Jefferies' 2023 Industrials Conference. I'm Collin Verron, and I cover building products here at Jefferies in Equity Research. This afternoon, we have GMS management with us, John Turner, President and CEO. He's gonna kick off with some prepared remarks, and then we'll open it up for Q&A. So JT, the floor is yours. All right, thanks very much. Appreciate everybody's interest today. Also, Scott Deakin is here to answer all the difficult questions. He's our Chief Financial Officer. Just quickly at a glance, for those of you that are not familiar with GMS, we're about a $5 billion organization. We've been in business for 50+ years. We're coming off a record year of $665 million of Adjusted EBITDA. 7,000+ teammates. We have a unique brand structure in the marketplace, which I'll go through, is a, a key differentiator for us, and we trade as GMS. Pretty balanced business, about 45% residential, 55% commercial. The vast majority of our residential business is made up of single-family new and multifamily, new and remodel. The R&R piece of our residential, the single-family R&R piece of our residential is very small. On the commercial side, we're split roughly 50/50 now between new construction and R&R. In commercial, it used to be a little bit heavier weighted to R&R, but with the malaise in the large office space, right now, that's closer to 50/50. But at the end of the day, the takeaway here is that, we're really well-balanced in both residential and commercial. What do key value-added distributors do? What do specialty distributors do? I think everybody understands what we do. We basically are the service component to what the manufacturers need to get to market to the contractor community. If you figure, I'll use wallboard as an example, five key manufacturers of wallboard in North America, and our customer base is in excess of 20,000+ contractors purchasing that wallboard. So, we basically take those 5 key manufacturers, and we distribute that every day to 20,000-plus customers. We are a value-added distributor, and I'll show you some pictures along the way, but in the beginning, you may have seen it, in that we do not drop simply at the curb. We are a point-of-use distributor. So we have a 1,500 boom truck fleet, and we stock and scatter our products basically to where they're being installed, which in today's day and age is exceptionally important as contractor labor is very, very tight. So we provide our products directly to the point of installation. But nice mix of products here, 29% of what we call complementary. I'll talk about that in a minute as part of our strategy going forward and has been over the course of the last several years, is to grow that business. The three core components are ceilings, steel framing studs, and, as I've mentioned already, wallboard. I touched on, just for a second, one of the key differentiators that we have. We've aggregated up this space over the course of the last 50 years, and we use those scale benefits, as you would imagine, on the purchasing side of just about everything. But at the go-to-market side, we represent the top brands, the top legacy brands in the marketplace, and so across North Texas, as an example, we are Cowtown Materials, and in the state of Florida, we are Gator Building Materials. And so why is that important? We basically continue to provide localized, specialized service into each market. They differ dramatically. Some are delivered in very different ways than others. Some are consolidated from a contractor perspective. Some are extremely fragmented from a contractor perspective. It allows us to customize our approach in every single market. At the same time, we run the same ERP across all of our operations, and we execute our technology strategy across all of our locations from a center-led place. So it's a unique model from a branding and a service perspective, but we are able to capture our benefits of scale using technology primarily. Just as a track record, again, this was last year, $5.3 billion. A nice year in profitability, as well as an exceptional year in cash flow. So part of a good distributor is we're able to convert a large percentage of our adjusted EBITDA to cash. Historically, 40-50%. We've been guiding more recently to 50-60% of adjusted EBITDA into free cash flow, and you can see that as a percentage, 12.5% of sales for our adjusted EBITDA. We just reported Thursday, this is our first quarter results. So our sales, actually, in spite of this residential recession that we're in on the new home side of things, we're still able to grow the business slightly. That's also in the face of a 20+% decline in steel pricing through the period. So we felt very, very good about this quarter, all in all. Slightly down on the net income side, slightly down on the EBITDA side, but improved on the free cash flow side of things. So all in all, a pretty good quarter for the business. This is our four-pillar strategic growth strategy. We never wanna forget about expanding our share in our core products. We talk a lot about growing complementary products, and I'll show you a little slide on the progression there here in just a second. Constantly focused on expanding our platform, both through greenfield and accretive M&A, and then we're always driving for improved productivity and profitability. We're doing that primarily through investments in technology, but also through shared best practices across the organization. When we talk about diversifying and expanding our product offering, you can see here that we've grown our share of our complementary business up from 20% in 2014 to just shy of 30% of our sales today, and this is one of the key areas that we've stated publicly. We wanna grow our complementary business at roughly double the rate of the core business, and we've been able to do that plus over the last 5 years or so. To the left, you can see the key areas in our complementary space: tools and fasteners, insulation, joint treatment, lumber, EIFS and stucco. Those are the areas where we're primarily focused, combination of both M&A and organic growth in those areas for us. Complementary products carries a... stronger margin profile in general as well, and it's also an area that we feel