Good day and welcome to the GMS Incorporated, fiscal second quarter 2018 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mark [Inaudible], Investor Relations. Please go ahead, sir..

Thank you, operator. Good morning and thank you for joining us this morning for GMS' earnings conference call for the second quarter of fiscal 2018 ended October 31, 2017. I’m joined today by Mike Callahan, President and CEO; and Doug Goforth, CFO.

In addition to the press release issued this morning, we have posted presentation slides to accompany this call in the Investors section of our website at www.gms.com. Turning to slide 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 margins 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, repair and remodeling or R&R markets.

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

Listeners are encouraged to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC, including the risk section in the company’s 10-K and other periodic reports and the definitions and reconciliations of non-GAAP measures.

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

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

We had another record quarter of revenue and adjusted EBITDA during the second quarter despite the negative impact of hurricanes Harvey and Irma.

As I mentioned on last quarter’s call, we experienced a short-term disruption at our Tejas Materials facilities in Houston and since then we’ve also had several facilities in Florida and other parts of the Southeast that were impacted by hurricane Irma.

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

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

From a business perspective natural disasters like this have historically driven accelerated volumes as recovery and rebuilding activity ramps up. In fact, we are already seeing this occur in Houston, where rebuilding activities in full swing and anticipate to continue for at least two years.

This will serve as a positive tailwind for our Houston business going forward. On the other hand while the damage in Florida was severe, it was mostly wind related causing power outages and lost shipping days, but will be less of an impact on our business given our focus on interior products.

All that said, I remain confident that our net sales will continue to grow above market and that our operational efficiency initiatives will support adjust EBITDA margin expand going forward. Now as we’ve discussed on prior calls, GMS has been able to establish itself as the largest distributor of wallboard and suspended ceiling systems in the U.S.

as we continue to profitably expand our geographic presence. As of this report, our share in wallboard and ceilings is approximately 14.5% and 17.7% respectively. Within wallboards specifically we have profitability grow our share by 590 basis points since 2010.

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

As a result, we are able to service small, medium and large size projects out of most of our facilities. In addition for many suppliers we have become a critical wink to a highly fragmented customer base.

Our position in turn has allowed us to benefit on multiple fronts with national scale that drives purchasing advantages over smaller peers, while our local expertise enhances service capabilities to help grow our business through organic market share gains.

Now since going public, we have increased our market share in wallboard by 140 basis points, opened six greenfield locations and added 20 locations through 10 strategic acquisitions with LTM revenues for those acquisitions in excess of $240 million.

In addition, we have increased our reported LTM second quarter ’18 net sales and adjusted EBITDA by 32.8% and 44.6% respectively as compared to fiscal ’16. Importantly we have been able to do this while also enhancing our adjusted EBITDA margin profile, which has expanded 480 basis points since 2012 to 8.1% on an LTM basis.

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

Now if I can move to slide five, let me shift gears provide a brief overview of our performance for the quarter. Second quarter net sales increased 9.5% year-over-year to a record $648 million. Excluding the negative impact of the hurricanes, net sales would have increased double digits for the 26th consecutive quarter.

Robust ceilings volumes, acquisitions and year-over-year price improvements across most of our product offerings were the primary drivers of the growth. Wallboard volumes also increased 4.3% supported by acquisitions and modest growth in the base business.

I would also like to highlight that gross margins during the second quarter exceeded 32.5% and expanded on both, a year-over-year and sequential basis as we said it would last quarter. This reflects solid volumes and the continued success of our purchasing initiatives undertaken during Q1.

While adjusted SG&A as a percent of net sales remain flat versus last year, net income increased modestly during second quarter ’18. And lastly, adjusted EBITDA increased 9.5% to a record $54.2 million during the quarter driven by higher net sales.

Now turning to acquisitions on slide number six; acquisitions really remain core to our story and we remain excited about the quality of our acquisition pipelines. We deploy capital on acquisitions where we can expand into or reinforce existing market positions.

