GMS Inc (GMS) 2021 Q1 法說會逐字稿

Greetings, and welcome to the GMS Inc. First Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leslie Kratcoski, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Darryl. Good morning, and thank you for joining us for the GMS earnings conference call for the first quarter of fiscal 2021. I'm joined today by John Turner, President and CEO; and Scott Deakin, Vice President and CFO. In addition to the press release issued this morning, we posted presentation slides to accompany this in the Investors section of our website at gms.com.

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 statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including the 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 that references on this call to the first quarter of fiscal 2021 relate to the quarter ended July 31, 2020. (Operator Instructions)

With that, I will now turn the call over to John Turner. J.T.?

Thank you, Leslie. Good morning, and thank you for joining us today. I'd like to open by saying that all of us at GMS hope everyone joining this call as well as your families and colleagues are safe and well. I'll start with a review of our operating highlights and then turn it over to Scott, who will cover our financial results. I'll then share some closing thoughts before taking your questions.

If you turn to Slide 3, our first quarter results reflect outstanding execution by our entire team against the backdrop of a business environment that clearly demand -- excuse me, that clearly remains challenging throughout the period. As a result of the economic impacts arising from the COVID-19 pandemic, net sales and organic net sales declined 5.3% and 5.7%, respectively. Despite the lower sales, we generated higher net income and higher adjusted net income. Furthermore, we improved both gross and adjusted EBITDA margins by 20 and 40 basis points, respectively. These improvements were the direct result of the rapid alignment of our cost structure to current demand. Our balanced product and market mix, which has been strengthened through the execution of our growth initiatives. And a relentless focus on serving our customers with operational excellence. Adjusted EBITDA of $83.1 million was 10.3% of sales, reflecting a decremental adjusted EBITDA margin of just 1.4%. This was significantly better than the 10% to 20% outlook we had provided in our fourth quarter call, as a result of better-than-anticipated gross margin performance, coupled with our proactive and disciplined stance toward cost containment and alignment in the current environment.

On the health and safety front, we maintain enhanced operating protocols in compliance with public health requirements, recommendations and guidelines aimed at reducing the spread of COVID-19 and the health and safety of our employees, business partners and communities remains our top priority. All of us at GMS express our gratitude to those who have been and continue to be on the front lines every day during these unprecedented times. Considering the environment in which we are operating, we are off to a strong start to fiscal 2021. My congratulations and thanks go out to the entire GMS team who made these results possible. Remaining engaged, focused and proactive as we come together in support of our customers and each other. At the same time, I offer our gratitude for the partnership we share with both our customers and suppliers, who have faced their own difficult challenges in navigating the realities of the current market.

With that, I'll now turn it over to Scott to provide some more perspective on our financial results for Q1. Scott?

Thanks, J.T. Good morning. Looking at Slide 4 of our deck. Net sales were $802.6 million, down 5.3% year-over-year as continued COVID-19 related market declines in the U.S. were partially offset by higher sales in Canada. Overall, organic net sales declined 5.7%. Wallboard sales of $328 million decreased 4%, or 4.1% on an organic basis, principally due to a decline in both price and mix, driven mostly by a share to a greater weighting of residential wallboard products and to a lesser extent, lower volumes, which were down only about 1% on a consolidated basis. Ceiling sales of $113.7 million decreased 11.9%, or 12.5% on an organic basis, driven by lower volumes and product mix, partially offset by higher pricing. Steel framing sales of $110.5 million decreased 16.2%, or 16.4% on an organic basis, primarily due to a decline in both volumes and pricing, partially offset by product mix. The deflationary environment in steel continued in the quarter with pricing down approximately 7% year-over-year and 2% sequentially. Year-over-year sales declines were more pronounced in ceilings and steel, product categories tied primarily to commercial construction activity given the relatively more challenged demand environment there versus residential. Residential, while still down year-over-year, continued to improve during the quarter and into August. Complementary other product sales of $250.4 million increased 2.3%, or 1.5% on an organic basis, due to positive contributions from acquisitions, execution of our strategic growth initiatives and positive organic growth in Canada. Gross profit of $260.5 million decreased 4.8%, primarily due to the lower sales. Gross margin of 32.5% improved 20 basis points as a result of favorable product mix and purchasing initiatives, given a higher proportion of sales in both wallboard and other products.

