GMS Inc.

Greetings and welcome to the GMS Inc. Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Keri Phelps. Thank you, Ms. Phelps. You may begin.

Thank you, Kat. Good morning, and thank you for joining us for the GMS Earnings Conference Call for the fourth quarter and full year fiscal 2024. I am joined today by John Turner, President and Chief Executive Officer, and Scott Deacon, Senior 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.gmf.com. Now looking at 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 uncertainty, 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 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 fourth quarter of fiscal 2024 relate to the quarter ended April 30th, 2024. 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, whose discussion will be starting on slide three. JP?

Thank you, Carrie. Good morning and thank you all for joining us today. Volume growth across all four of our major product categories for the year, as well as resilient pricing in wallboard and continued inflation in ceilings and complimentary products, helped drive a record $5.5 billion in net sales and $5.3 billion in organic sales for the full year fiscal 2024. Benefiting from our balanced end markets, continuing demand in multifamily, and solid levels of commercial activity helped to offset a more challenging single-family backdrop as compared with the year before. Looking at just our fourth quarter results, considering the significant steel pricing and associated margin headwinds, which accelerated particularly late in the quarter, we closed out fiscal 2024 with another solid level of performance, including generating net sales of $1.4 billion net income of $56.4 million, and adjusted EBITDA of $146.6 million. Cash flow generation was strong, with $204.2 million of cash from operating activities and $186.7 million of free cash flow. As with our full year results, we delivered fourth quarter volume across all four of our major product categories, albeit at a much slower rate for steel in April than expected, particularly for multifamily applications. Single family, however, began to trend favorably, and for the first time since the fall of 2022, wallboard volumes for this sector were up year over year for the quarter. And although our fourth quarter average wallboard price was down slightly year over year, mostly due to mix, prices were flat sequentially. And in the coming months, we expect to benefit from implementation of the previously announced manufacturer pricing actions consistent with the typical three to six month lag we traditionally see for wall board price realization. As we move into fiscal 2025, we believe we are prepared for what we expect to be an environment of changing end market dynamics once again. First, although temporarily hindered by the current mortgage rate environment and record high home prices, Significant pent-up demand remains for single-family housing, which provides confidence for the medium to long term. Through April, single-family starts were up almost 26% calendar year to date, as compared with a year ago. Therefore, we expect to see continued moderate year-over-year improvement for this end market in the near term, followed by a more robust recovery thereafter, with what we expect will be an eventual downward shift in interest rates. For multifamily, the demand environment was exceptionally strong for fiscal 2024 as compared to the prior year. However, given the significant decline in starts last year, this end market has likely peaked, and we believe it will plateau as we serve the remaining backlog over the next quarter or so before we see a notable decline in activity levels during the back half of our fiscal year. At approximately 15% of our sales, we expect that the pace of declines will be manageable. particularly given the expectation for offsetting demand improvement in single-family construction. Finally, commercial construction activity remained solid during fiscal 2024, with a number of megaprojects underway as well as still attractive demand in certain subsectors, primarily data centers, reshoring-related and stimulus-driven projects, education, and healthcare. However, With put-in-place spending flattening and new commercial starts declining, financing availability and cost, coupled with labor constraints and other inflationary pressures, appear to be headwinds, broadly. In this environment, we would expect a mixed demand profile by sector, as some commercial applications will likely be pressured, while others still have favorable support. As an indication of this varied environment, Steel framing demand softened late in the fourth quarter more than we had previously anticipated, both in terms of volume and price. However, more recently, most of the leading steel framing manufacturers have announced price increases, positive indicators for at least a flattening of recent deflationary pressures in the coming quarters. This dynamic backdrop of end markets brings to light the benefits of our balanced customer base. with a revenue mix that is today roughly 50-50 commercial and residential. While still constrained in the near term, we believe that improvements in single-family construction will help to offset the challenges facing the multifamily and commercial end markets. And all of these markets will ultimately benefit from relief in financing rates and availability when that occurs. I would like to thank the entire GMS team for their continued commitment to delivering outstanding service and adding value for our customers. Through their efforts, we continue to flex our operations to successfully navigate the changing tides of customer demand. Turning now to slide four, I'm very pleased to highlight that GMS continues to improve as we grow, and fiscal 2024 was another year of progress as our team executed with focus against our strategic pillars. We successfully expanded our share of U.S. wallboard sales by close to 80 basis points during the year, when comparing our shipments to those reported by the chips and manufacturers where the 12-month ended March 31, 2024, the closest proxy we have to our fiscal year. Likewise, in steel, for that same time period, we gained approximately 130 basis points of share, as reported by the Steel Framing Industry Association. And based upon available public disclosures from ceilings manufacturers, our share grew in this product space again in fiscal 2024, in total and particularly in the higher-end architectural specialties products. Our service model, commitment to job site safety, and our expertise in every end market we serve, as well as our intentional effort to deepen our customer relationships and use technology to be faster and easier to work with, all contributed to our success this year. Our complementary products grew this past year by 7.4%. In our key areas of focus, EAPS and Stucco, tools and fasteners, and insulation, we grew 11.5%. These outstanding results are due in many respects to those same things driving our core share, but are also due to our expanded sales organization, center-led purchasing programs, and the synergistic leveraging of acquired company expertise across the legacy business, while the newly acquired businesses benefit from GMS's systems and scale. We remain committed to both organic and acquisitive growth in the strategically critical complementary product space. M&A has been and continues to be a key strategic driver of our growth. This past year was no exception, as we acquired home lumber and building supplies, which expanded our presence and complementary product offerings in Western Canada. AMW construction supply, which expanded our complementary tools and fasteners in Phoenix, and Camco Supply Corporation, which provided us with one of the leading market positions in New York City, the largest MSA where we lacked a significant presence prior to this transaction. Also, subsequent to the end of our fiscal year, we announced a smaller acquisition of Howard & Sons to supplement our operations in Southern California, and our agreement to purchase Yvonne Building Supplies and other affiliated companies in Ontario, Canada, which we expect to close next month. we look forward to being able to welcome the Yvonne team and adding their seven locations to our portfolio to better serve the Ontario market. Our current Canadian operations generated approximately 13% of our total net sales during fiscal 2024. And of that, more than half of those sales were in complimentary products, which tend to be margin accretive to the overall business. In addition to our more traditional acquisition targets in the United States, with substantial white space still available for us in Canada, we expect to continue to pursue additional margin-enhancing opportunities like the pending Yvonne transaction. Our Yard of the Future initiatives also took steps forward during fiscal 2024. For example, we have now completed the installation of yard-wide Wi-Fi and added tablets in the 85% of our yards where doing so makes sense. With varying degrees of adoption so far, now that we have all of the tools in place, fiscal year 25 will be the year of further operational progressions of this paperless picking and loading technology. Where we have completed the necessary entity and data consolidations, we have simplified our back of house teams and processes and are working to implement more advanced ERP embedded purchasing capabilities. We've seen improved service and inventory momentum as a result, which contributed to the free cash flow success we achieved in both our fiscal fourth quarter and the full year. We expect to complete our entity consolidation and the associated process, organization, and data simplification of our various divisions by the end of calendar 2025, and expect to see cost and productivity benefits as we continue these efforts. And finally, we are making progress as we promote the value of our direct e-commerce platform to our customers. While adoption continues to evolve, we are seeing usage increase in many areas. For example, More than 70% of our customers had created online accounts by fiscal year-end 2024, and as such, we have seen increases in web orders and activity. Importantly, as of the end of fiscal 2024, the percentage of payments we are receiving through our integrated online customer portal is now approaching 20% each month, making it easier for our customers and saving the company both time and money. Collectively, all of the productivity initiatives we have underway are intended to help preserve and drive additional profits and make it easier to do business with us. We continue to become better operators and reducing complexity in the business with the objective of providing greater value to all of our stakeholders. With that, I will turn the call over to Scott.

