Good day and welcome to the GMS Inc. fiscal first quarter 2018 earnings conference call. Today's conference is being recorded. We will open for questions later in the presentation. [Operator Instructions]. At this time, I would like to turn the conference over to Rodney Noseia, Investor Relations. Please go ahead, sir..

Good morning and thank you for joining us today for GMS' earnings conference call for the first quarter of our fiscal year 2018 ended July 31, 2017. I am joined by Mike Callahan, President and CEO and Doug Goforth, CFO.

In addition to the first quarter press release issued this morning, we have posted presentation slides to accompany this call in the Investors section of our website at www.gms.com. Turning to slide two.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control that may cause actual results to differ from those discussed today.

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

In addition, statements regarding potential acquisitions and future greenfield locations are forward-looking statements as well as statements regarding the markets in which the company operates and the potential for growth in the commercial, residential and repair and remodeling or R&R markets.

As a reminder, forward-looking statements represent management's current estimates and expectations. The company assumes no obligation to update any forward-looking statements in the future.

Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including the definitions and reconciliations of non-GAAP measures.

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

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

While our facilities and our equipment were not impacted by the storms and flooding, a number of our associates were severely impacted with evacuations, extensive property damage and the trauma of seeing their entire communities under water.

We are extremely happy to report that none of our GMS family in Houston was lost in the storms, however there are many in great need. We recently set up an assistant fund for our employees to make contributions for disaster relief and as is typical when it comes to the GMS organization, donations began flowing as soon as I sent out the communication.

All of our yards in Houston are back open for business and we have already begun to take orders for the recovery efforts and while we have had some short-term disruption, our team at Tejas Materials will be back to normal soon.

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

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

As we have discussed in our prior calls, over our 46 year history, GMS has been able to establish a preeminent position as the largest distributor of wallboard and suspended ceiling systems in the U.S.

With our strong capital position, outstanding employees throughout the organization and strong supplier and customer bases, our business has continued to profitably grow market share and expand our geographic presence. As of this report, our share in wallboard and ceilings is 14.6% and 16.7% respectively.

I firmly believe that our significant success in all these areas is based on several factors. First, in looking at our national presence, we have established a very sound geographical balance throughout the U.S.

Additionally, our end market diversification between commercial and residential volumes further counter volatility and lead to consistent performance. These factors combined with carrying over 20,000 SKUs in available inventory make GMS an industry leader and a go-to source for superior service.

With our national footprint of 209 locations across 42 states and our balanced exposure to new commercial and residential construction along with R&R, we have the ability to serve small, medium and large sized projects out of most of our facilities.

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

Since we went public a little over year ago, we have increased our market share in wallboard by 160 basis points, acquired or opened 23 new locations with LTM revenues in excess of $231 million, increased our reported LTM Q1 2017 net sales by 30% and our adjusted EBITDA by 41%, compared to fiscal year 2016.

As a result, we have expanded adjusted EBITDA margins by 70 basis points in the LTM Q1 2018 period compared to fiscal year 2016. Looking at our result over the past several years, our margins have benefited significantly from profitable growth initiatives.

Since 2012, we have grown pro forma adjusted EBITDA at a 41% CAGR through the LTM Q1 2018 period resulting in 480 basis points of improvement in adjusted EBITDA margin to 8.1%. This has been achieved through a combination of gross margin gains of 360 basis points over that time period along with operating leverage on SG&A.

Now looking briefly at our scale advantages on slide number four. I would like to reinforce a couple of points that put us in a very attractive position nationally. Our suppliers and customers choose to work with GMS because of our differentiated service model that drives market leadership in majority of the regions that we serve.

Looking at our wallboard business, over the past six years we have profitably grown our market share by 600 basis points in wallboard to 14.6% of the total boards shipped over the June 2017 LTM period.

We are confident that we can continue to drive above market growth across all of our product categories through our multipronged expansion strategy as we capitalize on the strength of our large and diverse end markets.

Our dedicated employees collectively have a significant stake in the continued success of our company, which is strongly aligned with our efforts to drive superior execution throughout our organization. Turning to first quarter highlights on slide number five.

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

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

Net income increased approximately 67.4% to $15.3 million or $0.37 per share during the first quarter of fiscal 2018 and on an adjusted basis, net income increased by 10.9% to $19.7 million or $0.47 per share, compared to first quarter of fiscal 2017.

This improvement was largely driven by higher net sales which drove improvement of approximately 15% in both gross profit and adjusted EBITDA. We are growing our business and completing acquisitions with a sharp eye on preserving a strong balance sheet with improving leverage metrics.