Our 10 acquisitions completed since our IPO all fit that mould as they generated an aggregate of approximately $240 million in net sales for the 12 month period to the date of acquisition.

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

Southwest Building Materials added one branch which combined with our existing agreements gives us exclusive ceilings distribution arrangements across Northwest Texas.

This deal also added to our already very story footprint in Texas which not totals 16 branch locations, which each one building upon deep customer relationships and supported by pricing optimization and purchasing advantages provided by our national footprint.

Our acquisition pipeline remains robust and includes many of the hundreds of fragmented local competitors still representing more than half of the overall market. Many of these smaller peers fit the GMS culture and would greatly benefit from our platform as we look to expand our penetration into existing markets or enter into new ones.

We have the capital resources to continue executing on our robust pipeline while maintaining prudent leverage ratios. As such, we expect accretive actuations to continue to complement our organic growth moving forward. And with that I will turn the call over to Doug to further discuss our financial results and our capital resources. Doug..

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

Starting on the top line, we grew net sales 9.5% to $648 million, which increases in each product category compared to the second quarter of fiscal 2017. We increased base business sales during the quarter by 5.1% year-over-year.

Wallboard net sales increased 6.9%, $288.5 million in the second quarts compared to the same period last fiscal year on increased volume and pricing. Wallboard volume improved 4.3% supported by modest growth in our base business and the variable impact from acquisitions.

Wallboard price was up 2.4% year-over-year and essentially flat compared to the first quarter as expected. Our ceiling sales increased during the quarter by 19% year-over-year to $101.6 million.

This includes a 12.9% increase in the base business, driven by robust ceiling volumes, price gains, the benefit from acquisitions and share gains, all of which have aided in further expanding our market leading position to 17.7% during the quarter.

Steel framing increased during the quarter by 7.4% year-over-year to a $103.2 million including a 2.3% including in the base business, mainly driven by stronger commercial activity and the benefit of acquisitions offset slightly by lower steel prices versus the prior year. Steel prices were up sequentially from the first quarter.

As a reminder, we tend to view steel framing as a lead indicator of demand for our other products. Our other products net sales increased 10.2% during the quarter to $154.7 million, driven by base business sales up 6.1% highlighting the success of our efforts to drive above market growth in other complementary products.

This product category demonstrates the breadth of our portfolio, one of our major competitive advantages, and highlights the strength of our customer relationships and pull-through effects of wallboard, ceilings and steel frame. Gross margin improved 20 basis points to 32.8% for the quarter compared to the second quarter of 2017.

As we discussed on the last call, we experienced some margin compression during the first quarter as the market responded to the announced wallboard manufactures price increases for calendar 2017.

We have undertaken a variety of purchasing initiatives to adjust for the new price environment and we are pleased to report renewed strength in our gross margin as we expanded our gross margin 90 basis points sequentially during the second quarter.

This increase from the start of our fiscal year gives us confidence that we will deliver on our previously announced guidance of gross margin in excess of 32.5% for fiscal year 2018.

We continue to view this as a reasonable near term expectation for our gross margin, but my no means a ceiling on our potential to drive higher margins over the long term. We also remain committed to investment in our talent, capital equipment and technology across our business.

Adjusted SG&A as a percent of net sales of 24.5% was flat versus the second quarter of fiscal 2017 despite an acceleration of wage inflation, and increase in payroll related expenses, incremental storm related costs and expenses associated with our National Managers Meeting which we hold ever few years.

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

In October 31 our net debt to LTM pro-forma adjusted EBITDA stood at 2.9 times, consistent with the prior quarter and down a half turn from 3.4 times last year. Our liquidity remains strong, $19.8 million of cash on hand and $322 million available on our ABL Facility.

As a result, Standard & Poor's upgraded GMS corporate debt in November to BB- from B+. Regarding cash flow, during the first half of fiscal 2018 we generated $28.1 million in operating cash flow, which was largely influenced by higher earnings and improved working capital turns.