Thank you, J.T., and good morning, everyone. Starting with slide five, net sales for our fiscal fourth quarter increased 8.4%. or 6.7% on a per-day basis, to $1.4 billion, as volume growth across our major product categories helped to offset price deflation, notably including an estimated $29 million for steel, assuming current year volumes have been sold at prior year prices. Commercial multifamily activity levels remained solid for the quarter, while single-family turned a corner with positive year-over-year growth in demand. Our recent acquisitions, such as CAMCO, EMJ, and AMW, also contributed positively to our quarter's top-line results. Organically, consolidated sales grew 4%, or 2.4% on a same-day basis, compared to the fourth quarter of fiscal 2023. From a USM market perspective, commercial sales dollars grew 6% year-over-year on a per-day basis, despite continued and greater-than-expected steel price deflation. Single-family sales showed marked improvement with the year-over-year comparison turning positive for the first time since the fall of calendar 2022, with 2.8% growth per day as compared to the fourth quarter of fiscal 2023. Multifamily activity also remained solid, particularly in wallboard, but a little slower overall than we had anticipated, principally on steel volumes, with 2.4% growth per day in sales dollars, as compared to the robust fourth quarter a year ago. Wallboard sales dollars of $586 million were up 7.6% over the same period last year, or 5.9% on a per day basis, with multifamily volumes up 5.4% and commercial volumes up 8.7%. As expected, single family volumes also turned positive for the first time since the quarter of fiscal 2023, with wall board volume growth per day of 7.6% as compared with the fourth quarter last year. Organically, fourth quarter wall board sales were up 6% compared with the prior year period, or 4.3% on a per day basis, comprised of a 6.3% increase in volume, partially offset by a 1.9% decline in price and mix, as single family board comprised a greater portion of our sales this quarter. As expected, given the various supply-side dynamics, wallboard pricing remained resilient throughout calendar year 2023, despite the year-over-year slowdown in the single-family market. For our fiscal fourth quarter, the average realized wallboard price of $475 per thousand square feet was up slightly from the third quarter, but down 1.3% from the same period a year ago, as the outperformance in single-family wallboard volumes led to a greater mix shift for the less expensive board used in that end markets construction. Moreover, as we said in past quarters, we would typically expect a lag between announced manufacturer price increases and our realization of those prices in the market. As such, our teams are still in the process of implementing the increases announced earlier this calendar year. Therefore, while we expect to see some of those pricing benefits late in our fiscal first quarter, We also expect continued mix shifts, which, combined, will likely result in wallboard pricing remaining roughly flat year over year for us for the next several quarters. Longer term, the minimal capacity additions being made by the wallboard manufacturing space are expected to do little to alleviate the tight conditions we expect once single family demand gains some momentum, which, together with higher operating and raw material cost increases, particularly in gypsum, should help drive further pricing improvements. Sealing sales of $188.9 million in the fourth quarter were up 21.7 percent, or 19.8 percent on a per-day basis, with strong increases of 11.4 percent in volume and 8.4 percent in price and mix. Organic sales and sealings grew 11.4 percent, or 9.7 percent on a per-day basis, with a 5.5 percent increase in volume and a 4.2% increase in price and mix. Fourth quarter steel framing sales of $220.5 million were down 1.5% or 3% on a same-day basis versus the prior year quarter, as deflationary pricing drove an 11.8% decline in price and mix, while volumes increased 8.8%. Still healthy, but below our expectations due to slower multifamily conditions in certain markets, particularly late in the quarter. Organically, steel framing sales were down 6.6% on a same-day basis, with a 13.5% decline in price and mix, partially offset by a 6.9% increase in volume. Until we see some real recovery in either the office or other commercial remodeling space, Steel volumes will likely continue to be less predictable as larger projects and a higher mix of in-market applications are driving a greater portion of our commercial activity than has been true historically. Broadly speaking, prices for steel framing retreated farther and for longer than we would have expected. For the fourth quarter, prices for steel framing products were down 11.7 percent compared to a year ago, but were roughly flat on a sequential basis. And although we have received multiple price increase notices from the formers, it will take some time to realize any potential acceptance by the market. As a result, we expect monthly steel framing prices to soften sequentially through the remainder of Q1, at least slightly, before flattening at or around the quarter end levels in subsequent quarters. Complementary product sales of $417.6 million for the quarter grew 9.8% year-over-year in total, and 3.5% on an organic basis, representing the 16th consecutive quarter of growth for this category. On a per-day basis, complementary product growth was 8% for total sales and 1.9% for organic sales. Expansion of complementary products, particularly for tools and fasteners, heaps and stucco, and insulation, continues to be a key element of our strategic priority, as those categories grew 10.4% for the quarter. Now, turning to slide six, which highlights our profitability for the quarter. Gross profit of $451.2 million increased 6.3% compared to the prior year quarter due primarily to the favorable impact of our recent acquisitions and the improved volumes we delivered during the quarter across all of our major product lines, partially offset by deflationary dynamics and steel pricing. Gross margin of 31.9% was down 60 basis points as compared to 32.5% a year ago, primarily related to steel price deflation, partially offset by favorable volume-driven