Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GMS Inc. Fiscal Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lynn Ross, Chief Accounting Officer and Corporate Controller. Please go ahead..

Thank you. Good morning, and thank you for joining us this morning for GMS' earnings conference call for the fourth quarter of fiscal 2018 ended April 30, 2018. I'm joined today by Mike Callahan, President and CEO; and Doug Goforth, CFO.

And in addition to the press release issued this morning, we've posted presentation slides to accompany this call in the Investors section of our website at www.gms.com. Turning to Slide 2.

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

Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control 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, 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 management expectations or outlook for fiscal 2019 and beyond.

In addition, statements regarding potential acquisitions and future greenfield locations, the expected benefit of the Titan acquisition, expected synergies, savings, margin improvement, accretion, the expected transaction multiple, leverage, integration, growth, product expansion opportunity and [delays in] consumption, operational improvement, market growth and performance and the sharing of best practices are also forward-looking statements as well as statements regarding the markets in which the company and Titan operate and the potential for growth in the commercial, residential and repair and remodeling or R&R market.

As a reminder, forward-looking statements represent management's current estimate and expectation. 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 Factors section in the company's 10-K and other periodic reports and the definitions and reconciliations of non-GAAP measures.

Also, note that the references on this call to fourth quarter and fiscal 2018 relate to the quarter ended April 30, 2018, and the fiscal year ended April 30, 2018, respectively. And with that, I'll turn the call over to Mike Callahan.

Mike?.

Thank you, Lynn. Good morning, everyone, 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 fourth quarter financial results in more detail. We will then open the line up for your questions. Now turning to Slide 3.

We accomplished a great deal during the fourth quarter and we could not have done so without the hard work and dedication of our great employees. During our fiscal fourth quarter, we announced the acquisition of Titan, which extends our reach into Canada.

The Titan acquisition closed on June 1 and we are extremely excited to have Titan as a part of the GMS family. I will discuss the WSB Titan transaction in a little more detail shortly. In addition to Titan, we completed two small acquisitions during the fiscal fourth quarter and opened one greenfield operation in Hartford, Connecticut.

I am particularly excited about our entrance into the San Francisco Bay Area for the first time. Overall, we completed five acquisitions representing seven branches and opened three additional greenfields during fiscal 2018 and have recently opened two additional greenfields in the first quarter of fiscal '19.

We delivered solid fiscal fourth quarter results in what proved to be a very challenging environment as we continued to experience adverse weather and ongoing competitive dynamics.

While these challenges negatively impacted our wallboard volumes during the quarter, we remained disciplined on price and were able to capture approximately 2.5% of wallboard price growth during the fourth quarter. Fourth quarter net sales increased 3.4% year-over-year to a record $635.8 million driven by base business net sales growth of 2%.

Net income for the fiscal fourth quarter declined to $9.9 million or $0.24 per diluted share compared to $14.3 million or $0.34 per diluted share year-over-year.

The decrease was driven by $3 million in transaction-related cost and $5.1 million in mark-to-market currency adjustments during the fourth quarter of fiscal 2018, both related to the Titan acquisition.

In addition, the fourth quarter of fiscal 2017 included the benefit of $1.2 million of nonrecurring other income further contributing to the tough year-over-year comparison.

Gross profit increased 2.4% to $205.8 million, and lastly, adjusted EBITDA decreased 3.9% to $50.1 million during the quarter, reflecting lower gross margins and inflationary cost pressures.

Fiscal 2018 marked another year of progress for GMS as we were able to further expand each of our product categories, resulting in 8.3% growth in net sales to a record $2.51 billion for the full fiscal year ended 2018, driven by strong base business growth of 4.5%.

From a gross margin perspective, we were able to achieve and surpass the previously announced full year 2018 guidance of gross margin of 32.5%. Net income of $63 million in fiscal 2018 or $1.49 per diluted share grew $14.1 million or 28.8% compared to $48.9 million or $1.19 per diluted share in fiscal '17.

We achieved record EBITDA in fiscal 2018 of $199.3 million, a 5.9% increase over fiscal 2017. Now while we were pleased with another record year of EBITDA, we were unable to achieve double-digit incremental EBITDA margins.

Inflationary headwinds continue to be a challenge for us and for our industry, which impacted our operating expenses and ultimately, our adjusted EBITDA during the quarter and for our full year results.

