GMS Inc (GMS) 2020 Q4 法說會逐字稿

Greetings. Welcome to GMS' Fiscal Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Leslie Kratcoski, President of Investor Relations. Thank you. You may begin.

Thanks, Sherry. Good morning, and thank you for joining us for the GMS conference call for the fourth quarter of fiscal 2020. I'm 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 presentation slides to accompany this call 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 fourth quarter and full year fiscal 2020 relate to the quarter and fiscal year ended April 30, 2020. (Operator Instructions)

With that, I'll 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 begin by saying that we hope all of you joining the call, your families and colleagues are safe and well.

My opening remarks will include a review of our operating highlights, including actions we have taken in response to the impacts of the current pandemic. And then I'll turn it over to Scott, who will cover our financial results and provide an update on sales trends. I'll then share some closing thoughts before taking your questions.

If you go ahead and turn to Slide 3, first off, the thoughts and prayers of the entire GMS family are with everyone who has been impacted by the COVID-19 pandemic. The health, safety and well-being of our employees, business partners and communities remains our top priority. In response to the crisis, we have taken actions to promote the safety of our stakeholders by enhancing operating protocols in compliance with public health requirements, recommendations and guidelines. These precautions include curtailing nonessential travel and group meetings; implementing routine cleaning; practicing disciplined social distancing; restricting or modifying access to facilities, including limiting walk-in traffic in showrooms; recommending that employees who can effectively work from home do so; and use of appropriate personal protective equipment.

As we monitor recommendations of public health officials and the reopening guidelines of state and local governments, we will adjust our protocols as appropriate. I would like to share my sincere appreciation for all of our teammates who continue to be engaged, focused and proactive as we come together to support our customers and each other during this time. Additionally, on behalf of everyone at GMS, I would like to express our deep gratitude to the first responders, health care providers and essential workers who have been and continue to be on the front lines every day.

Turning to Slide 4, we entered the fourth quarter with strong momentum, in line with what we had seen through the first 3 quarters of fiscal 2020, grounded in our team's focus on effective execution of our strategic priorities. Through mid-March, we experienced favorable end market trends and generated robust volume growth. Even as disruptions from COVID-19 began to escalate in the second half of March, construction and building products distribution were fortunately deemed essential businesses in the majority of our markets, which enabled us to keep most of our locations open.

However, demand weakened significantly in late March and even more so in April. Our operations in several large MSAs were required to close, building and remodeling projects were paused by order of government mandate and customers appropriately and understandably retrenched in some of the hardest hit markets to focus on responding to the effects of COVID-19 on their businesses. As a result, net sales for the fourth quarter of fiscal 2020 were down 1.2% year-over-year as a high single-digit sales increase in February and March combined was more than offset by a double-digit decrease in April. As Scott will cover in more detail, we were pleased and encouraged to see improved sales trends since the end of the fourth quarter.

Despite the significant disruptions to our operations in the second half of the quarter, we were pleased to have overall generated higher fourth quarter year-over-year wallboard volume growth, an indication of just how strong our momentum was prior to the escalation of COVID-19. Our leadership team quickly and proactively took action upon the earliest indications of rapidly changing industry conditions to reduce costs, increase liquidity and improve financial flexibility to not only ensure we remain well positioned for the duration of this period, but that we are able to exit even stronger.

These actions, most of which are ongoing, include: proactively drawing nearly $90 million under our revolving credit facilities, deferring or limiting nonessential operating or other discretionary expenses, implementing a wage and hiring freeze and certain permanent headcount reductions, immediately furloughing employees in response to declining demand, utilizing certain benefits of the CARES Act, suspending company matching contributions to the 401(k) plan, closure of certain underperforming locations, delaying or reducing certain noncurrently critical capital expenditures, temporarily suspending acquisition-related activity and optimizing all areas of working capital.

