GMS Inc.

Greetings and welcome to the GMS second quarter 2023 earnings 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 the conference over to your host, Carrie Phelps, Vice President Investor Relations for GMS. Thank you. You may begin.

Thank you, Melissa. Good morning, and thank you for joining us for the GMS Earnings Conference Call for the second quarter of fiscal 2023. I am 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 have posted PowerPoint slides to accompany this call in the investor section of our website at www.gms.com. Turning to slide two. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risk 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 report. 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 the second quarter of fiscal 2023 relate to the quarter ended October 31st, 2022. 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'll turn the call over to John Turner. JT?

Thank you, Carrie. Good morning, and thank you for joining us today. With elevated single-family home construction activity, as completions eclipsed starts for the quarter, along with strong multifamily residential demand, year-over-year growth in commercial, and a favorable pricing environment, we again delivered record levels of net sales, net income, and adjusted EBITDA for our fiscal second quarter, as we continued the solid execution of our strategic priorities. Looking at slide three, With comparisons to Q2 of fiscal 2022, here are some highlights of our second quarter results. We grew net sales 24.4%, with 24.9% gross profit growth, as our teams continued to manage a shifting market mix and inflationary product pricing. Volumes in wallboard were up 11.6%, and we were again pleased to deliver positive year-over-year commercial wallboard volume growth for only the second time since the start of the pandemic after doing so last quarter as well. The inflationary product pricing environment, combined with our continued operating cost discipline, enabled us to improve our SG&A and adjusted SG&A percentages of sales by 50 basis points each. Net income improved 38.7% to $103.2 million, and adjusted EBITDA grew 30.7% to $195.5 million. And finally, adjusted EBITDA margin of 13.7% was up 70 basis points as compared with a year ago, with significantly improved cash flow. Our team's commitment to delivering outstanding customer service, together with the continued execution of our strategic priorities, helped drive this success. On slide four, we highlight our progress this quarter in advancing these strategic initiatives. expanding share in our core products. Although pockets of supply chain challenges remain, our teams continue to work diligently throughout the quarter to ensure product availability and to provide exceptional service for our customers. As a result, we delivered year-over-year organic wallboard volume growth of more than 11% for the quarter, which we believe outpaced the industry as a whole. We are also seeing success in ceilings. as we delivered organic volume growth in the low single digits with organic sales dollar growth of 13.6% for this category. We remain confident that leveraging our scale and our commitment to exceptional customer service and product availability will help us continue to grow the core business as we move forward. Second, growing our complimentary products. We continue to diversify and profitably expand our offerings, thereby enhancing our value to our customers. During the quarter, we continued to benefit from both higher prices and volumes and grew our complementary product sales by 26.5% in total and 17.8% organically. In particular, some of our larger complementary subcategories that are a higher focus of growth for us, including tools and fasteners, the Stucco and EAPS product lines, and insulation, collectively grew 33.4% for the quarter. Third. Expanding our platform through accretive acquisitions and greenfield opportunities remains a top priority. So far this fiscal year, including those that open subsequent to the end of our second quarter, we've opened five greenfield yards and nine Ames store locations. Our pipeline of potential acquisitions remains strong. We continue to actively pursue opportunities to strategically broaden our product assortment and expand our service territory. to help us provide added value and best-in-class service to our customers. Finally, our fourth strategic priority is to drive improved productivity and profitability. This is a broad focus across our organization as we continue to leverage our scale and employ technology and best practices that improve both cost and service. Included within these initiatives are ways to enhance the customer experience, making it simple to do business with us. As a result, The percentage of customers interacting with us online grew each month during the quarter. Additionally, we are making it easier and more productive for our teams, providing automation tools to improve picking, loading, and staging efficiencies, as well as fleet upgrades to reduce idle time, improve fuel efficiency, and promote safe work practices. Building our yard of the future to drive greater efficiency and productivity has helped us deliver improved profitability. Overall, I am very pleased with our team's execution. At the heart of our business is our people, our passion for service, and our relationships with our customers. With that, I'll now turn it over to Scott to provide more perspective on our results. Scott?