While we have taken steps already to address the inflation headwinds in previous quarters through various initiatives, we more recently initiated a strategic cost reduction plan in May of fiscal 2019 to further improve our operational efficiency and demonstrate our strong commitment to expanding our margins, while continuing to invest in the areas of our business that we believe will provide the best return for our shareholders, our business partners and our employees.

As a result, excluding onetime pretax charges in the range of $4.1 million to $4.6 million that we expect to record in the first quarter of fiscal 2019, we anticipate that the actions we have taken will generate payroll-related and other cost savings of approximately $20 million on an annual basis.

We started the new fiscal year committed to growing our revenue, both organically and through bolt-on acquisitions, improving our cost structure, increasing our adjusted EBITDA and generating free cash flow sustainably to reinvest in our business and to deleverage our balance sheet.

Residential, commercial and R&R end markets that we operate in remain strong and we are pleased by our initial results for the first quarter of fiscal 2019, as May net sales increased 7% year-over-year driven by 5.5% base business growth as we started to experience more favorable weather trends. Now moving to the Titan acquisition slide on 4.

Until recently, our M&A activity has been lighter than usual as the timing of deals can vary throughout the year. However, acquisitions continue to remain very core to our story.

And the recent acquisition of WSB Titan further establishes our position as the leading distributor of wallboard and ceilings in North America, with pro forma sales for the combined company of approximately $3 billion and pro forma adjusted EBITDA of approximately $302 million for the 12 months ended April 30, 2018.

Titan is the clear market leader in Canada, with approximately 2x the scale of its nearest competitor and comes with impressive adjusted EBITDA margins in excess of 14%. The addition of Titan creates a leading North American building materials distribution platform, which has multiple levers that we expect to drive long-term growth with.

This combination creates a well-balanced North American specialty distributor platform with multiple avenues for growth and a significant opportunity to share best practices and leverage each company's strengths, which we have already begun in the weeks since closing the deal. Now turning to Slide 5.

This fiscal 2018 pro forma summary helps to further illustrate how our strategic decision to convert the majority of our operating leases to capital leases that we announced during our third quarter earnings call, along with our June 1 acquisition of Titan, puts us in a very strong position heading in fiscal 2019.

First, the impact of converting the majority of our operating leases to capital leases would have increased our adjusted EBITDA margin by 100 basis points to approximately 9% on a pro forma basis.

Second, we expect the Titan transaction to be immediately accretive to both adjusted EBITDA and adjusted earnings per share, with the combined company expected to experience significant cost synergies estimated to be approximately $10 million in the first full year following closing, driven primarily by purchasing benefits associated with enhanced scale.

Including Titan, our pro forma sales of approximately $3 billion have increased by over 60% since our IPO in fiscal year '16 as we continue to grow both organically and through strategic acquisitions.

Additionally, on a pro forma basis for fiscal 2018, the combined impact of the change to capital leases and the acquisition of Titan, including synergies, would have increased our adjusted EBITDA margin by approximately 220 basis points on a pro forma basis.

So while we are focused in the near term on successfully integrating Titan, acquisitions will remain absolutely core to our growth story in the intermediate and long term as our acquisition pipeline remains robust, with very attractive partnership opportunities that 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.

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

Doug?.

Thanks, Mike, and good morning, everyone. Beginning with financial results on Slide 6. We delivered solid sales and adjusted EBITDA in the fourth quarter despite challenges associated with weather, higher costs and other competitive dynamics.

Starting on the top line, net sales increased 3.4% to $635.8 million and base business sales during the quarter increased 2% versus last year. Wallboard net sales decreased 0.8% to $280 million in the fourth quarter compared to the same period last fiscal year.

Wallboard volume decreased by 3.1%, primarily due to adverse weather conditions and continued competitive challenges that we believe have cost us approximately 50 basis points of wallboard market share over the last year.

However, we continue to remain disciplined in the market and were able to increase our wallboard prices by 2.5% during the fourth quarter.

Ceilings sales increased during the quarter by 9.3% year-over-year to $95.6 million, including a 5.1% increase in the base business, driven by prices, the benefit from acquisitions and a slight increase in organic volume.

Steel framing increased during the quarter by 6.8% year-over-year to $107 million, including a 5.5% increase in the base business, mainly driven by price and a slight increase in volume. We continue to work through changes to the U.S. trade policy to capture price increases appropriately.

