Good morning, and welcome to the GMS First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Leslie Kratcoski, Vice-President, Investor Relations. Thank you Miss Kratcoski. You may begin..

Thanks, Claudia. Good morning everyone and thanks for joining us this morning. I'm joined today by John Turner, President and CEO and Lynn Ross, Chief Accounting Officer and Interim CFO.

In addition to the press release issued this morning, we have posted presentation slides to accompany this call in the Investor Relations section of our website at gms.com.

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

Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management's current estimates and expectations.

The company assumes no obligation to update any forward-looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including Risk Factors section in the company's 10-K and other periodic reports.

Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call to first quarter of fiscal 2020 relates to the quarter ended July 31, 2019.

With that, I'd now turn the call over to John Turner..

Thank you, Leslie. Good morning and thank you for joining us today. I will begin today's call with a review of our operating highlights and then turn it over to Lynn to cover our financial results in more detail. I’ll then conclude our prepared remarks with some of my initial parts on our comp forward following my first four months here at GMS.

We were on to a strong start to fiscal 2020 as we remained focus on leveraging the foundation of our business and positioning GMS for long term growth and profitability. We achieved record net sales results in the quarter, which increased 8.9% year-over-year.

This growth was broad based across each of our product lines, with growth of 7.5% in Wallboard, 11.4% in Ceilings, 2.1% in Steel framing and 13.6% in Other products. Organic net sales increased 3.4% with just over 5% organic growth in the United States, partially offset by about a 10% year-over-year organic sales decline in Canada.

In the United States, the team delivered record results as we continue to experience healthy residential and commercial end markets with solid demand. While the commercial markets are also solid in Canada, we continue to experience the impacts of the significant slowing in single family housing, particularly in the Greater Toronto Area.

Based on our current read the timing of a recovery in the Canadian single-family housing market remains uncertain. However, similar to the United States, the fundamentals contributing to long-term Canadian residential construction demand remain sound, including strong household formation and population and economic growth.

For now, we remain focused on what we can control, and our Canadian team is executing very well in a tough environment. Nonetheless, our long term strategic rationale for last year's acquisition of the largest distributor in Canada remains extremely compelling.

While gross margin improved year-over-year, we did experience an increase in adjusted SG&A as a percentage of sales. This was due to some continued cost pressures as well as reduced operating leverage in Canada, but also because we are making investments in initiatives aimed at advancing our next phase of growth and success.

Adjusted EBITDA increased 11% to a record $83.6 million for the quarter, and we realized an adjusted EBITDA record margin of almost 10%. As previously announced, we acquired Hart Acoustical & Drywall Supply in the quarter adding three locations in South Texas.

We also opened two Greenfield locations, one in Manchester New Hampshire, and the other in Wichita Falls Texas. We remain committed to disciplined expansion of our geographic footprint through accretive acquisitions and Greenfield openings, balanced with our debt reduction priority.

With that, I'll turn it over to Lynn to provide more detail on our financial results for Q1..

Thanks John. And I would also like to thank you all for joining us today. We were pleased to deliver a strong first quarter, highlighted by record net sales and adjusted EBITDA performance. Looking at Slide four, we grew net sales 8.9% to $847.2 million including 3.4% organic growth year-over-year.

The modification in our calculation of organic net sales growth as described in our earnings release this morning is in response to the feedback from the investment community as well as our view that including sales from acquisitions such as Titan, after the first anniversary of the acquisition date is more appropriately reflected in organic net sales growth on a year-over-year basis.

As a point of reference, the 3.4% organic growth we're reporting today for the first quarter under our new methodology would have been 5.1% under the previous methodology, which would have excluded Titan sales from organic net sales for all of fiscal 2020.

Our sales of Wallboard were up by 7.5% compared to the same period last year, including 3.5% growth on an organic basis, which included a volume increase of over 4% and less than a 1% decrease in price. Our first quarter Ceiling sales increased by 11.4% year-over-year, or 8.3% on an organic basis.

This organic growth included price increases of approximately 5% and higher volume of approximately 3%. Our sales of Steel framing increased 2.1% year-over-year but declined to 0.8% on an organic basis, due to an approximate 5% increase in volume which was offset by declines from price and mix totaling approximately 6%.

