GMS Inc.

participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this call is being recorded. It is now my pleasure to introduce Carrie Phelps, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Sherry. Good morning, and thank you for joining us for the GMS Earnings Conference call for the second quarter of fiscal 2025. I'm 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 we issued this morning, you can find a set of PowerPoint slides to accompany this call in the Investors section of our website at www.gms.com. On 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 the references on this call to the second quarter of fiscal 2025 relate to the quarter ended October 31st, 2024. Once we begin the question and answer session of the call, we kindly request that you limit yourself to one question and one follow-up in the interest of time. With that, I'll turn the call over to John Turner who will begin on slide three. JT?

Thank you, Carrie. Good morning and thank you all for joining us today. For our second quarter, we reported net sales of $1.47 billion, which increased 3.5% year-over-year, primarily the result of recent acquisitions, with volume growth in ceilings, steel framing, and complementary products. Softened conditions across our end markets, together with the impacts from two major hurricanes, held back our wallboard volumes and our results in general for the quarter, causing the closure of more than 40 of our locations for at least one day during the quarter, plus subsequent slowdowns and disruption in construction activity in the hardest-hit areas as the local focus turned to cleanup and recovery, we estimate that Hurricanes Helene and Milton negatively impacted our net sales and organic sales in the quarter by approximately $20 million and adjusted EBITDA by approximately $6 million, inclusive of lost purchasing leverage and operational inefficiencies impacting SG&A. Organic sales for the quarter declined by 4.6% due to the hurricanes and to softening year-over-year demand, particularly in our multifamily and commercial end markets. Gross margin for the quarter was 31.4%, up 20 basis points sequentially from our fiscal first quarter, but down 90 basis points from a year ago. This variance from last fall can largely be attributed to a mixed shift from commercial and multifamily to single-family deliveries combined with price and cost dynamics in Wallboard, as our team continued to work during the quarter to pass through previously announced manufacturer price increases in a very competitive and cost-sensitive environment. That income for the quarter was $53.5 million compared to $81 million a year ago, and adjusted EBITDA was $152.2 million compared to $167.6 million in the prior year quarter. Given this softer market environment and amid the storm disruption, EBITDA margin was 10.3% for our second quarter compared with 11.8% a year ago, when both the multifamily and commercial end markets were much more active. The trends that we discussed on last quarter's call have continued to impact the industry at large. Although public sector projects, data centers, and other projects backed or influenced by government incentive programs such as the CHIPS and Inflation Reduction Acts continue, overall commercial activity levels were lower than a year ago and are expected to remain challenged until the interest rate and lending backdrop improves. In multifamily, high interest rates and suppressed commercial real estate lending also continue to constrain activity in the near term. Solid absorption rates of recently completed units in this space provide optimism for renewed investment. Given the development cycle for these projects, however, the ramp-up will take some time. For the longer term, the solid underlying demand fundamentals of the housing market, including favorable demographics, low levels of supply of new homes, a chronic undersupply of homes in general, and easing regulatory constraints for development, are expected to provide considerable support for the multifamily market over time. For single family, affordability issues, driven by sustained high mortgage rates and low resale inventory, have muted its recovery. It is particularly difficult for smaller builders, who, already relatively challenged in terms of land acquisition, lack the balance sheets and scale to buy down rates and offer other home buyer incentives common in today's market. Overall, single family activity during the quarter was roughly flat with a year ago, but with a continuing shift to larger builders. We believe that we will see improvement in this end market once mortgage rates recede, as there continues to be significant pent-up demand for housing. Ramping expansionary sentiment for zoning improvement in local markets should also have a positive influence, both single and multifamily. As we noted last quarter, all of these favorable influences should help to trigger eventual recovery in all of our end markets, led first by single family, then followed by commercial and multifamily. Against this backdrop, our diversified customer base and balanced revenue mix continue to serve GMS well, as we can nimbly flex up or down as our end markets fluctuate. In addition, where large national home builders now account for more than half of all new home sales, GMS is very well positioned to serve this demand with our distinct footprint, equipment, expertise, and scale. Taken together, these factors provide us with a great deal of confidence for the long-term prospects of GMS. I'd like to thank our dedicated team for their unwavering commitment to position GMS for success, especially when faced with market and operational challenges, like the weather events that affected our business in the southern regions this fall. As we manage through the continued macro dynamics impacting our industry, the efforts that our team have made to execute against our four strategic pillars are key in maintaining our position as the supplier of choice for our customers. These pillars are highlighted on slide four. Even as demand has further muted, we maintained our focus on growing or maintaining our share across our core product categories throughout the second quarter. For Wallboard, despite being significantly impacted by pacing headwinds in multifamily and commercial, our teams continue to stay close to customers across our end markets, particularly as we work through the quarter to manage through the manufacturer price increases announced in early calendar 2024. Using the Gypsum Association disclosures for the calendar third quarter, our share grew slightly year over year. In steel, framing, and ceilings, where our teams have been working to drive sales in data centers and other large commercial projects, our share also expanded year over year, per information provided by the Steel Framing Industry Association and manufacturer disclosures through September. Data centers represent a growing and attractive opportunity for GMS, in many cases demanding higher-end ceilings products steel framing, wallboard, and complementary products, as well as specialized service and delivery. Next, we continue to prioritize growth in our complementary products. As we've discussed on previous calls, we are focused on expanding high-opportunity growth subcategories, including tools and fasteners, eats and stucco, and insulation. The complementary product category continues to grow faster than our core products, and these three focus areas within the category have even stronger growth rates. We believe that driving solid growth in complementary products beyond that of our core products will, over time, increase the value we bring to our customers while also enabling accelerated growth and margin enhancement. During the quarter, we expanded our platform to the recent openings of one new Greenfield location, plus two more in November, to enhance our service levels in existing markets, complemented by the exciting acquisition of exterior product specialist R.S. Elliott in Florida. Our M&A expertise is one of our core competencies. Since COVID, we have invested just over a billion dollars to acquire 16 companies that generated approximately $1 billion of total annualized net sales and roughly $140 million in annualized adjusted EBITDA at the time of the deal closures. Six of these transactions were focused on the expansion of our core products, while 10 primarily helped us accelerate our complementary product initiatives, including those focused on Eats and Stucco, and tools and fasteners in the U.S., together with adding broadened offerings and scale to the one-stop, more broad-line model in place in Canada. Finally, we continue to make progress to drive improved productivity and profitability. Our team worked diligently during the quarter to implement the cost savings initiatives we announced in August, which we now believe will achieve closer to $30 million of annualized cost savings for the company. These results are realized through simplification and efficiency optimization. which were made possible by our prior investments in technology and other process improvements and structural changes. On a run rate basis, we achieved roughly half of the 30 million annualized savings in the second quarter and expect the remainder of the pacing to be realized in the third quarter. With that, I'll turn the call over to Scott.