incentives. Cost of sales for the quarter also included the negative $1.2 million impact of non-cash purchase accounting adjustments, primarily related to CAMCO, to increase acquired inventory to its estimated fair value. These adjustments were half a million dollars a year ago. Absent these adjustments, gross margin would have been 32% for our fiscal fourth quarter. Together with the traditional price implementation lag, competitive dynamics and mix also dampened fourth quarter gross margins as compared with our prior expectations for the quarter. Selling general and administrative expenses were $315.5 million for the quarter, an increase of $35.8 million over the prior year quarter, primarily related to our recent acquisitions and greenfield openings. Also contributing to the higher SG&A expenses were increased labor costs on favorable volumes, coupled with some inflationary pressures in wages and benefits. Relative to our expectations going into the fourth quarter, SG&A also included a $2 million reserve for bad debt expense. SG&A as a percentage of net sales was 22.3 percent, an increase of 80 basis points for the quarter of fiscal 2023, with 55 basis points of the leverage change attributable to reduced revenue as a result of product price deflation. Increased wages, benefits, and other costs resulting mostly from improved volumes as well as some inflationary pressure in these costs negatively impacted SG&A leverage by an estimated 15 basis points. Approximately 10 basis points of the remaining variance was primarily due to our recent acquisitions in Greenfield Yard openings. Adjusted SG&A expense as a percentage of net sales of 21.8% increased 90 basis points from 20.9% in the prior year quarter. All in, inclusive of a 4.6% increase in interest expense and a 17.1% increase in income tax expense, Net income decreased 25.4% to $56.4 million for the quarter, or $1.39 per diluted share, compared to net income of $75.6 million, or $1.80 per diluted share a year ago. State taxes were higher in the quarter, primarily the result of acquisitions that resulted in an increase in apportionment to higher tax jurisdictions, together with a one-time revaluation of the company's deferred tax liabilities. Also contributing to the decrease in net income was an increase in depreciation expense and a write-off of debt discount and deferred financing fees in connection with our term loan refinancing. Over the longer term, this refinancing is expected to benefit net income by approximately $2.6 million per year until the loan's expiration in May of 2030. For the full year of 2025, we expect our tax rate to be consistent with that of FY24. Adjusted EBITDA of $146.6 million decreased 5% or $7.8 million as compared with a year ago, and adjusted EBITDA margin decreased to 10.4% compared to last year's fourth quarter level of 11.8%. Now, shifting to our balance sheet, which is highlighted on slide seven. At April 30th, we had cash on hand of $166.1 million and $655.9 million of available liquidity under our revolving credit facilities. We had no near-term debt maturities, and our net adjusted EBITDA debt leverage at the end of the quarter was 1.7 times, better than indicated following the CAMCO transaction. Last year's leverage at the end of the fourth quarter for fiscal 2023 was 1.4 times. As JT mentioned, subsequent to the end of our fiscal fourth quarter, we entered into an agreement to acquire 100% of the stock of Yvonne's supply company and affiliates for a purchase price of up to $196.5 million Canadian dollars, or about $143 million U.S. dollars. With more than a quarter of the purchase price to be paid over the next five years, the transaction value is consistent with our track record of acquiring at or near GMS's market multiples. For the 12-month ended February 29, 2024, Yvonne generated net revenues in excess of $190 million Canadian dollars, which is just under $140 million U.S. dollars of current exchange rates. This transaction, which we expect to close next month, is expected to be slightly margin accretive in line with our broader Canadian operations. We expect to fund this transaction with cash on hand and from borrowings under our ADL, which we expect would, all else being equal, initially raise our net debt leverage ratio to just over two times adjusted EBITDA, with an expected one-half turn improvement over the course of FY25. Our team generated significant cash flow, as we traditionally do, during the fourth quarter. Cash provided by operating activities was $204.2 million for our fiscal fourth quarter, compared to $204.8 million a year ago. Free cash flow was $186.7 million compared to $185.4 million for the same period last year. Free cash flow for the quarter totaled 127.4% of adjusted EBITDA. For the full year, we generated cash provided by operating activities of $433.2 million and free cash flow $376 million, representing 61.1% of adjusted EBITDA, exceeding our expectations. Capital expenditures of $17.5 million for the quarter compared to $19.4 million a year ago. For the full year of fiscal 2025, we expect capital expenditures to total between $50 and $55 million. We repurchased another 174.6 thousand shares of stock during the quarter for $16 million and had $200.5 million of share repurchase authorization remaining at April 30th. Looking forward, We expect to continue our balanced approach of capital allocation with continued investment in our business and attractive M&A opportunities, while also seeking to opportunistically return value to our shareholders through our share buyback program. We have a solid balance sheet with no near-term maturities and an attractive capital structure, providing an effective foundation for the continued execution of our strategic priorities. Before turning the call over to JT, I have just a couple of housekeeping items. First, we will have an equal number of selling days per quarter year over year for our first three quarters of fiscal 2025. In our fiscal fourth quarter, we will have 63 days compared with 64 in the prior year period. And second, the projections that JT will provide exclude any benefit we expect to get from Vaughn after that transaction closes in the last month of our quarter. With that, I'll now turn the call over to JT. He'll start on slide eight.