Sales of our other products which consist of installations, joint compounds, tools, stucco, EIFS and various other complementary products continue to grow, increasing 13.6% in the quarter. This product segment now comprises almost 30% of our total sales.

On an organic basis, we saw a 3.1% increase in this category and we continue to focus on growing this highly profitable and complementary product segment. Gross profit in the first quarter increased almost 12% to $274 million.

This was the result higher sales both organically, and including the positive impact of acquisitions as well as $4.1 million of non-cash purchase accounting adjustments recorded in the prior year related to the Titan acquisition.

Our gross margins of 32.3% improved 80 basis points from 31.5% a year ago primarily due to net favorable price cost dynamics, tightened purchasing synergies and the prior year purchase accounting adjustments. At this time, we are maintaining our gross margin guide of 32.2 for fiscal 2020.

Turning to Slide five, adjusted SG&A expense as a percentage of net sales was 22.6% compared to 22.4% in the prior year quarter. The 20 basis point increase in adjusted SG&A was the result of several factors.

First of all, we experienced reduced operating leverage in Canada, and continued cost pressures across the business including some related to weather in the quarter. Additionally, we made some initial investments in business initiatives to support sales growth and operational efficiencies.

Our investment in six greenfields in the last two quarters also impacted operating leverage as these locations take some time to ramp up. These impacts were partially offset by increased efficiency from the company's cost reduction initiatives undertaken over the last 12 months.

Moving onto adjusted EBITDA, we delivered $83.6 million of adjusted EBITDA in the first quarter up 11% year-over-year. Our adjusted EBITDA margin was 9.9% as a percentage of sales, up 20 basis points from the 9.7% a year ago. Turning to Slide six, free cash flow this quarter was a use of $18 million.

It's typical for our first quarter to have a use of free cash flow, but this compares favorably to a use of $52 million a year ago. This improvement is primarily a result of a $26 million increase in cash from changes in networking capital, and $10 million of higher net income after adjustments for non-cash items.

At the end of the quarter, our net debt to LTM pro forma adjusted EBITDA was 3.7 times which was down from 4.2 times as of the end of the first quarter of fiscal 2019 following the closing of the Titan acquisition, and up slightly from 3.6 times at the end of fiscal 2019 as a result of the use of cash in the quarter that we just discussed.

We intend to continue to delever through positive free cash flow generation anticipated for the full fiscal year. And our balance sheet remains quite healthy with $24 million of cash on hand, and $296 million available under our ADL facilities resulting in substantial liquidity for our business.

Additionally, of our total long term debt, approximately 80% is not due until the year 2025. Now let me turn the call back over to John, before we open the line for questions.

John?.

Thank you, Lynn. Once again we are very pleased with our strong start to fiscal 2020. We continued to expand our market leading position in our balanced product portfolio. Our diversified exposure across commercial and residential new, and repair and remodel construction markets also continues to be an advantage.

Our dedicated team throughout North America continues to embrace our strong entrepreneurial culture and drive outstanding performance for our customers, suppliers and our shareholders. One of the things that attracted me to GMS was that our prospects for growth are significant.

And after my first four months here, I'm even more convinced that's the case. As we move forward, we are committed to advancing this next phase of growth and success. We will seek to capitalize on the meaningful organic growth opportunities across our platform.

We also intend to continue to enhance and expand our geographic footprint, through both Greenfield locations and accretive acquisitions, balanced with our debt reduction priorities. At the same time, we are also confident we will continue to leverage our scale and employee best practices to deliver further profit improvement.

The team and I will be working diligently to execute on these initiatives, and we will be sure to keep you updated on our progress. Operator, we are now ready to open the call for questions..

Thank you. [Operator Instructions] Our first question comes from Mike Dahl with RBC Capital Markets. Please go ahead..

Good morning. Thanks for taking my questions..

Good morning, Mike..

Hi, and John congrats on the first earnings call here. Just wanted to pick up on your commentary that you left up with and it sounds like you know significant growth focus here. If we look at the results for the quarter, SG&A still a bit elevated you know keeping the gross margin guide unchanged.