CapEx in the first half of fiscal year increased to $8.6 million primarily related to fleet and equipment purchases. We still expect our fiscal 2018 CapEx to be $12 million to $14 million or less than 1% of LTM pro forma sales. Now let me turn the call back over to Mike for some closing comments..

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

Our third quarter is off to a good start as underlying demand remains solid, pricing is stable and we continue to execute well against our growth strategy; all of which should drive above market net sales growth in the second half of the fiscal year.

We expect that our growth strategy coupled with improving gross margins and expected SG&A leverage in the second half of the fiscal year will help us deliver another record year of adjusted EBITDA. Our fiscal year of 2018 expectation fits within the context of our longer term objectives for the company which I will now discuss.

In our base business, we expect to grow approximately 2% faster than market, which based on our conversations with our suppliers and customers is expected to grow low single digits in the near term within our key end markets.

We expect that our above market growth will be driven by organic share gains and the addition of three to five greenfields per year, which have always been a lower risk, quick return part of our organic growth story. In fact in November we opened a new Olympia branch in Port St.

Lucie, Florida and anticipate opening a total of four new branches this fiscal year.

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

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

Our cash flow dynamics remain favorable and we plan to generate additional cash by growing the adjusted EBITDA while preserving low CapEx levels and appropriate working capital ratios.

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

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

Thank you. [Operator Instructions] And we’ll take our first question from Mike Dahl with Barclays..

Hi, thanks for taking my questions..

Good morning Mike..

Good morning. Mike, I appreciate the comments there around kind of the construct of how you view the business, not just near term, but long term and clearly you’ve had a track record of delivering on the above market growth over time.

It did seem like in this quarter specifically base business growth on wallboard volumes was a bit light even if we look at kind of the impact you outlined for the storm, so I was wondering if we could just get a little more color there on what you see.

You know was there anything specific to your business or did you see this as a broader market issue on wallboard and kind of how to think about the potential for reacceleration going forward?.

Well I would say Mike, for the remainder of this year I would say that we kind of look at the 2% above growth rate is kind of an annualized number.

Business might have been a little bit spotty in the quarter, but I would say that from where we sit right now we’re very confident of kind of reigniting of that growth rate for the second half of the year. That would be – you know that’s kind of the way we’re looking at it. We think that’s a reasonable range for the remainder of the year..

Yeah Mike, this is Doug, just to elaborate. I mean we still feel good, the main indicators and in markets with new residential and commercial are still well below historical norms.

We’ve got some markets that we’re seeing some real strength in, particularly our North West division which is Virginia on up into the Boston market, yeah the northeast, very strong there and we saw a little bit of a slowdown in the Pacific Northwest but there is a huge backlog of business there that we’ve already booked and in a lot of cases some of those projects have been delayed because of labor constrains, but we’re expecting that to accelerate.

And then also our Southern division which includes Texas as well as Georgia, you know that’s recovering from the storm, so we expect some pretty solid volumes out of that over the next two years, particularly Texas.

So just those three areas alone are more than 50% of our business and really upwards to 60% of our business if we throw in California, which has also been pretty strong for us..

Yeah, but Houston operations are running six days a week, so I mean it’s as an example. So yeah, we’re pretty optimistic on the back half of the year..

Got it, that’s helpful. Just to be clear, when you talk about that I guess you know the comment was 2% above market annualized in the markets low single digits.

So do you think you can get back to a mid single digit based business growth in the back half of fiscal ’18?.

Yes, yes, I think we can absolutely..

Okay. Second question is around SG&A and I appreciate that there were some headwinds there with the storms as well, but I think this was – at least in our model we had expected to start to see some leverage. You’re still saying that you expect better SG&A trends in the second half.

Can you give us a level of magnitude on how we should be thinking about SG&A and what else kind of went into the flatter performance in 2Q?.

Well we still expect leverage to accelerate in the second half, which is consistent with what we’ve been saying in the last couple of calls.

