GMS Inc.

Greetings and welcome to the GMS Inc. Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Leslie Krakowski. Vice President of Investor Relations. Please go ahead.

Thanks, Laura. Good morning and thank you for joining us for the GMS Earnings Conference Call for the second quarter of fiscal 2021. I'm joined today by John Turner, President and Chief Executive Officer, and Scott Deacon, Vice President and Chief Financial Officer. In addition to the press release issued this morning, we've posted presentation slides to accompany to this call in the investor section of our website at gms.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management's current estimates and expectations. The company assumes no obligation to update any forward-looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including the risk factors section in the company's 10-K and other periodic reports. Today's presentation also includes the discussion of certain non-GAAP measures. The definitions and reconciliation of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call to the second quarter of fiscal 2021 relate to the quarter ended October 31st, 2020. Finally, once we begin the question and answer session of the call, in the interest of time, we kindly request that you limit yourself to one question and one follow-up. With that, I'd now like to turn the call over to John Turner. JT?

Thank you, Leslie. Good morning, and thank you for joining us today. All of us at GMS hope everyone joining this call as well as your families and colleagues are safe and well. I'll start with a review of our operating highlights and then turn it over to Scott who will cover our financial results. I'll then share some closing thoughts before taking your questions. Starting on slide three, outstanding execution by our team enabled us to achieve solid second quarter results. While the overall operating environment remained challenging throughout the period, particularly with respect to commercial construction, we realized benefits from the strong residential market and a progressively improving environment in Canada. Net sales and organic net sales on a per-day basis declined 4.2% and 5%, respectively, year over year, exceeding our previous expectations. As anticipated, our gross margin of 32.6% was lower than the second quarter record of 33% last year. However, it increased 10 basis points sequentially, indicating continued discipline on both the demand and supply sides of our business amid the tight competitive environment. Controlled alignment of our cost structure to current demand enabled us to improve SG&A and adjusted SG&A as a percentage of sales while ensuring a continued relentless focus on serving our customers. As a result, adjusted EBITDA margin of 10.2%, marked the second consecutive quarter of exceeding 10% in a very tough market with decremental adjusted EBITDA within the outlook range provided on our first quarter call. We generated positive free cash flow, and our balance sheet and liquidity position provide us with exceptional financial flexibility. On the health and safety front, we maintain enhanced operating protocols in compliance with public health requirements, recommendations and guidelines aimed at reducing the spread of COVID-19, and the health and safety of our employees, business partners, and communities remains our top priority. Considering the environment in which we are operating, we continue to perform very well in the second quarter. My congratulations and thanks go out to the entire GMS team who made these results possible, remaining engaged, focused, and proactive as we come together in support of our customers and each other. At the same time, we offer our gratitude for the continued partnership we share with both our customers and suppliers. With that, I'll now turn it over to Scott to provide more perspective on our financial results for the second quarter. Scott?

