Earnings call: GMS beats Q2 expectations with robust sales and income

In a robust display of fiscal health, GMS Inc. (NYSE: GMS) outperformed market expectations in the second quarter of fiscal year 2024, posting net sales of $1.4 billion, net income of $81 million, and an adjusted EBITDA of $168 million. The company’s strong performance was driven by increased demand in commercial and multifamily construction, offsetting a softer single-family residential market. Despite facing headwinds in steel pricing, GMS’s diverse product portfolio and strategic acquisitions have positioned it well for future growth, particularly in the single-family housing market which is expected to improve.

Key Takeaways

• GMS reported Q2 net sales of $1.4 billion, net income of $81 million, and adjusted EBITDA of $168 million.
• Demand growth in commercial and multifamily construction led to volume increases in ceilings, steel framing, and complementary products.
• The company experienced a softer single-family residential market but is optimistic about future demand.
• Acquisitions and new locations have expanded GMS’s footprint and product offerings.
• Gross profit decreased by 1.3% due to market deflation and steel pricing pressures.
• The company expects third-quarter net sales to increase by low-single-digits, with adjusted EBITDA projected between $123 million and $127 million.

Company Outlook

GMS is optimistic about the future, anticipating continued activity in commercial and multifamily construction, with a potential uptick in single-family demand. The company’s strategy focuses on core product growth, expansion through mergers and acquisitions (M&A), and productivity and profitability improvements. They expect wallboard volume to rise by mid-single-digits and commercial and steel framing volumes to increase in the third quarter.

Bearish Highlights

The earnings call revealed declines in Canadian roofing and lumber product lines, attributed to soft residential demand. GMS also faced a decrease in gross profit by 1.3% due to market deflation and challenges in the steel pricing environment. Additionally, net income saw a 21.5% decrease compared to the previous year.

Bullish Highlights

GMS reported growth in tools and fasteners, EIFS and stucco, and insulation product lines, suggesting a strong performance in these areas. The company also enjoys a solid balance sheet with no immediate debt maturities and has generated more free cash flow than the previous year. An expanded share repurchase program was announced, signaling confidence in the company’s financial stability and future prospects.

Misses

The company’s gross profit margin took a hit due to market deflation, and net income was down by 21.5%. These figures reflect the challenges GMS faces in a volatile pricing environment for raw materials like steel.

QA Highlights

John Turner discussed the long-term growth prospects for the single-family and commercial/multifamily sectors, expecting steady growth in commercial and potential growth in single-family by fiscal year 2025. He also addressed pricing dynamics, suggesting the company might raise prices to outpace higher cost inventory. Turner highlighted the potential impact of interest rates on the sectors, with a forecasted slowdown in commercial not as severe as in the residential sector. The conversion of office space to multifamily and increased remodel activity could help offset any declines.

Market Expansion and Product Diversification

GMS’s strategy includes expanding its platform through acquisitions, enhancing purchasing, and logistics processes, and focusing on complementary products. The company’s dedicated sales forces and product mix have shown success, and despite the West Coast being the softest region in terms of construction activity, no specific verticals are significantly underperforming. GMS plans to continue its M&A strategy to strengthen its market position.

In conclusion, GMS’s second-quarter performance shows resilience in the face of market challenges, with strategic moves in acquisitions and product expansion setting the stage for future growth. The company’s leadership remains confident in their ability to navigate the dynamic construction market and deliver shareholder value.

InvestingPro Insights

GMS Inc.’s recent financial results have painted a picture of a company that’s adept at navigating the complex landscape of the construction industry. In light of their Q2 performance, let’s dive into some key insights provided by InvestingPro that could offer a deeper understanding of the company’s current valuation and future prospects.

InvestingPro Data highlights the company’s valuation metrics, with a P/E Ratio (Adjusted) for the last twelve months as of Q2 2024 sitting at 9.18, which is relatively low compared to industry peers. This suggests that the company is trading at a discount, potentially offering an attractive entry point for value investors. Additionally, GMS’s Market Cap stands at $2.84 billion, reflecting its substantial presence in the market.

From a profitability standpoint, GMS has demonstrated a strong Return on Assets (ROA) of 9.39% for the same period, indicating efficient management of its assets to generate earnings. This is a critical metric for investors looking to gauge the company’s ability to turn investments into profits.

InvestingPro Tips reveal that management’s confidence in the company’s trajectory is underscored by aggressive share buybacks. Share repurchases can often signal that a company’s leadership believes the stock is undervalued and that they are committed to delivering shareholder value. Furthermore, analysts have revised their earnings estimates upwards for the upcoming period, hinting at potential positive momentum for GMS’s financial performance.