that we've been under-penetrated in, and so that's why we feel like we really can grow it pretty dramatically going forward. Another one of our key pillars, M&A. We have a long track record of success, 90+ acquisitions and greenfields since May of 2014. So we're very active in M&A, very active in greenfield as well. And just to the right here are some examples of both that have been accomplished here really just in the last quarter. Three acquisitions in the last quarter and also three greenfield openings. We have a lot of room to still run in North America, particularly, up in Canada, where we have some major markets that we feel we can continue to grow in. I'd, I'd call out South Florida, I'd call out California here, I'd call out New York and New England, here in particular, and then in Canada, both Western Canada and Eastern Canada. We're not in Montreal, as an example, and in Vancouver, proper, we only have a few locations in Vancouver proper. So we have a lot of room to run, still here in North America for growth in white space. We have an attractive capital structure. We have no near-term debt maturities. Our... You can see here that all of our debt is out after fiscal year 2028 for us, so we're in really good shape. Our historical use of cash, primarily again, M&A and share repurchase, and then our normal capital expenditures have run about 15% of cash, $50 million this year. And then our debt slash lease payments, those are primarily lease payments. We've paid down our debt to a reasonable level here, 1.5 times debt leverage at this point. The fleet in the United States is all capitalized leases, and so that really goes to fund the fleet here. And so just before Q&A, just quickly, we're really well positioned for the future, whatever the future holds, when it comes to residential and/or commercial construction. We have a lot of room in front of us to grow from a white space perspective as well. We're recognized as the industry leader from a quality perspective. We get paid for that as well. We feel like, barring this current cycle, whatever comes, you know, next year or the year after, we'll be in good shape to capitalize on it. I think that, as everybody understands, residential real estate is underbuilt in the U.S. for sure, and we're in a wonderful spot there, and commercial is still gonna need to catch up to residential as well, going forward. So feel pretty good about the business over the long haul. The rest of that is just a lot of detailed information, which you're more than welcome to go visit us at gms.com on our investor page. And then you can quiz Scott about all the difficult questions around the numbers. With that, I'm gonna go to Q&A. All right, and if you guys have any questions, just raise your hand and then wait for the microphone, and then we can bring it over to you so everyone can hear the question. So do we have any questions in the audience before I kick it off? No. All right, so I guess I'd like to hear your thoughts just around the recent improvements in single-family housing starts and what you're hearing from builders. Just sort of what are your expectations for the year and maybe into calendar year 2024 as the recovery in resi construction volumes manifest, and maybe how we should think about the timing of single-family improvement benefiting GMS? I think the August read in the starts will be interesting, and I think really September will be the one that's gonna be most, most important. We'll get a lot of anecdotal information from builders before then, obviously, but prior to August, the starts numbers, permitting numbers had all been improving. And, you know, the July number actually was the first year-over-year read of the year that was better, from a starts perspective in single-family. Tremendous backlog in multifamily. Probably nine months to a year of backlog still in multifamily construction, out there. So we'll see what 7.5% mortgage rates does to the, to the new home consumer. Everybody in this room understands that existing home sales are basically they're not happening, today because of the mortgage rate situations. So that's driving all the buyers into new home construction, which is great for us. I'm just not sure what 7.5%-8% mortgage rates might do to that market also going forward. But we'll get more information on that in August and September. But in general, feeling relatively good about what 2024, calendar 2024 might look like in comparison to 2023 certainly. That's, that's helpful color. And then I guess any thoughts on commercial, given the softness in office as well as the regional banking issues? Have many of your customers expressed concern about this? Have you had any indications of products getting canceled - projects getting canceled or delayed? You know, it's interesting. I think, maybe we're all a little bit surprised by the strength in commercial, at this point, with the softness in office. We've had a very good, last several quarters in commercial, five quarters in a row of commercial growth, volume growth, in the business, and, we don't really see it stopping in the near term. We haven't seen any kind of indicators yet that would say that the headwinds that you just walked through are impacting anything other than office right now. Although you would imagine at some point in time, the rate situation and/or the tightening lending standards would probably slow that down. So maybe we go from mid to high single-digit growth to flattish, you know, worst-case scenario at this point, you know, barring any kind of, you know, black swan event. So any questions in the audience? All right, I'll keep going. So wallboard prices have remained resilient despite the slowdown in single-family demand that we've seen over the past several quarters. What do you think is driving that, and how is the resi versus commercial mix playing out in pricing? And I guess this all dovetails into what you're hearing around manufacturer utilization rates and things like that, so color there we go. Yeah, I think what you're seeing in wallboard today is that really the market, even though single-family is down 20% or so on a year-to-date basis, multifamily has been very strong, and commercial has been strong, and so that's