During the past year, through a combination of favorable refinancing efforts and accretive adjusted EBITDA gains, we have reduced our net debt to LTM pro forma adjusted EBITDA to 2.9 times, representing a half turn improvement from 3.4 times, compared to the prior year quarter.

And I think the key take away is that we have the balance sheet strength to continue advancing our growth strategy. Now turning to acquisitions on slide number six. Acquisitions remain core to our story. We deploy capital on acquisitions where we can expand into new markets or reinforce our existing market positions.

Our eight acquisitions completed since our IPO all fit that mold, adding a combined $231 million of trailing 12 month net sales to our business on a pro forma basis. Most recently in August, we made the very complementary acquisition of ASI's ceilings and building products business in Eastern Michigan.

ASI added three branches which brought us exclusive ceilings distribution arrangements in three local markets.

This deal also added to our already strong footprint in Michigan, a state we just entered in 2016, which now totals 16 branch locations with each building upon deep customer relationships and supported by the pricing optimization and purchasing advantages provided by our national resources.

Our acquisition pipeline remains robust with hundreds of fragmented local competitors, which still represent more than half of the market. Many of those smaller peers fit the GMS culture and platform and facilitate our objective to either expand in existing markets or enter into new markets.

We have the capital resources to continue executing on our acquisition pipeline while keeping to our target range of purchase price multiples and prudent leverage ratios. As such, we expect accretive acquisitions to continue to supplement our organic growth moving forward.

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

Thank you Mike and good morning everyone. Beginning with first quarter financial results on slide seven. Our first quarter performance puts us on track for fiscal 2018 to deliver another record year for both net sales and adjusted EBITDA and a higher margin than fiscal 2017.

We are winning new business, sourcing accretive acquisitions and taking advantage of solid demand. Looking at the topline for the quarter. We grew net sales 16.8% to $642.2 million with double digit increases in each product category, compared to the first quarter of fiscal 2017.

We increased base business sales during the quarter by 7.8% year-over-year. After adjusting for calendar fluctuations and shipping days, organic sales grew approximately 6.1%.

That said, the timing of the July 4 holiday on a Tuesday in calendar 2017 essentially resulted in two fewer shipping days for that four day holiday weekend or roughly the same number shipping days year-over-year.

Therefore the actual base business results are more representative of our momentum this quarter as compared to the per day growth figures we provided. Wallboard net sales increased 13.3% in the first quarter compared to the same period last fiscal year on higher wallboard volume and price.

Base business wallboard volume improved 3.7% supported by modest growth in new residential, new commercial and R&R activity. Wallboard price was up 1.3% year-over-year to 311 and stable compared to the fourth quarter of fiscal 2017.

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

Steel framing increased during the quarter by 24.1% year-over-year including 10% on a base business basis, mainly driven by stronger commercial activity and price gains along with the benefit of acquisitions.

Higher activity in steel framing is particularly encouraging given this business typically serves as the leading demand indicator for our other products including wallboard. Our other products net sales increased 19.8% during the quarter.

The pull-through factor from cross-selling initiatives was again evident with base business sales up 10% year-over-year. This product category demonstrates the strength of our one-stop shop solution of ancillary products for our customers.

It also shows the significant pull-through force of wallboard, ceilings and steel framing sales along with price optimization efforts on certain products.

Gross margin decreased slightly by 60 basis points to 31.9% for the quarter compared to the first quarter of 2017, primarily due to higher cost material purchases in wallboard, along with a shift in product mix.

While lower year-over-year, our first quarter gross margin was in line with our expectation that we communicated on our fourth quarter earnings call. On that call, we noted that we expected gross profit margins to decline sequentially in the first quarter of 2018.

First quarter gross profit margins ultimately did decline sequentially, but ended up coming in at 31.9%, which was at the top end of our expectations. This decline was due to elevated levels of volatility in wallboard pricing early in our first quarter as the market responded to the wallboard manufacturers' 2017 price increase.

To that point, in June, a detailed assessment of our consolidated May results prompted us to immediately undertake a variety of purchasing initiatives to better match our purchase cost to the prevailing price environment that we believe had peaked for the current calendar year.

As these initiatives took hold and began to roll through our P&L, gross margin improved each month sequentially throughout the quarter.

This upward trajectory allowed us to enter the second quarter of fiscal 2018 very confident in our ability to deliver gross margin of 32.5% for the full fiscal year 2018, which as we said before we believe is the fair near term expectation but certainly not a ceiling on future profit potential of our business.