Thank you, JT, and good morning. Looking at slide five, net sales increased 24.4% year-over-year to $1.4 billion for the quarter. Organically, sales rose 22.2% after adjusting out both acquisitions and the unfavorable impact of foreign exchange translation. Adjusting for one additional selling day year over year, net sales increased 22.5%, with daily organic net sales increasing 20.3%. From a USN market perspective, residential continued to lead the way, with sales up more than 34%, including greater than 50 percent growth in multifamily. Single-family sales were up 29 percent year-over-year, while commercial sales continued to show improvement, with sales up 17 percent over a year ago. Wallboard sales of $584.6 million increased 41 percent, or 38.9 percent on a per-day basis, comprised of a 28.9 percent increase in price and mix, and a 9.9% increase in volume. Organically, second quarter wallboard sales grew 41.4% year over year, comprised of a 30% increase in price and mix, and an 11.4% increase in volume. And on a per day basis, organic wallboard sales were up 39.2%, comprised of a 30% increase in price and mix, and a 9.2% increase in volume. In terms of all-board volume, per-day multifamily residential gains of 30% outpaced the mid-single-digit volume growth we achieved in single-family. Permitting, starts, and quoting activity in multifamily remain active, and with longer build cycles than single-family, the backlog and demand for this customer segment should remain strong through at least the remainder of this fiscal year, and likely beyond. Meanwhile, as with last quarter, Year over year, our commercial performance continued to improve. We were pleased to again see expansion in commercial wallboard volumes as compared with the same period a year ago. And in terms of wallboard price, our average realized price has increased sequentially for the past eight quarters, demonstrating resilience, even as we've seen a slowdown in single-family starts. For the quarter ended October, The average realized wallboard price was $474 per thousand square feet, up 8.4% sequentially and 26.3% as compared with a year ago. October's price of $477 per MSF was only slightly higher than the quarter's average, while November flattened further. Conversely, new manufacturer increases are being announced in the market. So while the outlook is mixed and we can't fully predict the degree or timing of market price elasticity going forward, our current near-term expectation is that the rate of our increases will continue to flatten with some sequential declines possible in future quarters. Regardless, given the healthy base of inflation realized thus far, we nevertheless expect year-over-year expansion in wallboard pricing through at least the end of our fiscal year. Ceiling tile and grid second quarter sales of $159.6 million increased 13.3% over the same period last year, or 11.6% on a per-day basis, comprised of a 9.6% benefit from price and mix and a 2% increase in volume. Organic sales and ceilings grew 13.6%, with 10.7% of price and mix and a 2.9% increase in volume. On a per-day basis, organic sales for steelings were up 11.8%, with 10.7% of price in mix and 1.2% in volume. Reflected in these numbers was a sequential price increase of 6.6% for the quarter. Second quarter steel framing sales of $278.2 million increased 2.3% versus the prior year quarter, or less than 1% on a per-day basis. where a price and mix benefit of 7.5% was largely offset by a 6.8% decline in volume. Our second quarter of fiscal 2022 featured inflation and availability-based dislocation that drove a short-term increase in shipments. Moreover, in this market, we've seen stronger activity in stick-built lower-rise structures, which typically call for less steel framing. while large office activity for both new and remodel also remained muted. Organic seals and steel framing were up 2.5%, comprised of a 7.9% increase in price and mix, partially offset by a 5.4% decline in volume. On a same-day basis, the trends were similar, with steel framing per-day sales of 1% organically, comprised of a 7.9% increase in price and mix, offset by a 7% decrease in volume. As we discussed last quarter, prices for steel framing products had begun to decline sequentially at the start of the second quarter, with August prices roughly 1% below July's level. As expected, steel framing prices have fallen further since. September fell 4% sequentially, while October fell another 3.5% from there. ending the quarter roughly equal to where the price was in October a year ago. Overall, however, given the tremendous rise in steel framing prices earlier in the year, the quarterly average price for steel framing products for our fiscal second quarter was up nearly 9% as compared with a year ago. Although again difficult to predict, our current expectation is for steel prices to decline each month sequentially in the low single digits through the end of our fiscal year, likely moderating a bit as we enter the spring months. Complementary product sales of $408.7 million, which comprised nearly 30% of our total net sales for the quarter, were up 26.5% year-over-year as we benefited from positive contributions from acquisitions as well as improved pricing across the category. Sales in this category were up 24.5% on a per-day basis. Organically, sales of complementary products rose 17.8% or 16% on a per-day basis, with the increase coming mostly from price and mix, but with moderately increased volume as well. Now, turning to our gross profit during the second quarter. Our gross profit of $464.5 million increased 24.9% as compared with a year ago, principally due to our successful pass-through of product inflation continued strength in residential market demand, improved commercial sales, and incremental gross profit from acquisitions. Gross margin of 32.5% increased 20 basis points year-over-year with strong margins in complementary products and better-than-expected margins, which were up slightly year-over-year in steel framing as our teams remained focused on inventory management and diligent project quoting amid the environment of declining steel prices throughout the quarter. As we have previously shared, while we manage the business towards an EBITDA level of profitability to account for mix and cost of execution, we traditionally operate at or around 32% gross margin and believe this to be a reasonable near-term expectation as well, even as we see a slowdown in the single-family demand ahead. Turning to slide six. Operating costs increased this quarter, particularly in items such as labor, fuel, and given robust activity and strong performance, incentive compensation. Regardless, as has been the case in recent quarters, product price inflation and the resultant increases in both revenues and gross profit dollars have outpaced these pressures. Therefore, adjusted SG&A as a percentage of net sales for the second quarter improved 50 basis points as compared with a year ago to 18.9%. All in, adjusted EBITDA improved $46 million, or 30.7%, to $195.5 million for the quarter. Adjusted EBITDA margin improved 70 basis points year-over-year to 13.7% for the quarter, representing an incremental margin of 16.4%. Now, turning to slide seven. Providing the foundation support for the continued execution of our strategic priorities is our capital structure and balance sheet. At quarter end, we had cash on hand of $124.2 million and $293.8 million of available liquidity under our revolving credit facilities. Our net adjusted EBITDA debt leverage at the end of the quarter improved to 1.6 times down from 2.4 times a year ago. During the quarter, we recorded significantly improved levels of cash flow as supply chain constraints have moderated. Cash provided by operating activities during our fiscal second quarter was $107.3 million compared with a use of $2 million a year ago. Free cash flow was $96.5 million for our fiscal second quarter compared with a use of $11.3 million for the same period last year. Capital expenditures of $10.7 million for the second quarter compared to $9.3 million in the prior year quarter. For the full year fiscal 2023, we continue to expect capital expenditures to be roughly comparable to those of fiscal 2022 at approximately $40 million. All considered, we expect to generate full year free cash flow for fiscal 2023 of approximately 60% of adjusted EBITDA. on an expectation of marked relative strength in the second half of our fiscal year. Finally, a note on our share repurchase activity before I turn the call back to JT. As part of our previously announced upsize share repurchase authorization, during the quarter we repurchased approximately 601,000 shares of common stock for $25.8 million. compared to 195,000 shares repurchased for $9.3 million during the prior year quarter. As of the end of October, we had $161.2 million of repurchase authorization remaining. Going forward, we will continue to align our capital allocation to our four-pillar strategy, balancing investing in our strategic initiatives with paying down debt and opportunistically leveraging favorable market conditions for share purchases as they arise. With that, I'll now pass the call back to JT to provide some perspective on our broader end markets and our outlook for the third quarter.