As we mentioned on the third quarter call, we have long-standing relationships with our steel vendors, and we worked closely with them prior to the announced price increases in April and May and continue to work closely with them to ensure that we are able to maintain a profitable steel inventory position.

Other products net sales increased 5.6% during the quarter to $153.2 million, driven by base business sales up 4.6%, highlighting the success of our continued efforts to drive growth in other complementary products.

This product category demonstrates the breadth of our portfolio, one of our major competitive advantages and continues to highlight the strength of our customer relationships and increasing importance with many of our large suppliers in this category.

We recorded $50.1 million in adjusted EBITDA in the fourth quarter, down from $52.1 million and a gross margin of 32.4%, down approximately 30 basis points.

Adjusted EBITDA margin was 7.9% as a percentage of sales, down 60 basis points, which was impacted by the decrease in gross margin and an increase in SG&A expense that was primarily due to higher logistics costs.

As Mike detailed, we are focused on further improvement of our margin profile and have implemented a series of cost reduction initiatives that I will provide more detail on in a minute. Turning to our fiscal 2008 (sic) [2018] results on Slide 7.

For fiscal 2018, sales grew 8.3% to a record $2.51 billion as we saw base business growth across each of our product categories, resulting in total base business sales growth of 4.5%.

Our ceilings growth was particularly strong throughout the year as we increased sales by 13.6% and base business by 9% as we continued to take share and benefit from our ability to pass through price increases. Overall, our strong sales performance produced a 5.9% increase in adjusted EBITDA to a record $199.3 million.

We recorded net income of $63 million or $1.49 per diluted share compared to $48.9 million or $1.19 per diluted share in fiscal 2017. And we're pleased to deliver full year gross margin of 32.6%, in line with our previously stated guidance of full year gross margin in excess of 32.5%.

Adjusted EBITDA margin decreased 20 basis points to 7.9% compared to fiscal 2017 as we were unable to expand our margin for the first time since fiscal 2011. Slide 8 provides additional insight into our operating expenses during the fourth quarter and full fiscal 2018.

Overall, organic adjusted SG&A expense increased by approximately 3.6% in the fourth quarter and 4.7% for the full year, primarily driven by higher logistics cost.

In response to these increases, we have implemented significant cost reductions over the last 30 days that we expect to result in annualized cost savings of approximately $20 million or approximately 80 basis points of our fiscal 2018 sales.

We also want to ensure that our company is still well positioned for future growth, and therefore, we have recalibrated our overall expense structure throughout the organization. Effective June 26, we reduced our G&A headcount, which will result in annualized payroll-related savings of approximately $16.6 million.

Furthermore, we have also taken steps to reduce other G&A expenses related to travel and entertainment, professional fees and other costs that will result in an additional annual savings of approximately $3.4 million.

Additional cost reduction initiatives are underway as well as the continuation of previously announced initiatives related to fuel and other logistics-based savings.

We expect to further improve our operational efficiency in fiscal 2019 and demonstrate our strong commitment to expanding our margins at double-digit rates, while continuing to invest in the areas of our business that we believe will provide the best return for our stockholders, business partners and employees. Turning to Slide 9.

As of April 30 and after the Titan acquisition, our net debt to LTM pro forma adjusted EBITDA stood at 4.1x, up from 2.8x pre-transaction levels. We're comfortable with this level of debt, given our history of strong cash flow generation and ability to quickly pay down our debt.

Our current leverage ratio post-Titan compares favorably to the 6x net debt to LTM adjusted EBITDA as recently as 2014 and 4.3x just before our 2016 IPO.

As discussed on our last earnings call, we have already transitioned the majority of our existing operating leases to capital leases and have begun leasing new equipment under capital leases, enabling us to accrue an accounting benefit that positively impacts our adjusted EBITDA while changing our economics and still -- while not changing our cash economics and still allowing us to take advantage of an immediate tax deduction.

We continue to expect the benefit of these changes to fiscal 2019 adjusted EBITDA to be in the range of $21 million to $24 million a year. Now let me turn the call back over to Mike for some closing comments..

Thanks, Doug. Before turning the call to Q&A, let me highlight a few items that give me confidence in our ability to deliver margin improvement and strong adjusted EBITDA in fiscal '19.

First, we expect Titan to contribute between $68 million and $72 million to adjusted EBITDA for the 11 months ended April 30, 2019, based on a monthly average exchange rate of 0.7816.