Turning to Slide 5. Adjusted SG&A expense as a percent of net sales of 22.2% improved 40 basis points. This, despite a 50 basis point headwind from the deflationary market pricing of wallboard and steel. Approximately 90 basis points of improvement was realized as a direct result of the proactive measures to defer or limit nonessential operating and other discretionary expenses as we align the company's cost structure with the current demand environment as well as favorable business mix towards single-family residential with respect to operating costs. All considered, first quarter adjusted EBITDA in dollar terms declined marginally to $83.1 million from $83.6 million. Adjusted EBITDA margin, however, improved 40 basis points to 10.3%. This represented a 1.4% decremental adjusted EBITDA margin. We were very pleased that our execution in the first quarter generated improved profit margins over both the prior year and against our previous expectations for the first fiscal quarter, despite the market-related decline in sales.

Turning to Slide 6. As is typical during our first quarter of the fiscal year, we generated a use of cash from operating activities and free cash. These totaled $15.7 million and $20.5 million, respectively, increasing only modestly compared to the prior year, despite our tempering some of the precautionary cash management measures we put in place in the fourth quarter. For the second fiscal quarter, we anticipate generating a robust level of positive free cash flow which is typical of our normal quarterly cadence. Capital expenditures of $4.7 million were $1.1 million lower year-over-year as we have delayed or reduced capital expenditures that were not anticipated to impact near-term business. This said, looking forward, we maintain our estimate for cash capital expenditures in fiscal 2021 of approximately $25 million. As of July 31, 2020, we had cash on hand of $139.7 million and $372.5 million of available liquidity under our revolving credit facilities. You'll recall that as a precautionary measure to increase cash on hand and financial flexibility at the start of the pandemic, we drew down approximately $87 million under our revolving credit facilities during the quarter of -- excuse me, during the fourth quarter of fiscal 2020. During quarter 1, we repaid approximately $44 million of these borrowings and repay the remainder of this precautionary draw in August. Our net leverage was 3x as of the end of the first quarter, relatively consistent with 2.9x as of the end of the fourth quarter of fiscal 2020 and compared to 3.7x as of the end of the first quarter of fiscal 2020. Our balance sheet remains healthy. And in terms of the overall stability of our capital structure, the large majority of our debt is not due until 2025.

Now let me turn the call back over to J.T. before we open the line for questions.

Thanks, Scott. Turning to Slide 7. While we continue to carefully monitor and address market developments, we remain committed to our strategic growth initiatives which guide our long-term management of a very attractive business with significant long-term growth potential. As a reminder, our growth priorities include: expanding share in our core products, particularly in geographies where we are underpenetrated; growing select other product opportunities outside of core products to diversify and profitably expand our product offering; developing the platform through accretive acquisition and greenfield opportunities while maintaining balanced progress in debt reduction; and leveraging our scale and employing technology and best practices to deliver a best-in-class customer experience as well as increased productivity and further profit improvement.

In terms of acquisitions and new market expansion, we have returned to an active stance in pursuing deals and in advancing our greenfield expansion. Near term, we are realizing benefits from the execution of all of these strategies, which have equipped us with not only meaningful scale and technology advantages, but with balanced product, geographic and end market portfolios. All of which should serve to enhance our performance in this current environment. For example, growing share in our core products in underpenetrated geographies is increasing our scale advantages. Focused emphasis on our offering of other complementary products enabled us to grow that segment of our business this quarter, despite the challenging environment and further diversifies and balances our product portfolio. Platform expansion from both acquisitions and greenfield locations has not only enhanced our scale, but has also provided further product, end market and geographic diversification, including market leadership across both the U.S. and Canada. Technology deployment, such as our e-commerce and fleet optimization and logistics software has enabled us to not only better serve our customers, but to achieve increased productivity through operational excellence. Finally, since our last update to you in June, current external forecast remain varied with respect to both residential and commercial construction. The outlook for residential construction has improved. On the other hand, consensus forecast for commercial activity are a little changed and still suggest a difficult environment. Looking ahead to the second quarter, we do anticipate further commercial weakness from what we experienced in the first quarter. Moreover, there is also 1 less selling day in Q2 of this year than last year. This is expected to present a more challenging year-over-year second quarter sales comparison to what was an all-time quarterly record last year. In terms of profitability, the year-over-year gross margin comparison, which was 33% in Q2 of last year, will be more difficult than was the case in the first quarter. Taking these factors into consideration, we believe it prudent to target a decremental adjusted EBITDA margin within the range of 10% to 20% for the second quarter of fiscal 2021. With the expectation that we will see some benefit from improved residential start numbers in our third and fourth quarters, we are optimistic that year-over-year sales comparisons should be less challenged in the back half of our fiscal year.