Thanks, JT. Good morning. Looking at slide four, net sales totaled $812.9 million, down 5.7% year-over-year, as continued COVID-19 market pressures in the U.S. were partially offset by higher sales in Canada. Overall, organic net sales declined 6.4%. With one less selling day year over year, daily net sales and organic net sales were down 4.2% and 5% respectively. Relative to an all-time quarterly record in the second quarter of last year, the team's continued ability to reposition and realign resources to capture demand where it is the strongest allowed us to exceed our previous expectations. Wallboard sales of $330.5 million decreased 5.7% or 6% on an organic basis, principally due to a decline in mix, driven by a shift to a greater weighting of residential wallboard. Price declined marginally, down less than 1%. On a per-day basis, wallboard net sales were down 4.3%, with volumes declining only about 1%. Ceiling sales of $111.3 million decreased 9.4% year-over-year, virtually the same on an organic basis, driven by lower volume, partially offset by higher price and mix. Daily net sales of ceilings were down 8% year-over-year. Steel framing sales of $111.3 million decreased 18.3%, again, roughly the same organically, year-over-year due to declines in volumes and price. On a per-day basis, net sales declined 17%. Year-over-year sales declines were more pronounced in ceilings and steel, product categories tied primarily to commercial construction, which remained challenged during the quarter. Residential activity, on the other hand, was very strong up both year-over-year and sequentially. Our complementary other product sales of $259.8 million increased 2.9% or 1.2% on an organic basis due to positive contributions from acquisitions, execution of our strategic growth initiatives, as well as organic growth and favorable pricing in Canada. Daily net sales of other products were up 4.5%. Gross profit of $265.1 million decreased 6.8% compared to the second quarter of fiscal 2020, primarily due to the lower sales. Gross margin of 32.6%, as expected, declined 40 basis points year over year, principally due to challenging mix dynamics, again, particularly in the commercial segment. Turning to slide five. Adjusted SG&A expenses, a percentage of net sales of 22.5% improved 20 basis points, despite a 40 basis point headwind from deflationary price and unfavorable mix impacts with certain products, notably steel and wallboard. Approximately 60 basis points of improvement was realized as a direct result of the continuing measures to align the company's cost structure with the current demand environment as well as favorable business mix towards single-family residential with respect to operating costs. As a result, second quarter adjusted EBITDA of $82.5 million compared to a record $89.9 million a year ago. Adjusted EBITDA margin of 10.2% declined only 20 basis points year over year and represented a 15% decremental adjusted EBITDA margin the midpoint of the outlook range of 10 to 20 percent provided on our first quarter call. All considered, we were pleased that our execution in the second quarter again generated an adjusted EBITDA margin in excess of 10 percent, despite the market-related decline in sales. Turning to slide six, we generated free cash flow of $32.7 million, or 40 percent, of adjusted EBITDA in the second quarter. This was lower year over year due to changes in net working capital driven by opportunistic inventory build in advance of manufacturer price increases and related timing of cash flows associated with certain purchasing incentive programs. We continue to generate healthy free cash flow in this environment and expect to do so in the second half of this year. Capital expenditures of $7.1 million were down $1.6 million year over year. Nevertheless, we maintain our estimate for cash capital expenditures in fiscal 2021 of approximately $25 million. As of October 31, 2020, we had cash on hand of $118.2 million and $415.4 million of available liquidity under our revolving credit facilities. During the second quarter, we reduced our net debt by $27 million and net debt leverage was 3.0 times as of the end of the quarter, equal to that at the end of the first quarter of fiscal 2021, and down from the 3.5 times as of the end of the second quarter of fiscal 2020. Our balance sheet remains healthy, and as an indication of the overall stability of our capital structure, we were pleased to receive an upgrade of our debt ratings from Moody's in October. As a reminder, the large majority of our debt is not due until 2025. Now let me turn the call back over to JT before we open the line for questions.