In addition, Titan brings a top-of-the-line margin profile to GMS, which we expect to increase our adjusted EBITDA margin by over 100 basis points on a pro forma basis, including the benefit of $10 million in projected purchasing-related cost synergies.

Next, we expect to generate approximately $20 million in annual savings associated with our cost reduction plan as we realign our structure with market dynamics.

And finally, as discussed on the third quarter, there will be a $21 million to $24 million adjusted EBITDA benefit associated with our decision to convert the majority of our legacy commercial fleet operating leases into capital leases. We will also see further benefit from recent U.S.

tax legislation, which will reduce the effective tax rate from roughly 32.5% to approximately 24% to 26%. For fiscal year 2019, we will be focused on executing on these initiatives and expect to generate meaningful adjusted EBITDA and margin expansion.

We intend to identify best practices and begin to implement them to improve our operating performance going forward. Our cash flow dynamics remain favorable, and we plan to generate additional cash by growing adjusted EBITDA while preserving low CapEx levels and appropriate working capital ratios.

And finally, we are well positioned to continue to reduce the leverage on our balance sheet related to the Titan acquisition and drive our net debt to LTM pro forma adjusted EBITDA towards our long-term target of below 2.5% or 2.5x, excuse me. In closing, we accomplished a great deal during fiscal 2018.

Our acquisition of Titan strengthens our market-leading position in North America. And while we always face challenges, we are well positioned for profitable growth and are confident that with the support and teamwork of our wonderful colleagues both in the U.S.

and Canada, our long-term strategy will enable us to continue delivering profitable growth over time. Operator, we are now ready to take questions..

[Operator Instructions]. And we'll go first to Keith Hughes with SunTrust..

A couple questions.

First, could you talk about the volume progression by month, what each month was in volumes roughly during -- year-over-year?.

Sure, Keith. It increased steadily throughout the quarter and continued to do so in May..

So is your volume up year-over-year in May?.

Year-over-year in May, yes..

It is up..

So, no, just to qualify that a little bit, volumes were up slightly. The majority of the increase is actually price related..

Okay. So it's -- based on the numbers you're saying, it sounds as though in the market right now, you really can't get price and volume. It's just a very competitive market in terms of pricing.

Is that a fair characterization?.

Yes. I would -- I think you're right, Keith. I mean, you really do have to pick and choose. We're working diligently to get paid for our service and there's definitely strong competitive dynamics right now, there's no question..

Though we have seen recent indications of competitors coming out with price increases..

Yes..

Okay.

And on your cost improvement program, when will be the first quarter we'll feel the real impacts of that? Will that come in the first quarter?.

Some of the impact will actually be seen in July. We had reductions actually earlier this week, so those are almost immediate and start hitting in July. You'll see the full benefit of it in the second quarter..

So on a run rate basis, second quarter we'll see the full benefit, correct?.

Correct..

And I guess, finally, particularly with the numbers, going to be a lot of flux with your accounting change, the big acquisition coming in.

Is there -- at least maybe in a future release, could you give The Street some level of guidance level in EBITDA, EPS, something like that? I mean, we obviously got a disconnect between what's going on and what The Street has been putting out.

There's a lot of estimates in the next fiscal year, so just if you could consider that in the future because there's a lot of confusion on your numbers at this point moving forward..

Yes, absolutely. And that's one of the reasons that we put some numbers out there specifically related to Titan as well as the cost reductions which, as we just said, you'll see the immediate full impact in the second quarter to try to help answer some of those questions that we've gotten from both investors and analysts.

I don't know that we're prepared yet to give full company guidance, but we're going to obviously need to continue to work closely with you guys to make sure that your modeling and your expectations are reasonable..

Okay. Final question.

The 7% you threw out for May, is that an organic number including all products?.

It's about 4.5% on an organic basis or just under 5% organic for all products..

All products, okay..

We'll go next to Michael Dahl with RBC Capital Markets..

So a bit of a rough start to the morning.

And I think, one of the things -- just going back to Keith's questions about what's going on in the market price versus volume, and there does seem to be some push and pull, but I think what people are struggling to bridge a bit is you're exercising discipline in an attempt to get profitable sales, right, but what we've seen is actually share come down a little bit and margins are still under a bit of pressure.

So is there any more detail just that you can give us on two fronts? You alluded to some things on the competitive dynamics.