As a result of the lower-demand environment, coupled with mix, gross margin was down slightly year-over-year. Adjusted SG&A as a percentage of sales was 90 basis points higher year-over-year due to overall lower sales, operating inefficiencies related to COVID-19 business interruptions and the impact of lower selling prices, the latter of which was somewhat more pronounced than previously expected. In addition, while we took significant action on the cost front as the impact of the pandemic escalated, our fourth quarter results did not reflect the full alignment of our cost structure due to the very rapid nature of the decline in sales, which took place late in the quarter. As a result, we realized a year-over-year decline in adjusted EBITDA to $63.6 million or 8.2% of sales.

As disclosed in our press release this morning, we recorded a noncash goodwill impairment charge of $63.1 million in the fourth quarter related to our Canadian business as part of our annual goodwill impairment test. Scott will, in his remarks, cover the accounting specifics and timing dynamics which triggered the impairment. Notwithstanding, in the fourth quarter, our Canadian operations generated approximately 3% organic sales growth on a constant currency basis despite COVID-19 disruptions.

This was the first time we experienced an increase in sales in Canada since the second quarter of fiscal 2019. This represented a continuation of the positive trajectory we had been reporting throughout fiscal 2020 as year-over-year sales declines narrowed and now have turned positive. While current forecasts call for declines in the Canadian construction markets in calendar 2020, they indicate recovery in calendar 2021, and we firmly believe that our Canadian operations remain a very important, compelling and profitable component of GMS' long-term growth strategy.

Early in the fourth quarter, we completed the previously announced acquisition of Trowel Trades Supply, Inc., which represents our entrance into Vermont, thereby increasing our coverage in the U.S. to 44 states and further bolstering our position in the important New England market. We also opened a greenfield location in Panama City Beach, Florida, which will enable us to more fully participate in rebuilding efforts in the Florida Panhandle following Hurricane Michael in late 2018.

Now if you'd turn to Slide 5. Although just a few months ago no one would have predicted that fiscal 2020 would have concluded the way it did, it was a strong year overall for GMS, and our teams made meaningful progress. Reported and organic net sales growth of 4% and 2%, respectively, resulted in record sales of $3.2 billion for the year. We generated almost $300 million of adjusted EBITDA, also a record, and an adjusted EBITDA margin of 9.2%, despite the significant disruptions of COVID-19 late in the fiscal year.

Strong free cash flow of $278 million or 93% of adjusted EBITDA was generated not only as our business grew in the first 3 quarters of the fiscal year, but also in the contracting environment of the fourth quarter when we quickly and proactively identified and executed initiatives to increase and preserve liquidity. As a result, we were able to invest in organic business initiatives, conclude 3 business acquisitions, open 6 greenfield locations and reduce our net debt leverage from 3.6x to 2.9x over the course of the fiscal year.

I'd like to extend my thanks to all of our teams for their dedication and commitment, to all of our customers for entrusting their business to us, to all of our suppliers for their partnership and to all of our shareholders for their support.

With that, I'll now turn it over to Scott to provide more perspective on our financial results for Q4. Scott?

Thank you, J.T. Looking at Slide 6, net sales were $770.9 million, down 1.2% compared to the fourth quarter of the prior fiscal year.

As an indication of a marked change in momentum, an approximately 7% increase in sales for February and March combined was more than offset by an approximate 16% decline in April. This was comprised of a deep 70% decline in markets subject to mandatory shutdowns, notably including Washington state, Pennsylvania and Michigan, together with a more -- a much more modest 9% decline elsewhere. In aggregate, we estimate the negative impact of the COVID-19 pandemic on fourth quarter net sales to be in the range of $60 million to $65 million. Overall, organic net sales declined 1.8%.

In terms of product line mix, sales of wallboard were up 0.3% compared to the same period last year. On an organic basis, sales were down marginally, which included an organic volume increase of 2.7%, but with lower price and mix of 3%. Fourth quarter ceiling sales decreased 1% year-over-year or 2.6% on an organic basis as a 2.3% increase in price and mix was more than offset by a 4.9% volume decline. Sales of steel framing decreased 7.4% or 7.8% on an organic basis, including a 2.4% and 5.4% decline in volume and pricing mix, respectively. Sales of other products were flat in the quarter or down 0.3% on an organic basis.

