GMS Inc . (NYSE: NYSE:GMS) has reported a resilient third quarter for the fiscal year 2024, with net income reaching $51.9 million and adjusted EBITDA hitting $128 million, outperforming market expectations. The company saw volume growth across all major product categories and anticipates further expansion in the fourth quarter. The acquisition of Kamco Supply Corporation is set to enhance GMS's market presence, with projected synergies in cost and revenue. Despite steel price deflation and adverse weather conditions, net sales rose by 1.9% to $1.3 billion, and the company remains optimistic about future growth and profitability.
Key Takeaways
- GMS Inc. reported a net income of $51.9 million and adjusted EBITDA of $128 million for Q3.
- Net sales increased by 1.9% to $1.3 billion, despite a $55 million impact from steel price deflation.
- Volume growth was noted in all major product categories, with wallboard sales up 4% and ceiling sales growing by 6.1%.
- The company acquired Kamco Supply Corporation for $321.5 million, expecting to realize cost and revenue synergies.
- GMS expects solid commercial activity and growth in single-family and multi-family wallboard volumes in the coming quarters.
Company Outlook
- Commercial and multi-family activity levels are solid, with single-family demand showing improvement.
- Anticipated mid to high single-digit growth in wallboard volumes and low to mid-single-digit growth in ceiling volumes.
- The first positive year-over-year comparison in single-family wallboard volumes in a year and a half is expected.
- Adjusted EBITDA is projected to be between $145 million to $150 million for Q4.
- Fiscal 2025 could see a shift in end market dynamics, with strength in single-family and a substantial completion of the multi-family backlog.
Bearish Highlights
- Steel framing sales declined by 13.3% due to price deflation.
- Harsh weather conditions pushed an estimated $15 million of net sales into the fiscal fourth quarter.
- Net income decreased by 19.9% compared to the previous year's quarter.
Bullish Highlights
- Acquisition of Kamco expected to provide significant synergy in purchasing and cost savings.
- Moody's (NYSE:MCO) Investor Service upgraded GMS to Ba1, reflecting a strong balance sheet.
- The company remains confident in its strategic pillars and M&A appetite, with a solid pipeline in both Canada and the US.
Misses
- Single-family volumes were down 2.3% year-over-year, though improvement is expected.
- Overall adjusted EBITDA decreased by 9.1% to $128 million from the previous year.
Q&A Highlights
- Scott Deakin confirmed comfort with the company's debt leverage and strategic initiatives.
- The Kamco acquisition is closing soon, with expected margin enhancement and volume growth.
- The Bronx facility acquisition presents significant purchasing synergies and market growth potential.
- A normalized mix and growth in the office remodel sector are anticipated in the upcoming quarters.
In summary, GMS Inc. has navigated through market challenges to deliver a strong third-quarter performance. The company's strategic acquisitions and market expansion efforts, coupled with resilient product sales and a positive outlook for the upcoming quarters, position GMS for sustained growth. Despite some setbacks, such as steel price deflation and adverse weather, GMS's commitment to strategic pillars and market optimism underscores its confidence in driving further growth and profitability.
InvestingPro Insights
GMS Inc. (NYSE: GMS) has demonstrated a robust financial performance in the last quarter, with notable growth in net income and adjusted EBITDA. The InvestingPro data and tips provide further insights into the company's financial health and stock performance.
InvestingPro Data:
- The company's market capitalization stands at $3.58 billion, reflecting its substantial size in the industry.
- GMS has a Price to Earnings (P/E) ratio of 11.78, which adjusts slightly to 11.46 when considering the last twelve months as of Q2 2024, indicating a reasonable valuation compared to earnings.
- Over the last three months, the stock has seen a strong return of 27.02%, showcasing significant investor confidence.
InvestingPro Tips:
- GMS's management has been actively engaged in share buybacks, a sign of confidence in the company's value and a potential positive for stock price support.
- Analysts are optimistic about the company's profitability, predicting that GMS will be profitable this year, which aligns with the company's own positive outlook for the upcoming quarters.
For readers looking to dive deeper into GMS's financial health and stock performance, there are additional InvestingPro Tips available that can provide more comprehensive insights. For instance, the company's liquid assets surpass its short-term obligations, indicating a strong liquidity position. Moreover, GMS has been profitable over the last twelve months and has experienced a significant price uptick over the last six months, further confirming the company's robust financial standing.
To explore these insights and more, visit https://www.investing.com/pro/GMS for a full list of InvestingPro Tips, and don't forget to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 9 additional tips listed in InvestingPro that can help you make more informed investment decisions.
Full transcript - GMS Inc (GMS) Q3 2024:
Operator: Greetings, and welcome to GMS Inc., Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carey Phelps, Vice President and Investor Relations. Thank you, Ms. Phelps. You may begin.