Thank you, Scott. Turning to slide seven, while we continue to carefully monitor and address market developments, we remain committed to our strategic growth priorities. These four initiatives and our Q2 progress are as follows. First, expanding share in core products. particularly in geographies where we are under-penetrated. In ceilings, we believe we are expanding share in both the mineral fiber and architectural specialty segments of the market, as evidenced by our sales levels compared to available market data. Also, our focus over the past year on increasing our penetration in residential construction in geographies where we have historically been underrepresented has enabled us to capture demand more effectively in this strong end market. Next, To diversify and profitably expand our product offering, we are focused on growing select other product opportunities outside of core products. Success on this front stems from multiple initiatives in both the U.S. and Canada, resulting in higher year-over-year growth in this category for the second quarter in a row despite the difficult market. One example is one of our region's early success in expanding its offering of waterproofing products in response to customer demand. While we are in early innings, We are beginning to extend this initiative to other regions through sharing of best practices and leveraging capabilities across our platform. Third, we are developing our platform through accretive acquisition and greenfield opportunities while maintaining balanced progress in debt reduction. We opened a new greenfield location in Hillsboro, Oregon in the second quarter and are actively working a robust acquisition pipeline. At the same time, we reduced our net debt by almost $30 million. And finally, so that we deliver a best-in-class customer experience, as well as drive productivity and further profit improvement, we are leveraging our scale in employing technology and best practices. Deployment of our e-commerce platform progresses, with key adoption metrics including quoting, customer account activation, and online payments increasing across our operations. Near-term execution of these strategies equips us with not only meaningful scale and technology advantages, but with balanced product, geographic, and in-market portfolios, all of which are serving to enhance our performance in this current environment. At the same time, these strategic growth priorities guide our long-term management of a very attractive business with significant long-term growth potential. And finally, turning to slide eight, as we look ahead, Expected continued strength in residential construction is well documented with strong housing data coupled with robust order growth and positive commentary from home builders. Commercial construction remains challenged, although more recent forecasts, while still projecting declines, are more favorable than previous estimates. Ultimately, we believe the actual near-term trajectory for commercial will depend largely on developments in addressing COVID-19 and the impact on the broader economy. For our fiscal third quarter, we currently expect to generate a year-over-year sales decline, which will be slightly improved from the 5.7% or 4.2% on a per-day basis realized in the second quarter. As was the case in Q2, there is also one less selling day in Q3 of this year versus last year. In terms of profitability, we anticipate gross margin in the third quarter to be similar to that generated in the first half of this fiscal year. which will be lower than the 33.3% realized in Q3 of last year. As a result, we currently expect to generate a decremental adjusted EBITDA margin within the range of 10% to 20% for the third quarter of fiscal 2021. As we conclude, our focus remains on controlling what we can. We have taken and intend to continue to take the necessary actions to optimize our operations and align our business with demand. I am confident in our team's ability to continue to leverage opportunities, address challenges, and execute on our strategic plan to ensure that GMS remains well positioned to generate value for our shareholders. Operator, we are now ready to open the call for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation form will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. One moment while we poll for questions. Our first question comes from the line of Mike Dahl with RBC Capital Markets. You may proceed with your question.

Hi. Thanks for taking my questions. I wanted to start out just on the kind of third quarter commentary, and maybe it would be helpful if you could give us some perspective on how monthly trends progressed through your second quarter and then trends in November. And the second part of that question, I think we can get a sense of resi versus non-resi by looking at some of your commercial trends. oriented segments, but could you just help break out for us what you think your overall resi sales did versus commercial on a year-on-year basis? Thanks.

I'll take the first part of your question, and JT can follow up on the second part. Trends progressively through the quarter were positive. Every month over the course of the quarter, on a year-over-year basis, improved. And I can extend that into November as well. So really for the last four months, we've been improving year over year every month.

And as we talked about previously, I think it's coming to pass, and that is that residential is strengthening. And each month as we go forward, we're beginning to shift the starts from three to six months in previous announcements. Commercial, however, has also continued to decline at you know, fairly significant rate. And while it feels like that rate of decline is flattening, we haven't completely seen that yet. And so I think that our idea in the third quarter of being slightly better than we were in the second quarter is simply the reality of residential continuing to strengthen and commercial not getting a lot worse. And that'll give you the net of our 55 commercial, 45 residential kind of gets you to the number you know, a little bit better than we did in the second quarter.

Okay, thanks. That's helpful.

The second question, just as a follow-up to residential and things specifically, I guess, on wallboard, you know, this is clearly across the industry you're seeing a shift in terms of, you know, distribution focus on capturing the residential demand and allocating efforts to do so more than probably in the past. There's clearly a strong backdrop for residential, so there's maybe enough to go around. But from a competitive standpoint, have you seen any major shifts in terms of the competitive dynamics, and how are you thinking about pricing going forward?

Well, the good news for us is that we started from a more balanced position than some of our competitors. But also, you know, we've been talking for 18 months, and you're probably getting tired of hearing me talk about it. But the reality is one of those strategic pillars is to gain share in, you know, our core categories. And we recognized well before the pandemic and well before this dramatic market shift that, you know, we had some opportunity in residential. So I think we have a little bit of a head start there. than some of our competitors, for sure. And, you know, in residential, those discussions aren't happening every single solitary day with major builders, right? There's only a few times during the year when you're having those discussions and you're able to secure that business with the bigger builders. Now, with smaller builders and the contractor-controlled business, sure, that's a day-by-day effort. The other thing I think we have an advantage is just we have the ability to service the entire product mix that all of those contractors and or builders need, and we have the ability to do that in every market and we also have the scale of our ability to handle the inventory, and we have the ability to get the inventory from the suppliers based upon being, for the most part, the largest player in the space. So I think we offer a lot of advantages that maybe some of our competitors don't. All that being said, price is an issue, and residential board is the most commoditized board out there in the market. We're capable of providing you know, just about any price that is reasonable with our excellence on the operating side, you know, we can make money. So I think we can be very competitive where we need to be. You know, on the other hand, you know, maybe we're getting into an environment where there's some inflationary pricing, and that'll, again, we can think that benefits us even more than the balance of our competitive space.

