GMS : Second Quarter Fiscal 2022 Earnings Conference Call Transcript

GMS, Inc.

Second Quarter Fiscal 2022 Earnings Conference Call and

Webcast

December 2, 2021

GMS, Inc. - Second Quarter Fiscal 2022 Earnings Conference Call, December 2, 2021

C O R P O R A T E P A R T I C I P A N T S

Carey Phelps, Vice President of Investor Relations

John Turner, President, Chief Executive Officer

Scott Deakin, Vice President, Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Keith Hughes, Truist Securities

David Manthey, Baird

Brian Biros, Thompson Research Group

Noah Merkousko, Stephens, Inc.

Matthew Bouley, Barclays

Chris Kalata, RBC Capital Markets

P R E S E N T A T I O N

Operator

Greetings, and welcome to the GMS Second Quarter Fiscal 2022 Earnings Call and Webcast.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Carey Phelps, Vice President, Investor Relations for GMS. Thank you. You may begin.

Carey Phelps

Thank you, Melissa. Good morning, and thank you for joining us for the GMS earnings conference call for the second quarter of Fiscal 2022.

I am joined today by John Turner, President and Chief Executive Officer; and Scott Deakin, 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 Investors section of our website at www.gms.com.

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GMS, Inc. - Second Quarter Fiscal 2022 Earnings Conference Call, December 2, 2021

Turning to Slide 2. On today's call, Management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today.

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

Today's presentation also includes 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 for the second quarter of fiscal 2022 relate to the quarter ended October 31, 2021.

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. J.T.?

John Turner

Thank you, Carey. Good morning, and thank you all for joining us today. We're going to start on Slide 3. We are pleased to share with you today results from another record-setting quarter with net sales of $1.15 billion, net income of $74.4 million and adjusted EBITDA of $149.5 million. An inflationary pricing environment and continued strength in the residential market, coupled with our focus on customer service and execution, drove another quarter of strong performance and, profitability.

A few specific highlights from the quarter include: record levels of net sales, net income and adjusted EBITDA, with sales growth in each of our four reporting product categories. All core product line sales were up at least 25%, with steel remaining a standout, with a greater than 140% increase for the quarter.

Gross margin was 32.3%, which was slightly higher than expected. SG&A and adjusted SG&A as a percentage of sales improved year-over-year for the sixth quarter in a row. And finally, adjusted EBITDA margin improved 280 basis points to 13% for the quarter, compared with 10.2% a year ago.

Within the context of high product inflation, supply-chain constraints and strength in residential demand, our focus on serving the needs of our customers and executing on our strategic priorities were instrumental in our ability to deliver this level of performance. I'd like to share a few examples.

First, on Slide 4, we remain focused on expanding share in our core products as our sales force works diligently to earn a greater share of our customers' business. While many homebuilders pulled back their activity levels during the quarter due to supply chain concerns, our channel checks with suppliers provide confidence that we are maintaining or growing share in each of our key product categories, with notable growth in steel framing.

Second, we are growing our complementary products to continue to diversify and profitably expand our offerings. This quarter sales grew 24.8%, marking the sixth consecutive quarter of year-over-year growth for this category. As you saw in last night's release, we just completed our latest and largest acquisition in this product category, AMES, the nation's foremost provider of automatic taping tools. I will discuss this

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GMS, Inc. - Second Quarter Fiscal 2022 Earnings Conference Call, December 2, 2021

acquisition in more detail momentarily, but we are excited about this margin accretive transaction and its growth potential.

Regarding platform expansion. Beyond the AMES and Kimco transactions that we completed this week, during the second quarter, we completed the purchase of the EIFS division of DK&B Construction Specialties, expanding our complementary product offerings and expertise in the Greater Nebraska market. And we opened a new greenfield facility in Tennessee, enhancing our ability to service our customers in that growing market.

Finally, we continue to execute against the fourth pillar of our strategic priorities, to leverage our scale and employ technology and best practices across the business to drive improved productivity and profitability. Arming our team with the tools and data to make better informed decisions is helping to drive additional operational efficiency. And we are advancing our levels of customer service by working to automate our transaction processes from order through dispatch to delivery, providing online capabilities to enhance the customer experience while lowering our cost to serve.

Before turning the call over to Scott, I'd like to spend a few minutes discussing our acquisition of AMES Taping Tools, which is highlighted on Slide 5. AMES pioneered the development of automatic taping and finishing tool technology in the 1930s, dramatically improving the speed, quality and efficiency of the professional interior finisher. Today, AMES is the premier supplier of high-quality automatic taping tools and brings to us the industry-leading ATF brand, TapeTech, and the industry's most widely used e- commerce platform, all-wall.com.