As we conclude, our focus remains on controlling what we can. We have taken and intend to continue to take the necessary actions to optimize our operations and align our business with demand. I am confident in our team's ability to continue to address challenges and leverage opportunities quickly and nimbly. We firmly believe the foundation we have built at GMS, coupled with our strong liquidity and ability to generate cash, healthy balance sheet, market leadership and ongoing commitment to our strategic growth priorities positions us well for the duration of this period and for long-term success. Operator, we are now ready to open the call for questions.

(Operator Instructions) Our first questions come from the line of Matthew Bouley of Barclays.

This is Ashley Kim on for Matt today. So the first question I wanted to ask was on the margin side. Assuming resi will continue to outperform commercial, do you expect a significant mix impact as a result of this?

I think on the wallboard side, we certainly expect an impact a little bit. But as we've stated in the past, the profitability of the 2 are similar because of the lower cost to deliver but the gross margin itself is actually a little bit lower on the residential side. You're seeing the mix in ceilings and steel, and we expect that to continue. We are very happy with our other product category performance in spite of commercial weakness. And we don't see any reason why that shouldn't continue. And so in general, I think that what we were able to do here in the quarter, I see the trends continuing.

Got it. That's helpful. And then what are you seeing on tenant improvements, just seeing that you called that out last quarter, a potential weak spot? And has this shown any improvement as people kind of head back to work?

Not yet.

Our next questions come from the line of Trey Grooms with Stephens.

So first, I want to maybe see if you can expand on your comment about expecting or maybe seeing further commercial weakness. So ceilings and steel, organic volume, both down double digits and taking out the impact of 1 less day is that to mean that you're expecting a deceleration from that level that we saw in 1Q is that -- or any more color you can give us around that comment?

Yes. I don't think it's much different than we talked about last quarter, although it's becoming more clear now that commercial is certainly going to be weaker as we move through the balance of calendar year and likely won't strengthen until we get into later in calendar 2021. On the other hand, I think I was accused of being somewhat bullish on the residential side after the last call, and I think I'm probably more excited about it now than I was then. So I think that offset, as we mentioned here in our comments, is likely to happen later in the year as we get -- as we begin to roll over these starts numbers that are happening as we speak. But the degree of those offsets to what is, yes, a continued deceleration of steel and ceilings -- expected deceleration of steel and ceilings. I can't tell you the degree of that deceleration really out much further than we're operating right now. But I would expect it to slightly deteriorate through Q2. And then we'll get on the phone again and we'll talk about Q3 when we have a little bit better visibility into it.

Okay. That's helpful. And with the SG&A leverage that you guys achieved, and Scott, you mentioned a few things that were drivers there. But you also mentioned the headwind there that you had, the 50 basis points headwind on -- from price. What is your thoughts around SG&A, the kind of sustainability there, at least for the leverage, or when you've got volumes that are probably going to be challenged on one side of the business, in 2Q, wallboard volumes might not be as good as what we could see later, just given the timing and the lag with start. How should we be thinking about the SG&A side of things?

Well, look, I think all the discipline that we've been maintaining in the business over the quarter, we would expect to continue with that. We're really pleased with what we're seeing on the logistics side of it, the warehouse and delivery side of things. The -- we've been able to flex wages, labor, materials, repairs, those types of things really well. As you look forward into the G&A side of things, I think we're really disciplined there. Obviously, we'd expect to maintain what we're doing on things like travel, entertainment, meetings, all of those kinds of things, the more truly discretionary kinds of things that we'll be doing. So maintenance there is going to be important to us and a key part of the way we'll run the business over the quarter. Obviously, as you indicate, though, we do have some softer revenues in terms of the air cover of that. The net of that is that we don't expect a whole lot of leverage go into the next quarter, but we should be pretty solid just in terms of our ability to weather the sales decline in that environment.

Okay. And if I could just sneak 1 more in on the housing comment earlier, J.T., that you made around -- it was down in the quarter -- volume was down -- kind of residential volume was down in the quarter, but that -- it did improve and any more color you can give us on that? It sounded like it improved through the quarter and into August. Are you kind of in the positive territory there yet? And it sounds like it's expected to ramp up even further as we get through this quarter, but just any more color on the trajectory?

Yes. I mean, we entered the quarter kind of low single digit volume, exited the quarter much -- even lower single-digit volume declines. And now we're maybe getting almost flat on a year-over-year basis, currently. And I think that, that trend, I mean, it's hard to imagine that trend isn't going to continue and eventually flip to a positive with the starts numbers that we've seen. So if we could get another 3 to 6 months of robust starts numbers, obviously, what they start, they'll finish, for the most part, residentially, and we'll be supplying it. So I think we remain positive in that trend.