Thanks, JT. Good morning, everyone. Starting with slide five, I'll provide some further commentary on our second quarter results. Net sales for the quarter increased 3.5 percent year-over-year to $1.47 billion. Volume growth in steel framing, ceilings, and complementary products, primarily driven by $117 million in benefits from recent acquisitions, was partially offset by an estimated $20 million negative impact from the two major hurricanes that hit one of our largest and most robust regions and an estimated $18 million negative impact from steel price deflation. assuming current year volumes have been sold at prior year prices. As JT mentioned, organic sales declined 4.6% as compared to the prior year quarter, primarily due to year-over-year market-driven declines in multifamily and commercial volumes, along with the impacts from hurricanes Helene and Milton. From a U.S. and market perspective, across all product lines, commercial sales dollars declined 4.4%, while multifamily fell off much more significantly, declining 16.9% as compared to a year ago. U.S. single-family sales dollars were up just slightly, less than 1% above the prior year quarter, but below our expectations as mortgage rates have increased despite the recent Fed rate reductions. Also, given the heavier single-family weighting in the hurricane's hardest-hit regions, the bulk of the hurricane impacts were evident in our single-family results. Wallboard sales dollars of $582.1 million were down 0.5 percent as compared with the same period last year, comprised of a 1.6 percent decline in volume, partially offset by a 1.1 percent increase in price and mix. Again, we estimate that the bulk of the $20 million reduction to net inorganic sales from this quarter's major hurricanes had the greatest impact on single-family volumes for wallboard. Organically, second-quarter wallboard sales were down 5.2%, entirely volume-driven, reflecting approximately flat year-over-year demand in single-family volumes, a 19.2% drop in multifamily volumes, and commercial volumes that were down 6.9%. The decline in wallboard volume included an estimated nearly 200 basis point reduction due to the hurricanes, with the remainder reflective of the weaker market conditions. A heightened mix shift toward the lower-priced board used in single-family construction resulted in flat year-over-year organic price and mix for wallboard, despite a slight improvement in realized price. Notwithstanding the unfavorable change in mix, the average unit value for wallboard products was again up slightly sequentially from our fiscal first quarter as our team worked to implement the pricing actions that were announced by the manufacturers early this calendar year. The average realized wallboard price for the quarter was $481 per thousand square feet, which is similar to where we ended the quarter on October 31st. but up slightly from the $476 second quarter average for fiscal 2024. While the additional round of wallboard manufacturer price increases originally proposed to go into effect this fall were not realized in this current environment, given the escalating costs and industry capacity utilization that is estimated to be in the mid-80s, even with relatively soft market conditions, we would expect a renewed attempt at increases sometime in the first half of calendar year 2025. For ceilings, including acquisitions, sales were up 16.6 percent year-over-year in the second quarter, comprised of an 11.1 percent improvement in volume and a 5.5 percent benefit from price and mix. Organic sales for ceilings grew 1.6 percent for the quarter, including a 2.5 percent decrease in volume but with a 4.1 percent increase in price and mix. The decrease in organic volumes this quarter can largely be attributed to the general slowdown in commercial activity, despite some bright spots in projects such as data centers and healthcare facilities. Looking to calendar 2025, we expect that the inflationary dynamics typically associated with the ceilings market will continue. Second quarter steel framing sales were down 6.3 percent in the quarter, reflecting volumes that improved 1.5 percent, offset by negative pricing mix of 7.8 percent, which, indicative of a stabilizing commodity market, was better than we had expected. As JT mentioned earlier, while steel prices were down year over year, we did start to see some slight sequential improvement as we moved through the quarter, and there are new supplier increase announcements in the market in this third quarter. Organically, steel framing sales were down 14 percent, with an 8 percent decline in volume and a 6 percent decline in price and mix. Complementary product sales of $466.8 million for the quarter grew 9 percent year-over-year, representing the 18th consecutive quarter of growth for this category. Sales decreased 1.4 percent on an organic basis, due primarily to the soft commercial and multifamily conditions combined with lower year-over-year pricing for some of our products, such as lumber