It seems like your -- you may be a little tilted towards focusing on growth, but just wanted to ask you in that -- with that backdrop and the investments that you're likely to make to continue the growth here, how should we think about margins and call it the near to mid-term.

And I'm thinking just you know EBITDA margins and whether or not we kind of plateau here..

Well let me address the discussion around the investments first off, and kind of a focus on growing the business. We will remain balanced in the way we do our investments as far as our organic approach versus accretive acquisition approach.

But internally, we're investing in sales specialists and some of our other product categories, and particularly around Architectural Specialties and Ceilings as well as tools and accessories and we have a nice little business called Tool Source Warehouse, which we're expanding as we speak as well.

So we have some investments that that are going into some of the product categories that are very profitable for us, and that we're kind of in our infancy and in a lot of ways. So that's kind of some of the investment behind the growth initiatives.

Additionally, we have ongoing technology initiatives to drive both productivity and service to our customers. So we have a logistic software implementation that's underway. We have what we called Direct, which is the automation of our B2B relationship with customers online. And then we are now just beginning to roll out a upgrade to our ERP.

It's the same ERP that we're on, it’s just moving everybody to a single instance. So that's a little bit of spending that's going to go on as we go forward. I'm going to go ahead and let Lynn talk about what we expect from a margin perspective, but I'll reiterate our guide of 32.2 on the gross margin.

I think there are top line sales are probably going to be similar. We've got good momentum, so I wouldn't expect the end market seem fine. So that's kind of where I'm going to leave it and I’ll turn it over to Lynn..

Yes, absolutely. Yes, Mike, I'd like to add to what John says and response to your question about the 10% to 15% incremental adjusted EBITDA margins. We do plan to be at 10% or higher going forward. In terms of our gross margin guide of 32.2, we've talked about that has been a prudent guide in the past. We obviously, will strive to do better.

And then, with respect to operating leverage, how much we get depends on our performance in our Canadian business. It also depends on the mix of sales growth between volume and price. Obviously, it depends on the timing of efficiencies with respect to our initiatives. We do plan to seek areas of getting additional operating leverage.

So, does that respond to your question?.

Yes. It does. Yes. Thank you for all the detail on those. And then just shifting gears; obviously there are a lot of things going on and going right for your business.

One of the things that has been top of mind for investors though some of the dynamics around wallboard and wallboard pricing, specifically yourselves and your public peer are -- one of your public peers on the distribution side are showing much more mild pricing declines than the manufacturers have shown.

Could you just comment on what you think is driving that, is that just the timing differential or has something shifted in terms of your ability to keep price while achieving a better purchase price from the OEMs? And just how to think about that dynamic and what you're seeing there? Thanks..

Well, Mike, as you know, we pride ourselves as being a service leader. And so, we believe that we get paid for that. We have a fairly complex mix of business. And so across those end use commercial and residential markets, we feel like we are not in a position to give up a tremendous amount of price at the moment.

At the same time, you can see by our growth that we are very much focused on maintaining and growing our share in the market. And I think we're in a very good place right now..

Okay, great. Thank you..

Absolutely. Thank you, Mike.

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

Thank you. I guess the question is on the U.S.

business, you kind of give us the view under the old same-store sale calculation what that would look like? Are you seeing any substantial regional variations within that five-odd percent number of one part of the country caring or lacking versus the average?.

Hi, Keith. The same trend that's been going forward; you're looking at the coastal regions, the southern regions are stronger and the center part of the United States is a little softer.

We've done some things in our business in the middle of the country and we're very proud what our teams been able to accomplish there to improve their business slightly. But generally speaking, it's coastal from the Northeast all throughout the southeast, to the south and back up the West Coast, those are the strongest parts of the business..

And I guess as you look at your commercial backlog, is that – are you seeing any signs of weakness on quotation bid activity thing of that nature in commercial?.

No, yet. Commercial still remains very strong, solid pipeline..

And the final question. Okay. And I guess final question on Canada.

At what point, what month, quarter, how you want to do it? Where did you reach the point where Canada started really turning down on it? When you anniversary it, I guess is my question?.

I'm going to let Lynn answer it, because I don't think I was here when that started..

Okay..