Thank you, Scott. Turning to slide eight, despite the challenging macro environment and the developing slowdown in new single-family housing permits and starts, building activity and demand for our residential products has been strong through the first half of our fiscal year. which has helped us deliver outstanding results. That said, while we expect continued strength in multifamily, as well as some continued recovery in the commercial market, we also expect a decline in single-family demand for our products to further materialize in the coming months. We are preparing accordingly, and in our single-family business, which makes up roughly a third of our overall business and about half of our wallboard revenues, we will feel demand pressure. However, a backlog of work in process remains, and the specific timing, extent, and duration of this decline is uncertain. Moreover, we believe we are well positioned to weather this expected slowdown. We have the benefit of a balanced split between commercial and residential revenues and the ability to flex to meet the demands of each customer segment. Also, in recent years, we have successfully expanded our product offerings to better serve all of our customers, including growing our complementary product segments. whose revenues we estimate to be roughly 60% commercial. And in terms of execution, the improvements we've made in enhancing the productivity and efficiency at our yards and across our business have made us better operators. With variable performance-based incentive compensation and other activity-driven costs currently making up a large portion of our G&A, we are confident that we will be able to flex as the business requires. On the pricing front, inflation is moderating across all categories. We expect steel framing to continue its deflationary trend and ceiling grid will likely follow suit. As Scott discussed, we also expect the pace of wallboard price increases to slow, but still expect year-over-year favorability in pricing during our third quarter for wallboard, ceiling tiles, and complementary products. With this as our backdrop, as highlighted on slide 9. For our fiscal third quarter, we expect to deliver total net sales growth in the mid-single-digit range, most of which we expect to be organic and inflation-driven. Gross margin percentage consistent with a year ago and with our long-term trend, around 32%. And adjusted EBITDA margin should approach last year's level of 11.7%. I am pleased with the commitment and determination demonstrated by our team as we continue to deliver solid results. Over the long term, we are confident that our scale, breadth of product offerings, and our demonstrated capability to serve as commercial, single-family, and multi-family customers positions us well and that continuing to execute against our strategic objectives will deliver value to our shareholders. Thank you for joining us today. Operator, please open the line for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, as a reminder, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from Lyme. of David Manthe with Baird. Please proceed with your question.