For those interested in further analysis and additional insights, a subscription to InvestingPro provides access to more than just these highlighted tips. In fact, there are 11 InvestingPro Tips available for GMS, offering a comprehensive analysis that could be invaluable for making informed investment decisions.

Currently, InvestingPro is offering a special Cyber Monday sale with discounts of up to 60%. And for those looking to maximize their investment in knowledge, use coupon code sfy23 to get an additional 10% off a 2-year InvestingPro+ subscription.

In conclusion, GMS Inc. appears to be a company with strong fundamentals, as evidenced by its robust return on assets and favorable valuation metrics. With management’s strategic share buybacks and analyst optimism, GMS is positioned to potentially provide value to shareholders, both in the short and long term.

Full transcript – GMS Inc (GMS) Q2 2024:

Operator: Greeting, welcome to GMS Second Quarter 2024 Earnings Conference Call. At this time all participants’ are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a note, this call is being recorded. At this time, I’ll turn the conference over to Carey Phelps, Vice President of Investor Relations. Carey, you may begin.

Carey Phelps: Thank you, Rob. Good morning, and thank you for joining us for the GMS earnings conference call for the second quarter of fiscal 2024. I am joined today by John Turner, President and Chief Executive Officer; and Scott Deakin, 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 Investors section of our website at www.gms.com. On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management’s current estimates and expectations. The company assumes no obligation to update any forward-looking statement 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 factor 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 second quarter of fiscal 2024 relate to the quarter ended October 31, 2023. 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. JT?

John Turner: Thank you, Carey, and thank you all for joining us today. We are pleased to report another solid quarter, which exceeded our stated expectations for net sales, net income, and adjusted EBITDA. Continued demand in commercial and multifamily construction drove volume increases in ceilings, steel framing, and complementary products, all of which helped to offset a more challenging steel pricing environment and relative softness in single-family residential demand. Despite the single-family market, wallboard experienced only a slight overall volume decline, which was offset by continued resilient pricing. For the quarter, net sales were $1.4 billion, net income was $81 million and adjusted EBITDA totaled $168 million. Cash flow improved again this quarter as we recorded cash from operations of $118 million and free cash flow of $102 million, up 10% and 6%, respectively, from the prior quarter. Net debt leverage improved to 1.5 times from 1.6 times a year ago. Our well-balanced portfolio of products and end markets combined with our team’s expertise and the company’s scale continues to provide us with the ability to flex our operations as dynamics in our end markets change. In the near-term, multifamily activity is expected to continue at or near current levels as backlog has work through over the next few quarters. Commercials also expected to continue at its current pace into the spring. And we are optimistic about the sequentially improved levels of activity we’ve seen in single-family demand. As the recent easing of mortgage rates, limited supply of existing homes for sale, and favorable demographics seem to be setting up promising conditions for this end market, particularly as we look out into fiscal 2025. Our teams have done a remarkable job so far this fiscal year under challenging circumstances to continue to focus on our strategic pillars, which are highlighted on slide four. First, we have continued to grow in our core products with higher wallboard sales as a percentage of gypsum-associated shipments versus the prior year, reflecting at least in part our strength in serving the nation’s largest homebuilders as they too gain share and as they report a more positive outlook. We’ve also increased share in steel framing according to the Steel Framing Industry Association data and we’ve continued to gain share in ceilings as evidenced by manufacturing partner disclosures and channel checks. Second, our team continues to put great focus on growing our complementary products category, which made up 30% of our sales for the quarter and delivered its 14th consecutive quarter of year-over-year growth. We are placing particular emphasis on tools and fasteners, EIFS and stucco and insulation, which collectively continue to grow faster than the overall category during the quarter. Third, expansion through M&A and Greenfield openings continues to be one of our key levers of growth. During the quarter we acquired AMW Construction Supply, a highly respected distributor of tools and fasteners and other complementary products in the Phoenix Arizona market. And we also opened two new Greenfield locations. Post-COVID, we have acquired 14 companies, representing a total of 30 distribution centers and 91 AMES stores, with estimated annual revenues at the time of deal closings of nearly $600 million. And we’ve also opened 26 Greenfield locations. We continue to have a promising pipeline of opportunities and an appetite to expand our footprint in key markets where we are under-penetrated, while we also broaden our service territories and product offerings in existing markets. Finally, we’re successfully driving improved productivity and profitability throughout the business, reducing complexity costs and becoming more efficient and effective operators with enhanced tools and data to facilitate better decision-making and offerings that provide an overall enhanced customer experience. The benefits of these efforts are evident in the levels of SG&A we recorded this quarter, which Scott will detail during his remarks. Before turning the call over, I want to thank our team for maintaining our high level of performance and commitment to delivering outstanding customer service during the quarter. We have demonstrated our flexibility and expertise in supporting all of our end markets and believe that we are well positioned as demand dynamics progress in the coming quarters. With that I will turn the call over to Scott.