What specifically is giving you optimism that this will ease up and what types of competition or competitors are you seeing? How's that shifted? And I guess just directly on the gross margin side, how should we be thinking about gross margin over the next couple of quarters just given some of these pressures?.

Well, we can kind of split this up. I would say in terms of the reason for optimism in the future, I mean, number one, all of the manufacturers have announced price increases to take effect July 1. And frankly, the supply line right now for wallboard deliveries is probably out 3 to 4 weeks in a lot of markets in which we do business.

Now a great deal of that is related to transportation issues. I mean, just the availability of trucks to put on your loads has been under enormous pressure. But fundamentally, the board situation is challenging and price increases have been announced.

And frankly, we've seen some of our competitors announce increases as well, including surcharges, freight surcharges above and beyond the price increase. So I think from where we're sitting right now, I mean, inflation is a reality.

Obviously, we've had to fight it in our business and everybody in our industry is fighting it right now, and so the need to recoup costs is pretty much out there across-the-board.

So that -- I would say from my vantage point, I do think there's a shifting dynamic, particularly given that the volume levels are picking up going into what are historically our best months of the year. May has indicated that and the June activity levels are going to be just as strong, if not better, so that's kind of my view..

Got it.

And on the level of gross margins that we should be expecting over the next few quarters?.

Well, starting in June, Titan rolls into our numbers and their gross margins are actually -- they're a little higher than ours but not significantly higher than ours. So your expectation should be that we should continue maybe slightly higher than what we've been doing.

Again, you'll see the full -- really see the full benefit of that in the second quarter, a little bit of it in June because of Titan..

Right. And, Mike, you alluded to the June activity. June is kind of wrapping up in a couple days here.

Is there anything you're willing to throw out there on -- relative to those May numbers of 4.5% to 5% organic, how June has shaped up percentage-wise?.

Yes. June is -- we're seeing -- obviously, we haven't closed the month yet, but we're seeing mid-single-digit growth there as well..

Okay. And last one from me. Inventory per branch seems to be running up quite a bit.

Can you speak to that a little and help us understand what the strategy is there and how we should be thinking about that rolling through and normalizing over the next quarter or two?.

Well, a lot of that is the price increases from the suppliers. I mean, it's not only wallboard. It's pretty much all the products..

Steel, installation. I mean....

Steel, ceiling, grid....

Yes. I can't think of anything that we sell that's not going up in price right now, frankly..

Okay.

I guess to be clear, it's more that than necessarily some sort of load up on inventory?.

Right. I mean, right now, we haven't really seen any indication that anyone has built up a significant amount of wallboard. You're simply too busy -- the market is too busy to have done that, and we certainly haven't been able to do that..

We'll go next to David Manthey with Baird..

Wondering if you could tell us the $302 million pro forma fiscal '18 adjusted EBITDA, does that -- that includes Titan, it includes Titan synergies and the lease accounting change.

Is that correct?.

That's right. It does not include the $20 million of operating expenses that we've taken out..

Okay. That was my next question. So if you hit the full $20 million run rate in the second fiscal quarter, let's say, that's something between $10 million and $15 million.

So if we're bridging the fiscal '18, the starting point will probably be something in the $315 million to $320 million range and then adjusting that relative to the core growth, plus or minus any bolt-on acquisitions?.

That's right..

Yes..

We'll go next to Truman Patterson with Wells Fargo..

Just a quick follow-up on the prior question. You guys mentioned the onetime Titan bump in EBITDA, same thing with the capital lease accounting.

If we think about just core GMS EBITDA margins in 2019, are you guys expecting improvement there?.

Absolutely. The $20 million in cost reductions, and we should have said this, that's all U.S. That's all here. Canada is not involved in this at all. In fact, they're incredibly lean operators up there. And on the lease accounting, that's also all U.S. They don't lease equipment up there to begin with.

They purchase their equipment, so it's all primarily here in the U.S..

Okay. Okay. If we adjust for pricing, it looks like volumes were flattish to down during the quarter.

Are you guys seeing any slowdown in the commercial segment due to steel tariffs either recently or in kind of your outlook going forward?.

No. On the commercial segment, I would actually say that activity level remains pretty high. It's pretty active. You're seeing some softness in multifamily, but I think the other segments are actually quite busy..

Okay. Okay. And then final question. There's been a lot of talk about the competitive dynamics of the wallboard industry.