The company, which will continue to operate under its well-known brands, utilizes three channels of distribution.

First, AMES' network of more than 85 stores sells products for residential and commercial interior finishing applications and provides an unparalleled fleet of 100,000 ATF tools available for rent.

The second distribution channel is the sales of TapeTech-branded ATF tools and related products through dealers and distributors, including GMS.

The third channel is online sales of drywall finishing and related products through the all-wall.com e- commerce platform. With trailing 12-month revenue of approximately $100 million and margins in excess of our company average, AMES should serve not only as a complement to our product offerings, but to our long-term profitability as well.

With that, I'll now turn it over to Scott to provide more perspective on our financial results for our second quarter. Scott?

Scott Deakin

Thanks, J.T., and good morning. The buoyant inflationary environment and healthy demand in residential construction were the principal drivers of our solid results this quarter, serving to offset lingering relative volume weakness in commercial.

Looking at Slide 6. Net sales, which benefited from a full quarter of contribution from our Westside acquisition increased 41.5% for the quarter to $1.15 billion. Organically, sales rose 31.2%, driven by pricing gains across many of our product lines, coupled with continued strength in the residential market. The number of selling days for the quarter was the same year-over-year. From an end market perspective, both residential and commercial sales in the U.S. were up more than 35% organically year- over-year again, principally, due to price inflation.

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GMS, Inc. - Second Quarter Fiscal 2022 Earnings Conference Call, December 2, 2021

Wallboard sales of $414.5 million increased 25.4%, comprised of a 22.5% increase in price and mix, and a 2.9% increase in volume. Organically, wallboard sales grew 19.7%, comprised of a 20.8% increase in price and mix, partially offset by a slight 1.1% decrease in volume. Commercial volumes continue to lag the residential market and given the supply chain issues that builders are facing in other products, new single-family residential volumes have now dropped to high single-digit growth. Given pervasive supplier pricing actions, our average realized wallboard price has increased sequentially each quarter for the past year.

For the second quarter of fiscal 2022, the average realized wallboard price was $376 per 1,000 square feet, up 5.4% from the first quarter and up 21.9% from the second quarter of last year. While the pace of price increase is tempered late in the quarter, we anticipate further price escalation to resume in the new calendar year.

Ceiling tile and grid sales of $140.9 million increased 25.6% year-over-year, comprised of a 24.6% benefit from price and mix and a 1% increase in volume. Organic sales and ceilings grew 17.4% with 20.4% of price and mix, partially offset by a 3% decline in volume. Steel framing sales of $272 million increased 144.4% as steel price and mix increased 132.2% and volume grew 12.2%.

On an organic basis, steel framing was up 122.2% comprised of a nearly 120.1% benefit from price and 2.1% on increased volume. Sales growth of our complementary products was 24.8% for the quarter as we benefited from positive contribution from acquisitions and strong pricing in most product categories.

On an organic basis, sales of complementary products were up 12.6%, with the majority of the increase coming from price. Gross profit of $371.9 million increased 40.3% over a year ago, as gross margin performed slightly better than expected, coming in at 32.3% or 30 basis points behind last year's level. Pressures on wallboard margins, due to the timing of our pass-through of supplier pricing actions moderated slightly sequentially, and were partially off (audio interference) year-over-year increases in ceilings, steel framing and complementary products. While it typically takes three to six months to fully pass through a price increase in wallboard, our teams have made clear progress, narrowing the gap and driving sequentially improved gross margins in that product category.

Turning to Slide 7. Adjusted SG&A expense as a percentage of net sales improved 310 basis points year- over-year to 19.4% as significant product inflation outpaced increases in operating costs. While this improved leverage was driven by the inflation that positively impacted our net sales dollars, we are pleased with the cost disciplines our teams have achieved against the backdrop of a difficult COVID era comp. And inflationary and activity-based operational increases in several areas, most notably, in fuel and employee comp and benefits as driven by our higher levels of sales and profitability.

All-in-all, Second quarter adjusted EBITDA of $149.5 million was 81.2% higher than a year-ago, and an adjusted EBITDA margin improved 280 basis points year-over-year to 13% for the quarter, representing an incremental margin of 19.8% at the upper end of our expectations.

Slide 8 references our cash flow dynamics during the quarter as well as our balance sheet and liquidity position. Given continued inflation, extended lead times and certain instances of tight product availability, our commitment to ensure product availability for our customers across our portfolio of offerings has required a higher use of cash again this quarter, principally associated with inventory. We recorded a use of cash from operating activities and free cash of $2 million and $11.3 million, respectively. The inflationary increases we had in our revenues during the quarter also drove a use of cash related to accounts receivable.

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