Scott Deakin: Thanks JT. Good morning everyone. Starting with slide five, I’ll now provide some further perspective on our second quarter results. Net sales for the quarter decreased just slightly year-over-year to $1.4 billion as steel price and mixed deflation of more than 30% drove an $85 million reduction in net sales. Single-family demand softness was also a headwind, while robust activity levels in both our commercial and multifamily end markets with volume increases in steel framing, ceilings, and complementary products were a favorable offset. Our recent acquisitions, including EMJ, Tanner, Blair, Home Lumber, and AMW, also contributed positively to our quarter results. Organically, sales were down 3.1%. From a U.S. end market perspective, multifamily sales dollars grew 9.3% year-over-year, while single-family sales dollars declined 10.3%, resulting in a total residential sales dollar decline of 5.7%. Commercial sales dollars in the U.S., on the other hand were roughly flat as increased sales volumes were offset by the noted steel price deflation. As we highlighted last quarter, many of our regional markets are continuing to experience favorable commercial demand with active projects underway are scheduled to start in the coming quarters across nearly all sectors. For example, we expect to participate in the Tampa Airport expansion, multiple new hospitals and other medical facilities, student housing and other higher education facilities, a new casino, several manufacturing facilities, a number of mixed-use residential projects, and even some tenant build-out projects in the office space. While financing is tight and could become a headwind for the commercial end market, we are capitalizing on the attractive level of demand that we’ve been seeing currently. Now, looking at our second quarter results for each of our product segments, wallboard sales dollars of $585.2 million were roughly flat with a year ago, while multifamily and commercial wallboard volumes were up 17% and 6.5% respectively. Single-family wallboard volumes declined 11.4%. Overall wallboard volumes were approximately flat, with resilient prices that remained steady with a year ago, again reflecting the realities facing wallboard manufacturers, which are high input and production costs, a lack of excess capacity, and increasingly pressured access to synthetic gypsum. Organically, second quarter wallboard sales were also roughly flat with a prior year period comprised of a 1% decline in volume and a 0.7% increase in price and mix. For the second quarter, the average realized wallboard price was $476 per 1,000 square feet, up slightly from both a year ago and sequentially from our fiscal first quarter. Given this continued resilience and pricing, we now expect roughly flat sequential wallboard price and mix through the end of our fiscal year. Second quarter ceiling sales of $175.3 million increased 9.9% year-over-year, comprised of an 8.5% increase in volumes and a 1.4% benefit from price and mix. Organic sales and ceilings grew 7.2% with a 5.8% increase in volumes and a 1.4% benefit from price and mix. Second quarter steel framing sales of $232.1 million were down 16.6% versus the prior year quarter as deflationary pricing drove a 30.7% decline in price and mix, while volumes increased 14.1%. Organically, steel framing sales were down 17.4% with a 30.5% decline in price and mix, partially offset by a 13.1% increase in volume. While steel framing has been a headwind over the last year, raw material pricing has increased with the underlying commodity indices for coal-rolled and galvanized up nearly 50% per ton since the low point this fall. Additionally, lead times continue to extend with inconsistent availability regionally. Accordingly, we have received multiple notices of upcoming price increases from our manufacturing partners. Given what is traditionally a four to six month lag post commodity index change, we currently expect steel prices to continue to be pressured in the third quarter before flattening out sequentially in the fourth quarter and then turning positive on a sequential basis during fiscal 2025. Complementary product sales of $428.3 million for the quarter grew 4.8% year-over-year, as we benefited from positive contributions from acquisitions. Organically sales of complementary products declined 1.4%, reflecting pricing pressures in lumber and volume declines in our Canadian roofing and lumber product lines given the currently soft residential demand. As we’ve discussed in previous quarters, we are especially focused on our tools and fasteners EIFS and stucco, and insulation product lines where we are leveraging significant opportunities to share best practices across our operations and drive growth in these areas. For our fiscal second quarter, these lines grew 10.6% in the aggregate. Now turning to slide six, which highlights our profitability for the quarter. Gross profit of $458.6 million decreased 1.3%, compared to the prior year quarter. This decline was nearly entirely driven by market deflation and steel pricing. Gross margin of 32.3%, compared to 32.5% a year ago, just slightly ahead of our expectations for the quarter. Volatility in steel pricing and realization of purchasing incentive tiers were the principal factors in both comparisons. Selling, general, and administrative expenses increased $21.9 million during the quarter to $300.9 million, including an increase of $12.6 million related to recent acquisitions in our newly opened greenfield locations. Excluding these expansions, we were very pleased that the remaining increase in SG&A expenses lagged our consolidated increase in sales volumes, even as our high cost to serve end markets led the way in our volume growth for the quarter. I would like to thank our teams for their discipline in controlling costs and driving inefficiencies out of the business. Our right sizing of the business last winter, coupled with efficiencies gained from ongoing productivity initiatives, enabled us to achieve these favorable SG&A results. SG&A as a percentage of net sales was 21.2% for the quarter, an increase of 170 basis points from 19.5% a year ago, with 120 basis points of the difference due to steel price deflation, 30 basis points due primarily to increased labor costs, mostly associated with the higher level of commercial and multifamily activity levels we experienced during the quarter, and remaining 20 basis points due to recent acquisitions in Greenfields. Adjusted SG&A expenses as a percentage of net sales of 20.6% was also up 170 basis points from the prior year quarter. All in, and with 16.7% higher interest expense, net income decreased 21.5% to $81 million for the quarter, or $1.97 per diluted share, compared to net income of $103.2 million, or $2.41 per diluted share a year ago. Adjusted EBITDA of $167.6 million decreased $28 million, as compared with a year ago. On single-family demand pressure, steel framing price declines, and the activity-based operating cost increases in the quarter, adjusted EBITDA margin decreased to 11.8%, compared to last year’s second quarter level of 13.7%. Now, shifting to our balance sheet, which is highlighted on slide seven. At quarter end, we had cash on hand of $76.5 million and the $823.7 million of available liquidity under our revolving credit facility. We have no near-term debt maturities and our net adjusted EBITDA debt leverage at the end of the quarter was 1.5 times, compared to 1.6 times a year ago. Cash generation improved again this quarter. Cash provided by operating activities was $118.1 million, compared to $107.3 million in the prior year period, while free cash flow for the quarter was $102.1 million, improved from $96.5 million a year ago. Year-to-date, we’ve generated 19% more free cash flow than a year ago, and with relative strength of cash flows in the second-half. For the full-year, we expect free cash flow generation to be between 50% to 60% of adjusted EBITDA. Capital expenditures of $16 million for the quarter, compared to $10.7 million a year ago. We now expect that for the full-year fiscal 2024, capital expenditures will be approximately $55 million. In October, our Board of Directors approved an expanded share repurchase program under which the company is authorized to repurchase up to $250 million of its outstanding common stock. This expanded program replaces our previous repurchase authorization. During the quarter we repurchased approximately 689,000 shares leaving $241.3 million of authorization remaining as of the end of the quarter. We are well positioned with a solid balance sheet with no near-term maturities in our capital structure. We expect to continue to balance investing in our strategic initiatives, including additional M&A opportunities with paying down debt and opportunistically leveraging favorable market conditions for share repurchases. I’ll close my remarks today with thanks to our team for again successfully delivering solid results amidst ever-changing market conditions. I’ll now turn the call over to JT for a review of our outlook starting on slide eight.