Could you just walk us through how the market has changed over the past couple years, especially taking into account Beacon's acquisition of Allied and ABC's acquisition of L&W, really thinking about how it's impacted pricing market share by end channel, et cetera, the past couple years and then how we should kind of think of that over the next couple years as well..

Well, I think, generally speaking, I think some of our competitors out there have looked to grow -- looking to grow share. And in doing -- and frankly, are maybe a little bit more skeptical on the availability of price increases that have been announced by the manufacturers.

And so in a competitive situation, maybe comfortable in going in and quoting work at a current number or maybe even a lower number in anticipation that numbers are not going to go up.

And frankly, as we've seen, as we talked about earlier, all of our costs are going up on the purchase side, I mean, whether it's wallboard, steel, insulation and the like.

And so there's kind of a settling out process with a lot of our competitors right now, and that's just the nature of the beast and you have to choose whether or not you want to take a long-term job at a less-than-adequate profit margin. And so that's the classic volume versus price trade-off, but we're doing this for profit not for practice.

And so we're going to constantly focus on trying to get paid for our service. We do think that we're the best at what we do. This will -- and we're going to continue to drive service throughout all the markets that we serve.

But yes, the competitive dynamics are definitely different today than they were 3 or 4 years ago, but we're still going to get our share and continue to grow our business..

And the ones that have really been trying to -- or that have been quoting the lower prices and going out and gaining share, you have seen, we'll just call it the largest disruptors go out and push pricing recently..

I think, right now, we're seeing price increases announced more consistently than we were a year ago. I'll put it that way..

We'll go next to Trey Grooms with Stephens, Inc..

So I guess I'm kind of following up on this competitive -- the competitive dynamics that are in the industry here in light of these increases that are coming out, as you mentioned, by the wallboard manufacturers just try to really get a sense. I mean, you're expecting margins to improve. You've got this increase coming.

Competitors are still being a little bit more irrational maybe or less disciplined than maybe we would have thought they would be at this point. Just trying to get my hands around your expectations, number one. It sounds like you think there is going to be some traction with these manufacturers' increases.

And if that's the case, just get a little more color around your price-cost situation playing out for the next few quarters in light of that increase coming in..

Well, what I would say to you is that -- I mean, based on the fact that we're anywhere from 3 to 4 weeks out on deliveries in terms of getting product in, that creates a lot of tension. And frankly, I think it lends itself to support for a price increase.

And the work that we're quoting right now going into the summer and beyond has got escalators built into the price rate. So we're going to -- as soon as we realize where this thing finally settles in -- as you know, it takes a while to kind of figure out where the numbers finally settle in.

But we're quoting the up number and we're starting to see some activity that would indicate that this -- the price is going to hold. Now where it settles, I don't know in the end. But fundamentally, we feel pretty good about the increase going forward..

Is that regional or is that pretty well broad-based as far as the traction that you're expecting and the job quotes kind of lifting and it reflecting some of this expected increase?.

I would say, generally speaking, it's across the board. There may be some small pockets that I really can't speak to, I'd have to get a little bit more detail to you. But fundamentally, I think everybody is expecting it to move up..

Okay. That's helpful. And then lastly for me on Titan. You gave us a range for kind of the expected EBITDA contribution there.

Behind that number, can you give us some color as to what are your expectations for or your assumptions for end market trends or volume, price? Just any kind of directional color you can give us on that specifically for the Titan business that might be embedded in those numbers..

Well, definitely on a top line basis, there is above-market growth factored into those numbers, but we're not going to provide specifics on that. But it is ahead of the pace that we're seeing here in the U.S., so the business up in Canada continues to be strong.

They had -- they did have a slow start to the year, particularly January through April was relatively slow, but May really jumped up significantly. And the slow start was primarily weather-driven, but now things have really kind of taken off up there again so we feel good about that..

We'll go next to Kevin Hocevar with Northcoast Research..

Maybe one more on the competitive dynamics.

Given the environment and the competition that's being seen and what's sounding like maybe an inability to fully pass along the price increases without perhaps walking away from some volume, is there any opportunity to push back on the manufacturers to get some concessions on pricing in, particularly, wallboard and -- or based on what you're saying, just the lead times being extended, is that really not easy to do given kind of the environment that we're in?.

I would say that the environment we're operating in today, I mean, the manufacturers have been pretty consistent about wanting to recoup cost and it's a very, very challenging environment for them as well as for us in a lot of ways.