and metal trim. Our team remains focused on driving growth in complementary products, particularly for tools and fasteners, eaves and stucco, and insulation, where these subcategories collectively grew 14.1% for the quarter. Now, turning to slide six, which focuses on the quarter's profitability. Gross profit of $461.1 million was just slightly higher than during the second quarter of fiscal year 2024. Gross margin was 31.4 percent, down 90 basis points from a year ago. Roughly two-thirds of the percentage variance was the result of cost-price dynamics on wallboard manufacturer price increases not yet captured during the quarter, together with a mixed shift from higher margin commercial and multifamily business to single-family activity. Unrealized manufacturer purchasing incentives, given the tighter demand and storm disruption, were also a factor by an estimated 15 basis points. Finally, several one-time operational impacts, including inventory loss and damage and liquidation of capitalized freight, lowered gross margin by another approximately 15 basis points. Selling general and administrative expenses for the quarter were $324.2 million, up from the prior year's $300.9 million. As a $23.3 million year-over-year increase, approximately $21 million related to recent acquisitions, $5.6 million related to additional severance costs, primarily associated with the previously disclosed cost containment actions, and $2 million related to higher insurance claims. Despite the headwind of storm-related inefficiency seen in the quarter, these increases were partially offset by lower overall operating costs, reflective of a realized savings from the announced cost reduction actions and reduced activity in spending amid the softer market conditions and mixed shift in in-market demand. SG&A expenses were 22% of net sales compared to the prior year's 21.2%. an increase of 80 basis points. Forty-five basis points were attributable to restructuring costs, primarily severance related to the previously announced cost containment efforts. General operating cost inflation resulted in approximately 40 basis points of due leverage. Operational expenses principally associated with higher accident claim activity and rent expense drove 30 basis points of due leverage. and steel price deflation contributed another approximately 30 basis points of deleverage. These factors were partially offset by a 30 basis point improvement from the lower average operating costs on recent acquisitions, a 20 basis point improvement from our implemented restructuring actions, and a 15 basis point improvement related to wall board price inflation. Adjusted SG&A expense as a percentage of net sales of 21.1 percent increased 50 basis points from 20.6 percent. All in, and inclusive of a 26.4 percent increase in interest expense, net income decreased 33.9 percent to $53.5 million, or $1.35 per diluted share, compared to net income of $81 million, or $1.97 per diluted share. Adjusted EBITDA of $152.2 million decreased 9.2% year-over-year from $167.6 million in the prior year's second quarter. Adjusted EBITDA margin is also down at 10.3% compared to the prior year quarter's 11.8%. Now, continuing to the balance sheet on slide 7. On October 31st, we had cash on hand of $83.9 million and $458.6 million of available liquidity under our revolving credit facilities. Following the acquisition of CAMCO, Avon, and RS Eliot earlier this calendar year, coupled with share repurchase activity and an increase in capitalized equipment leases, our net debt leverage was 2.3 times as of the end of the quarter, up from 1.5 times a year ago. Cash provided by operating activities for the quarter was $115.6 million, compared to $118.1 million in the prior year quarter. Free cash flow, $101.5 million, which was almost 67% of our adjusted EBITDA for the quarter, compared to $102.1 million, or 61% of adjusted EBITDA a year ago. For the full year of fiscal 2025, we now expect free cash flow to total approximately 60% to 65%, of adjusted EBITDA. Capital expenditures for the quarter were $14.1 million compared to $16 million a year ago. At this point, we expect the capital expenditures will be approximately $45 to $50 million for full year fiscal 2025. During our fiscal second quarter, we repurchased 593,000 shares of stock for $52.3 million at an average price of $88.19 per share. Indicative of continued confidence in the business, earlier this week, our board of directors renewed our share repurchase program, authorizing the company to repurchase up to $250 million of its shares outstanding. Share buybacks continue to be a core component of our capital allocation strategy as we balance those repurchases with continued investment in our business, attractive M&A opportunities, and debt repayment. Our capital structure and solid balance sheet provide what we continue to believe is an effective foundation for the execution of our strategic pillars. With that, I'll turn the call back to J.T. who will start on slide eight.