Across the product groups, we experienced positive volume growth in February and March, while April volumes declined. In the case of ceilings and steel framing, the April declines were further exacerbated by the mandated shutdowns and other disruptions in April having a disproportionately greater impact on commercial projects than residential ones in the markets we serve.

In addition, we saw further deflationary market pricing for both wallboard and notably steel in the fourth quarter. The impact of this deflation for the fourth quarter was higher than we had anticipated on our Q3 earnings call. This was due to further pricing declines resulting from changes in both the demand and competitive environment related to COVID-19 as well as on mix given a larger contribution of sales from residential projects, given the disruption to commercial jobs noted earlier.

Gross profit of $251.6 million decreased 2.1% compared to $256.9 million in the fourth quarter of fiscal 2019, primarily due to lower sales. Gross margin of 32.6% compared to 32.9% a year ago, and was at the lower end of the range we provided in our third quarter earnings call. This, again, was a result of COVID-19-related market disruptions as well as the resulting higher mix toward residential projects.

Turning to Slide 7. Adjusted SG&A expense as a percent of net sales increased 90 basis points to 24.5% compared to 23.6% in the prior year quarter. Approximately 60 basis points of this was related to the previously mentioned deflationary market pricing that we experienced. The remainder was due to lower sales and inefficiencies related to COVID-19 business interruptions as well as the timing of certain expenses in April, more than offsetting SG&A leverage realized in the first 2 months of the quarter.

As noted, in the fourth quarter, in connection with our annual goodwill impairment test, we recorded a $63.1 million noncash goodwill impairment charge related to our Canadian reporting unit. The primary factors contributing to the impairment were an increase in the discount rate and a decrease in market multiples, each resulting from the pronounced decline in market valuations and uncertainty prevalent at the time of the impairment analysis. While the mid- to long-term outlook remain favorable, a decrease in the reporting unit's forecasted near-term cash flows, principally resulting from COVID-19, was also a valuation consideration.

In addition, we also recorded a $14 million gain in connection with cash proceeds received as a part of a class action legal settlement. Both the goodwill charge and the legal settlement are excluded from adjusted EBITDA and adjusted net income. Fourth quarter adjusted EBITDA of $63.6 million compared to $73.5 million a year ago and represented an adjusted EBITDA margin of 8.2%. While we responded swiftly to the sudden change in the demand environment in late March, as J.T. mentioned, the timing and the rapid nature of the escalation of COVID-19 disruptions prevented our fourth quarter results from reflecting the full realignment of our cost structure. This resulted in a meaningfully higher decremental adjusted EBITDA margin that we would anticipate going forward.

For some context around that, business activity since the end of March has improved on a relative basis. To date, in the first quarter of fiscal 2021, we have experienced sequential improvement in net sales levels as the majority of the mandated shutdowns have been eased or lifted and as businesses have begun to reopen. Specifically, sales per day in May were up approximately 16% from levels in April, and sales per day thus far in June are sequentially higher than the levels realized in May. On a year-over-year basis, comparably -- comparable daily sales through the first 3 weeks in June are down low single digits compared to the double-digit year-over-year decline experienced in April. For the month of May, we realized an approximately 5% year-over-year decline in sales per day.

While we believe significant uncertainty remains as to the pace and trajectory of a market recovery in fiscal 2021, based on our experience to date in our first fiscal quarter and coupled with the assumption that the sales for the remainder of June and July shrink similarly to a single-digit year-over-year decline, we believe we can generate a year-over-year decremental adjusted EBITDA margin for the first quarter within the range of 10% to 20%.

Now turning to Slide 8. Free cash flow for the fourth quarter of fiscal 2020 of $163.4 million increased $80.6 million or 97.4% year-over-year and represents 257% of adjusted EBITDA. This improvement is a result of a $73.4 million increase in cash resulting from changes to net working capital, $6.1 million of higher net income after adjustments for noncash items and $1.1 million of lower capital expenditures. This strong free cash flow generation is not only a -- is not only representative of the defensive nature of our distribution business model, but is a direct result of our actions to tightly manage working capital to preserve liquidity.