Specifically to the second quarter some of the items that I called out, particularly around payroll related costs which includes not only insurance but workers comp, as well as a national managers meeting that we had; just those items which are considered to be non-recurring or a little bit over 20 basis points on our revenue for the second quarter and then the actual storm impact, that’s $4 million in lost revenue.

We figured that cost us about $900,000 in adjusted EBITDA which is about 14 basis points on the adjusted sales numbers. So certainly we don’t expect that to repeat itself in the second half of the year, so we’ll get back on track leverage wise..

Okay, and last one for me just around the M&A environment. You know you’ve completed a few now year-to-date or a couple now year-to-date.

I think it’s – the cadence has probably come down a little bit compared to where you were running last year, but you know you’ve clearly brought in the footprint a lot and then deepened some of your local market positions with some of the recent deals.

So is there any additional color you can provide on whether its geographic focus for the remainder of this year and heading into ’19, you know new geographies or where you’d like to continue to build your market positions locally. Any color on that will be great..

Well, I mean as you’ve seen before Mike, the math, if you look at where we are and where we’re not, there are some significant expansion opportunities. I mean I think the Amarillo acquisition is a good example. We got a significant footprint in Texas, but there is still a lot of markets in that area where we do not have operations.

So I would say that we really are primarily interested in finding companies that kind of share our culture and our service orientation and that is really the primary driver. But I think if you look at the west, certainly – if you look up on the map in the New England area, I mean there’s a lot of pockets where we have no presence at all.

So we kind of take the opportunities as they present themselves and this business can be a little bit lumpy you know.

You kind of have clusters of acquisitions that come together and then you know you may have a little bit of a lull, but – so I can’t really point to the specific geography, but we do have very active conversations going with a number of significant players in these markets and that really has not changed at all in the last couple of years.

I mean it’s still a pretty steady pipeline of you know 15 to 20 opportunities at varying stages that you’re talking about at any one time..

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

Not really on the multiple front. I do think there’s a heightened awareness I guess.

I mean if you look at our company and a number of our competitors that are out there looking at opportunities to grow their footprints as well, I think a lot of the independence are probably sitting up and taking note and trying to figure out who they want their dance partner to be ultimately, and so I think that’s going to continue as we continue to see further consolidation in the industry..

Okay, thank you..

Thanks Mike..

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

Good morning. It looks like you guys have been busy since August..

We have..

Are you talking about August of 2017 or 2014?.

No, it seems like you hit the accelerator pretty hard on the M&A side. So look, what I wanted to understand is, give an update of where you are in terms of integration operationally, you cover the pipeline pretty good.

What’s you thought about the ability to integrate effectively and kind of really pull synergies out?.

Thanks Bob, it’s a good question. Actually all of our acquisitions have been integrated into the companies and the systems and that even includes Southwest which we announced and just closed on Monday. That’s a single location that our countdown materials company acquired. So we’re really excited about that.

As we talked about it in terms of realizing the synergies, the majority of which come on the purchasing side, that’s a day one.

On day one when the materials start coming in under our programs and we start to realize those benefits, they will turn their inventory typically in 30 to 45 days, so you’ll immediately in that second month of operations start to see the impact on their margins.

So we feel really good about it and we also feel really good about the work that our integration teams have been doing to get these guys into our systems..

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

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

Got it, that’s helpful. And I was hoping, you mentioned its still studs is always a leading indicator and you had titanic growth in the base business in ceilings, which we weren’t expecting. Can you talk about what’s going on that’s driving this growth and if there is any benefit from product mix which is driving up sales in ceiling.

It’s kind of so strong it’s an anomaly and you’re hoping to get a better framework for understanding why the growth is so robust..

Well, I’ll tell you, when we have our divisional calls every month, one consistent theme is the activity level in terms of commercial backlog and I’ll tell you, the other thing that drives the ceilings piece and we’ve talked about this before, our folks in the field really, really drive their businesses.

Ceilings is not something you can just kind of put in a warehouse and hope that it sells itself. You got to go out and actively promote it.