J.T. Thank you, Scott.

While near-term market conditions continue to present headwinds, GMS is well positioned given our expertise, flexibility, and scale to successfully service both commercial and residential customers. Given all the evolving market dynamics, we believe the conditions will remain choppy and unpredictable into calendar year 2025. Considering this, let me discuss our expectations for the fiscal third quarter. Starting with organic wallboard growth, using our U.S. business as the proxy, as compared to the third quarter of fiscal 2024, we expect single-family volumes to be roughly flat versus prior year, multifamily wallboard volumes to be down roughly 25%, and commercial wallboard volumes to be down high single digits. As a result, total organic wallboard volumes are expected to be down mid to high single digits, and total wallboard volumes, including acquisitions, are expected to be down low to mid single digits. Given the structural changes we've seen in the wallboard space, including limited excess capacity and rising costs for manufacturers, particularly from the reduction in availability of synthetic gypsum, We expect like-for-like product-level pricing to remain stable with where we are today until we see a more robust demand environment. Therefore, for our fiscal third quarter, given our mix expectations, we anticipate wallboard price and mix to be up slightly year-over-year. In ceilings, we expect third quarter volumes to be up high single digits, driven by acquired volume and favorable project mix, with mid-single-digit improvement for price and mix. For steel framing, with soft conditions in commercial and multifamily activity expected to continue, volumes for our fiscal third quarter are expected to be down low single digits, with price and mix down low to mid-single digits. Although prices started to stabilize sequentially during our fiscal second quarter, and despite recently announced increases, we expect the pricing in steel framing to contract slightly, as is seasonally typical during our fiscal third quarter. Finally, net sales for our complementary products are expected to grow in the very low double digits year over year, likely around 10%, principally the result of acquired volume. All in, and as shown on slide nine, we expect our fiscal third quarter net sales to be up low single digits as compared with a year ago, with organic sales down low to mid single digits. Gross margin is expected to continue to improve slightly over our fiscal second quarter, at approximately 31.5% to 31.7% for our fiscal third quarter. Adjusted EBITDA for the quarter is expected to be in the range of $113 to $118 million, with EBITDA margin of approximately 9% for what is seasonally our softest quarter. As we continue to manage through this down cycle for the near term, we remain optimistic about the path ahead. We see several positive trends on the horizon, including solid market demand for further housing construction with a growing U.S. population and undersupply of homes, along with rising demand for commercial construction in the United States created by infrastructure investment backed by government incentive programs, among other drivers. And with a further reduction in rates, we would expect additional drivers of demand to emerge. We only need to look across the U.S. northern border to see what could eventually happen here in the States with further reductions in rates. as we've seen a similar underbilled and pent-up demand situation in Canada. Canadians have been faster to react due to their typically shorter duration interest rate locks, following a string of rate cuts by the Bank of Canada. And with additional relief expected, homebuyers came off the sidelines in October, driving a 30% increase in homes sold as compared with the prior year and a 7.5% increase in the total monthly value of residential permits. we would expect a similar directional boost in the U.S. with mortgage rate relief. In addition, further supporting optimism in Canada are programs such as the Government of Ontario's More Homes Built Faster program and similar initiatives in other provinces. These undertakings have been launched to ease the permitting and construction of additional and more affordable housing units, and we are encouraged by increasing enthusiasm for similar policy changes designed to address the need for additional housing in the United States. In the meantime, the GMS business model is resilient, and we firmly believe we are well positioned to navigate this period as rates should continue to lower with time. With the expectation that we will continue to generate substantial levels of cash flow, we expect to continue to invest in our business, further strengthen our balance sheet, and execute against our strategic pillars to strengthen the company in anticipation of the next growth cycle. Thank you for joining us today. Operator, we are ready to open the line for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question. One moment while we poll for questions. Our first question is from Trey Grooms with Stevenson. Please proceed.

