GMS - Q2 2024

Transcript

Operator (participant)

Greetings. Welcome to GMS's second quarter 2024 earnings conference call. This time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. 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 (VP of Investor Relations)

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 investor 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 Factors section in the company's 10-K and other periodic reports. Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call to the 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 Jr (President and CEO)

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 1.5x from 1.6x 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 is worked through over the next few quarters.

Commercial is 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 the 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 home builders 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 continued 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 2 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 (SVP and CFO)

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 or 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 thousand sq ft, up slightly from both a year ago and sequentially from our fiscal first quarter. Given this continued resilience in 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 cold 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 in 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 the remaining 20 basis points due to recent acquisitions in greenfields. Adjusted SG&A expense 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 $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 1.5x, compared to 1.6x 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.

With relative strength of cash flows in the second half, for the full year, we expect free cash flow generation to be between 50%-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 Jr (President and CEO)

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.

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 to 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 in 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-$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 (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press Star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

... So that we may address questions to as many participants as possible, we ask you please limit yourself to one question and one follow-up. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Trey Grooms with Stephens. Please proceed with your question.

Noah Merkousko (Senior Research Associate Equity Research)

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

John Turner Jr (President and CEO)

Thank you, and good morning.

Scott Deakin (SVP and CFO)

Good morning.

Noah Merkousko (Senior Research Associate Equity Research)

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, you know, still expecting some volume pressure as we look at the third quarter, but, you know, it sounded pretty constructive in terms of the potential for sequential improvement from there. So I guess, you know, is it reasonable to expect, maybe some growth as we look at Q4, or, you know, just given where wallboard is typically installed in the building process, is that potentially, you know, later, more of a fiscal 2025 event?

John Turner Jr (President and CEO)

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, very slight, but yes.

Noah Merkousko (Senior Research Associate Equity Research)

Got it. That makes sense. Then as we think, again, maybe longer term into fiscal 25, you know, potentially seeing growth on the single-family side, sounds like commercial is holding in for now, but in a scenario where you've got those two end 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 Jr (President and CEO)

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 multifamily.

Noah Merkousko (Senior Research Associate Equity Research)

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

John Turner Jr (President and CEO)

Thank you. Appreciate it, Noah.

Operator (participant)

Our next questions are from the line of David Mantey with Baird. Please proceed with your questions.

David Manthey (Managing Director Equity Research)

Hi, good morning, everyone.

Carey Phelps (VP of Investor Relations)

Good morning.

John Turner Jr (President and CEO)

Hi, David.

David Manthey (Managing Director Equity Research)

Really, really encouraged with 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 Jr (President and CEO)

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 increase cycle, if we're going to get into a new increase 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 (SVP and CFO)

I'll just reiterate, too-

David Manthey (Managing Director Equity Research)

Okay, fair enough.

Scott Deakin (SVP and CFO)

From past discussions, we turn steel inventory pretty fast, too, about 9x, so there typically isn't much inventory impact as we work through those pricing changes.

David Manthey (Managing Director Equity Research)

Yep. 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 tap 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 Jr (President and CEO)

Are you 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 homebuilders' 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, you know, it's a longer period of time. So we're still experiencing the strength of the projects that, of course, broke ground a year ago and remodel 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, you know, less volatile than new in commercial. And so I think that'll 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, you know, off 20% like we saw single family just hit the brakes so hard a year ago, and now we're down in there, you know, over the course of the last couple of quarters, having significant double-digit declines in volume. I just don't see commercial doing that. Will it soften? Certainly will. I think, you know, you can't with the ABI 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 gonna be fully offset by single family activity, because I don't think it's gonna 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 multifamily, 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, I do feel like we'll see some slowdown in commercial, but we're not expecting it to be, to be, you know, off 15% or something, something like that.

David Manthey (Managing Director Equity Research)

Yeah. Commercial is about 2/3 remodel, correct?

John Turner Jr (President and CEO)

Yeah, historically, that's right. It's a little less than that right now because of the softness in office, so it's, you know, closer into that 50/50 range, but in a historical market, our remodel would be two-thirds. That's right.

David Manthey (Managing Director Equity Research)

Okay. Thank you very much.

Scott Deakin (SVP and CFO)

Thanks, Dave.

John Turner Jr (President and CEO)

Thanks, Dave.

Operator (participant)

Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your questions.

Anika Dholakia (Equity Research Analyst)

Good morning, this is Anika Dholakia on for Matt. Thanks for taking my question.