Okay. Thanks, J.T. Scott. Good luck in the quarter. Thank you. Thank you.

Our next question comes from the line of Kevin Hulsivar with North Coast Research. You may proceed with your question.

Hey, good morning, everybody. Hey, Kevin. On that last point, you know, there is a wallboard price increase here for, you know, what was it, mid to late October, early November. So, curious if you can comment on, you know, your expectations if you're seeing that hold and And secondly, I know one of the manufacturers announced a January increase. So I'm curious if you've seen anybody else follow and if you think that the market is able to accept another price increase in that timeframe.

Well, we're right in the middle of what I would say is the execution phase of any kind of increases and what's going to hold or not hold from the October piece. We're certainly... believing that the demand picture may shape up such that it does make sense to have some pricing in the market. It's not that way yet, but I think it could be, you know, in relatively near term. And as we've said before, you know, better prices. Prices are better for everybody, quite frankly. They're better for the entire supply chain. You know, and so hopefully, you know, calm heads prevail and maybe some of that comes to fruition. As far as one on top of the other, I think all of the building product space is in the middle of hearing and seeing price increases and how much of that's going to stick and how many are going to come into the market. I don't know. I think between October and January, there should be some degree of those two that sticks, you would think, right now. But again, it's really, really early in that game, and we probably won't really know until we get you know, well into this quarter and maybe even into the next one to see what's shaping up.

Okay. And then on, you know, steel prices have really moved up the past few months. And, you know, it seems kind of unique in that, you know, obviously the steel side of the business is softer and, you know, the commodity has gone up quite a bit. So curious, does that have any impact, you know, the weekend markets? Does that have any impact on your ability to push through the steel pricing there? or is it just, you know, since steel prices are so well-known, it's easy to pass that through regardless of the demand environment. And, you know, with that type of inflation, how does that typically impact? Is there a timing, you know, with the magnitude of increases we've seen, is there a timing impact where maybe there could be a gross margin hit, you know, as you try to push those prices through? Just kind of curious your thoughts on the impact to the business from the rising steel prices.

Well, sequentially, we saw, you know, very, very slight increases in our pricing, but we didn't see dramatics, you know, what we call the squeeze internally here, right, which you're kind of alluding to there. Steel, generally speaking, you know, we're going to quote what we're buying. We're going to buy it out fairly quick. We're going to try to work. If we have longer projects, we're going to put escalators on those longer projects. And then we're really buying out the big projects, you know, really close to the time in which we ship them. There's a lot of back and forth there. Stock steel prices, you know, if we pay more, we raise the price. And that's your stock steel price, right? And then, sure, there's still day-to-day negotiation on that front. But you are correct that when you're looking at a market that's down, you know, significant double digits, that puts some extra pressure on the price. I certainly would prefer to be in the other environment with rising commodity price and rising demand. Then I think we'd pass it right through. But, you know, it's a negotiation. There's no question. But I don't think you can see it in our gross margins, right? I think our gross margins are pretty good, and I think the discipline in the business is good. And we're earning the pricing by being, you know, the best in the space from a service perspective.

I'll just add, it's a very fragmented supply base, too. So all of our purchasers are very localized and a lot of tight relationships with the suppliers that we're working with to make sure we manage that tightly.

Okay, great. Thank you very much.

Our next question comes from the line of David Matthew with Baird. You may proceed with your question.

Thank you. Good morning, everyone. Hi, David. Let me approach. Yeah, good morning. I'm hoping I can approach this wallboard pricing question from another angle. JT, you've recently noted that the wallboard production capacity is something like 10% higher than current demand. And I'm just wondering maybe from a historical perspective, has the company been able to achieve positive pricing with this type of capacity versus demand gap?