John Turner: Thank you, Scott. Our end markets remain dynamic. Permits and starts on U.S. multifamily structures have declined, but a solid backlog remains and is expected to deliver year-over-year growth, albeit at declining rates, through at least the end of this fiscal year. Commercial, while solid with improved volumes over a year ago, has still not yet returned to full pre-COVID levels. And the most recent put-in-place figures support a continuation of the activity levels we’ve been experiencing, at least in the near-term. Meanwhile, the single-family market in the U.S. appears poised for a rebound in the coming quarters, with recently declining mortgage rates and a fundamental demand for new housing given the supply shortage of existing homes for sale. And for our Canadian business, the news is even more encouraging as we’ve seen improving starts levels and government-backed programs to promote immigration and population growth that are providing a stimulus to housing, setting up nicely the prospect of several years of residential growth. With that as our backdrop, let me move the expectations for our third quarter. First, looking at wallboard, as I said at the start of the call, the backlog in multifamily is still expected to be relatively strong for the quarter and should continue to provide positive year-over-year growth. We expect multifamily wallboard volumes to be up mid-teens, as compared with a year ago. Commercial too should do well with wallboard volumes in that end market expected to be up mid-single-digits. Single family wallboard volume is expected to be down low-single-digits, a marked improvement in year-over-year comparisons. In total, we expect wallboard volume to be up mid-single-digits, with price mix flat to down just slightly from a year ago, as single-family residential reverts to a more normal component of our mix. As we’ve reported, pricing for wallboard has remained steady in a relatively balanced capacity environment. Additionally, continued investment is required by our manufacturing partners to adjust to the declining availability of synthetic gypsum. As such, we expect continued relative stability and wallboard pricing for the remainder of our fiscal year with the potential for increases as the single-family market recovers. In ceilings, for our fiscal third quarter, given our expectation of continued solid demand in our commercial end market, including encouraging prospects for increases in remodel projects as indicated by our backlog and channel checks, we expect a mid to high-single-digit increase year-over-year in ceiling volumes with price and mix up low-single-digits. For steel framing, demand should remain solid with volumes expected to be up low-double-digits, as compared with a year ago. Pricing will continue to be challenging for our fiscal third quarter with expectations of sequential improvement as we move into the year end. As compared with the third quarter of fiscal 2023, price and mix for steel framing is expected to be down nearly 25%, which will again impact our net sales, SG&A leverage, and other financial metrics for the quarter. We expect to see solid growth in our complementary products as we continue to focus on expanding our sales of these offerings. For our fiscal third quarter, our complementary products year-over-year sales growth should be up high-single-digits to low-double-digits for the quarter. Given all these expectations we anticipate total net sales for our fiscal third quarter to be up low-single-digits, as compared with a year ago. Gross margin will likely be consistent with last quarter, and adjusted EBITDA is expected to be in the range of $123 million to $127 million for the quarter. Overall, we expect another solid level of performance for the third quarter. And as we approach the end of calendar 2023 and look ahead, we have reasons to be optimistic. First, although multifamily in the U.S. will slow down once the backlog is worked through, given the fundamentals underlying and supporting housing demand, coupled with an improving interest rate outlook, we expect improving sequential trends in single-family through the balance of our fiscal year and likely beyond. Commercial too is expected to continue to do well for the time being. While tighter lending standards may cause an air pocket in demand at some point next calendar year, activity levels are solid for now and we believe easing within the credit markets will drive expansionary improvements. All in all, we believe that we are well positioned, with flexibility built into our operations to pivot our efforts as demand levels change in our end markets, which we are confident will help us to continue to drive growth and profitability as we deliver long-term value for all of our stakeholders. I’d like to close out our call today by thanking our customers, our suppliers, teammates, and shareholders for your continued support. And I’d like to wish you all a joyous holiday season. Operator, please open the line for questions.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Trey Grooms with Stephens. Please receive your questions.