Operator (participant)

Sure.

Anika Dholakia (Equity Research Analyst)

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. I guess given just starts are so much weaker, when do you see this pressure coming? Is it more of a fiscal 2025 story, or could it potentially be earlier? Thanks.

John Turner Jr (President and CEO)

No, 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 you know, significant slowdown.

Anika Dholakia (Equity Research Analyst)

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 three Q ahead of it flattening in four Q? Thank you.

Scott Deakin (SVP and CFO)

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 we saw in Q2.

Anika Dholakia (Equity Research Analyst)

Perfect. Thank you, guys. I'll pass it on.

John Turner Jr (President and CEO)

Thank you.

Operator (participant)

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

Mike Dahl (Managing Director and Equity Research Analyst)

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, and that, you know, by the time commercial sees its decline, 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, you know, cap rate-induced. So how are you I guess, if single family offsets commercial, how are you thinking about the impact from multifamily in 2025 and beyond? And just remind us at this point, what percentage of your business is multifamily?

John Turner Jr (President and CEO)

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% range is multifamily. And so I almost throw multifamily and 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, you know, teens. Probably, I would imagine single digits to, you know, maybe at the bottom, low double at the best.

And then multifamily can be off by 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 gonna have that deep of a correction from a commercial perspective. We certainly will bounce, and it'd 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, I use my phone. But when we, when we read everything from the journal, it really doesn't matter what you read, you, you see government stimulus is engaged today across all of North America in driving multifamily construction for the long haul, because it's the only way to provide affordable housing. And I, I feel like we're going to get through whatever this air pocket is going to be in, in 2024, our fiscal 2025, 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 (SVP and CFO)

That last point is particularly notable in Canada, where the relative mix of multifamily is higher versus single family in that market.

Mike Dahl (Managing Director and Equity Research Analyst)

Got it. Yeah, 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, you know, if you play that out, you talked about potential for price increases in wallboard as single-family strengthens. 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 Jr (President and CEO)

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 you're capacity constrained, because you're running all the single-family product, there's no reason to consider a five-eighths, you know, a decline in price in five-eighths.

Mike Dahl (Managing Director and Equity Research Analyst)

Great. Got it. Thanks.

Operator (participant)

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

Kurt Yinger (VP and Equity Research Analyst)

Great, thanks, and good morning, everyone.

Carey Phelps (VP of Investor Relations)

Good morning.

Scott Deakin (SVP and CFO)

Hey, Kurt.

John Turner Jr (President and CEO)

Hi, Kurt.

Kurt Yinger (VP and Equity Research Analyst)

On the ceiling side, you know, the last couple of 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 Jr (President and CEO)

Sure. I mean, our organic efforts are absolutely paying dividends, 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, the bigger driver and probably why we're expecting, again, a pretty strong quarter going forward.

Kurt Yinger (VP and Equity Research Analyst)

Got it. Okay, that makes sense. And then just second, within complementary 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 Jr (President and CEO)

Yeah, it's both product, it's both, vendor relationships in our tools, in fact, of course, our M&A and tools and fasteners, right? We bought Tanner, we've just bought AMW out there in Phoenix. And so we'll continue down that path from an M&A perspective as well. But those 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, in both tools and fasteners, east and stucco, primarily a southern, you know, Southern United States effort, and then insulation. So we've been growing.

As we get bigger, we're 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, are 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 (VP and Equity Research Analyst)

Got it. Okay. Appreciate the color, guys. Thank you.

Scott Deakin (SVP and CFO)

Thank you.

John Turner Jr (President and CEO)

Thank you.

Operator (participant)

Thank you. Our last question is from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question.

Brian Biros (Senior Equity Research Analsyt)

Hey, good morning. This is actually Brian Biros on for Steven. Thank you for taking my questions. First, I guess 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 Jr (President and CEO)

You know, the West Coast has been the softest throughout the entire period, and so it's still soft, right? With, you know, multifamily has been fine out there, but it's been soft across the board. When you ask about 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, you know, high single to low double-digit range as far as activity goes.

Brian Biros (Senior Equity Research Analsyt)

Okay. And then, I guess last follow-up would be, please 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 AMES stores and the acquired tools distributor you guys mentioned. I think you mentioned earlier, so this acquisition's added some expertise. I guess, I'd 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 Jr (President and CEO)

Yeah, it relates back to the... So organically, it just relates back to what, 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. You know, 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 buy side, 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 the 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, we'll continue to do M&A in that channel.

Operator (participant)

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