This is as tight as I've seen it. And of course, I've only been here about 18 months. So if you go back in history, I think when capacity tightens and demand is increasing, there has been successful periods of time in which pricing has gone up. So I don't expect it to be any different. I just don't think we're kind of at it. We may be at an inflection point right now. It feels maybe like that, but we won't know for sure if this is the actual inflection point until we get into next year. One, I think we have to confirm the demand, right? I think we have to confirm that the residential is going to continue to grow at the rate it's currently growing. Because we know commercial is not going to be very good for a period of time still. I mean, that's obvious based on starts and the ABI and everything else. So what we don't know is residential, are we going to continue to have these great starts numbers every month throughout the winter and into the spring? And is demand going to continue as, you know, kind of stimulus wears off, et cetera, in the economy? So that side is still, I guess, what I would call the unknown. But if all of that comes together from a demand picture, you know, up against an environment where there's 10%, 15% capacity, left to be filled. I think you're getting tight enough there to where it just makes sense that the whole industry should go up.

Okay. Thank you for that. And the second question, could you give us sort of a longer-term perspective on contribution margins during a recovery? I guess as I'm looking at the model and thinking about the moving pieces here, there's probably a a slight downward bias to gross margin given that in a recovery we see steel and ceilings and things growing faster. Any thoughts as it relates to either the gross margin, again, one, two years plus, and contribution margins in a recovery?

Yeah, let me flip the script a little bit on the question. I don't know what the gross margin may or may not do in a recovery, but I can tell you that in the early stages of a recovery, growing off of the lower cost base, and the discipline nature of our team, I would expect us to not add costs until we are confident that we're in that growth phase. So we should get some leveraging in the beginning phases of any recovery, for sure. Now, what happens on the gross margin side, I don't really know. Scott, do you have any perspective?

I just look at the past history. I think if you look at a pretty good series of quarters in the past history, gross margin differential from quarter to quarter over that kind of period doesn't move all that much. The business we're in is really making sure we're aligning supply with demand and trying to maintain that spread as tightly as possible regardless of the cycle. We do that. That said, as we'll continue to guide, our business is based on EBITDA to try to make sure we align the operational side of the house with the gross margins and we'll continue to do that as well. And I guess what we just continue to guide you to is that sort of 10 to 20% kind of incremental EBITDA margin decremental kind of rate in taking JT's points in terms of how we'll manage the cost structure and the upside. We'll try to maintain that as well. So that's the best guidance we can give you at this point as we deal with the cycle and as we deal with mixed dynamics in this market.

That's helpful. Thanks for the call.

Our next question comes from the line of Keith Hughes with Truro Security. You may proceed with your question.

Thank you. I'm looking for the next quarter to given potentially inflation coming in wallboard. Do you anticipate some of the gross margin pressure that you discussed for the quarter, upcoming quarter? Is that coming from the kind of lag as you push through wall board increases onto your customers?

There is a little bit of lag, obviously, in there as well. There's also the mix shift dynamic that we're in. Residential board has a little bit lower gross margin, right? But we've talked in the past about the operating margins being similar between the residential and the commercial. But on the pure gross margin side, there is a little bit of a mix. There's always a little bit of lag in the... But again, we're acutely, I mean, we're looking at it, tracking it, following it, talking about it every single week with our operators, you know, out there trying to lead in the space and continue to deliver, you know, exceptional service and earn a little bit of a premium. And I think that in times like this, we're in a decent position to do that.

Just to add, when we talk about pressure, again, please keep in mind that Q2 and Q3 last year were particularly strong. And so if you look at it on a sequential basis, we're really expecting to do pretty similar in Q3 versus what we did in Q2. And we recognize going into Q2 and Q3 that they would be tighter, not so much because of the market, although that's a factor, but really it's a tougher compare versus prior year.

Okay. And switching to the other products, this has had really nice growth in a tough environment here, particularly the last couple quarters. Can you kind of rank order at this point? What are the largest products you sell in that segment?