Furthermore, during the quarter, our investments in equipment, technology and branch talent helped drive higher gross profit dollars, while also delivering an improvement in SG&A at percent of net sales which we expect to continue. Adjusted EBITDA increased 14.8% to a record $52.8 million during the quarter on higher net sales.

Our adjusted EBITDA margin of 8.2% was down slightly from the prior-year period, primarily due to the temporary gross margin pressure I just discussed which just outweigh the improving operating leverage.

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

Given the strength of our business over the past year, in June we took an opportunity to refinance our first lien term loan. We expanded the borrowing base by another $100 million to $578 million and used the additional net proceeds to pay down $94 million on the ABL facility.

We also extended the maturity by two years to 2023 and reduced the interest rate by 50 basis points. Including our prior refinancing activity during the fiscal second quarter 2017, since our IPO, we have reduced our interest rate on our term loan by 75 basis points while expanding the borrowing base by $200 million.

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

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

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

Thank you Doug. As we look to fiscal year 2018, our efforts will be geared towards delivering another record year of adjusted EBITDA at a higher margin year-over-year by capitalizing on healthy demand trends, executing on our attractive acquisition pipeline and generating additional SG&A savings.

And that fiscal year 2018 expectation fits within the context of our longer term objectives for our company, which I will now discuss.

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

We also plan to continue to supplement base business growth with acquisitions by executing on our strong deal pipeline at attractive multiples and similar average yield sizes as in fiscal 2017.

To that point, on a pro forma basis including acquisitions, sales increased to approximately $2.45 billion for the 12 months ended July 31, 2017, representing approximately 25.1% growth, compared to the 12 months ended July 31, 2016.

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

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

And in closing, we are extremely pleased with the consistent improvement across all of our major product categories which continue to build upon a strong track record of profitable growth. The dedication of our team, our national scale and differentiated service model along with a proven acquisition strategy continue to drive superior performance.

Coupled with our comprehensive product offering, balanced end market exposure and efficiently managed operations, we believe we have a very attractive growth in adjusted EBITDA margin opportunity in the coming years.

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

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

[Operator Instructions]. We will go to our first question from Bob Wetenhall with RBC Capital Markets. Please go ahead..

Hi, gentleman. Good morning. Nice quarter..

Hi Bob..

I am sure everybody is safe in Houston.

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

Well, generally speaking, Bob, our activity levels in commercial have been very strong. In fact, recently I have read a recent Dodge report where commercial activity is up 6% as of July. And I look at our activity levels across the board, our quote activity and our backlog position is extremely very, very strong.

The only soft pocket, I think, we have seen thus far has been the multifamily category, although frankly certainly in some of the markets, we are talking about here, particularly in Houston, that's going to be interesting dynamic going forward. The Class A office space continues to be a good segment for us in terms of backlog and quote activity.

And that's pretty much across the board. So I know there was some noise earlier in the year about some softness in commercial but frankly we are just not seeing it. And I think some of the things that Doug alluded to in terms of steel volumes indicates further business down the road..

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

Well, I would say, certainly a lot of those projects that Mike alluded to, particularly some of the larger specialty type stuff where they are doing airport type or a lot of those new stadiums, stadium remodeling, et cetera, even multifamily, that type of work tends to, the larger players in the space tend to get a larger share of that business than some of the smaller competitors that Mike alluded to.

So we certainly believe that we get more than our fair share of that type of business throughout the country. And there is other areas of the country that we are really strong in, particularly the Pacific Northwest, et cetera. that are just going like gangbusters, both on the commercial and the residential side.

And again those are markets that we are really strong. And so I mean, our footprint is really favorable to where a lot of the activity and a lot of the cranes are right now in the country..

Got it.

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

Well, I guess addressing the Houston situation, we are still sorting things out. Although our operations are up and running, all three of our operations in the Greater Houston area are operating. The volume of material that is going out the door, candidly, is significantly higher than you would normally experience.

There is numbers that have been thrown around. It's anecdotal at this point, but I can tell you that we are having a hard time keeping anything in stock. And that includes wallboard, plywood, related building products and we are literally shifting ceiling tile by the pallet load or is being picked up in many cases.

So the R&R balance there, just trying to quantify the magnitude of what's coming is hard to do at this point. But I think it's safe to say that we will have a significant increase in volumes in that market as we try to recover and rehab not just single family but commercial and everything that's been devastated by the storm..

And it will be on a sustained basis..

Yes..

It's going to be going on for a long time in Houston.

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

As far as Florida goes, I actually got an update this morning before the call from our SVP of Ops and we are currently positioned to shut down operations on Friday. Al the South Florida operation certainly will be battened down and waiting for the storm.