Noah Merkousko: Good morning this is Noah Merkousko on for Trey. Thanks for taking my questions and congrats on the strong results.

John Turner: Thank you. And good morning.

Carey Phelps: Good morning.

Noah Merkousko: So, starting off here first, thank you for all the detailed commentary on your demand outlook. But, you know, if we maybe dig a little bit deeper here on the single-family side, still expecting some volume pressure as we look at the third quarter, but it sounded pretty constructive in terms of the potential for sequential improvement from there. So I guess, is it reasonable to expect maybe some growth as we look at the 4Q or, you know, just given where wallboards typically installed in the building process, is that potentially later, more of a fiscal ‘25 event?

John Turner: We’ll probably lap the lowest points over the course of fourth quarter, first quarter, and second quarter of next year, so we should be getting some sequential growth based on what we expect to see from continuing starts. What we have seen from starts already should indicate some growth as early as our fourth quarter, yes. Very slight, but yes.

Noah Merkousko: Got it. That makes sense. And then as we think, again, maybe longer term in a fiscal ‘25, potentially seeing growth on the single-family side, sounds like commercials holding in for now. But in a scenario where you’ve got those two and markets diverging, can you just remind us of the mix impacts as it relates to price? I know it has different impacts on the gross margin and SG&A, but when you get down to EBITDA, is there really much of a difference there?

John Turner: No, there’s not. You summarized it perfectly. A little bit of gross margin difference. You know, a little bit of SG&A difference on the commercial and multifamily. So, a little bit better margins, gross margins, a little bit higher costs, but at the end of the day, they both end up, both the new single-family ends up being very similar in profitability to commercial and multi-family.

Noah Merkousko: All right. Got it. Thanks for the answers and good luck with the rest of the year.