Insulation is the largest, primarily commercial insulation, but we have a nice residential insulation business also with what I would call a, you know, for the market in Canada, a pretty good share of that business in Canada. So we have insulation as our number one product category. After insulation, it kind of goes down into some of the related products with wallboard. You end up with joint treatment and fasteners, things like that. But lumber is becoming more and more important to us, and there's a major focus across the business on lumber. Most of our lumber is fire-treated lumber and or lumber used in commercial construction, not your traditional residential lumber packages or trusses or anything like that. things that our customers have to buy, so we've moved that direction. And then you get down into tools, and you get into stucco and eaves, which is a continuing focus for us. Predominantly through the south, where stucco and eaves is used more. And you heard me talk about waterproofing, brand new, but I do think the exterior envelope is something that we will be successful at over time. And it's in its infancy, but I think the signs are we can be good at that as well.

And how did Canada do versus the average revenue change in a quarter?

Canada was a source of strength for us. I think we've got this within the footnotes of the queue, but Canada is up about 9.3% relative to the U.S. being down in roughly the eighths.

Okay. Thank you. Thank you.

Our next question comes from the line of Matthew Woolley with Barclays. You may proceed with your question.

Good morning. Thanks for taking the questions. One more on wallboard price. You know, you talked about building inventory ahead of the manufacturer price increases. Was that a pre-buy ahead of the October price increase or the January price or both? And does it kind of signal that you do have a stronger view about the market accepting price this year relative to the past couple years?

Let me answer the first half of your question. It's really both. Also, you know, we're big believers in servicing our business, and so inventory is important. And, you know, in the event there's any tightness anywhere, we want to make sure we've got the inventory. But, two, I don't think it signals much in the – the reality is we turn that inventory 13 times. So – We're buying now. We don't think prices are going down. So the reality is we can buy a little bit now, and if they do go up, then we're in good shape. If they don't go up, it doesn't matter. We sell our inventory. So I wouldn't read too much into it other than we just think it's smart to put a little bit of cash over there. Again, it doesn't age out. You don't have a situation where we don't sell that inventory and turn it back into cash very, very quickly if we need to. So I think that we're just being prudent.

Okay, got it. Second one on back on commercial construction. JT, you talked about sort of signs of stabilization at lower levels. I don't want to put words into your mouth. But, you know, I'm wondering, you know, with your own customers, if you're kind of seeing those sort of signs of life in the forward looking indicators that you have, whether it's, you know, quoting new jobs,

you know if there's any specific verticals or regions that you think may be you know kind of inflecting in the near term thank you well I mean we're quoting at lower levels right but it's stable and that's really the message across the board and that makes sense to all of the macro indicators that are out there so our pipeline reflects what I think are the macro indicators our quoting is reflecting the macro indicators You know, the new product pipeline, the new construction pipeline seems to be, you know, bottomed and maybe moving up a little bit. As far as quotes go, I think people are expecting things to be better, you know, a year from now. And a lot of those projects, you know, are starting to bid now. You know, the big emphasis for us today or the big problem really today commercially is in all regions is tenant improvement. Tenant improvement is off in all regions. And tenant improvement is an important part of what we do. So that's the biggest negative in our business is the lack of tenant improvement.

Okay. Got it. Thank you.

Our next question comes from the line of Steven Ramsey with Thompson Research Group. You may proceed with your question.

Great. Thanks. A couple things you guys discussed. ceilings share gain. Can you share more on why this is happening? And do you feel like it's accelerating in a challenging environment? And is that because competitors are stepping back and less able to compete as effectively? And that share gain, can you discuss if that's tenant improvement related or new construction related?

Yeah, the share gain is coming from the concerted effort across our entire business to be the number one ceilings distributor in every market in which we participate. And we're fortunate to have very, very strong relationships with Armstrong and USG, the number one and number two player in ceilings. And so it made sense for us to make that commitment. Again, as part of that first strategic pillar of growing our core products, you know, 18 months ago, we recognized that we – we needed to put an effort everywhere because we had examples of being the best in major markets and it didn't make any sense to not be the best everywhere. So we've been working to do that. I'm not going to say we're the best everywhere yet, but that's our goal, right? So we've added salespeople, we've added engineering capability around architectural specialties, we've had quite a bit of success with architectural specialties. And I would say that most of that is new projects and not in the TI space. The TI space is really you know, the acoustical tiles, right, the mineral fiber. But we have decided everywhere to participate in ceilings. And there are very, very few parts of our business today where we don't have a good ceilings line. And where we don't have a good ceilings line today, I promise you we're beating down the doors of the manufacturers to get access to their line in those markets. So I really think that's what's happening.