Hi. Good morning, everyone. Good morning, David. Three quick questions here. First off, what percentage of US MSAs do you have a presence in today? Second, if you could talk about multifamily, what the mix of wallboard and overall GMS sales are multifamily. And then finally, what percentage of customers and revenues come to you via online channels? Thanks.

Sure. From an MSA perspective, outside of New York City, we really are in all of the balance of the top MSAs in the country, and also the state of Utah. So we're not in New York City. We're really not in the state of Utah. Outside of that, we're in all the top MSAs in the US. And in Canada, other than Montreal, In the eastern provinces, we are in all the major MSAs in Canada. So fairly well balanced. So we think that our multifamily mix is about 15% of our wallboard sales and about 10% of our overall sales, David. And then what was the third question? Online sales?

Right. What percentage of your customers use online channels and maybe what percentage of your revenues? Sorry, what percentage of your revenue is coming via online?

So from a revenue perspective, pretty small. But from a usage perspective, pretty good. I'll give you some color on that. So it's a B2B process. So we began the journey in e-commerce to specifically improve service. And so what happens is our large customers tend to place orders in their own systems and send them to us. But once we get those orders we get a lot of activity from an automated perspective. So I'll give you an example. Of our top 100 customers, over 80% of those customers are signed up with us online, and 60% of those 80% consistently use the system month to month. So we have a pretty good number of our largest customers using our system. Of our total customer base, we have about 40% of our customers signed up, and about 50% of those customers use us on a regular basis. And that last number I gave you of 40% of our customers signed up, that's any customer that has an open account with us that has done any sales with us in the last 12 months. So it's a very broad base of customers. So we have fully 40% now of that very broad base of customers signed up. And again, of those customers, about 40% to 50% use us consistently every month. And what do they do? Primarily, they check orders, they check inventory availability, they check pricing, and they check shipment activity, as well as we've talked in the past about our picture delivery capability. So after delivery, they check our pictures on site to ensure that the products are there and that they're ready to dispatch labor. So we have a lot of activity going on in e-commerce, but from an actual order receipt and revenue generation, it's still fairly small. although our accounts receivable now is up to north of $65 million on a monthly basis, is coming through our e-commerce system. Again, very good number considering our large customers are not going to pay that way. Our large customers are going to use their automation and their own systems to pay us. So we feel pretty good about the traction we've got going on there, David.

Got it. Thanks, JT. Absolutely. Thank you.

Thank you. Our next question comes from the line of Trey Grooms with Stevens Inc. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking my question. Nice job in the quarter. Thanks, Trey. Morning, Trey. Good morning. So if we could touch on commercial. So commercial sales up for, I think it was the second quarter in a row. You mentioned an improving commercial landscape for the near term. First off, if you could maybe speak to where you're seeing relative strength and weakness on the commercial side and looking forward, what kind of visibility do you have there and how are you thinking about the commercial demand more kind of in the medium term? Should that continue to hold up relatively well or are you kind of bracing for a potential slowing on that side as well?

I think that the headlines are just starting, right? People are already worried after one month of the ABI being below 50. We're going to give that a little more time. I think we feel like the commercial market is going to remain relatively flat, low single digits in the medium term, Trey, and the big drag there is still office, right? Office is just not coming back, and that's the driver of our steel framing decline as well right now in volume. So that's the, you know, the one kind of elephant in the room is just the office component. The balance of the commercial space is continuing to do just fine. I mean, it really, almost everything else is either flat or up.

Education's flat-ish. Hospitality's been showing some real positives just recently, but the other trends have been more positive. But office is the one that we're still waiting for recovery on.