Capital expenditures of $4.3 million and $25.2 million for the quarter and fiscal year came in at the lower end of our previous estimated range as we delayed and reduced capital expenditures that were not anticipated to impact near-term business. We will remain disciplined on this front until there is greater clarity in the market. As a result, we anticipate cash capital expenditures in fiscal year 2021 to approximate $25 million. At the same time, we anticipate a reduction in finance lease obligations in fiscal 2021.

As we look to the first fiscal quarter of 2021, we expect working capital will be a use of cash given the relative recovery experienced in our markets since the significant decline seen in April. Combined with the typical quarterly cash -- excuse me, typical quarterly cadence of our free cash flow generation, we anticipate generating an overall net use of free cash in our first fiscal quarter.

During the fourth fiscal quarter, we reduced our net debt by $141.5 million, including a $50 million prepayment of outstanding principal earlier -- early in the quarter. Net leverage was 2.9x as of the end of the fourth quarter compared to 3.3x as of the end of the third quarter of fiscal 2020. As a result of the aforementioned expectations for free cash flow in the first fiscal quarter, we expect that our net debt leverage will increase sequentially as is typically the case for the first quarter.

As a precautionary measure to increase cash on hand and financial flexibility, in late March, we borrowed $87.2 million under our revolving credit facilities. As a result, as of April 30, 2020, we had cash on hand of $210.9 million and availability under our revolving credit facilities of $368.8 million. Subsequent to the end of the fourth quarter, we repaid $40 million of the borrowings on our revolving credit facilities as prevailing concerns about significant disruptions in the credit markets did not materialize. 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.

Thank you, Scott. Let's go ahead and turn to Slide 9. While we have made near-term adjustments to our operations, our strategic growth priorities continue to guide our long-term management of the business to capitalize on what we believe remains a very attractive business and industry with significant long-term growth potential.

As a reminder, these strategic growth priorities include: expanding share in our core products and in geographies where we are under-penetrated, growing select other product opportunities outside of core products to diversify and profitably expand our product offering, expanding the platform through accretive acquisition and greenfield opportunities balanced with debt reduction priorities and leveraging our scale and employing technology and best practices to deliver further margin expansion.

A few words about acquisitions and new market expansion. While we have taken a temporary pause in deal execution until we have better visibility into the recovery, we are continuing our active dialogue with potential acquisition targets and anticipate resuming activity in earnest as business conditions improve. Moreover, we are actively working to engage in or, in some cases, reengage in conversations with potential candidates who might now benefit from GMS' financial and operational strength during this market downturn. We also are working to actively advance our greenfield expansion plans so that we are prepared to implement them when and where most appropriate. We continue to see acquisitions in greenfield expansion as an important component to our growth story and strategic build-out of our geographic footprint.

Over the past year, we believe we have also made progress on other elements of our growth strategy, which is helping us more effectively navigate the current environment. For example, our strategic e-commerce initiative has the potential to enhance not only top line growth, but further leverage our scale and drive lasting productivity and represents our commitment to further employing technology throughout our business. With the potential for further evolution and change in how business is conducted as a result of the COVID-19 pandemic, we believe we are well positioned to begin offering more and more of our customers a broader and wider spectrum of virtual experiences to complement the deep in-person relationships inherent in our business.

Our e-commerce strategy and platform has been on a multiyear journey focused on developing a digital platform and updated business processes to accommodate how business will be conducted in the future. Seeking our customers' input along the way, we have invested in a unified platform to control the customer experience end-to-end and allow us to continue to deliver unique experiences to our customers. While companies going through digital transformation often look to different products for each offering, such as commerce, payments, delivery, et cetera, we offer a unified customer experience with investment in a tightly integrated platform. Employees, including salespeople, dispatchers, drivers and customers, can all interact and work together on the same platform and data in real time. While you'll be hearing more about our e-commerce strategies in the future, today I wanted to provide you with this update as customer adoption is accelerating, and given the evolving importance of our providing customers a digital experience, perhaps now more than ever.