You’ve got to develop technical expertise and really product knowledge is extremely critical and so I think our ceiling specialists throughout the company, and particularly these larger metro markets, they just drive the heck out of their business and they are in the field, they are a go to source for product knowledge and I think its reflected in the kind of growth that we’re experiencing, plus just the funded metal commercial activity level.

We feel very positive about our current backlog position and the activity level for the last half of the year..

So you’re seeing in combination with good demand and you gained share in wallboard.

Are you also picking up share in ceilings then too?.

Yes, we are..

That’s pretty sweet.

And then just final question; how do we think about product mix impacting both top line growth and kind of profitability as we move into next calendar year, especially if ceilings become the larger contributor to the revenue mix?.

Well, you know even though ceilings been growing for over a year now at double digit rates, we are not really anticipating a major shift in our product mix. You know wallboard’s been holding pretty steady at about 45%, 46% of sales. At least near term we don’t see that changing significantly..

Got it. Great quarter. Good luck in the next quarter. Thanks..

Yeah, thanks Bob..

We’ll go next to Luke Young with Baird..

Good morning Mike and Doug, how are you?.

Hey Luke, how are you doing?.

Hey Luke. Good, thanks..

I am doing well, thanks. First question, thanks for the comments on the commercial backlog. It sounds like that’s been pretty consistent.

Would you say there’s been much of a change there or the comments that we’ve heard relative to you know folks being booked out well into calendar ’18 and what not, still holding that business did you say?.

No, I think that’s pretty consistent Luke.

You know we spent a lot of time with the guys in the field talking with them about what they are saying what their activity levels are and you know we’ve got a number of commercial contractors, drywall sub contractors that essentially are booked for the entire calendar ’18 and looking at ’19 at this point and that’s becoming more of the theme, so I think it’s a pretty consistent story..

And then could you just remind us how that business breaks down between new constructions on our work on the commercial side?.

I’m sorry, what business?.

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

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

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

For the full year it’s still our expectation to put up incremental double digit EBITDA on a full year basis..

Okay, helpful. That’s all I got, thanks..

Thanks Luke..

We’ll go next to Trey Grooms with Stevens Inc..

Alright, thank you. I guess the first question I’ve got is on the outlook that you guys were talking about earlier around the overall market growth, low single digits in the near term.

Is that really for the overall business? I mean it seems conservative, especially on the wallboard side with the backdrop of storms and you know overall improving demand and you know some of the leading indicators that you discussed. So the question is, is that kind of low single digit market growth in the near term, is that overall.

Is that – you know would you expect any outperformance on the wallboard side or the ceiling side; just any comments around that?.

Trey, this is Doug. I believe actually what Mike said was low to mid single digit growth..

For the wallboard..

Well and I would say overall low to mid single growth and as we talked about early on the call with Mike Dahl, you know we think that mid single digit growth on an organic basis is certainly a realistic and sustainable number for us. You know I will give a proviso; third quarter of last year was a monster quarter for us.

We had I believe 15% organic growth third quarter of last year, so..

That’s a tougher comp..

Yeah, very tough comp coming up in the third quarter..

Right and that’s why I was kind of – you mentioned the mid-single digit earlier. Maybe I misunderstood, but I thought that that was for you guys and that would include the 2% faster than market growth, maybe I misunderstood.

Okay, so next question for me is you know some of the manufacturers out there were getting reports that you know some of them have been putting folks on controlled distribution in some of these storm hit markets you know and given the spike in demand there.

Can you talk about – I mean, are you guys seeing that at all? I don’t know if you can talk about that or not, and if so you know, how wide spread is that geographical in your opinion?.

Well, that’s a good question. Trey, actually what started off is kind of an isolated situation in terms of control distribution. We are seeing on a much broader basis.

We have a call just two days ago with our divisional VPs and pretty much across the broad you are looking at one to two weeks delivery leads for the board getting to the yards and if you are trying to get significant excess amounts based on your historical purchasing patterns you are going to have an hard time getting it right now.