And so our internal pipeline and our internal checks, as well as external checks with our larger commercial contractors, basically would tell us that we're going to be flat to up slightly over the course of the next quarter or two.

Got it. Okay, perfect. That's super helpful. And then, I mean, you guys have been very acquisitive over the last, well, for as long as I've known you guys. And So I guess the question is, you know, as we see some kind of slowing on the horizon, especially on the residential side, how are you thinking about M&A? How are you, you know, what's your appetite there? Do you kind of, do you feel like it's appropriate to kind of take the foot off the gas some now, or do you continue with the current strategy, or just how are you approaching M&A and what's your appetite there? And then I guess as As part of that, leverage is in a very nice place right now. I've seen you guys take it up higher than this for the right deal, pointing to the Canadian acquisition you did a few years ago. But how are you also kind of thinking about the leverage with that backdrop as well? Thank you.

Well, I'll start with just the appetite for M&A. Nothing has really changed other than our valuation today is not where we'd like it to be, and our objective has always been to acquire at or better than our current valuation, and then enjoy the synergies internally that we bring to the new company or the new acquisition. So that's been a little bit of a headwind. Valuation expectations on the seller side still appear to be a bit And then, of course, you've got risk out in the next six to nine months across the board. So it's hard to pay with the anticipation of any kind of upside in growth. So all three of those things make us a little more cautious than we normally would be. All that being said, continue to have great relationships with sellers in our pipeline and constantly are having conversations with them. And we would expect to have some things happen over the course of the next couple of quarters, although not strategically, right? Nothing huge today in the pipeline. I don't think we have that kind of risk appetite. So in the midterm, we're going to do what we just did this last quarter. We're going to generate a bunch of cash. We're going to continue to pay down a little bit of debt, and we're going to continue to use the authorization that we have in stock repurchases.

Yeah, Trey, to your point about leverage, we're down at 1.6 now. As you noted, when we did the Titan acquisition, we showed a willingness to go above three to be able to get something of that level of strategic importance done. But we did it only with the expectation that we'd be able to very quickly get that down below based on the combined cash flows of the companies, and we did that. So we've always been clear that we will continue to be pursuing those larger types of opportunities as well as the medium and smaller ones. If something like that presented itself and it had the strategic benefits and we thought we could be able to bring that leverage down relatively quickly, we would definitely do that.

Thanks again for taking the questions and all the color. Good luck. Thanks, Ray.

Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Hi, thanks for taking my questions. It's just as a follow-up, when you're thinking about the resi piece of your business, obviously you see the clients and starts permits. I'm sure you see the builder order trend. So what's going into the funnel is quite a bit smaller than what's coming out of the funnel as builders kind of push their year-end deliveries. Do you do you have a way of kind of quantifying or looking at, you know, what percentage of the homes under construction are still pre-wallboard installation phase or anything like that that helps you kind of gauge when this slowdown will actually more materially impact you over the next couple of quarters? I know you say you have to little visibility, maybe it's year-end, but if you could just go into a little more detail on other things you're looking at or more granular data, that would be great.

We have all the macro data that you do, and so we have the full pipeline of backlog calculated on a divisional level or an MSA level. We have some data available to us that's provided by outside services, but mostly we rely internally on our own checks with our team, but also with our big customers that are doing that work. And so we do have a pretty good view of that. Now, our big customers, generally speaking, they're operating in terms of the next month to two months to three months in residential, so they're not really giving us exact numbers out, four, five, and six, but they do give us kind of anecdotally what they're thinking is happening. So we do have that. So on a division-by-division basis, we have that. You know, it's interesting, at the moment, what we're starting to experience is a little bit of, I call it bifurcation in certain markets, in that you have the West Coast as an example. They're eating through the backlog fairly quickly because there have been less supply chain disruptions. The land developers were able to deliver the lots, et cetera, et cetera. We get into the Southeast as an example, particularly Florida. You're still having product availability issues there, and so the cycle times for the bills are still longer. And you've got some land issues and land development issues down there that are slowing builders as well. But you're also hearing the builders now start talking about the fact that the buyers that are out there are all interested in spec homes. They want quick closings. So we are seeing activity, at least to whatever the expectation of sales are, you're seeing a lot of builders reflect that in their strategy into next year. So long-winded answer, but we have a pretty good view, and it's usually incorporated into the outlook, or it's always incorporated into the outlook, quite frankly. And we break it out in a bunch of ways internally, and so far we've been pretty good at it, although I would tell you it's getting more complicated.