In conclusion, the recent trends we've seen that Scott laid out are indeed encouraging. And fortunately, unlike in the past downturn, construction end market fundamentals were very strong prior to the pandemic. However, there does continue to be uncertainty regarding the outlook for construction given current macroeconomic conditions. Current external forecasts vary with respect to both residential and commercial construction in calendar 2020 and 2021 and include a variety of views as to the shape and duration of the downturn and subsequent recovery.

Within our own operations, projects underway are continuing and being completed with commercial projects having come back online more slowly than residential ones, both single and multifamily. Our near-term project pipelines and backlogs remain principally intact and most of our customers are generally optimistic. On the commercial side, we see variation in activity depending on geography and project type. On the residential side, activity levels are currently steady for the most part, although we could see a pause due to the disruption in starts this past spring.

With all that said, visibility more than a few months out remains cloudy at best. Not respective of the market dynamics, our focus will be on controlling what we can. We have taken and will continue to take the necessary actions to optimize our operations and align our business with demand. And for the time being, we will be prudent and cautious with respect to reintroducing costs, doing so only to the extent that we need to in order to effectively service the business. I'm confident the strategic foundation we have built at GMS, coupled with our strong liquidity and cash generating ability, will enable us to continue navigating the evolving operating environment and position us for long-term success.

Operator, we are now ready to open the call for questions.

(Operator Instructions) Our first question is from David Manthey with Baird.

So we understand that everyone is navigating uncertainty here. But as you look to the new fiscal year, I would imagine you have some sort of view as it relates to the shapes of the recovery curves, as you mentioned. And I'm just wondering if there's any guidelines you can give us at all in terms of what you are thinking as it relates to the next fiscal year for new residential, new nonres and renovation. And then you mentioned the nonres construction. That's an area we're keenly focused on. What do you think the odds of a double-digit decline in nonres construction over the next 12 to 18 months?

Well, let me address the nonres first. I think that the latest forecast we saw when we say double digits was low teens in commercial starts, most likely, commercial spending. I think that 3 months in a row here of the ABI being lousy probably supports that. All that being said, I also think that the work-from-home situation is probably pretty difficult for developers and architects. I would expect to see that ABI recover as we move forward. But I don't think it's beyond the pale to expect 10% to 15% decline in commercial in -- not on an immediate basis, but out 9 months, 12 months. There's definitely going to be, I'll call it, a spotty recovery as some people called it Ws, right, the W recovery, the ups and the downs, and the -- I think we'll be navigating that kind of an environment from a commercial perspective.

Today, our commercial pipeline is good and everything has come right back as expected. The only notable issue in commercial today is what we call tenant work or tenant improvement work, which you'd expect, which is the day-to-day office work that people do to reposition a floor of an office building or to replace the ceilings, et cetera. Those things, of course, are all on hold, and we'll have to wait and see what happens when people come back to work after the pandemic. We could actually see a spike in that type of business as floors get reconditioned and people have to have more space to work, et cetera.

So a lot of unknowns, but I do think generally, commercial is most likely going to be in that 10% to 15% down range out 6 months plus from now. The good news is I think by then, residential will probably be fully recovered. And if the -- if we're kind of putting this recession in the rearview mirror and the pandemic is in the rearview mirror at that point in time, I really think housing is going to come screaming back. Now you -- we already had pent-up demand and now you're going to have this situation where people want to get out into the suburbs, want to get out just a little bit further. And I just feel like the demand situation in -- for new homes is going to be significant.

Our next question is from Mike Dahl with RBC Capital Markets.

J.T., just a follow-up on that. I appreciate the commentary and the insights. I guess to the point of the interplay between commercial falling off and residential recovering, I guess, you also noted severe lag to resi starts, there could be some delayed weakness there. So when you're -- again, understanding there's not a ton of visibility right now, but when you're thinking about and planning the back half of this fiscal year, is it then your expectation that we could see potentially a bit of an air pocket in sales? So maybe you stay in the low single digits declines in the near term, but then those -- at some point in the back half, you see a reacceleration in those declines as you work through that air pocket?