Hey, good morning, everyone. Hi, Trey. Hey, morning. I guess the first question is, you know, around wild board price cost. JT, you know, you mentioned, you know, that I think you guys have made some headway, but you did mention that it is a competitive and you know price sensitive market can you can you talk about where you are there as far as you know that price cost kind of getting that back and pushing that through kind of where you see that going over the next couple of quarters um you know specifically on wallboard if you could yeah i i think we we just discussed maybe 60 basis points of gross margin was still price costs attributed to wallboard um and that's slightly better than it was in our last quarter

And we talked about the gross margin moving forward sequentially, again, somewhere between 10 and 30 basis points. Most of that is going to come from the normalization of some of the one-time events that we saw in the quarter that Scott talked about. But we continue to see, as I just indicated, a little bit of improvement in wallboard price going forward. But it's a really difficult market right now. I think we've gotten about as much as we can get, particularly in some of the residential markets. You know, with multifamily being down as much as 25% in the market, probably unlikely to get much price in multifamily. And you can hear the single family guys in their remarks. Difficult to get much more in single family, although we continue to find ways to get a little bit here and there. We are focused in other parts of the business to improve gross margin as well, not just wallboard. I think commercially we still have an opportunity with our service advantage. and some of the ability to service some of the more difficult work that's out there to continue to drive some more gross margin until we really see a demand and improved environment. I think the key driver here is demand. When we see demand improve instead of continue to decline in volume, I think that's when we'll all be able to go out and get all of our margin.

Okay. All right. Thanks for that. And then kind of sticking to the, I guess, the pricing theme here, but maybe longer term pricing expectations, you know, especially around steel framing and I guess maybe even ceilings, you know, with the tile and grid, you know, with the backdrop of some tariffs, you know, the noise around tariffs, but also, you know, with the new administration coming in and that sort of thing. So any kind of color on that as far as maybe a little bit longer-term kind of pricing expectation there on other parts of your business?

I mean, there's tariffs in place now on steel, right? And so it should be somewhat helpful for us if those stay in place and or increase. No big impact in sealing tiles from tariffs. We expect that market to be basically what it has been forever, which is slightly inflationary almost all the time in that case. Tariffs in general, really for us, we talk about it internally that we'll have to wait and see what happens, but steel is really the one product that we would have that would be impacted dramatically from tariffs. Tools and fasteners in some respects, also, but mostly steel would be impacted, which I guess I would consider it probably a positive for us as a distributor. It's inflationary for sure, but I think that's probably more positive than negative for us. In the near term, with no tariffs, we still see steel bouncing along the bottom. We had a little bit better quarter from a price perspective this last quarter. You know, the underlying commodity, the cold rolled steel is kind of bouncing around right about the bottom of where it's been over the course of the last 18 months. And hopefully that's what it does in the near term with demand being, you know, off is that it kind of flattens. That's kind of what we have in our forecast going forward is flattening, you know, flattening price. And again, just as a reminder, which you already know, the steel industry is all about cars and all about all about appliances and all about structural steel. So I think in general, with an improving rate environment, that's probably going to help also be inflationary for steel.

Well, just to add for clarity's sake, we don't source any of our steel framing externally or outside of the country, but to the extent there is an overall impact to the world steel market, that would impact us indirectly.

Got it. Okay, well, thanks for that. Thank you, JT. Thank you, Scott, and best of luck with the rest of the quarter. Thank you. Okay.

Our next question is from Keith Hughes with Truist Securities. Please proceed.

Thank you. You gave us some views on multifamily and commercial, pretty negative coming up. I just wanted to clarify, is that sort of your view for the next quarter, or is that something going into next year?

Again, the categories that we're most involved in, Keith, in construction to this point aren't showing a whole heck of a lot of improvement as we go into the next few quarters. I would expect with rates coming down that what we'll see is we'll see a pretty good improvement across the board. I mean, retail has been lousy. Office has been lousy. Healthcare and education's been fine and holding in. Data centers are good, but that's offsetting just the office component. All the manufacturing spending that we're seeing, all the infrastructure spending that we're seeing in construction, that's not helping the wallboard business. So we need people to build structures. And so we don't see a lot of impetus for new structures being built over the course of the last couple of quarters. All that being said, just like I said last quarter, if this is the bottom of the cycle, which we feel like we're moving into the bottom of the cycle as we speak, it's a relatively soft cycle.

Okay. And your commentary on the commercial wallboard and ceilings and volume seems different. It seems like ceilings are going to do a lot better. Is that remodel business, or am I interpreting that wrong?

Well, a couple of things. Ceilings are doing better than the underlying wallboard business because of the projects that are happening. So data centers are great for ceilings. Health care has been good for ceilings. Education has been very good for ceilings. And that's offset basically the fact that office has been lousy, right? So those categories are fine for ceilings. Additionally, the acquisition of CAMCO, which you're seeing there if you look at our organic versus our acquired volumes, CAMCO is an exceptionally strong ceilings provider in New York City. And so we have been seeing a little bit of recovery in New York City when it comes to some office activity, et cetera, and CAMCO is doing a fantastic job up in the city. So we are benefiting from that.

Okay. One final quick question. The guidance for the next quarter, the net income, is that a gap net income or just a net income?

So we provide, if you look in the slide deck to the back slide, we actually provide a reconciliation of that so you can see those particulars there. Okay. All right.

Thank you very much. Thank you.

Our next question is from Kurt Yanger with DA Davidson. Please proceed.