Thank you, Scott. We're pleased with the results we delivered for fiscal 2024. And believe that, despite some short-term pressures in our end markets, we are well positioned to pivot as needed to address any shifts in end market demand and economics as we move throughout fiscal 2025. The resilience we saw in wallboard pricing during fiscal 2024 continued to prove out the new realities of the wallboard industry, including tight capacity with few newer planned additions expected in the near term, coupled with rising manufacturing costs, notably including those driven by the declining availability of synthetic gypsum, primarily in the eastern U.S. After a slow year for single-family activity, with an undersupply of new and existing homes on the market, We've seen some improving trends, but anticipate a more substantial recovery to be tied to lower mortgage rates over time. Meanwhile, we believe that the long-anticipated multifamily decline has indeed reached certain geographic markets, even as others continue to have significant units in backlog. And, as I stated earlier in my remarks, commercial put-in-place spending is flattening while starts are slowing. Therefore, we expect commercial conditions to be a bit bumpy going forward, as certain megaprojects, data centers, and some other less financing-sensitive projects likely continue, while smaller project starts are expected to be more limited until we see some improvements in rates. Given this backdrop, let me turn to our expectations looking forward. Starting with wallboard volumes as compared to the prior year, we anticipate single-family to be up mid-single digits for our fiscal first quarter. And as we progress through the balance of the year on normal seasonality and without any expectation for accelerated market recovery, we expect growth to be in the high single digits for single-family wallboard volumes on a year-over-year basis. Multi-family wallboard volumes will likely be flat to up slightly during our fiscal first quarter before declining progressively into the back half of our fiscal year. And commercial wallboard volumes are expected to be up low single digits for our fiscal first quarter before flattening for the next couple of quarters, and then likely declining year-over-year in our fiscal fourth quarter. Considering all of these end-market dynamics, in total for GMS, first quarter wallboard volumes are expected to be up low to mid-single digits, and also up mid-single digits in the next couple of quarters thereafter. After a nearly one-year pause in pricing actions, we believe we have begun a renewed inflationary period for wallboard. Our pricing for wallboard is expected to remain resilient this quarter as we continue to work to pass through the earlier announced manufacturer price increases. While implementation of these actions is taking longer than we would like, we expect to see some benefits from these price increases beginning in July, tempered by the impact of the expected mix shift from higher single family volume. As such, we expect first quarter wallboard prices to be roughly flat as compared with the prior year period. Post our first quarter, we expect to see sequentially improved pricing in the low single digits with further realization of this round of price increases. For steel framing, as noted, pricing and gross margin have softened more than we expected, and demand will most likely be choppy as multifamily high-rise and certain commercial projects conclude, while key megaprojects and other commercial activity continues. For the first quarter, we expect volumes to be up low to mid-single digits year over year, a notable slowdown from fiscal 2024, with prices down low single digits sequentially and down in the low teens year over year. While the underlying rolled commodities are driven by other end market sectors and thus very difficult to predict, all of the major framing formers in our markets recently announced price increases. which should support some greater stability in future months. In ceilings, given the noted level of activity in our commercial end market, we expect low to mid-teen increases year-over-year for volume, inclusive of recent acquisitions, and a low to mid-single-digit increase for price and mix. All considered, we expect healthy mid- to high-teen sales growth in ceilings for the next several quarters. Finally, Net sales for our complimentary products are expected to grow at mid single digit levels as compared with the first quarter of fiscal 2024. And we expect this pacing to continue through the remainder of the year. All in, as shown on slide nine, we anticipate net sales for our fiscal first quarter to be up mid single digits as compared with a year ago, with organic sales up low single digits despite the deflationary pressures and steel prices. For Q2, and the full year, we expect similar growth, but with some improved pacing versus Q1. Principally on the continued pressures in steel pricing and the still-in-process implementation of wallboard pricing, we'd expect first quarter gross margins to be constrained versus prior year and prior quarter at approximately 31.5% before returning to more normal levels, around 32%, for the remainder of our fiscal year. Despite actions being taken to manage near-term discretionary and investment spending, we also expect that deflationary steel pricing relative to strong delivery activity will continue to have a deleveraging effect on SG&A for the quarter before improving later in the year. As a result, we anticipate adjusted EBITDA to be in the range of $160 million to $165 million for our fiscal first quarter, with a slight margin improvement from our fourth quarter. Assuming general stability elsewhere, given our outlook for markets and the actions we are taking to manage within them, we expect second quarter EBITDA margins to be consistent with prior year. And on a stronger overall year-over-year growth profile for the full year, we also expect to see year-over-year profitability improve in subsequent quarters. Thank you for joining us today.