John Turner: Thank you. Appreciate it, Noah.

Operator: Our next question is from the line of David Manthey with Baird. Please proceed with your questions.

David Manthey: Hi. Good morning, everyone.

Carey Phelps: Good morning.

John Turner: Hi, David.

David Manthey: Really encouraging results here and good outlook. Thank you. So first off, with the steel and the visibility you have into pricing there along with your balance sheet strength. Can you typically raise prices slightly faster than the pace of that higher cost inventory working through your balance sheet and into your P&L? There might be a slight margin opportunity, especially given the visibility you have on that now?

John Turner: You know, Dave, what I would say is there’s two dynamics there. You’ve got the quoted piece, which is kind of a locked-in piece, which is a large percentage of it, which is your quoted commercial work. And then there’s your stock steel work. In your stock steel work, I would expect if the availability is to tighten up as we think, then yes, there is the opportunity to be a little bit in front of the pricing that we’re receiving. On the other hand, the negotiation around the quoted piece is one that we probably could see a little bit of — in the near-term when prices go up a little bit of squeezing. So I would just say all in all through this increased cycle, if we’re going to get into a new increased cycle and it certainly appears like we’re going to, at least in the near-term, we’ll probably be able to keep margins flat during that period. I don’t think we’ll be able to increase them significantly, but because of those two offsets.

Scott Deakin: I’ll just reiterate too from past discussions. We turned steel inventory pretty fast too, about 9 times, so there typically isn’t much inventory impact as we work through those pricing changes.

David Manthey: Yes, okay. Thank you, Scott. And then there’s clearly a lot of folks there at GMS that have lived through more than one cycle. And I’m just wondering if we can tap your brains, I assume you’ve tapped theirs, just in terms of any wisdom that they’ve shared relative to the current interest rate situation and sort of how things might play out? Things that we may not have thought of at this point would be helpful?

John Turner: I’m speaking primarily about a commercial cycle, because I think we’re in the bottom of the residential, right? The new residential seems to have bottomed and most likely, if we come off of this interest rate environment, there shouldn’t be much of a lag. And there isn’t, apparently, according to most of the home builders’ reports, there isn’t much of a lag in activity from interest rates coming down to building of homes. The commercial one, on the other hand, it’s a longer period of time. So we’re still experiencing the strength of projects that of course broke ground a year ago and remodeled projects that were basically financed when things were a little bit easier out there. I do think we’ll see an air pocket in commercial, but we have a real strong remodel component. And remodel, historically, has been less volatile than new in commercial. And so I think that will help us. And also, we were back looking again, Dave, at the volumes. We’re still not back. Our industry, ourselves and our industry, I would guarantee that, are still not back to pre-COVID levels in volumes in wallboard and steel, in the neighborhood of 10%. So whatever happens in commercial going forward, I just don’t see it being a draconian event. I don’t see it being off 20% like we saw single-family just hit the brakes so hard a year ago and now we’re down in there the course of the last couple of quarters having significant double-digits declines in volume. I just don’t see commercial doing that. Will it soften? Certainly will. I think, you can’t, with the AVI and the financing being as tight as it has been, I think it’ll soften into 2025, the back half of our fiscal 2025. I also think it’s going to be fully offset by single-family activity, because I don’t think it’s going to be a real dramatic change and post that period I also think that there’s a lot of pent up demand out there. You’re reading about it every day whether it’s the conversion of office space to single — or to multi-family or just in general our channel checks are indicating increased remodel activity in office, some of that being driven purely, because it hasn’t been done in a long time. So I do feel like we’ll see some slowdown in commercial, but we’re not expecting it to be off 15% or something like that.

David Manthey: Yes, commercial is about two-thirds of remodel, correct?

John Turner: Yes, historically that’s right. It’s a little less than that right now, because of the softness in office. So it’s closer into that 50-50 range. But in a historical market, our remodel would be two-thirds. That’s right.

David Manthey: Okay. Thank you very much.

Scott Deakin: Thanks, Dave.

John Turner: Thanks, Dave.

Operator: Our next question is coming from the line of Matthew Bouley with Barclays. Please proceed with your questions.

Anika Dholakia: Good morning. This is Anika Dholakia on from Matt. Thanks for taking my question. So first off, just curious if you could give us a little more detail on the strength in multifamily that you guys are seeing this quarter and moving forward? I know you guys noted that backlog should carry you through fiscal year and further growth into 2024? So I guess given just starts are so much weaker, when do you see this pressure coming? Is it more of a fiscal ‘25 story or could it potentially be earlier? Thanks.