So it’s pretty tight supply conditions, and particularly the specialty products like the Glass Mat products and things such as that are even more difficult to get because of just pressure on the Glass products. Its, pretty tight conditions right now..

And so has the lead time expanded materially you know today versus what it has been normally for this time of year?.

Yes it has, I would say compared to four or five months ago, it’s a materially different environment..

Alright, that’s helpful. And then last one for me, and I know you mentioned it briefly earlier around pricing, but as you look with all the manufactures out with increases on the wallboard side, for most of them for January and then kind of the expectations for continued pricing in ceilings.

From where we stand today given the backdrop of everything that we’ve talked about thus far on the call, what you got as gut feeling for pricing, traction and this year as we look into – excuse me, as we look into ’18 versus maybe if we were sitting in the seat a year ago looking into price increases that have been announced..

I really would have to say that the pricing environment or pricing outlook rather is – I think there is a lot of traction there.

If you talk to every manufacture about paper costs, for example which certainly year-over-year have risen radically and there was no significant realization to speak of last year and I think that when you combine that with the product availability that we just talked about, I would say that the traction of under the this price and where it settles in.

Well, as I said in my remarks, it will be a while before we know where it finally settles in. But every single manufactures that we talk with is adamant about recovering cost and dealing with the inflation that they are having to confront right now.

So we are certainly quoting jobs with escalators and price increases going into ’18, I can tell you that..

Alright, well that’s super helpful and thanks a lot for talking my questions..

Yeah, take care Trey, thanks..

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

Hey, good morning everybody..

Good morning Kevin..

Back to the controlled distribution stuff, I was wondering if you could comment on how you are planning on managing inventory levels ahead of those wallboard price increases and how do you historically manage them? Do you typically try and build some inventory ahead of that and how does the control distribution affect your ability to do that compared to say prior price increases?.

Well, I mean our strategy ideally would be, to be able to purchase inventories and build inventories candidly between the fundamental demand levels that we are dealing with coupled with controlled distribution. It’s pretty tough to build inventory right now.

We built a little bit, but it’s difficult to attain right now just because of the all the different factors that are out there. So in effect, we are pretty much selling what we are buying at this point for the most part..

Got you, okay..

We are turning almost 15 times right now..

Yeah, inventory is turning, wallboard inventory is turning 15 times. So it’s going in one and out the other..

Okay, got you, and then with – could you comment on how the wallboard volumes trended throughout the quarter. Because I believe the Gypsum Association data had volumes about a 1% in the calendar year third quarter and then manufactures had pretty positive commentary about October.

I think some are saying high to double digit type volumes once the dust settled post the hurricanes. So I was wondering if you can give any comment on how that trended throughout the quarter and how things have gone so far in November..

Well, on a calendar quarter basis if you are comparing the Gypsum Association, they were up about 1% for North American and we were essentially flat. So it’s rare for us to have a quarter where are not above Gypsum Association numbers. Although we have seen that before, you know, it happens occasionally.

On an LTM basis we are still over 200 basis points above the Gypsum Association reported numbers and we expect to continue to get back to that number, near term. But in terms of our growth for the fiscal quarter, obviously we were impacted.

Most of that $4 million impact was in the month of September so we actually saw a very large acceleration in October of the last month of the quarter in our volumes..

Okay, got you..

It is something that is actually continued in November. Our November sales pace is just on a daily basis is about the same as it was in October, there are fewer shipping days in November due to the holidays, but the sale pace has remained strong..

Okay, and then final question on the tax rate, it looked like you were typically 41.9. I think this quarter, the adjusted tax rate was below that. So I was wondering we should think of the tax rate for the year and also just kind of bigger picture.

I know there is target tax reform and it seems to change every day, but you know given your tax rate and primarily U.S. exposure, it seems you guys have the potential to benefit a lot if there is any tax reform. So I know it’s tough to really say much at this point, but I was wondering if you have any comments on that as well..