Operator, we are ready to open the line for questions.

Kat? Just a minute, guys. Sorry for the delay. We are trying to communicate electronically here with the operator.

Ladies and gentlemen, we apologize for the technical inconvenience. Please stand by. The event will resume momentarily.

Once again, ladies and gentlemen, we do apologize for the technical difficulties. We will take our first question coming from the line of Trey Grooms with Stevens. Please proceed with your question.

Good morning. Thanks for taking my questions. This is Noah Murkowski on for Trey. Sorry, I'm not sure if you can hear me.

Ladies and gentlemen, stand by one moment. I apologize for that. Go ahead and continue, please.

All right. Some cool tunes. Yeah, so just I know. Hey, yeah, so just wanted to touch on wallboard pricing. I mean, sounds like there's maybe some limited traction, but it's kind of taking longer than expected. And we'll kind of see that play out in the coming quarters. And so I guess first, I was wondering if you could kind of break out what you see as like for like pricing versus, you know, what you're seeing from a negative mix impact as you see single family accelerate relative to commercial.

Yeah, I mean, as we stated just now in the call, I mean, I think like-for-like pricing, we'll see low single-digit appreciation in the price of wallboard for both commercial and residential wallboard as we go forward. We expect some improvement in July. We've achieved some pricing with some of our larger national account customers, which we expect to come in in July. We've already achieved a little bit of pricing this quarter, believe it or not. And we would expect most of it to be realized in the second quarter.

Okay. And then, but, but then you've got the mix negative mixed impact on top of that. That's kind of keeping it at this sort of flattish. Yeah.