I think the likelihood is -- and again, this is just today. The likelihood is today that I think the residential recovery 6 months from now will be stronger than anybody is forecasting. And I think the commercial decline will begin at that point in time, and I think it's going to decline in that 10% to 15% range. So we have a really balanced business, as you guys know: 55% commercial, 45% residential. We've put a lot of emphasis in the other product category not just during this year after I've arrived, but even before getting here. We've certainly accelerated our attention in that space. I think that other product area has a lot of opportunity for us, both residentially and commercially.

So I just feel like from a wallboard perspective, some of the residential demand will replace some of the commercial demand that's dropping off. I think ceilings and steel certainly are going to be under pressure. But I think our other product category, while we gain share in some things we're not really in dramatically today, but also we have a very robust business residentially in the other product category. I really think they could kind of offset one another as we move through the next 12 months. That's kind of my view today.

But like we said in our call just now, we're acutely managing volume every day. We look at what we're selling and what our sell prices are, and we align our cost structure according to that, and we align our cash-generating expectations and abilities to that. And I think that we'll be in very good shape as we move into the next robust period of growth whenever that is.

Okay. Got it. That's helpful. And my second question then on the wallboard side. I think there was a comment in the opening remarks about lower-than-expected prices and some competitive dynamics. Can you give us a sense of, just on a more sequential basis, how did wallboard prices exit the quarter and how are they performing quarter-to-date through June, if you could?

Yes. Well, the absolute number is lower in wallboard exiting the quarter, a lot of that being the mix in April with commercial dropping off so dramatically and just having that residential wallboard in there. So the April price is kind of a bad price to look at. I think if you look at the first 2 months of the quarter, sequentially, we're down less than 1% in pricing in wallboard, and that's kind of what we've been experiencing, very, very low sequential declines on a quarter-to-quarter basis. And I will tell you, that's what we're experiencing, as we speak, in wallboard.

The bigger surprise, I guess, was steel. We really felt coming out of third quarter that steel prices were probably getting to the point where maybe they would start bottoming a little bit, and that didn't happen. And I guess I would tell you right now, I think they're bottoming when you look at the commodity itself and you look at the amount of capacity that's been taken offline in steel. So that was a bigger surprise to us than anything actually.

Our next question is from Keith Hughes with SunTrust Robinson Humphrey.

To build on that last question, given the May, June, can you give us -- is there any other deviations, any products that are doing particularly better or worse than the averages you gave us? And also on pricing in ceilings -- pricing and mix in ceilings, how is that going in the last 1.5 months or so?

Well, I mean, all of our commercial products are down a little bit more than our residential products. So our wallboard business is strong and our other product category is, well, relatively strong, let's say, and then ceilings and steel are trailing. We expect ceilings to kind of have the same experience we've had, which is some volume decline, but pricing is okay, stable to up. Steel seems to be kind of bottoming out. We're going to trail a little bit -- the market prices are going to trail a little bit to commodity prices, so we may still see a little more deterioration. But that should stop, unless there's a complete falloff in commercial demand, and it just becomes very, very, very competitive in that regard. We're not seeing that though at the moment.

And do you think in commercial, specifically ceilings demand, with some of the openings that are coming up in some of the northeastern, northwestern cities, is there going to be kind of a pop in demand for a period of time to finish those projects out before we make a longer-term determination of what commercial looks like?

Yes. I think that -- we're not seeing cancellations, right? We're not hearing or seeing that projects that were in the framing stages or the foundations were built the -- for those types of projects, we're not hearing that they're being stopped. So the expectation is that pipeline will continue for some period of time. The concern is purely this last 3-month ABI number, right? And how much of that is real demand destruction versus kind of COVID/work-from-home/nervousness about spending money commercially. So the near-term demand, anything that was in the ground is going to be finished. All those projects will be finished. Our pipeline looks relatively good in that regard, and yes, you're right. So I don't expect ceilings and/or steel to be big issues until we hit whatever that air pocket is going to be in commercial, and I don't think we know what it is yet.

Our next question is from Kevin Hocevar with Northcoast Research.