In many cases, we will be moving equipment and assets to more centrally located parts of the state to try to avoid any storm damage and obviously currently they are having issues related to gas and water and the like already. So we will see and I guess Tampa as well is on high alert at this point. So that's a TBD item.

But we are trying to do everything that we can to protect our folks and to secure the operations and see what exactly happens with Irma, because I guess right now, it's still unpredictable. But it's certainly a very scary storm..

Yes. To Doug's comments about a lot of pull-through on the demand side, it's obvious that wallboard pricing held up sequentially.

Does this create a more positive environment for product pricing going into next year?.

It definitely provides more support..

[I would agree] [ph]..

And just one quick one. Doug, you mentioned 32.5% gross margin and I was curious, you know 31.9% first quarter GM, can you just walk us through the cadence of the year, how we should think gross margin will move? Thanks and good luck. Great execution. Congratulations..

Thanks Rob..

Yes. I mean as we mentioned, we are not going to get specific by quarter, but our expectation is 32.5%. That's what we believe we are going deliver for the fiscal year and certainly we are not satisfied with that number. So we are working on ways to further expand that for the year, particularly as we enter into fiscal 2019.

I certainly believe that when we enter into fiscal 2019, we are going to be at a higher run rate than that 32.5%.

Obviously, we would have to be, just to get to 32.5% for the full year, you have to be running higher than 32.5% Can we take the next question please?.

The next question comes from Mike Dahl with Barclays. Please go ahead..

Hi Mike..

Hi Mike..

Hi. Thanks for taking my questions, I guess. I am clearly saddened on unfortunate circumstances in Houston. So happy to hear that at least your employees and their families are safe.

Sticking with some of the comments in response to Bob's questions, but focusing more on the inventory positioning as it relates to your position in the rebuild process, you mentioned it's hard to keep anything in stock.

Can you give us a sense of kind of how you are planning to manage inventory? And any initial conversations you have had with suppliers to gauge availability of some of supply of critical materials?.

Well, I think the manufactures are all going to be highly supportive of anything we need to do in order to build up a higher level of stock. We have had some preliminary conversations about securing short term overflow warehouses, perhaps for what I would call the higher turn products that we know that are going to be in high demand.

I am sure a space like that will be difficult to locate, but I still think it's something we need to consider. I recall back when we had the terrible tornadoes in Joplin, we essentially set up an operation there to be able to service that market and help the rebuilding efforts there. So in some respects I can see doing the same kind of thing here.

But our management group down in Texas and our Vice President that coordinates that area of the country, I am sure are already in extended conversations with a number of suppliers about what we might have to do to be able to facilitate that process..

We are very comfortable that we are going to be able to service our customers' needs, particularly our larger customers. We have already been in detailed discussions with them to make sure they recovered. I mean actually things are going in Houston, as Mike alluded to, we really started operations back last week.

We opened up with a skeleton crew on Thursday and those guys have pretty much been working every day since then. A lot of the products that we are having the most difficulty with are the other, the complementary products, particularly ceilings. We have got school districts, et cetera.

coming in, picking up ceiling tiles by the pallet load, things like that. So wallboard, obviously. There is a fair amount of production capacity in Texas and the surrounding states. So there was one location that shut down for a period of time due to the storm, but they are open up back now. So we are not really too concerned about that.

But we are staying close to the situation..

Okay. Thanks. And is there anything, I guess to that point, anything in the conversations that would suggest, clearly with Katrina we were in a fairly tight utilization situation at peak housing or heading into peak housing. Maybe there is a bit more spare capacity on the wallboard side.

But anything to suggest that we could see a situation like we saw 12 years ago where we are really on an allocation basis? Are you hearing anything from that initially from the manufacturers?.

I really can't say that we have head anything to that extent yet, Mike. That could happen, but at this point we are not having any conversations about allocation..

Got it. And then shifting gears a little bit, I think going to ceilings in the quarter. Doug, I think you mentioned that both volume and price were positive.

I was hoping you could give us a little more color and split those two and give us a sense of what volume versus price was?.

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

Okay. Great. Thanks guys..

Thanks Mike..

And we will take our next question from Keith Hughes with SunTrust. Please go ahead..

Hi Keith. Good morning Keith..

A couple of quick questions for you. On your wallboard volume in the quarter, we have seen many quarters when you have come in pretty far ahead of the industry numbers. This looks a little more in line.

And I know you can't really gain share every quarter, but was there anything specific in the quarter that prevented you from potentially more wallboard volume?.

Nothing specific, Keith. We definitely believe that we passed on a certain amount of business due to price and we are okay with that. But we look at it more on an annual basis, particularly on LTM basis. And if you look at it LTM on June, we still outgrew the market by 270 basis points. We did have a pretty tough comp.