So from a price perspective though, I mean, that's why we just got it back to 32% gross margins later in the year is because we're having a, you know, an expected pretty good year over year single family market and even though, you know, when you read the headlines, it's not terribly significant. But last year was so bad single-family-wise that, you know, based on the activity we've seen so far, that's where we're going to get that single-family growth on a year-over-year basis. And, of course, that's the largest consumer of Wal-Mart in any of our end markets is single-family.

Okay. That makes sense. And then maybe on that margin, I mean, 30, yeah, 31.5% in the quarter? I guess if we're just looking at wall board, is it just the delayed impact of pricing and that catches up later, like you said, or is there something else going on?

No, I mean, it is, but two thirds of our expected miss in, I would say expected miss, we've never really given the quarter before, but in our own internal view, about two thirds of what we would call the headwind for the quarter is the steel and about a third is wall board. So we see both improving as we move through the second quarter. But yes, for the wallboard question in particular, it's just the realization of the price increase is taking us a little longer than we'd like.

All right. Thanks. That's helpful. I'll leave it there. Thank you, Noah.

Thank you. Our next question is coming from the line of Matthew Booley with Barclays. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking the questions. Maybe just sticking on the wallboard piece. You know, I know you mentioned that mix is kind of the offset, um, you know, here into the next quarter. Uh, I mean, as we kind of think about the shape of, I guess, volumes, as you're talking about how this year will look where we're new residential really is kind of the source of volume growth. Um, I mean, presumably the, the mix headwind would, would persist. Um, So can you just kind of put a little color on how you think about Q2, Q3, Q4, if really new resi is the big driver of growth, you know, what that would do to the mix effect on wall board price? Thank you.

I mean, it really should be flat over the next couple of quarters in total. Maybe we can do a little bit better than that. But the growth margins improve because the cost of service, well, the operating margins, you know, improve, but so do the growth margins improve because at the end of the day, both commercial and single family growth margins are similar, but the net headline price is going to be flat. But as both go up, the gross margin dollars improve, gets us back to that 32% and takes us back into, you know, pretty good profitability.

Got it. Okay. Thanks for that. And then secondly, I guess also back down to the margin side, So the gross margin, I guess one quick clarification, how much in that guide of 31.5 is purchase accounting from CAMCO? So if you could quantify that, but then just kind of higher level, you know, when you think about getting back to 32, I'm curious if there's any kind of, I don't know if there's like a temporary inventory headwind on the gross profit that would dissipate if you saw price stability. So just any kind of color on that. And I guess I'll squeeze this one in here too, but the EBITDA margins being consistent year over year in the second quarter, does that also mean you should be getting to SG&A leverage beginning in Q2? Sorry for all the questions, but if you could address that. Thank you.

I'll speak to the first one, Matt. We talked about the purchase accounting impact in Q4. We wouldn't expect any further continuance of that into Q1. at the cost of sales line will obviously have impacts related to G&A and amortization on the step-ups and those types of things, but with regard to cost of sales, you shouldn't see anything there.

I'm going to address the last part of your question because I remember it better. Yes, we should start seeing some SG&A leverage in Q2. It's not going to be dramatic, but it's going to be good to get us to flat EBITDA margins on a year-over-year basis with expected sales you know, north of that mid-single-digit range, you know, we expect Q2 to kind of rebound nicely for us.

Yep, got it. Okay, and I was asking about the kind of inventory headwind. Is there any kind of inventory headwind given deflation that would dissipate, or is it temporary?

No, so we don't have deflation in wallboard, so we're not facing that on the wallboard side. On the steel side, it comes through pretty quickly. So we pass pricing on steel through much faster, either up or down. So no, we don't anticipate having a big problem with inventory. The steel market being commercial, a lot of the larger commercial work is protected for a period of time through bid activity and through commitments at the manufacturing level to us. And so the shorter term business, the more stock steel business, it turns very, very, very quickly. So we don't anticipate a big squeeze in steel.

All right. Thanks, guys. Thanks for addressing all that. Appreciate it.

Absolutely. Thank you.

Thank you. Our next question is coming from the line of David Manthee with Baird. Please proceed with your question.

Thanks. Good morning, everyone. JT, last December on the call, you addressed each of your three key end markets. You talked about the possibility of an air pocket in commercial demand during calendar 24. You talked about a moderation in multifamily once you work through the backlog, and then a recovery in single-family housing demand. The overlay there, though, you said that easing in credit markets will drive expansionary improvements thereafter. And just given the lack of rate movement, could you contrast your current outlook in those three categories with that of six months ago?