So, go ahead Lynn..

I'd say comps get easier in the back half of the year case with respect to Canada..

So the back half year of your fiscal year or calendar year?.

Yes, fiscal –yes, sorry, fiscal Q3..

Which would be kind of calendar, or beginning at 2020 on the calendar basis, is that correct?.

Yes, correct..

Okay. All right. Thank you very much..

Thank you, Keith..

Our next question is from Kevin Hocevar with Northcoast Research. Please go ahead..

Hey, good morning everybody..

Hi, Kevin. Good morning..

I wanted to revisit -- so the gross margin guide 32.2% for the year. If I look back historically, July has always been your lowest gross margin quarter of the year and you put that number this year, you put up 32.3%. So, I guess I want to get a sense for -- still going with the 32.2% for the year.

Is there anything that would cause that then to come down the balance of the year and kind of back to normal seasonal trend of that going higher? Or -- but like you said, there is maybe some conservatism baked in there? I just wanted to have a better understanding of -- is there something that's going to drag that down or any clarity you provide there would be helpful?.

Yes, sure. On the 32.2%, Kevin, we believe the best just a prudent guide. I don't see anything coming at us that would drive that down in the balance of the year. And like we've discussed, we continue to make that -- maintain that guide, just we believe that it's prudent, we will strive to beat that..

Okay, got you. And John, I think you mentioned to an earlier questions, something along the lines of top-line sales remaining similar. I just wanted to get some -- as we look ahead, we want to get some clarity on that.

What that's in reference to? Is that the 9% sales you grew this quarter? Or is that you grew -- it looked like base business volumes were up in that 3% to 5% across the different categories? Is that an expectation that you expect going forward? Just any color you can provide on as we look at the top-line going forward, what we can expect?.

Yes. I'm speaking mostly toward our organic number. So I would expect low to mid single-digit type growth on the organic side of volume. Not -- I'm not 100% convinced yet on what's happening with steel pricing and/or really the wallboard situation, but I think from a volume perspective, the pipeline looks low mid single-digits..

Okay. All right. Thank you very much..

Our next question comes from Michael Wood with Nomura Instinet. Please go ahead, sir..

Good morning. This is Ryan calling on for Mike. Just 3.4% organic growth.

Can you just talk about how you think that performed against the industry? In other words, were you able to achieve your one or two points growth above the market?.

I don't think we have all the numbers yet, but we think we're growing above the rate of the market slightly. I don't think 3.4% is dramatically greater than the market, but I do think we're doing better organically.

Our mix of steel business in the quarter was definitely something that dragged us back on the top-line a little bit, but I think on a volume basis we're better and our wallboard volume was certainly better than what we think the industry is performing at the moment..

Okay, great. And then you called out favorable price cost in the quarter.

Are you able to quantify this? And then what's your expectation for that for the balance of the year?.

Yes. So I would -- as you know, we don't provide the gross margin by product category. I would provide a little bit of color and say that our steel gross margin was down due to the fact that we were selling through higher price inventory, price declines were particularly marked in the month of July for steel business. And wallboard was up.

Did I provide that bit of color?.

Great. Thank you..

Our next question is from Matthew Bouley with Barclays. Please go ahead..

Hi, Good morning. This is actually Christine Cho on for Matt. My first question is actually on ceilings.

I was wondering noting that price was a positive contribution of about 5% in the quarter, what is your expectation on the ability to continue to push price in the segment?.

I would tell you its pretty dependent upon the mix of what we sell. We are very focused on driving a higher value through our ceilings business with architectural specialties. Again, I mentioned a little bit of investment there as well, on sales people and engineers in that space, but I think that that's about normal.

It's maybe a little robust for the quarter, but I wouldn't expect it to change dramatically going forward..

Got it. Thank you.

And then just going forward, how are you thinking about your strategy, maybe a little bit more color on your strategy for tuck-in acquisitions and greenfields throughout the rest of the year and potentially more color on 2Q ?.

Well, as we mentioned we're disciplined in our approach. We're focused on delevering the business. But when the right opportunities in the right markets and some sort of significant strategic component come along, we're certainly going to continue to do acquisitions. I would expect it to be mostly small tuck-ins.