So there's -- they're pretty rigid in terms of their pricing discipline and there's not a whole lot of concessions out there, frankly..

Yes. Okay. And then on the M&A front, wondering if you could just comment on that. I know, obviously, Titan being a large acquisition and taken on a little bit of leverage but like you showed in a lot of slides, less than maybe you've been accustomed to in a couple years ago.

So what's your thoughts on continuing some M&A because it does seem like some acquisitions are being done in the industry so wanted to get your thoughts on continuing to do these types of acquisitions, bolt-on acquisitions kind of the balance in 2019 and beyond..

Well, really, the excitement for me is that not only do we have opportunities for acquisitions in the United States, but now we've got opportunities in Canada as well.

I mean, the guys that are running Titan are very deeply entrenched in the markets in which they serve up there and they've got a pretty decent pipeline, a very good pipeline for some opportunities up there as well as here. So you can never switch it off and we've got to be opportunistic.

We've got to be diligent in terms of making sure that the cultural fit's there when we look at a potential target, but we're not going to sit on the bench. And we have a number of opportunities that we have ongoing dialogue with right now in the States and we'll have those kind of opportunities in Canada.

So -- but we'll do all of that within the context of adequately managing our balance sheet. We do want to delever.

But the good news is if you look at the cash flow generation that we'll have in the future, and we've proven that in the past with 29 acquisitions since, I guess, 2014 or something, we've still been able to delever the balance sheet significantly. And I would say that, that's going to continue to be the case here..

We'll go next to Matt McCall with Seaport Global Securities..

I actually want to follow up on a previous question, just to make sure I understand the answer a little better.

Last year -- well, earlier this year, Q1 of '18 gross margin was down, pricing was -- were flat, but volume is up strong, and I remember a conversation then that you went back and you had some conversations with the manufacturers about what was actually sticking in the market.

Now it seems like we've got this disconnect, a little different dynamic, gross margin is down, pricing is up, but volume is now down.

So, Mike, your answer was, they're being pretty rigid, I think, with their stance, but is -- does the conversation not occur similarly to what we saw earlier this year where it's just not able to play out right? Or are you thinking things are changing that dramatically and they expect it to change that dramatically, therefore, they're being more rigid?.

Well, I'm not going to get into the details of our conversations with the manufacturers in specifics, but I would tell you that the pricing dynamic right now as we look into July, remain positive. I mean, that's our view..

Yes. Matt, I would add to that. Look, nothing has changed about the way we operate. I mean, it certainly got more -- a lot more competitive particularly about pricing. But we're the price leader and we work with all of our suppliers, not just wallboard, to go out there and get price increases because there's real inflationary pressures going on.

They have them. We have them. Our competitors have them. So we work real closely with those guys to get the price increase. But at the end of the day, if we're not able to get an acceptable price increase from our customers, then we absolutely will go back to our suppliers again and negotiate..

Okay. Okay. All right. I misunderstood. Okay. You've mentioned weather a couple of times and I know you talked about it in the release.

Is there any -- you got any estimate of what the impact was in the quarterly results from just weather that remained poor?.

Not really. It just caused us to get off to a slow start, particularly up in Canada. We'll have two months of their results in our first quarter numbers. Things took off in May as we talked about with Keith earlier. We saw steady progression of sales throughout our quarter and then May continued to rise..

Okay. All right. And a final one, I guess, this has two parts. You said -- I think you mentioned in the prepared remarks that in addition to the cost savings you quantified, you've got additional savings that you've announced previously. I don't recall if you quantified that, I think, you said transportation.

And then as you look out, you said gross margin should be better than what you've been doing recently. Which metric were you referencing? Because it's kind of in a little bit of a range there and does that just -- go ahead..

Well, unfortunately, we talked about it last year that we expected to get some operating leverage in the second half of the year based on our normal growth, but also some initiatives that we had going on particularly around logistics, fuel savings, improving our turnaround times, et cetera.

And while we continue to work on those, they simply haven't progressed or given us as much savings as we had anticipated, certainly, not enough to offset the inflation costs, which were real. Fuel is one of the bigger items.

You can see that in that schedule that we added this year to kind of break out our operating expenses showing, hey, this is where our costs were growing on a dollar basis, particularly for fuel, which was up for the quarter $1.1 million based on last year. And as we saw with wallboard, our volumes were actually down for wallboard.