Sure, one thing I’ll point out, we are still providing that adjusted net income and adjusted tax, which is effectively our cash, in fact its effective tax rate that that’s a 38.5%.

So we’ve made some real improvements in that over the last couple of years and we actually just finalized our federal tax returns for the year and filed that, just recently filed that so we adjusted that.

So we are certainly expected that lower corporate tax rates that are currently under discussion are going to benefit us in a significant fashion, particularly as it comes to earnings per share perspective.

I actually went back and looked at our earnings per share numbers, retroactively for – I took the fiscal ’17 results and kind of did the math at 20%, although I understand they are talking about 22% today. But you know at that 20% rate, we would be looking at an impact on our EPS of almost 30% so its significant for us.

Now obviously from a cash flow perspective we would more likely than not shift purchases from – shift our equipment from leasing to buy, but even that, considering the tax savings that we would get from both the rate and the immediate deduction on equipment.

Even though we would use some cash, it would really be insignificant, less than 1% of our sales. Now again, that’s based on the current stuff, so we are putting out guidance..

Yes, we are not going to….

Or anything like that where the numbers have changed – the numbers are chaining hourly, but again, we expect significant benefit if they are able to ass something similar to what they currently have in reconciliation..

Got you. It sounds great, thanks for the color..

Take care..

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

Well, this is Reuben Garner on for Matt good morning..

Hey Reuben..

So just a clarification on Trey’s question about the controlled distribution; you mentioned it’s on a much broader bases now and one to two week delivery or lead times to the yards.

Can you just clarity, is that just in the markets impacted by the storms or has – when you say broader basis, has it hit some of your other markets in the Northeast or Midwest or Pacific Northwest..

Yeah I’m sorry if I weren’t clear on that. It actually is on a broad basis throughout the country. I mean, it effected markets including you know, the non-Texas markets, the Midwest you know, the far west and Northeast. I mean all of the markets for the most part particularly the major metro markets have experienced tightness of supply..

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

How temporary do you think that one to two – I think normally it’s about a few days. How temporary do you think the one to weeks is or is that kind of what happens when you get utilization rates for the manufactures up into the 80%-plus range..

Well, I think that’s a good observation. I think when you talk about effective capacity utilization, I mean a lot of manufactures will tell you that they are running in the low 90%. Not in terms of theoretical capacity, but what they can actually produce with the labor and shifts that they got currently running.

So when you start getting above 85%, 90% availability becomes an issue and frankly price goes up as well. So you know based on where they are sitting today and while there maybe a little bit of capacity being added here and there we don’t see any big size mix shifts in capacity being added to the market..

Okay, all right, very helpful. And then your outlook of low to single digits near term, I assume that’s kind of maybe the second half of your fiscal year.

Can you talk to us about maybe your end market expectations, resi versus commercial within that outlook and maybe tax reform was brought out, maybe what your thoughts are or what customers are telling you about if there is indeed tax reform maybe on the commercial side could you see what kind of acceleration would you expect from a demand perspective..

Doug and I can kind of tag team this. As far as segments I think we talked about before, there is no doubt that the multi family business has softened somewhat throughout the country.

Although we still have some decent activity in multifamily in pockets, but I would say that where multifamily has perhaps slipped we are seeing better single family activity. It’s almost like its making up the gap.

So that’s kind of how we see the coming, really the 2018 this probably would pick up in single family housing, which we obviously have a big presence in.

At the same time, the commercial activities we touched on before, the quota activity, the backlog what we are seeing in steel, pricing and steel volumes tell us and frankly talk about the customers, is that the commercial activity is going to be a very, very strong at ’18 and going into ’19..

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

So there should be a reasonably large impact on commercial activity..

Perfect. Thank you guys. I appreciate it..

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

Hey guys, this is Truman Patterson on for Stephen..

Hey True..

Hey Truman, good.

How are you?.