Sure. I think multifamily, you know, that was kind of already baked in, right? And so we've there's still 900,000 units out there as of the last report. I mean, I think this morning the new report came out, but we're on here with you guys. So 900,000 units in the last report, they build about 450,000 units a year. So we really felt like, you know, we had another, we feel like we have another couple of quarters before we start to see the big declines there. So nothing's changed in my mind there. I think, you know, my hopeful side on single family would have been that we would have started to at least get an indication that rates were coming down by now. And of course, it seems like higher for longer, although maybe there's some September relief. I doubt it. Probably, you know, post the election, I think we'll start seeing some rate relief, which is good for next year. So our single family view is the same as I gave you before, but I don't think we'll see a lot of upside to what we've just talked about. And commercial activity, I mean, it's really bumpy. I think it's probably a little worse than I would have guessed six months ago. based upon just more difficult financing environment for privately financed projects. Will the mega projects offset all of it? I don't think so. I think that's why we talked about maybe having some declining year-over-year results in fourth quarter of next year, relatively flat Q2, Q3 type overall commercial activity.

Okay, thank you for that. And second,

As it relates to the single family side, I don't know exactly what time frame you're talking about. You said through April up 26%, and I'm not sure if that correlation is to your 2.8% single family sales per day in the April quarter. And I know there's a difference in starts and completions, there's a gap there, and Could you address that? And then just in terms of within single-family housing, are you seeing any noticeable trends of the square feet of wallboard you're selling per housing start? Is there any size issue that is also influencing the numbers?

Yeah, let me address the second comment first. Interestingly enough, we are not seeing in our big national accounts less wallboard per unit. But I think what we're seeing is we're seeing more single-family versus townhouse activities. And so while the single family houses are using a little less wallboard, the townhouse activity is much slower than it was before. And so we're seeing more actual single family going into that market or going into that demand picture for us. As far as the timing goes on the 26%, so let me tell you what the 26% was. That was the non-seasonally adjusted starts through April. So if you look at the single family starts through April, non-seasonally adjusted, that was the Census Bureau's number of 26% year-over-year improved starts. Those probably follow on in a six to nine month period. And so that's why we see accelerated single family sequential growth for us as we get through our Q1 and into Q2 and Q3, which is why we just talked on the call of having our growth rate be better than mid-single digits in Q2 and Q3. almost all of that being driven by single-family activity.

Got it. That sounds great. Thanks, JT.

Thank you, David. I appreciate it.

Thank you. Our next question is coming from Stephen Ramsey with Thompson Research Group. Please proceed with your question.

Hey, good morning. This is actually Brian Byros, not for Stephen. Thank you for taking my question. Maybe I'll start on the residential side. Large homebuilders I've seen a lot of share gain kind of in the past few years here. Can you kind of just refresh us on how your positions in the past couple years to this and then how you're positioning for the upcoming years, kind of strategic efforts you guys are making to benefit from the large home builder share gain?

Yeah, I mean, we've talked about it now kind of multiple quarters in a row. We continue to gain share with the larger home builders. Our scale and national presence is important for the national home builders. As the national home builders tend to be more center-led over time, that actually helps us as their center-led purchasing organizations and center-led construction organizations value what we do more so. So I think we've talked about it. If the national home builder was representative of 35% share, 30-35% share of the total, we're probably 45%. You know, 50% of our share is upwards almost of our new builder businesses, national home builders.

Got it. And then second, on stealing volumes, performing pretty nice in the past few quarters here. It looks like you're expecting another strong performance in Q1. Can you kind of touch a little bit further on kind of what's driving that? Trying to think about the end markets there with tenant improvements. Kind of weak, not great. What are the headwinds and tailwinds now? Thank you.

Yeah, so office is your headwinds, right? I mean, still office activity, remodel activity in office, pretty quiet. And the tailwinds are data centers, public and private education, and the healthcare space. So those three are really good right now. And so data centers use a tremendous amount of ceilings, suspended ceilings. Obviously, primary education, secondary education, lots of suspended ceilings, and that activity is really strong. You can see it in the Census Bureau reports on where the commercial spending is still growing, still growing in health care, still growing in education. You know, if you look at the – it shows that it grows in office, but that's data centers. They have data centers rolling into the office category. So that's really your strength there.

Got it. Thank you.

Thank you. Our next question is coming from the line of Mike Dahl with RBC Capital Markets. Pleased to see with your question.

Thanks for taking my question. I want to start on steel pricing. So, obviously, you know, we've seen some increased attempts over time, which in the recent past have proven unsuccessful. We saw weakening through the quarter. You talked about weakening month over month through 1Q. I guess what's giving you confidence that we see stability thereafter? It's unclear fundamentally whether anyone's blinked on capacity. Demand, you've pointed out, is still choppy. So why would this time be different on the steel price increases? And then maybe if you take your comments for 1Q as far as where you'll end up at the exit rate, thinking about carryover deflation into 2Q and beyond.