Okay, that's helpful. And my second question, as part of this, will also be a follow-up, but when we're thinking about the 3Q guide, in terms of total growth going from the 20s to mid-single digits. You've articulated some of the moving pieces, certainly, but maybe a little more detail. When you say, you know, timing of single-family demand slowdown, unknown, but will materialize. So do you expect, is the expectation that your single-family resi business is down year-on-year in volume terms in the third quarter? And then on the pricing side, very helpful color on, some of the sequential trends in October, trends in the ceiling grid and the steel. If those sequential declines continue as you expect, what does that mean for the year-on-year declines that you're expecting within your third quarter guidance?

I would tell you that wallboard, we're still expecting to have slight growth in wallboard volume, but still really strong pricing on a year-over-year basis. So, you know, high double digits really in total revenue growth from a wallboard perspective. Ceilings, possibly in revenue. We had a very, very strong third quarter last year, winter season last year in ceilings. So we're going to comp that as well. But, you know, it's probably down low single digits. And steel, based mostly on the same trends we've already been experiencing, just the reality of the steel prices year over year, we are laughing now the high point in steel. Should have made that commentary a little earlier to you all, but I think you probably know it already anyway. But this is the high point in steel pricing as, you know, November, December, January was the peak of steel pricing last year. And so that's probably going to be down in that, you know, I don't know, 15 to 20-ish range plus. And so you mix all that together with complementary and, you know, you get that mid-single-digit revenue guide.

Mike?

Thank you.

Our next question comes from the line of Jeff Stevenson with Loop Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions today, and congrats on the nice quarter. Thank you.

Thank you, Jeff.

So you guys saw strong wallboard volumes during the quarter, which came in ahead of the industry, and just wanted to know kind of what were the primary drivers of that above-industry growth, and can you talk about as well how volumes trended throughout the quarter?

Well, I think the efforts we've put in over the last several years, we've talked about it many times, of being more focused on the builder business as a company over the course of the last three to four years. Not that we were big, I've said it before, not that we anticipated the post-COVID bounce and the extreme success in single family, but the reality is we were focused on doing more of it, and that came to fruition, and here we are, unfortunately, peaking when inflation hits and now the rates are up and now we're going to go from peaking into whatever's going to happen to us next year. But I think that that's really the biggest driver is really the success on the single family side. The other piece of it, of course, is we still, even though we've had all this success in the single family, we're probably still more weighted in wallboard to commercial than the industry is. And so the whatever the commercial recovery is we're experiencing, you know, low to mid single digit recovery and commercial, uh, at the moment, uh, that's, that's a help, uh, for us as well. And multifamily is just strong period. I mean, multifamily, it's not a huge, as I mentioned earlier, right. It's not a massive part of the business, but it's growing 20 or 30%. So that's, uh, that's certainly a tailwind.

Right. Right. Um, no, that makes sense. And then I appreciate your comments on your commercial business. That was very helpful, but, um, During the earnings season, there's been some talk of a slowdown in discretionary non-residential renovation work given delayed projects. Have you seen any signs of this in your ceilings business? And if so, do you believe they're just delayed or canceled?

I don't see any activity, you know, in office growing. I just don't see it happening. And so I'm assuming that's primarily what you're talking about when it comes to ceiling tiles. It's a huge driver of it. You know, but we're not seeing transportation projects delayed, airports, you know, those types of projects are still happening. Main Street commercial is happening and still doing well. Hospitality is going to be fine. Healthcare is strong, you know, but office is not, it's just not happening. We talk about discretionary remodel in office. We're just We're just not seeing that yet, and I think that building owners just have to wait and see what happens from an occupancy perspective, or they have to decide to compete one or the other, and neither of those things have happened yet.

I'd say as well, Jeff, in commercial, some of the dynamics you talk about have really been going on for The better part of 18 months in terms of longer quoting cycles, rebidding kinds of activity, you know, reengineering of quotes as inflation factors have been accounted for, et cetera. And ultimately, that's extended the entire commercial process. So those kinds of things you're talking about are not a recent dynamic. They've been something we've been dealing with for the better part of 18 months or so.

Great. Thank you.

Thank you. Our next question comes from the line of Stephen Ramsey with Thompson Research Group.

Please proceed with your question.