You mentioned sales down low single digits so far in the quarter. Curious, do you think you're still gaining share in there? It was a little better than I had anticipated. And how is -- is volume flattish in there and pricing down a little bit? Just any color you could give there would be helpful.

Yes. So on a year-over-year basis, pricing is down a little bit in wallboard, but again, sequentially flattish as we speak. Are we gaining share? Again, that's a fairly subjective question. We don't have a lot of additional data points out there. I think we're doing as well or better than most, how about that, in that area. And I'm very happy with our other product category, all the work that we've done there. If you look at the fourth quarter to, in essence, be flat in the fourth quarter in the other product category and having a very difficult April. So wallboard and other, both very strong in my estimations for the fourth quarter.

So again, we're not seeing sequentially a lot of pricing decline. But we'll have to see what happens going forward competitively. I mean, obviously, residential is very, very competitive, always is. Anytime builder business is driving the business, it's the most competitive of all the end markets. And commercial seems to be holding in right now. I mean pricing commercially seems to be holding on okay.

And another real positive surprise for us has been multifamily. It just has come really roaring back. Our multifamily contractors were really worried regarding the kind of the pandemic. We'll have to see what multifamily looks like 9, 12, 18 months from now, but right now, it seems to be good.

And on the gross margin front, it turned down here year-over-year for the first time in a while. I know it sounds like residential markets being stronger is a mix impact there. Is that the only thing? Or is there also some price/cost tailwinds? I know that that was -- has been a big tailwind for you guys the last several -- year or so, and I think that that's anniversarying around now. So wondering if you could just give a little color on the factors driving gross margins there? And how should we think of gross margins going forward, the balance of the year?

I mean I -- well, let me talk about the price/cost dynamic first and say that I think it's fairly balanced at the moment, right? I'm not seeing a big advantage for us going forward. It's not a big disadvantage going forward. I think everybody is in it together right now. I think suppliers and distributors all understand that the environment that we're in, and we're all acting somewhat responsibly at the moment. So in that regard, I feel pretty good about where we are.

I'll let Scott talk a little bit more about gross margins. I think we gave a decremental guide, more in line -- mostly because I think we're going to have to balance gross margin issues up and/or down with mix as it moves around and with demand and with competitiveness with what we're doing on the cost side of the business. I don't think it's as stable as it was and as easy to talk about as it was 6 months ago. That's my perspective. I don't know, Scott?

I mean, look, it's a little tough to tell you exactly what it would be, but I think the kinds of ranges we've been operating with are holding true. Tying your question back to the question about how we're pursuing the marketplace and share gains, the nice thing about all this is we're able to deliver the volumes that we've been delivering and not take meaningful reductions to the spread that we're realizing on margins. So we've got a lot of discipline in the business in terms of our aligning the cost side of the business with the pricing side of things. And you might see a little bit of movement on the fringes in terms of basis points, but it's going to stay in the same kinds of ranges we've been operating, is our expectation.

Our next question is from Matthew Bouley with Barclays.

Sticking with the margin side, and I hear you on the decremental guide for Q1 and what, Scott, you just mentioned around the gross margin. But just assuming some of the cost actions you took are now somewhat fully flowing through, any additional color on the SG&A side within that?

I mean we were pretty encouraged by what we saw in May in terms of our working past some of those issues that we saw in April, just the timing of our being able to flex the cost structure given the pronounced very quick downturn in the business. The timing of some April expenses just that in the normal course were there relative to the sales decline. May was really positive in that regard. So as long as we're able to maintain a relatively -- relative volume decline or increase at the margins or relatively low percentages, I think our ability to continue to practice that discipline with expenses is pretty good.

So we're encouraged by May. We expect it to continue into the remaining months of this quarter. But obviously, we just got to be careful that if there is a significant shift in volume out there, the ability to flex some of those costs quite as quickly may be an issue for us. But on balance, the alignment of the revenues to the costs and our ability to tightly manage the flexing of that, I think is pretty solid right now. So that's why we're pretty comfortable with that range.

Okay. Perfect. And then just secondly, the strength in free cash flow, and you called out the strength in working capital management. I think last year, there was a timing benefit on payables in Q4. And obviously, this year, you still performed better than that. Anything else to call out this year that -- kind of specific or onetime in nature or really just strength in working capital management broadly?