been a nice offset, although the industry is likely down somewhere in the neighborhood of 10% in volume. Coming into this downturn, the industry was running at very high utilization rates from a manufacturing perspective. And so what we're seeing is this slight downturn of 10% is not enough to drive prices down. It's, they've been very resilient there, and they're holding on. On top of the capacity situation, and I'll call it, no new capacity really coming into the market of any significance, the expectation of a rebounding single-family market going into next year and a consolidated manufacturing base now, they're acting rationally in that respect, and they're kinda saying: Okay, I think next year is gonna be better, so let's not, let's not give away the farm this year. That's definitely happening. The cost side of things in wallboard is definitely changing, as synthetic gypsum is drying up east of the Mississippi, and all of those manufacturing facilities are needing to convert to natural gypsum. So they have a tremendous amount of increased costs just in transportation, but then they have all the capital that's required upfront in the milling capacity to actually be able to mill and use natural gypsum. And that synthetic gypsum, of course, is drying out because coal-fired electrical production is going away, and that's a byproduct. Synthetic gypsum is a byproduct of that coal-fired electrical production. So there's some real inflation that's helping to keep manufacturing prices up, as well as the fact that the utilization rates aren't at a point yet where chasing volume as a manufacturer would make much sense. That's helpful color. And then you talked a little bit about the opportunity in the complementary products. Can you just dive a little bit more into that and some of the product-specific categories? What's the opportunity from a the size of the M&A market or organic growth? Just a little bit more color on the complementary products. Yeah, I mean, we basically stated from an organic perspective that we were gonna be able to double. This was three or four years ago when we first started talking about this publicly. We would double the rate of growth organically in complementary versus our core, and we've been able to accomplish that. Going forward, with the scale of that business now, we're at about $1.5 billion in our complementary channel. The scale of that business in a couple of areas, tools and fasteners, insulation, EIFS and stucco, in particular, now allows us to look into the M&A area there. And particularly, tools and fasteners is where we've been focused in that area, and we've done a few small ones because we're learning that business a little bit better. But I feel like we have $a few hundred million worth of opportunity over there, maybe $500 million worth of opportunity in that tools and fasteners space over time. Great. And then I guess just pivoting to the ceiling side of the business. Historically, ceiling prices have consistently gone up, but your guidance for Q2 estimates that ceiling prices will be down low single digits. Can you just dive a little bit more into what's driving that assumption? Sure. So right now, with office being as down as it has been, the high end of the market is off, and off dramatically. I think if you looked at what Armstrong's talking about moving forward, and we're one of Armstrong's largest customers, love their products and their business. But Armstrong's talking about having double-digit volume declines. We're talking about having, you know, single, very low single-digit volume declines to possibly being flat. And what's happening there is that we participate in the commodity side of the business, as well as the high-end side of the business, and we also participate with other manufacturers where we do not have the Armstrong line exclusively. The lower end of the business is doing just fine from a volume perspective. And so what's happening is there's enough volume there, it's offsetting the increases in the higher end part of the business. But we're still seeing. In general, prices on a like-for-like basis are still moving up in that business. We just, we're mixing down at the moment. Great. Pause for any questions in the audience here. All right, and then I guess if you can talk about capital allocation, how you're balancing deleveraging, acquisitions, buybacks, organic growth. Just dive into your main priorities here. Sure. I mean, the last chart I put up there, prior to the summary basically says it, right? Over 50% of the cash we generated recently has been used for acquisitions. That's probably what we'll continue to do. The next use of cash has been repurchase activity, which we'll continue to do. We have about a $50 million run rate right now in capital expenditures. That's what we expect to maintain this year and probably into next year, as well. And then the debt service on the fleet leasing is what it is. It's about that same amount, you know, $50 million a year or so. Great. All right, and I guess my last question here, can you talk a little bit about greenfield opportunities? Is that something you guys look at, or is just, you're really gonna concentrate on M&A? Just talking about how you balance that approach. Well, they go hand in hand. You've seen us accelerate it recently because we've accelerated the M&A recently, but I'll give you an example. So in Canada, we've done both M&A and greenfield post the 2018 acquisition, our entry into that market. Oftentimes, we will do an acquisition, and then we will, within a year or two, we'll begin to add greenfield locations in and around that business as we grow that business. We very rarely greenfield into a new market. That's just adding a competitor and creating a pricing environment that's not necessary. We usually will acquire into a market, and then we will add greenfield around that as we grow. That's great. That's all the questions I had. If we have any questions from the audience? Otherwise, we'll wrap up. All right. Thank you, guys, for all of your attention today, and we're available and around for questions. And, we're here for the rest of the afternoon as well, so hopefully we'll see some of you in the individual sessions. Thanks.