John Turner: We think it’s fiscal ‘25. I mean, we just did the math on starts and completions. You know, I think it’s the same math that you guys have done and everybody does. And we just experienced, of course, the single-family backlog environment and worked ourselves through that. And so between that experience and the math, I think it’s fiscal ‘25 before we start to see significant slowdown.

Anika Dholakia: Understood, thank you. And then for my second question, I know steel deflation was a large headwind this quarter, and you guys are seeing further pressure into the third quarter. Do you have a sense of maybe the magnitude of pressure that you see in 3Q ahead of it flattening in 4Q? Thank you.

Scott Deakin: Well we talked about sort of the $85 million impact in the third quarter. I’d say based on our projections for Q3, it’s probably still meaningful, but less than that, probably in the ballpark of about $50 million. And then you can flow that down through the P&L in a similar fashion to what we saw in Q2. Still impactful, but less than what we saw in Q2.

Anika Dholakia: Perfect. Thank you, guys. I’ll pass it on.

John Turner: Thank you.

Operator: Our next questions are from the line of Mike Dahl from RBC Capital Markets. Please proceed with your questions.

Mike Dahl: Good morning. Thanks for taking my questions. I want to stick with multifamily, I mean, I think it’s helpful the way you articulated the balance between single-family and commercial on that by the time commercial season declines, single-family could make up for it. It does seem like multifamily declines could be more meaningful and those cycles can potentially last a little longer given it is credit and tap rate induced. So how are you — I guess if single-family offset commercial, how are you thinking about the impact from multifamily in ‘25 and beyond? And just remind us at this point, what percentage of your business is multifamily?

John Turner: Well we use wallboard as a proxy right in our wallboard volume it’s about 17% it’s less than that as a total revenue component probably down in that 12%, 15% percent range is multifamily and so I almost throw a multifamily commercial together and so you got to put those two markets together and single-family is 50% plus of the overall wallboard business and probably when we get into a more normalized market, 50% plus of our overall revenue. So if we see single-family come back meaningfully, it’s in my mind a full offset to whatever we would see in multifamily and commercial. Again, my expectation of commercial is not to be off in the teens, probably I would imagine single-digits to maybe at the bottom, low-double at the best. And then multifamily can be off it’s 15% or 20% and you’d still get a full offset of single-family. I’m hoping it’s not that bad on the multifamily and the commercial side. It just doesn’t feel like whatever this next year is coming into that we’re going to have that deep of a correction from a commercial perspective. We certainly will bounce and it would be very volatile in multifamily. The other offset to multifamily down the road, of course, is you are hearing more and more every day about the conversion from office to multifamily. So, that’s going to happen. And that’s more of a remodel activity. And again, we’re very strong in that area. So I would expect that to be a degree of an offset as we get there. And then, I mean, the reality is further down the road, every day you can’t pick up the paper and not read about. I’m aging myself there when I pick up the paper, by the way. I don’t actually do that. I use my phone. But when we read everything from the journal, really doesn’t matter what you read. You see government stimulus is engaged today across all of North America in driving multifamily construction for the long haul, because the only way to provide affordable housing. And I feel like we’re going to get through whatever this air pocket’s going to be in ’24 or fiscal ‘25, and you’re really going to have a pretty strong fundamental position for housing, all housing, going out into the end of the decade.

Scott Deakin: And that last point is particularly notable in Canada, where the relative mix of multifamily is higher versus single-family in that market.

Mike Dahl: Yes, that’s all very helpful. Certainly the last point. I fully agree with in terms of the importance longer term of multifamily and serving affordability. With these puts and takes, so shifting to the pricing dynamic, if you play that out, you talked about potential for price increases in wallboard as single-family strength and so you’d have potentially the half-inch market weakening and then single-family strengthening how does that typically play out in terms of then what happens with pricing? Would you still expect broad increases across wallboard products or would it be a little bit more targeted in terms of maybe not seeing increases on half-inch, but seeing increases on your single-family business? How have you typically seen that play out?

John Turner: When single-family is strong, it’s the capacity situation. It eats up a lot more capacity. It’s a much bigger part of the overall market historically, so it’s across the board. You know, it’s across the board. I mean, really if you look at the commercial products they actually run slower and so generally speaking if your capacity constrained, because you’re running all single-family product there’s no reason to consider a five-eights, you know, a decline in price in five-eights.

Mike Dahl: Great. Thanks.

Operator: Thank you. Our next question is from the line of Kurt Yinger with D.A. Davidson. Please proceed with your questions.