So on lower wallboard volumes and essentially flat volumes on other products, we actually had $1.1 million higher fuel expenses. And everybody knows what's going on with fuel, so those are some of the things that we're working to handle.

Now, we've been dealing with that a long time and fuel, in the general scheme of things, is not that significant a piece of our business. It's 80 basis points of our sales in fiscal '18 was fuel -- was delivery fuel related. So it's not like it's a particularly significant expense overall, but still it matters.

And that's part of the reason we had that shortfall against last year's EBITDA numbers, so those are the things that we're working on to improve. We can change turnaround times in some cases where we're bringing in better equipment and getting better fuel efficiencies.

Certainly, on the payroll front, which was the highest dollar increase not only for the quarter but for the full year, our payroll and payroll related was up 3.8%. Now there's obviously wage inflation in that, normal merit increases, et cetera, are going to increase those costs.

So I think you can see just by that increase that we, obviously, did make some headway in controlling our costs. It just wasn't enough, particularly to get to what our expectations are. We've consistently told people that we expect to grow our incremental EBITDA at low double digits and we fell short of that this year.

So that's one of the reasons that we are really driving and we've taken the steps that we have. I mean, the things that we did were difficult decisions. But we meant it when we said we're going to deliver double-digit incremental EBITDA growth, just like we meant it last year when we said we were going to get our gross profit back to 32.5%..

Our final question comes from the line of Michael Wood with Nomura Instinet..

Wondering if you could help me just bridge the $302 million pro forma EBITDA that you had given. If we're adjusting Titan because we're going to have to take out one month of that, probably put you closer in the mid-290s.

And then if we're adding back, let's say, 10 months of the restructuring savings that you commented on, it puts you around $312 million as kind of a baseline for this year's results.

Is that the right way to think about it? Then we add or subtract what we think is happening to the base business?.

Well, I think -- going back to Titan, I would use the range that we put out there which is $68 million to $72 million..

$68 million to $72 million..

And that's an 11-month number, you got that. So I mean, Titan is going to grow. They are growing. So that's our expectation, so that's kind of built into that range that we put there. So you may be giving it a little bit too much of a haircut on Titan.

In terms of that $20 million savings, as we said earlier, we expect to start seeing the full run rate of that in the second quarter and we'll see some of it in the first quarter, and that's not even baked into that....

$302 million..

$302 million number, so you may be a little light there depending on what you're modeling for sales..

Okay. Yes, I'm just trying to understand. I mean, the analysts who have adjusted for Titan are at that $312 million to $313 million range, and it sounds like you'd be comfortable at those published estimates.

I mean, can you comment on that just to give people some comfort around where this year is expected to shake out?.

Well, at this point, we're still limiting the guidance to what we specifically gave for Titan. But we are going to continue to provide enough information on the business, like we said what our market share was for wallboard at 14.2%.

We've outlined kind of provided more detail on our cost here, so we feel like we've given enough data for people to get -- to work their models, not only the analysts but the investors. So I think for right now, that's about as far as we're willing to go..

And on the price that you're taking for the manufacturers and the competitive response that you're seeing out there, do you think that there's -- potentially, you're getting the price put to you quicker than some of the larger distributors out there that you're competing against or do you think they're actually effectively eating that price from the manufacturers in order to gain the market share?.

It would be a bad day if we ever found out that we were getting price increases ahead of the competition..

Yes. That would not be good..

Okay. It seems like a tough decision from them.

But I guess just moving on with the double-digit incremental margins that you commented on, should we think of that being more realistic just on volume or is that something that you can achieve on your organic sales growth? And the other part of that is should we think of the restructuring savings as part of the vehicle to get to double-digit incrementals or is that accretive?.

Well, if you go back to fiscal '18 and you pro forma that $20 million, our incremental EBITDA would have grown about 16%. And I'm not committing, Mike, to 16% a year moving forward, but that was on essentially flat volume. No growth in wallboard that year and we don't intend for fiscal '19 to be another year of no growth in wallboard volume.

So it's going to be a combination of organic growth, the cost restructuring that we've done. Certainly, Titan is going to be a tremendous headwind to our results..

And that concludes our question-and-answer session. Mr. Callahan, at this time, I would like to turn the conference back to you for any additional or closing remarks..

Thanks, everybody, for joining us today. As I said earlier, we're very excited about where we are today and look forward to updating all of you on our progress in the coming quarters. Thanks again..

And that concludes today's conference. Thank you for your participation. You may now disconnect..