Our next questions come from the line of Steven Ramsey with Thompson Research Group.

Maybe I'll start with the other segment. Can you go into a little more detail on what drove growth in this category, while the other products did go down steeply and maybe go into a little more detail on your comment that you expected trends to kind of sustain some growth out of that category?

Well, I think my comment regarding sustaining growth is really more along the internal performance of the organization, not so much tied to the external environment. And that is that we've had our foot on the accelerator on other products for quite some time. And we have momentum now and I expect that to continue. Really, the other product category, anything related to residential is doing well, and we don't expect that to stop.

Great. And then maybe on Canada, just what drove growth in that geography, any particular segment or region? And do you think it is sustainable into Q2?

Yes. So a couple of things. One, our business in Western Canada, as I've mentioned in the past, is more reflective of kind of a home center environment in the COVID-19, I think the phenomenon we've all seen now is the home-improvement phenomenon is one of the many different changes societally, and we are certainly in a position to take advantage of that have been. Additionally, Canada had gone through a housing slant prior to COVID and the demand remains pent up. And I think that you're seeing some snapback coming out of COVID. I don't know how long that might last, but we certainly see good near-term trends in Canada. And our team up there has done a very, very good job of positioning us to be ready to capitalize in this moment. So continue to do well in Canada.

Great. And then last 1 for me, high level, on the urbanization driving or being one of the drivers of housing growth, housing starts that we're seeing. I mean, as we move from maybe a world where homes are more spread out and even offices potentially move to kind of a hub approach, less centralized, big offices. Does that change your strategy for acquisitions in greenfields going forward as maybe the layout of homes and commercial construction evolves over the next few years?

Well, I mean, the reality is, as we mentioned before, we're pretty well balanced. We're 55% commercial and 45% residential. Doesn't mean we're that everywhere. So when we talk about one of our growth initiatives being stronger in our core product mix, it's becoming balanced everywhere and not by shrinking one category but by becoming stronger in the other category. So I think acquisition wise, the reality of that is it's pretty much white-space related. And -- but yes, obviously, we would -- we think that the ability to service residential is very important to us going forward, particularly in the near term. And so acquisitions in and around that makes sense.

Our next questions come from the line of Keith Hughes with Truist Securities.

Just kind of a question about pacing it. You gave us an update through kind of mid-June, last time you reported. It looks like July may have fallen off more. If you could just talk what organic growth looked like in July and even into August, that would be helpful.

Sure. Yes, we decelerated a little bit on a year-over-year basis, but we continued to improve sequentially into July. So a tale of 2 stories. And Scott probably has the details.

Year-over-year across, say, the 4 months, even into August, we were in the ballpark of sort of 4.5% to 6% for each of those months, sequentially, positive. July was down a tick versus the prior month, but really not much. So I'd say we were fairly consistent across those 4 months.

And that's sort of negative 4 to -- 4.5% to 6%. That was year-over-year. Is that correct?

Yes, sir.

Okay. I guess final question. On the deflation in steel framing, any signs that that's at an end at this point? Or we still have several more quarters to feel that on the numbers?

Not several more quarters, it would appear. It would appear -- I mean, we were still seeing some deflation, albeit less in the very near term, but it looks like it is bottoming as we speak, at least what we can see in the market, it looks like it's bottoming as we speak. At least sequentially, I would have to go back and really look at last year's. I think even we think it's going to be a little bit better than this. We said 7% this quarter, I think we thought maybe it's going to be a little better than that as we move forward, but not a lot, probably year-over-year, but sequentially, we think it's coming to an end.

Our next questions comes from the line of Kevin Hocevar of Northcoast Research.

You mentioned -- in terms of gross margins, it seems like the July quarter's historically -- at least since you've been public, has always had the lowest gross margin quarter of the year. And so would you expect -- it sounds like maybe in the next quarter, it might be tough to reach the 33% gross margin that you saw last year. But would you expect gross margin for the balance of the year to be better than the July quarter? Or was there anything in July that -- the July quarter that this year would be different than that?

I mean we were 33% in Q2 last year, 33.3% in Q3 against 32.5% in this last quarter, I think we'd be looking for the remainder of the year to be much more consistent with Q1 of this year versus the higher levels we were at last year.

Okay. Got you. And then in terms of M&A, it sounds like you mentioned in the prepared remarks, returning to a more active stance. I'm curious on that in greenfield. Curious what the M&A pipeline looks like. And also, it looked like you closed a couple of branches in the quarter, curious what the greenfield outlook is as well.