I would say it's the latter. We just very aggressively went after -- there was a lot of unknowns at the time as we were managing through that. There were -- was talk around liquidity concerns in the marketplace, credit availability, et cetera. So we went very conservative very quickly. And accordingly, we saw a lot of -- a very nicely improved cash flow from working capital on the balance sheet.

As things have stabilized, as we've gotten better comfort in what we can avail ourselves to in the credit markets, we released some of that. So you'll see -- as we indicated, you'll see some reversal of that in 1Q. But it really is just on our very specific focus on working capital in the fourth quarter that led to all that swing.

Our next question is from Trey Grooms with Stephens.

This is actually Noah Merkousko on for Trey. And so my first question, you mentioned in wallboard there was a more competitive environment. Is that at a distribution level or at the supplier level?

Well, I think a little bit of both. I mean I think that everybody is adapting to the expectation of a lower volume environment. And you had a little bit of a consolidation last year, right, with manufacturers. So really at both levels. But I would say, probably more competitive in the end markets with distribution than with the manufacturers. Mostly residential.

Okay. And then just a quick follow-up. I know we've been talking about decrementals, but for that 10% to 20% guide for 1Q, what's the biggest swing factor that will get you to the high or low end?

Gross margins and volume. I think we got our arms around our -- I mean we have our arms around the cost structure. We can control that. In the near term, what happens with volume and gross margin, a little bit -- is still a little bit up in the air.

And our next question is from Steven Ramsey with Thompson Research Group.

I wanted to, I guess, hone in on ceiling volumes. In the quarter, I guess, thinking about the April, June time -- through June time frame volume decline, maybe seems fairly modest given what some suppliers have discussed publicly on April trends.

Yes. I mean, again, April was a lousy month in ceilings and in steel for sure, and we're seeing it bounce. I don't know if that means it's going to bounce for 6 months or if it's only going to bounce for 3 months as we refill that hole, right? I mean that April hole was pretty deep in commercial. So we're refilling that hole, bouncing back, projects are coming back.

But certainly, ceilings are commercial -- exclusively commercial product. And so it's going to tie out directly to that. As well as I mentioned the one area that is most immediately evident from a not bouncing back perspective would be the tenant improvement work, and that's a lot of ceilings volume in tenant improvement work. So I think ceilings is certainly going to be under pressure. On the other hand, you could see that spike nicely if there's some sort of reconfiguration activity that starts up after people start coming back to work. So in the near term, ceilings volumes, for sure, challenged.

Great. And then last question, you talked broadly, but maybe to hone in on Canada trends. Is Canada trending similarly to U.S. as far as a recovery off the lows in April? Or are you seeing a divergence in your outlook there and cancellations of projects?

Canada is performing better. I'm really disappointed for our Canadian team that they're having to face now another huge challenge in this COVID-19 situation after doing such a good job of managing through really a lot of the government-inflicted housing declines up there. But they're doing a fantastic job. Our May business in Canada was strong. Our business on the West Coast of Canada, as most of you know, is different than in the balance of the country. And on the West Coast and Vancouver Island, in particular, we're very much like a home center.

And DIY.

And DIY. We've had a very, very strong couple of months out there, as you would expect. And that will come back a little bit as people go back to work. The good news is our volumes in residential products look good, which is insulation and roofing. And some of the things that we do in Canada that we don't do in the United States looks good. So -- and Canada has done a pretty nice job in general managing this COVID-19 situation. And hopefully, they don't see the resurgences that we're seeing down here in the U.S. So I feel pretty good about our structure in Canada. I feel good about our pipeline in Canada. I feel great about our team in Canada. It's really just going to be dependent upon the economy up there as to how well we do.

We have reached the end of our question-and-answer session. I will now turn the call back over to Leslie for closing remarks.

Thanks, everyone, for joining us today. As usual, a replay of the call will be available on gms.com shortly. And as always, we appreciate your interest in GMS. Thanks.

Thank you. Bye-bye.

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