Great, thanks, and good morning, everyone. Just in terms of the different outlook items, I'm curious where you feel like you have kind of the best visibility at this stage and whether it's commercial project deferrals or maybe the same thing on the multifamily side, whether the level of visibility compared to three or six months ago has improved at all?

I mean, I think our best end market visibility is single family and then commercial. And what's been happening in multifamily, which is unusual, is the degree of delay of the projects. So we still have the pipeline, but the pipeline is not being sold because the projects aren't happening. So as we get on the line with our guys and they talk about the pipeline, what we hear consistently is that three or four or five of the largest projects in each one of the divisions continues to be pushed down the road, not canceled, but being told by subcontractors and developers that the projects are being delayed in anticipation of lower rates or the need for lower rates and or the financing itself didn't come through. So that's basically what we're seeing. And so the multifamily pipeline, we can see it. Unfortunately, it just keeps getting delayed and pushed down the road. But most of the commercial work that we're doing, you know, are projects related to kind of the mega projects and CHIPS acts and infrastructure acts, et cetera. So we see those and or healthcare education. Those are all still happening. And, of course, the data centers. So I think the best visibility of single family, then I would tell you that we're pretty confident in the outlook on commercial. and then multifamily remains difficult because of the degree in which we just don't see them happening.

Right. Okay. That makes sense. And then just second on SG&A, could you talk a little bit about, you know, how you're thinking about the next couple quarters in terms of, you know, getting back to neutral or maybe generating some positive SG&A leverage and, just given some of the moving pieces with acquisitions and the cost reductions, obviously volume is going to play a component as well. But with where you sit today, how are you thinking about that over the next two to four quarters?

I think we're pretty close to neutral in this next quarter. And then I would expect us to be better going forward. Again, I'm going to caveat that the same way you did in that if we don't see further declines in volume that make it much more – that we end up chasing, right? As you know, as you chase into volume declines, you're always trying to understand the degree of the fixed infrastructure that might be necessary to be taken out versus the variable piece. The variable piece, obviously, we will take out, some of it naturally and some of it has to be forced out, but that I'm very confident in. The fixed piece, we'll have to take a step back and understand if there's more of that that's necessary or not. Right now, we're getting north of $30 million from our cost savings activity last quarter. And I think we've done a nice job to get us positioned to get us through the next two quarters, three quarters, which I really would imagine would have to be the bottom, based upon what we're hearing from a rates perspective, you know, barring any kind of really strange new policies coming in from the government. But I would guess we're two quarters to three quarters away from a bottom.

Okay, perfect. Thank you. Appreciate the color. Thanks, Kurt.

Our next question is from Quinn Fredrickson with Baird. Please proceed.

Hey, good morning, guys. Good morning. You did mention you're expecting some renewed effort on price increases from the manufacturers early next year. I understand your comments that getting price, or I should say more price near term is challenging, just given the level of demand, but I mean, should we anticipate a similar kind of experience to what you dealt with this year with a bit of a lag to realize, but eventually getting at least some of the increase? Is that kind of the right way to think about it at this stage?

Yeah, I think we'll absolutely. As an industry, I think it's become very, very aware. Manufacturers are very aware of their customers, meaning distributors, difficulty in passing through this last price increase. So I think there'll be a combination of everyone working together to get the next one in. All that being said, you know, we always have a lag to get it, but we're basically communicating now moving forward to our customers that, you know, prices are going to probably be up in the first half at some point. We're going to have to decide when that is, but we're beginning to communicate that now. and work through some of those issues, the same ones we've had to work through. But I would expect a similar experience to what we've had this year, albeit I do think that we will get more of any kind of price increase from the market going forward simply because we all need to at this point. We all must get more. And so I'm hoping and believing that we'll do this more in partnership across the manufacturing environment than in the last price increase.

That's helpful. Thanks. And then, JT, given your prepared comments about smaller builders and the challenges they're facing, can you just talk about how GMS is positioned relative to larger builders versus the market?

I mean, again, I think that we are in a wonderful position along with a couple of the largest competitors out there to service the national builders in a much better way than, let's say, a lot of the smaller competitors can. And that's just our ability to flex our equipment and our ability to move equipment around. So in the morning, it's very easy for us to do a commercial drop and then get out in the afternoon and do residential drops with the same equipment. All of our equipment is capable of both. For the most part, all of our teams are trained to be able to do both. We've got the geographic presence across every major market in the country, with the exception of one or two very small places like Utah, to service anybody's volume. You know, we're not small anywhere. So I think that when it comes to being able to service the national builder, we're in a great spot along with, you know, again, just one or two competitors. But we also have been servicing the small builder and we love the small builder business. We have wonderful relationships there, you know, small and medium builder business there. And I mean, we're really hopeful for them to have success as well at that, you know, hopefully the,

rising tide floats all boats when it comes to this situation next year with rains.

Thanks.

Our next question is from Stephen Ramsey with Thompson Research Group. Please proceed.