Yeah, we've got Q1 down low single digits sequentially. And we have Q2 flattening with the price increase announcements and kind of staying there. We feel like we're near a bottom. The underlying commodity seems to be bottoming or has bottomed. Of course, we've seen that before. I think every one of your comments is very fair. For us, as I don't want to call ourselves a victim by any stretch of the imagination, but we're certainly not the driver of steel prices And we're a very small part of the overall steel market. So I think ultimately what's going to stabilize steel is going to be a lower rate environment, which is going to help people go out and buy cars and buy appliances and do all the things that they'd like to do. You know, the used car market doesn't help us, obviously. The new car market does. And so everybody's buying used cars right now because the cost of a new car is crazy. So I think that what you'll see with rates coming down is you'll see a stabilization in a lot of places. for us, but steel in particular. But right now we feel like the steel formers who we buy from seem to be pretty adamant that this price increase is necessary and will stick. So we'll see. We even put that in our comments here in that particular case. And we're calling out an inflationary environment in wallboard, not yet calling out an inflationary environment in steel. But what we have is sequential declines through this quarter, and then a flattening as we go through the balance of the year. That's what's in our outlook.

Okay. And then just so then to follow up and to tie it into my second question, then so if we're down low single digits in 2Q and flat thereafter, it still seems like there would be some carryover year-on-year deflation. If you could size the year-on-year, what that would imply, you know, for 2Q and then Back to the SG&A dynamic, if you're continuing to see this deal pricing pressure, and I appreciate your comments on the accelerated top line, but a lot of that is also acquisition-driven, which hasn't really levered SG&A. Some of the dynamics around some inflationary pressures, based on everything we hear from everyone else, seems like those dynamics are relatively sticky. I guess I'm still... still looking for a bit better of a bridge to get to such a quick return to SG&A leverage in this environment?

Well, again, in that quarter we have steel prices flat sequentially. This quarter is where we're going to, this is our Q1, our Q1 is where we have it down low single digits, then flat sequentially thereafter because the price increases have all been announced for July. We don't expect to see a lot of steel deflation post this quarter. Scott's comments indicated that this quarter we do. And going forward, though, we also don't have much volume in the steel business, right? So we're basically looking at steel being flat sequentially from a volume perspective. So we're not fighting that double whammy of a declining price and delivery expense. So that's a big reason as to why the SG&A flips in Q2. but also the SG&A flips in Q2 because we've got strong wallboard volume and a lot of that's residential and the cost to deliver that is lower than the commercial cost to deliver. And so we expect that as that happens, we'll be able to manage our SG&A. And additionally, I mean, we're doing a lot of things internally as that commercial market and the multi-family market appears to be flattening and preparing for decline. We're doing things internally you'd expect us to do, which is to control our G&A, right? So we're doing all those things. So, you know, the big wild card, you know, is going to be steel in some respects into Q2. If what happens is what we believe will happen, I think we'll start leveraging SG&A in Q2 and post-Q2.

Sorry, I don't know if I'll get cut off here, but, again, so I hear your – comments on sequentially that makes sense but year over year it still seems like some of those things would be headwinds so when you talk about leveraging sgna are you talking about sequential or year on year your sgna percentage will be down year on year year on year down year on year and again we're going to get wallboard price we're getting wallboard pricing too right so that's important wallboard's big part of the business still okay

Thank you. Absolutely.

Thank you. Our final question is coming from the line of Jeffrey Stevenson with Loop Capital Markets. Pleased to see with your question.

Hey, thanks for taking my questions today. So, regarding your term wallboard margin pressure, have you experienced an unusual amount of pushback from large national accounts when you've historically had passive and long manufacture price increases?

I mean, I'd say it's about the same, except for in the environment we were in a couple of years ago when the demand, you know, housing starts were in that 1.5, 1.6 million range where, you know, the demand outstripped the ability to supply. And so there were, you know, spotty service issues across the industry. You know, right now, what you're seeing is the industry is getting close to that environment again, and we think we'll probably be in that depending on you know, what happens with commercial and multifamily to some extent, you know, late in our fiscal year. But with any recovery in single family, it's going to get pretty tight. So I would say that this is a pretty normal cycle for the big national home builders that we've talked to. And like I said, we've had some success in that recently in getting that there. I think the balance of the market is a little more difficult than we had anticipated in getting pricing All that being said, we're going to push it through. And as I said, I think it was two years ago, I don't know if everybody remembers, or three years ago, whenever it was, whatever we take, we're going to push through. And the timing of that may be a little bit elongated from time to time, but if we take pricing, it's going to go into the market. And that's where our heads are, and that's where our guys are out executing today.

Okay. Understood. Understood. And just for clarification, how did your wallboard price at the end of April compare with your average quarterly wallboard price? Because you reported a sequential improvement in February wallboard pricing last earnings call. I wondered if pricing came off at all as the quarter progressed or if there was any changes more mix-related.

Yeah, we were 475, 475, 475. The February improvement went away pretty quickly with, you know, some national home builder mix. picking up. So we were believing that we would see a little bit of sequential improvement in the quarter, but it was pretty much flat the entire quarter.

So we exited 475 as the answer. We basically ended it flat all quarter.

Okay, great. Thank you.

Thank you. That concludes our question and answer session, and this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.