The second quarter of last year, we were at 13% organic growth which was 2X what the Gypsum Association did. So we had a tough comp rolling off but we don't think there is anything specific for this change with our business..

Okay.

And if you look at August across the entire business, has the cadence of business in the very [indiscernible] of Houston, has the cadence of business changed, either positively or negatively?.

Pretty consistent..

Yes. The business remains pretty steady..

I would agree..

Okay. Final question. You had nice SG&A leverage in the quarter.

Is the leverage we saw here, will we see the same amount or rate, if you will, for the remained of this fiscal year?.

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

You are referring to as a percentage of sales, correct?.

Yes, Keith..

Okay. All right. Thank you very much..

Thank you..

And we will take our next question from Luke Young with Baird. Please go ahead..

Good morning.

Just wondering regarding the wallboard pricing initiatives that we have discussed, just wondering if you could give any more color in that regard? I am wondering, is this something that should be viewed as more one time in nature helping to adjusted relative to the price discovery process with pricing going in to the market? Or would you expect maybe that there could be some lasting benefits from these initiatives?.

Well, on the cost side. I believe you are talking about our purchase cost. That's a process. Our purchasing teams and the divisions are always working on different opportunities to further enhance that and expand our margins. So it's ongoing. But of course, you negotiate prices every year going into the next calendar year.

So we expect that process to start relatively soon. We do expect that manufacturers come late this year. We will be coming up with price increase notices and we will start working on programs with them as part of that process..

And our view is that the remainder the year is generally stable in terms of pricing. Everything is kind of settled in..

In terms of our sales price, yes..

And then second, on ceiling pricing, I know you had mentioned last call that there is some 10% type increases out there for the August timeframe.

Now that we are kind of seeing those start to get into the market, any sense for market reaction, chances of that sticking? I know it's kind of an unprecedented level of a price increase for the ceilings products..

I think the pricing environment is really going to settle in and be fairly consistent with what has been in the past, which is 3% to 5% per year. There has been some shifts from some of the manufacturers on the 10%, but it's still a critical business for us and you are going to see consistent price gains year in and year out..

Okay. Thank you..

Thanks Luke..

[Operator Instructions]. We will go to our next caller. It's Mike McCall with Seaport Global. Please go ahead..

Hi guys. It's actually Matt. Mike's my uncle. So let's see, you reiterated the 32.5%. Q1 was a little bit better. I am just looking at the puts and takes. You are still targeting the same number but for instance the purchasing initiatives work out the way you expected, it sounds like your belief is that pricing could peak in June.

I am just trying to think, what changed, if anything, because it sounds like Q1 came in a little bit better.

Was there an offset to that upside that kept you in that 32.5% range?.

Well, part of it, Matt, was our turns actually accelerated. So we actually turned inventory for the quarter at 15 times, which is up from the 14 that we been running which is really good, 15 is even better. So that enabled us to turn some of that higher cost inventory a little bit faster than we anticipated. So that was certainly part of it.

There was also some one-off opportunities that we were able to take advantage of, particularly in July to pick up some slack in some certain markets where there was some opportunity for us to buy some product at volume, which is only going to accelerate our margin growth in August. But otherwise, it's pretty much business as usual..

Okay. All right. So no big changes. And the other question I had, Mike, I think you mentioned the temporary locations and also in the storm areas and maybe the need for efforts to get product from other geographies to source those markets.

Are there anticipated temporary cost, temporary expenses that could impact near term results even though the topline is going to perform better, you can have some offset on the cost and expense lines?.

Yes. That's a potential, but the reality of it is, at this point we are not talking about anything specific in terms of, given the size of our facilities and where they are located strategically in the market, it maybe that that's not even necessary. It's more of a speculative thing on my part as to whether or not that's something we might consider.

But even if you were do an overflow facility, it would be very low cost, typically minimal people and equipment. It's literally a place to house inventory and probably take it off a truck or a railcar and dispatch it directly to a job site. So again, that's very preliminary on our part..

Yes. And more likely than not, it would be taking advantage of some reload opportunities that we can partner up with some business partners of ours. We have already identified a couple of locations south of Houston that have that potential, should we need them. I mean our locations, particularly the Downtown Houston yard is actually huge.

It's almost 100,000 square feet. It's actually an old factory from World War II that used to make tank parts there. So we can do a lot of business just out that one facility and then we have two other facilities of about 40,000 square feet each. So we are not sure we even need it..

Yes. I would agree..

Okay. Great. Thank you guys..

Thank you..

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

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

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