Good morning. I wanted to ask a broader question on wallboard pricing. You're kind of waiting on more demand to make it easier for that to get passed through. Do you have a prediction on how much better activity needs to get to make that pricing more easily achieved? Just sort of thinking by all three end markets, how much better does it need to get to make it easier to swallow for the customers?

I really feel like it just needs growth. It just needs volume growth. It doesn't need dramatic volume growth. Low single-digit volume growth would be enough.

I mean, capacity levels are already tight, and the inflationary dynamics are driving the manufacturers to be inflationary. We've really essentially got the fundamentals on the supply side. We really just need more demand-side support in terms of being able to get the market to understand that.

I mean, ultimately, customers, again, are exceptionally difficult in environments where they are under the same profit pressures that we are under. And so it's not a time when anybody is comfortable accepting a price increase in anything when it comes to building products. I mean, if you really look across the spectrum of building products, probably insulation is the one that's probably the firmest. And again, that's a really tight capacity situation. So for me, it's going to take just a little bit of volume to go out and get it. And let me just clarify one word you used there, waiting. We're not waiting for anything. We're fighting every single day to get pricing. And we continue to get it, albeit trickling in versus pouring in.

Okay, that's great. And to clarify, when you talk about just any volume growth, if the market backdrop kind of moves from flattish to negative to more mixed, Is that enough or do you need just almost all three end markets or the composite backdrop to flip to volume growth?

Well, I think it's going to be depending on the degree of growth in each one of those categories, right? I mean, if we see a significant mid-single digit to high single digit uplift in single family activity or the expectation of that, if we see mortgage rates get into that 6% range, you know, we've seen some pretty damn good activity with selling and mortgage, even just this last week, with just this little drop in rates we saw, right? We saw a big pop in mortgage applications just in this last week. If we can see some activity in single family in the neighborhood of that mid-single digit to high-single digit, that would do it, almost regardless of what's going on with multifamily and commercial. I think multifamily will come back summertime. You'll start to see things be better come summertime. I think a lot of the multifamily developers are trying their best to accelerate, seeing the demand that's out there. They just have to get the projects out of the ground. It's really hard for them to do that right now. But I do think that'll be better come summertime. And commercial is going to be what it is until we get some more residential development and a reduction in rates, right? This kind of mid single digit, low single digit declines. But, you know, any growth at all in the composite aggregate wallboard consumption, I think will be enough.

Agree. All that said, the reality is that single family, the leverage effect of demand on single family is higher on a per unit basis, which I think is understood.

Thanks for those insights. That's great. And last one for me, the good guys within the commercial market, you cited healthcare, education, data centers, and you talked about how that's an uplift for ceilings, at least offsetting other declines there. But Can you talk about the complementary products exposure to the good segments within the commercial market? Thank you.

I mean, we're equally weighted.

That's, I think, you know, all things being equal, we'd be a little stronger in complementary products than we would be in wallboard volume. commercially because of the data centers and the degree of the strength in data centers when it comes to complementary. I think we're a little more heavily weighted in data centers with complementary products than some of the core commercial categories, but it's not dramatic.

Okay, that's helpful. Thank you.

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed.

Morning, thanks for taking my questions. I want to go back to the ceiling side. If I look at your guidance and take into account that the CAMCO acquisition and some of the other deals are driving kind of double-digit M&A contribution and you're expecting your mid-single-digit price mix growth, that suggests that organic volumes would be declining significantly. call it like high single digits, which is a pretty big acceleration to the downside versus the last couple of quarters. Can you talk more specifically about what's driving that expectation for your organic ceilings volumes in 3Q?

Yeah, I mean, we have them more like low single digits down. So I'm not sure how the math is working out right here on the call, but I think our organic ceiling volumes are probably low single digits, similar to what we just experienced

Okay, got it. If we can follow up on some of the M&A contributions by Seidman, I guess. Yeah. Offline. And then shifting gears to margins, I just want to make sure we understand kind of some of the bridge correctly. The 60 basis points, that basket is price-cost mix. It sounded like it's mostly price-cost, but can you expand on that part a little bit more? And then similarly – I want to make sure that we understand the unrealized rebate issue, which volumes are down year on year. It makes sense that your rebates would be down, but is there something that was more temporary about that that resolves over the next couple of quarters?

The price-cost dynamic is roughly two-thirds of that is one element of it. The second piece is Just with the way the manufacturer incentive programs work, they're on a calendar year basis. And with the decline in the markets and with the storm impact, ultimately our ability to generate enough purchase volume against that was impacted in this last quarter at a rate that was higher than what we had typically seen in the third quarter. So that drives the year-over-year difference for us. We just fundamentally, given the timing of it, we don't think we can make it up and accordingly affect our ability to recruit against it.

Yeah, that was going to be my last clarification. Okay, that's very helpful. Thank you.

Our next question is from Matthew Boulay with Barclays. Please proceed.