Yes. So we -- in the quarter, let's talk greenfield first, we have 6 to 8 identified greenfields, all good markets, all complementary opportunities for us to expand where we already have a presence. So that strategy is going to continue. What we closed were basically operations that through different acquisitions and legacy things didn't make sense in the near term. So just a couple of those.

Acquisitions. Our pipeline was good before COVID, and we paused it and now we've unpaused it, and the pipeline is good post-COVID. So I would expect to see some activity over the next 2 to 3 to 4 quarters, for sure, on that front.

Our next questions come from the line of David Manthey with Baird.

First off, on -- in your comments in the prepared remarks, J.T., you mentioned that residential starts will help the revenue trends in the third and fourth fiscal quarters, and I think you made a comment about less challenged sales comps in the back half of the year. Was that a comment that pertains to residential exclusively? It sounds like you're also implying that non-res may be weakening, which I guess those lines, who knows where they intersect. But was that comment specifically related to residential?

It is. It's primarily related to residential. I think that we believe Q2 could be the bottom as a direct result of that recovery in residential, for us, I hope. Most of the commercial forecasts are showing down 8, 9, 10 for the year, some of them in low double digits, some of them at 5, so it's kind of all over the board, but you get that consensus into that 8, 9. I think we're kind of in the heart of it in that regard. But I do think if you look at the July numbers, if the July starts numbers were to repeat and then in August and then in September, we start seeing those kinds of numbers, then you would -- our Q3 and our Q4 will be much better than otherwise, that's for sure.

Okay. All right. And last quarter, you had mentioned you expected ceiling volumes to be down, but pricing higher and with ceiling prices down slightly here this quarter, which is pretty unusual for you. I assume some of that was grid pricing, but what other factors were behind the lower ceiling prices? And is that a temporary or onetime deal? Or could that be a medium-term headwind?

Yes. No, we have -- ceiling's price is not down. But I mean, I'll let Scott -- I guess, the headlines are down a little bit, but there's a...

Well, I think you've got it right. It's really on the grid side versus the tile side, you've got it about right.

Yes.

Okay. And so I guess, as long as steel remains a headwind, that could be a headwind. And then just the final question for Scott. Could you just give us the number of selling days in the second through fourth quarters of the fiscal year, just so we have those?

We're just -- we're down 1 in Q2, up 1 in Q3 and down 1 again -- just the opposite, we're up 1 in Q2, down 1 in Q3 and...

Down 1 -- down 1, down 1, up 1.

Yes. Down 1, down 1 and up 1 over the course of the next 3 quarters for a net down 1 for the full year.

Our next questions come from the line of Mike Dahl with RBC Capital Markets.

This is actually Chris Kalata on for Mike. My first question, I just want to go back to the incremental EBITDA commentary for next quarter, the 10% to 20%. I would have thought with the outperformance this quarter that, that would come in slightly above that range. So I was just curious to get your thoughts on some of the moving pieces there and whether some of the cost takeout you saw in SG&A comes back in the quarter? Or are there some other onetime items that we should be aware of in terms of that, to look into this...

No. I mean it's a slightly deteriorating top line. It's 1 less selling day, exacerbating that problem. And it's a normalized gross margin versus a very difficult comp in the previous year, and that math means 10% to 20% decremental. SG&A will stay under control for sure.

Got it. That makes sense. And then just on my second question. Any way you could parse out the deterioration in commercial, how that looks in new construction versus R&R and then kind of what's your near-term outlook...

Unfortunately, right now, it's really difficult. It's a very -- it's a weird time. It's hard for us, and this -- we're going to need to put a couple of more quarters in the bank before we understand that a little bit better. All of it is challenged. I mean the pipeline we're doing, for the most part, is a lot of new and a lot of remodel that had already started. So the traditional refit and office refit and those types of activities that we would be doing in this normal busy time of the year, that's not happening. So I think both are equally challenged, quite frankly. It's at the moment. I think longer term, you'll start to see some remodel come back. And I think that as people really come back to work and occupy office space, we'll start to see some pickup in that. But with hospitality, restaurant and office being as challenged as they are, those are all robust, remodel type markets, it's just not happening at the moment.

There are no further questions at this time. I would like to turn the floor back over to Leslie Kratcoski for closing comments.

Thanks, everyone, for joining us today. As always, a replay of this call will be available shortly on our website, and we appreciate your interest in GMS. Good day.

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