Good, good. Just wanted to dig into your gross margin commentary a little bit. It had a nice 90-bp jump quarter-over-quarter. In the press release I believe you guys left guidance unchanged at 32.5%, but then Dough I believe in the commentary you might have said over 32.5%.

Could you just elaborate on that? And also could you talk about the gross margin progression throughout the quarter by month?.

Yeah, sure Truman. I mean we expected to do a little bit better than 32.5% for the full fiscal year, so that’s what my comments were specifically.

I mean in the first quarter we were at 31.9%, so obviously that’s just math, but based on everything we see today, prices are holding stable and we expect them to remain stable through the balance of the calendar year. It should enable us to do that. In terms of margin progression, it was reasonably balanced through the quarter.

We talked about on our last call that we had pretty much gotten the margins up to where they needed to be. In the first quarter they went up you know every month and fairly significantly obviously and it stayed pretty steady since then..

Okay, okay thanks. And I know you guys have kind of touched on the M&A environment and the pipeline and everything, but I’m going to ask it a little bit differently.

Given the tax reform, more recently over the past, well call it month or so, have you really seen any change in the sellers behaviors at all and do you think those tax reforms might change their behavior in the future, as well as your expectations for kind of the valuations going forward, because inevitably lower tax rates typically make an earnings stream work more..

I know. We haven’t seen any changes in seller behavior. Pricing expectations are pretty much steady to where they have been for the last few years. But we do think that if this legislation passes, that it will actually have a positive impact on people who are considering selling.

I mean most of the people that we’re buying from have a set expectation of how much they want to walk away with when the deal closes and honestly, we’ve had some deals because we have been very disciplined in our approach to pricing and what we will pay for a business.

There have been some opportunities that we just couldn’t close the evaluation gap, so you know we believe that this will help..

Yeah, I would agree with that, absolutely. I can see some doors that might have been closed in the past reopening for sure if it goes through as they are discussing today..

Okay, okay, fair enough. And whenever I’m kind of digging through your acquisition history, it looks like they have a pretty healthy EBITDA margins that are – you know post synergies that are pretty accretive to your company overall.

Could you maybe just walk us through some of the tradeoffs between how you guys view greenfielding, a new branch versus making an acquisition?.

Well, greenfield certainly carry a lot less risk. They are in markets that we are already in or just adjacent to an existing market, so we know them very well. But we know the customers, the suppliers, etcetera and typically we’re moving in there.

It’s a logistics play and we can go in and find a facility that we can lease on a short term basis typically three years with a couple of renewal options and we’ll already move an existing base of business in there to start with, we put some working capital in, some used equipment.

I mean your typically talking about an investment of maybe $1 million total, most of that being working capital, some lease hold improvements and we’ll get that back in under 2 years and within 5 years it’s going to look like a full line branch.

So that’s certainly less risk than an acquisition, but you know from an acquisition point of view we’ve done 26 now since August 2013. We talked about integrations earlier, the team has gotten really good at that and we’ve been pretty successful.

There’s been a few of those that in hindsight we would have handled it differently, but our track record is pretty good and as you talked about the LTM dollars as well as the adjusted EBITDA are really healthy. So they have been accretive to our business and we expect that continue at the same six to eight year rate.

You know timing can be a little lumpy, but we feel good about it. We are going to have a busy second half of the year..

Truman?.

Thank you, guys. I appreciate it..

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

Thank you, operator. As we look to the remainder of fiscal ’18 and beyond, we feel really good about our position as a leading distributor with a very strong capital base that should help us accomplish profitable growth in a lower risk more efficient manner.

Our seasoned team, our national scale and our differentiated service model, coupled with our proven acquisition strategy really did position us well to continue to provide best-in-class service to our customers.

And our product offering, balanced end market exposure and track record of execution give us high level of confidence in our ability to grow net sales and adjusted EBITDA above the trend in the coming years. We are very excited about where we are today, and we look forward to updating you on our results in coming quarters.

So thanks everybody for joining us today and we look forward to speaking to you again next quarter. Thank you..

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