Gotcha. And then switching to single-family side and wallboard there, is there an increasing lag time that's pushing back the times that your products go into the home for various reasons? Seems like we've heard of various building product companies who have seen lag times extend beyond the normal timeframe. I guess what I'm getting at is, is demand better than what near-term revenue shows on single family and maybe does that support sales in the upcoming quarters?

Well, I mean, we've been talking about the fact that, you know, if you looked at the strengthening sequential sales of residential for us, we're six months after those starts numbers started to come alive, right? So, and we were stronger in November, you know, than we were in October. I don't necessarily have any data that would say that those lead times are extending. But, of course, we're just one part of the process of building a home. So if it takes longer to get the land prepared and it's taking longer to pour the foundations and it takes longer to build the lumber out, then it's going to take a little bit longer for them to order and install the drywall and the other products that we sell into the home. That's a fact. If you've got data or you can see and talk to the home builders that, you know, instead of 90-day cycles to build houses, they're at 120 days, well, then, yes, that's a direct impact on us.

To J.P.' 's point, we have heard evidence of things like lumber or appliances and other products that go into a home being a little bit extended from certainly what we're seeing on our supply side, which is a factor, but it's not significant, at least at this point.

Great. Thank you.

Our next question comes from the line of Trey Grose with Stevens. You may proceed with your question.

Hey, good morning. Thanks for taking my question. Hi, Trey. Hey, JT. So first one, you know, we spent a lot of time talking about wallboard pricing and, you know, a lot of time around that. Clearly still up in the air. But what about on the ceiling side? How are you thinking about ceilings pricing? As we go into 21, I think there was a price increase announced recently from one of your big suppliers. So anyway, just any thoughts around the ceiling pricing as we look into next year, given the demand backdrop?

I would probably say that everywhere other than potentially the commodity mineral fiber, the market will accept the prices. I think that the architectural specialties is a continuing trend. Trend will be a larger part of ceilings going forward and those are quoted on an individual basis And so I think that those prices will continue to rise and I think the higher end and the more premium You know mineral fiber and acoustical ceilings will will bear whatever pricing You know the two leaders put into the space on the manufacturing side. I do think on the commodity side It's going to continue to be a struggle because that's just a little bit more competitive there and there's just more players and

Understood. And I don't know if you can get in the weeds this much, but with your seedlings business, can you give us an approximate mix of what is more commodity kind of seedlings versus the acoustical and some of the others that you were talking about? You know, I don't have it.

I don't have it sitting right here with me. It would just be all speculation.

Okay, fair enough. So my next one is, a little bit higher level here looking into 21. But it sounds like, and correct me if I'm wrong, but it sounds like the commercial side could be bottoming. It sounds like maybe it's not getting worse. And so if that's the case, and we're looking at the res side, where clearly res has been good from a start standpoint. You guys are We're definitely starting to experience some benefits from that, and I would expect that to continue as we go over the next few quarters. My question is really, as we look a little further out, if this continues to be the case, at what point do we start to see some revenue growth or volume growth in your business overall?

You know, again, we usually just give you that one quarter out because it's really all we can see right now, and this is a very difficult time to be forecasting. I would tell you that November commercial was still slightly worse than October commercial, and we're talking about, you know, double digits. So I'm not all that excited about bottoming at these levels and how long we would stay here. I don't really know. You know, commercial was super strong, obviously, last year, right up against COVID. So, you know, we get into that. April, and then we start rolling into next year, May, June, July, those first months after COVID, you know, we might be able at the end of the next quarter to give you a view that says, hey, maybe that's the time. But, you know, commercial still pretty, I mean, I don't want to be dour, but it's not good. You know, our steel sales are fairly reflective of that, right? And we're gaining share in ceilings, thankfully, that we, you know, focused on that quite a while ago. And we also are gaining share, I think, residentially, where we focused on that quite a while ago with our wall board. And all of that is helping us perform a little better than we otherwise would have. But commercial is certainly not going to be a tailwind, I believe, until late 21.