And greenfields are really expansions of our business in major markets where we already are. They're not going to be standalone greenfields in markets where we're currently not. So they tend to ramp up a little bit faster.

But as you can see even in this quarter with six of them over the last two quarters that there is a little bit of an SG&A impact on them. So we'll continue to do about what we've been doing..

That's great. Thank you..

Our next question is from David Manthey with Baird. Please go ahead..

Yes. Hi. Good morning..

Good Morning, David..

Yes. Good morning. Earlier in the call, you had mentioned 10% EBITDA.

I didn't quite catch if you're referring to an expectation for a reported level of 10%, if you're referring to a contribution margin, could you clarify that?.

Yes, sure. So we always strive to be at 10% that's been kind of our stated goal and we believe that that 10% adjusted EBITDA margin continues to be a good goal. What I was referring to is the guidance with respect to the 10% to 15% incremental margin that we've also provided as guide on previous calls and we continue to adhere to that as well..

Okay, sounds good.

And then in terms of the growth that you've been seeing here in the last few quarters, 3%, 4%, 5% kind of volume growth and now price mix seems to be waning a bit, how do you think about those dynamics relative to the 10% to 15%? Is there a revenue -- organic revenue growth target that you need to achieve in order to get in that 10% to 15% window? How do you think about the stall speed here?.

Well, I would tell you that, yes, obviously, in the near-term, we need to maintain a reasonable growth level that low single-digit type organic growth level and we don't see any reason why we wouldn't be able to achieve that kind of a level to achieve the flow-through that we're talking about.

Obviously, if there is a significant change in the end-use markets then we'll have to adjust, but we don't see that in the near-term..

Okay. Yes. I'm sorry..

Yes, we will have to achieve the low-to-mid single digits, and then like we discussed that 32.2% is a prudent guide. We hope to exceed that. And then with respect to operating leverage, we talked about the fact that we're seeking to look for operating leverage as through the balance of the year..

Okay. And then last question on Canada.

Can you discuss specifically what actions you've taken up there in terms of rightsizing that business today to improve the profitability, even if the growth just sort of flattens out from going down right now?.

Sure. I was just there. And I can tell you that our team has done a fantastic job. I was there last week. We've reduced our headcount over 13% in that -- in Canada. At the same time, we've strengthened relationships with a lot of the customers.

It's unfortunate, what we're going through up there in single-family with the balance of the business being pretty strong. The commercial and multifamily markets – high rise multifamily in the Greater Toronto area look very good.

Our team is executing exceptionally well, very soft in the prairies in single-family, soft in GTA in single family, a little soft on the West Coast in single-family as well. But we've done everything.

We think we know how to do to reduce our costs, but also kind of ignite again a little bit of an additional organic growth engine up there, and I'm comfortable that, that team is positioned for the long-term. We're going to do very well in Canada over the long-term..

Appreciate it. Thank you..

You're welcome. Thank you..

Our next question is from Trey Grooms with Stephens. Please go ahead..

Hi. This is Noah Merkousko on this morning for Trey Grooms.

How are you guys doing?.

Good morning. Great.

How are you?.

Well.

So first question kind of talking about what you've seen on wallboard, volume and pricing trends in August, it sounds like pricing has been relatively stable, has that continued in August?.

Yes, it has..

All right..

Yes. So let me give you a little bit more context on a year-over-year basis, our sales per day were higher in each month in the quarter and we see that positive momentum continue into August. In addition, our sales were sequentially higher or stable each month during the quarter and we see that continuing into August..

Got you. That's helpful. And then just a quick follow-up here from a price cost standpoint, is it fair to say you're pretty well caught up there.

And any color and expectations for the remainder of the year would be helpful?.

I think we are caught up. I think steel remains a little bit under pressure just because I think for the balance of this year; the rate of decline is definitely slowing in steel, just the raw material itself. You can see that if you look at the commodity market.

But steel really seems to be the only place that may have a little more slippage; everything else seems very stable..

All right, thanks guys. I'll pass it on..

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

I'd just like to thank everyone for joining us today. A replay of the call will be available shortly on our website. And as always, we appreciate your interest in GMS. Good day..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.