your thought process in the likelihood or eagerness to deploy this, and how you think about balancing, holding cash for acquisitions versus repurchasing stock?

So you -- if you look at our numbers, we actually ramped up a little bit of our share repurchase activity over the course of this last quarter as well. For a $200 million authorization, and I say this with the understanding that as we talked about it in our opening comments, our capital deployment is going to be focused on a number of different areas, which is continuing our organic growth, our M&A activity, our acquisitions, et cetera. It's just that with this level of evaluation and given sort of the market dynamics, we needed to have a little more flexibility around that. We thought that was prudent to do. The last authorization we had was coming to its end. So this is a replenishment of that. I think from a debt capacity standpoint and a capacity standpoint, it wouldn't be out of the realm to see us do in the ballpark of about $25 million a quarter. So that authorization would be over the course of a couple of years, but again, we'll balance that against the needs we have for acquisitions and the need we have to continue to drive our strategic initiatives for the business as well.

Our final question comes from the line of Jeff Stevenson with Loop Capital.

Congrats on the strong quarter.

Thank you.

So should we expect to continue to see low single-digit organic wallboard volume growth run rate in the next couple of quarters given that you see residential backlog through the end of the calendar year and then improving commercial environment as well? Is that the right way to think about it?

I think so, yes.

Okay. Great. And then ceilings manufacturer mentioned they saw some channel destocking during the start of the year. I was wondering if you could comment on that and talk about if there's been any changes sequentially in sell-in versus sell-through ceilings demand.

I think that it's pretty much stabilized at this point. I think the -- all of the channel, the distribution channel probably had a little bit higher inventory in most categories coming into this calendar year based upon the concerns and supply chain disruptions and prebuy, et cetera. So grid as an example, grid moves in price with steel. So there was a lot of effort to try to understand what was going to be needed and get that into the house. And now as those things have stabilized, right, there was some destocking in that area. I think, naturally, there's some destocking in titles that went on in the first quarter, but I think that we're pretty much normal. Our inventory levels are normalized in ceilings, I would say, right now.

We've reached the end of our question-and-answer session. This also concludes today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.