Good morning, everyone. Thank you for taking the questions. Just on wallboard price and mix, did you call out the kind of like for like versus mix, or I guess quantify that impact? And I guess as you're looking at Q3 and presumably beyond, you got this headwind from multifamily and commercial. I'm just curious if there's a way to parse out how you're thinking about that mix headwind going forward in wallboard. Thank you.

I mean, I think what we said was like-for-like pricing is very similar to up, again, sequentially. And this next quarter, we're talking about, again, overall pricing being up flat or up slightly in spite of that mixed impact. So we're still getting a little bit of pricing on a like-for-like basis.

Okay. And you're effectively assuming that we'll continue that way going forward?

I mean, through the third quarter, at least, we are.

Okay, got it. And then just on the M&A landscape, obviously, you've been quite active in the past year. So my question is, from you guys, should we be looking for kind of a digestion period here going forward? Or perhaps given the kind of choppier end market backdrop, does it seem like the M&A funnel is reasonably active from a valuation perspective. Just, you know, kind of where are you guys willing to operate from a leverage perspective? Any thoughts on M&A into the next year? Thank you.

Yeah, I mean, the pipeline is still really good. You know, we expect to stay active. We, you know, we have allocated a little bit more cash towards share repurchase. I think it was prudent as we purchased a lot of shares at $88 on average this last quarter. and we obviously have the authorization now renewed. All that being said, we still like 1.5 to 2.5 times leverage, so that's certainly something we're targeting. We do expect to continue to generate really good cash flow, as we mentioned, 60% to 65% of adjusted EBITDA now. That's a higher amount than we had historically guided to. That's a combination of us managing working capital better but also just managing working capital in a declining environment. So we still have plenty of cash to do things with. And again, I would expect, we'll wait and see what happens over the course of the next few months as the new administration steps in, if there's any shocks to the system. But it does look like 25 late to 26, maybe even faster, could be really good. So I don't think we'd be afraid to get up into that two and a half range considering the cash we're going to generate and the expectation that 26 and 27, probably late 25, we hope, are looking pretty good. I don't think we'll slow down the M&A a lot.

I'd say also in that, in terms of our ability to manage the leverage, even though we just renewed our share repurchase authorization, we really got the ability to flex that up and down. to be both opportunistic in terms of what we're doing in share or purchase, but also manage cash to direct it appropriately towards acquisition should we need to.

Got it. Well, thanks, Scott. Thanks, JT. Good luck, guys.

Thank you.

Appreciate it.

Our final question is from Jeffrey Stevenson with Loop Capital Markets. Please proceed.

Hi. Thanks for taking my questions today. Did you guys see a deceleration in single-family demand as we move through the quarter and into November as the industry enters an air pocket from slower single-family starts earlier this year? And if so, are you expecting the air pocket and demand to last multiple quarters on the single-family side?

Well, I mean, we're thinking it's flat as we go through this quarter, which is certainly lower than we would have thought two or three quarters ago.

But we're not seeing a dramatic deceleration as we go forward.

Okay, so, you know, relatively flat, you know, as we look at third quarter, obviously, and into the fourth quarter is how you're thinking about things right now.

Yeah, I mean, October starts were lousy, but those aren't going to impact us this quarter. We'll have to see how the November starts came in, right? And so it's really choppy. As I said, you know, if you look at it, one week, It's bad, and the next week it looks like it might be better, and then long-term rates were below 4.2 yesterday, the 10-year. Now, I don't know what it is this morning. Who knows? But I think that if we get mortgage rates mid-sixes, I think single-family is going to just kind of muddle along. If mortgage rates are 7-plus, I think we could find ourselves in a more difficult spot when it comes to single-families.

Okay, that's very helpful. And then I just wanted to touch on steel framing pricing. Obviously, you saw some sequential improvement. And even though you're expecting a seasonal dip here, with manufactured prices increases in the market, are you seeing signs that pricing is starting to stabilize? And if we see any improvement in market demand, that things could improve into 25%?

I think what we'll see in 25, at least in the first half of 25, because in our space at least, is flat pricing in spite of the price increases. I think there'll be spots where prices can go up, but I think there's a lot of markets where it'll just remain flat as we go forward. I do think steel pricing is going to be another beneficiary of lower rates because I do believe the automobile industry will do better. I probably believe that you know, we're not going to see a reduction in the tariff environment when it comes to steel, and we'll probably, you know, see, you know, an increase in that environment, right, or at least in rhetoric when it comes to steel. So I think with improving automobile sales, with improving housing, which would improve, you know, appliances, with improved commercial construction, that would improve structural steel. I think that you should see things maybe accelerate in the back half of 25, but steel's been as volatile as anything and the hardest one to predict. I don't know if you can take my prediction to the bank. I would just tell you over the next quarter or two, we think at least flat is reasonable.

Great. Thank you.

With no further questions in the queue, this will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.