Kurt Yinger: Great, thanks and good morning, everyone.

Carey Phelps: Good morning.

Scott Deakin: Hi, Kurt.

John Turner: Hi, Kurt.

Kurt Yinger: On the ceiling side, the last couple quarters you’ve talked about kind of the Greenfields and some expanded vendor relationships. Can you maybe talk about how those factors played into the strength you saw this past quarter and maybe also touch on just competitive dynamics and how you’re thinking about any additional kind of share opportunities within that market?

John Turner: Sure. I mean, our organic efforts are absolutely paying dividends. There’s no question about that. I would probably, though, point out more to the strength in the remodel sector and our channel checks telling us that the increase in office remodel and tenant improvement work, smaller work, medium-sized work, suburban work, all those things seem to be strengthening a little bit right now. And so that would really be the bigger driver and probably why we’re expecting again a pretty strong quarter going forward.

Kurt Yinger: Got it, okay, that makes sense. And then just second within complimentary products, can you talk about any internal initiatives you have to maybe expand the strength in those categories across more of the footprint and what you’re prioritizing to grow the business organically at this stage?

John Turner: Yes, it’s both product, it’s both vendor relationships in our tools and, of course, our M&A and tools and fasteners, right? We bought Tanner. We just bought AMW out there in Phoenix. And so we’ll continue down that path from an M&A perspective as well. But we — that hose acquisitions also provide expertise for us to help grow organically. And we’ve been growing our sales teams in this area and our leadership teams in this area across all of our divisions, and both in tools and fasteners, EIFS and stucco, primarily a Southern, you know, Southern United States effort and then insulation. So we’ve been growing as we get bigger we were able to specialize our sales force and that’s fairly meaningful when you’re able to do that. When you can take these types of products and not have to have a generalist out there selling them with the key volume still for most of our generalists obviously or our core products. So when you get big enough and have scale and you can afford to have the sales forces out there dedicated and expertise dedicated to this complementary product mix, we’re seeing huge success with that.

Kurt Yinger: Got it. Okay, appreciate the color, guys. Thank you.

Scott Deakin: Thank you.

John Turner: Thank you.

Operator: Thank you. Our last question is from the line of Steven Ramsey with Thompson Research Group. Pleased proceed with your questions.

Brian Biros: Hey, good morning. This is actually Brian Biros for Stephen. Thank you for taking my questions. First of all, it sounds like you’re not really seeing any meaningful pauses or cancellations in non-res activity yet, but obviously expecting an air pocket eventually. I guess outside of office, which sounds like it’s actually not doing so bad right now? Are there any verticals or geographies that look like they would be the next to see kind of this downward pressure based on what you’re seeing today?

John Turner: You know, the West Coast has been the softest throughout the entire period. And so it’s still soft, right? With multi-family has been fine out there. But it’s been soft across the board. When you ask about a geography, that’s really the softest geography is the West for us. But none of the verticals themselves are indicating any more softness than each other. I mean, if you look at the put in place numbers too, it’s fairly reflective of that. The key construction related categories are all, kind of, in that high-single to low-double-digit range as far as activity goes.

Brian Biros: Okay, and then its last follow-up would be, do you provide more color on the, I guess, kind of just the overall platform expansion strategy here as the end of the year, I guess, more, kind of more specifically the AIM stores and the acquired tools distributor you guys mentioned. I think you mentioned earlier some of those acquisitions added some expertise. I guess we’ll just be interested to hear how you guys think you can capitalize on that and kind of roll that expertise type stuff out across the platform? Thank you.

John Turner: Yes, it relates back to — so organically it just relates backward the answer to the previous question and that is primarily using resources that really know and understand that business and understand the supply of those products better and helping our purchasing teams do a better job of nationalizing our approach to the buying of a lot of those products. I’ll give you an example. Our fasteners business was up pretty dramatically in the quarter. As a percentage, it’s still a small part of the overall business. But a lot of that is just us being smarter and better about how we buy those products, providing a competitive price for all of our teams. So we’re doing a lot on the backside, I would say on purchasing and also some logistics support with our internal company that we call TSW, which is an internal distribution arm, primarily for complementary products, but then also it’s supposed to focus on sales teams that I just answered. The more and more that we can generate enough volume to afford to have specialization, the better we do. And that’s continued to roll out across the business. And then our M&A will continue to do M&A in that channel.

Operator: Thank you. That concludes our question-and-answer session, and this will also conclude our call for today. Thank you for joining us this time. You may disconnect your lines at this time and thank you for your participation.

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