Hi. Good morning. Maybe to start with on the commercial, I mean the complementary side of things, growth rate very strong and very favorable compared to the other three groups. And it seems to be very strong in relation to pricing being the major driver. As we get to the other side of pricing and being such a driver for the three core groups, will we see complementary take up a much stronger percentage of total sales?

Yeah, I mean, I think we've talked about it in the past that if you were to reduce and remove the steel inflation over the course of the last year plus, our complementary business is approaching 40% of the mix. So all that being said, there's some inflation in complementary as well. It's been less there than it has been in some of the other categories, but there is definitely still inflation there in complementary. But complementary will continue to be a focus and should, over the long haul, be a larger percent of our overall business.

Okay, helpful. And then one more on complementary with margins up in the quarter. You called it out as a driver to gross margins. Can you talk to the drivers of that? You also talked about AIMS. Is that a major contributor? And do you see margins improving in the next several quarters?

AIMS is a driver. We don't see margin improving, but we don't see any reason the complimentary margin would be declining. So, you know, our margin guides always include the entire business. But, yes, AIMS, as Scott called out, incremental gross margin from acquisitions. Ames is a great company, continues to operate at very high gross margins, a wonderful part of our business now. And in general, our complementary business has leveled off, let's say, at much higher margins than we would have thought. And some of that is the mix of products that we're able to sell. As we talked about, particularly tools and fasteners, eaves and stucco and insulation were up 30 plus percent. versus the whole at what I say, 26 and a half or something in that neighborhood. So we're gaining traction in a good mix of complimentary products as well.

Excellent. Thank you.

Thanks, Stephen.

Thank you. Our final question this morning comes from the line of Matthew Boulay with Barclays. Please proceed with your question.

Good morning. You have Elizabeth laying it on for Matt today. I was wondering if you could talk a little bit about how you're thinking about SG&A going forward, you know, kind of how you're thinking about cost leverage as residential volumes come down and, you know, maybe you still continue to see that strength within commercial, but how should we be thinking about costs within that basket and, you know, maybe how that relates to your plans for spending on, like, productivity and automation?

So I'll kind of work backwards, you know, and I'll really start with how we managed the business during the early days of COVID when there was a lot of uncertainty out there. We really took a lot of actions very quickly, you know, in a very focused way to manage the cost of the business. And I think you certainly saw that in our results in terms of the incrementals we were able to and decrementals we were able to manage. We took, you know, some pretty tight actions there. And I think the learning from that is we would do that again. Specifically, to your point on automation and some of the things we're doing around Yard of the Future, that is one area that we did not skimp on. We continue to focus on those strategic investments, both in terms of CapEx as well as spending, so I think you would see us do that again. Bringing your question all around in full circle to the types of things we'd be focused on in this environment, we're actually fortunate right now that we've got a higher level of what I would call actionable types of things that we can affect in this environment if we saw a marked downturn. For example, incentive and bonus compensation is relatively high because the business is doing well. If that were to shift at all, we'd be able to move that down. We have other variable expenses like fuel, like maintenance, like those types of things that are truly activity driven in the business that would flex really nicely. And then also in this environment with being quite busy, our levels of contract labor, for example, are relatively high. So we'd be able to take actions on that before we got into the types of things that would be a little bit more difficult to affect. But, you know, again, looking back at how we handled the business during the early days of COVID showed a lot of discipline in how we manage those costs. And I think you very much see us do that again.

Okay, thank you. That's really helpful. And then I was also wondering, following up a little bit on the complimentary side of things, you know, it is a larger part of your business now and that has kind of been a point of, you know, where there have been a lot of acquisitions. Is that an area where you expect you'll continue kind of building out those offerings there? And are there any other spots within the business where you think, you know, maybe there's a different vertical you eventually want to enter?

Yeah, I appreciate you raising that. That's very much something we have been talking about. And as JT was talking about some of our pipeline activity, our pipeline still remains very full, both on the core products as well as those complementary areas. And while we've got some near-term pricing kinds of dynamics and valuation kind of dynamics we're thinking through, all of the things that we do, both in terms of thinking through our opportunities strategically, working on the relationship building, and driving the pipeline development is very much focused, and we've got a widening of the aperture in those areas, particularly those three areas that JT focused where we've seen some higher than average growth in our complementary tools and fasteners, eaves, those types of things. We've got a lot of really promising activities going on there. So I think you'll see activity from us both in the core as well as the complementary going forward.

Thank you. Thank you.

Ladies and gentlemen, this concludes our question and answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.