You're going to get some natural laughing from a financial standpoint on the ceiling side, which is good. So you won't see... The year over year declines that are as pronounced as we've got this year. Those will start to moderate and then you get the strength on the residential side going forward based on the starts we're seeing. That should start to give us some pretty positive indication, but we're we're just not in a position to be able to define exactly how that shakes out past a quarter or so at this point.

Yeah, I mean, I I think we're feeling better. But we're not feeling good yet.

Understood. And I understand it was a tough question given the uncertainty that we're sitting here looking into right now, but I appreciate the color. The last one for me, and it kind of dovetails from that one, just kind of where we, given where we are in the cycle and on your strategic priorities, one that you point out is the platform expansion. So I guess Could you go into a little bit more color around that? I mean, your leverage has come down. You've reduced, you know, your net debt metrics are improving. So as we look at where we are today in the cycle, and then we look at opportunities that are out there, both Greenfield and M&A, how are you, and you know that you're balancing it with debt reduction priorities, but can you go into a little more detail about that, especially given where we are right now in this cycle and kind of a little bit more uncertain outlook currently?

Yeah, I mean, we have five or six greenfields in the pipeline that are, you know, in process that, of course, put them on hold, you know, in the April timeframe when we looked at COVID. And, of course, you put anything on hold and then you got to pull them back out of the can, so to speak, and get them done. It's hard to get it done, right? I mean, we got to go get property. We got to hire people. We, you know, There's some things, it just takes a little bit of time. So we're back half-loaded this year in our green fields, for sure. But we've got the one open up there in Oregon, which is in western Portland, and we're super excited about that because that's going to be a booming market. And we've got four or five more good ones that will get done, if not this fiscal year, really very closely thereafter. So they'll all be kind of coming together. The acquisition pipeline is good, and we're talking to multiple players and multiple people, and I think that we'll have some things to talk about in the next quarter or two on that front. Unfortunately, today I don't have any exciting news for you, but we've got a good pipeline, and we agree with you. We have a good balance sheet, good liquidity, and we should be a good acquirer.

Great. Thanks for all the color. I appreciate it, and good luck. Thank you. Appreciate it. Thank you.

Our next question comes from the line of Sam Darkatch with Raymond James. May I proceed with your question?

Good morning, JT. Good morning, Scott. How are you?

Good, Sam.

Just a couple quick housekeeping questions. With respect to capital allocation, I don't want to major in the minor, but I noticed that you bought a little bit of stock in the quarter for the first time in a while. I think the last time you did so was – early 2019 when the stock was half the price and the valuation was around six times. Anything as to the rationale or the reasoning behind that? I know you have $58 million left under the authorization and you're about to go into a heavy seasonal cash flow time of the year. Is there anything there that we should take from that activity?

We telegraphed that in our last quarterly call that we were going to start doing that. You know, Sam, it's nothing more than a modest share repurchase associated with offsetting our equity compensation programs. We're issuing equity, obviously, as a part of those programs, and you'll see us over time engage in some limited pieback to offset the dilutive impact of that, but at this stage, it's really nothing more than that.

Gotcha. And then my last question, the typical free cash flow expectations, I think, Scott, are between 40% and 50% of EBITDA. Is that still the expectation for the fiscal year, or are you looking to hold a little bit of extra inventories throughout the next couple quarters?

It's towards the lower end of that range in this environment with EBITDA being down versus where we were, say, last year. But And that low 40s is certainly still a pretty good indicator. And then as we come back out of that, I think on a more normalized basis, back to that 50 is probably a good indicator of what the business is capable of overall. But in this environment, closer to 40 is probably about right.

Very good. Thank you, gentlemen. Stay well.

Thank you. You too.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Ms. Leslie Krakowski for closing remarks.

Thanks, everyone, for joining us this morning. A replay and transcript of our call will be available shortly on GMS.com. And as always, we thank you for your interest. Good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.