Carey Phelps: Thank you. Good morning, and thank you for joining us for the GMS earnings conference call for the third quarter of fiscal 2024. I'm 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. As detailed on Slide 2. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management's current estimates and expectations. The company assumes no obligation to update any forward-looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including the risk factors section in the company's 10-K and other periodic reports. Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call to the third quarter of fiscal 2024 relate to the quarter ended January 31, 2024. 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 begin on Slide 3. JT?
John Turner: Thank you, Carey, and thank you all for joining us today. I would also like to thank our team for once again executing against our key initiatives and delivering outstanding service and solid results this quarter. Volume growth was realized across all of our major product categories as we benefited both from our organic efforts and from the contributions of recent acquisitions. And except in steel, pricing remained resilient and in total, accretive to growth as compared with a year ago. Our increase in total net sales versus last year was achieved despite significant steel price deflation, which we expected, along with the near-term headwind of adverse weather conditions that we faced in late January. The difficult weather forced all but one of our geographic divisions to shut down locations temporarily during the week of January 15, delaying sales into the early part of our fourth quarter. Still, even with these challenges, we were pleased to deliver third quarter net income of $51.9 million and adjusted EBITDA of $128 million, which were both above our previously communicated expectations. During the quarter strong multi-family and commercial end market demand, along with an improving single-family backdrop and gains from acquisitions, helped drive volume growth in wallboard, ceilings, steel framing, and complementary products. And these trends are expected to continue as we anticipate delivering both year-over-year and sequential growth in net sales for our fourth quarter as we close out fiscal 2024 at the end of April. While multi-family permits and starts do indicate a forthcoming slowdown likely in the back half of this calendar year, for now there remains a significant number of units still under construction. Commercial is also expected to continue its current pace of solid demand as our internal and external channel checks indicate levels of backlog consistent with those we experienced in our third quarter. For single-family, we are encouraged by the continuing uptick in new home orders reported by our builder customers and the three-month consecutive rise in builder confidence levels, reflecting expectations for an improving mortgage rate environment and the pronounced foundation of pent-up need for housing in a relatively supply-constrained environment. In addition, we are pleased with the continued resilience of pricing in wallboard, reinforcing what we continue to believe is a structurally changed industry with low levels of recent new or planned capacity and rising manufacturing costs, particularly given the declining availability of synthetic gypsum. Pricing in ceilings and complementary products has also held up well, while steel framing has performed as expected with prices down substantially year-over-year. Although raw steel price indices began escalating roughly four months ago, it appears that these have now reached a near-term peak, as such, while we expect our prices to slightly increase sequentially for our fiscal fourth quarter, those prices will likely flatten for at least the near term thereafter. While navigating the near-term dynamics in end market demand and pricing, our teams have continued to deliver solid results and have maintained their focus on the successful execution of our four strategic pillars, which are highlighted on Slide 4. First, measuring against data from the Gypsum Association, the Steel Framing Industry Association, and Manufacturer Disclosures, we believe that we have continued to expand our share in each of our core product categories. Customers across our end markets are seeing the value that our scale, expertise, product breadth and commitment to delivering outstanding service provide. In recent months, we have successfully secured a range of new projects, including expanding activity with some of the nation's largest residential home builders. While also winning commercial work in those sectors which remain most active, primarily manufacturing, medical, education, government, and data centers, as well as participation in many of the megaprojects underway across the country. Second, our complementary products category continues to grow as an increasingly important part of our product mix. This category has made up 30% of our sales so far this fiscal year and as we've said in previous quarters, our aim is to grow this category at twice the rate of our core products. In particular, we are placing emphasis on tools and fasteners, EIFS, and Stucco and insulation, which collectively grew 11.7% for the quarter, while the total complementary products category grew 7.3%. Over time, we expect to continue to drive accelerated growth in this margin-accretive segment as a percentage of our overall net sales. Third, we are seeing success with our many productivity initiatives and our push to drive complexity costs out of the business while further realizing the benefits of our attractive scale position. Equipping our yard operators with the right tools and technologies continues to improve the efficiency of their operations. Our eCommerce advancements are providing an enhanced customer experience and among other features, offer an avenue for quick product pricing and order information, together with easy online payments, which customers are increasingly taking advantage of. Additionally, we are consolidating a number of our legacy legal entities and merging back-of-house functionality, thereby reducing organizational and process complexity along with costs, while also leveraging the standardization of our product, vendor, customer, and other operational data across the business. Collectively, these initiatives help drive additional profitability in the business and make us better operators, further positioning GMS as a provider of choice for our customers. Finally, our fourth strategic pillar is to expand our platform through accretive acquisition and greenfield opportunities. During the third quarter, we opened three new greenfields and we continue to focus on M&A to drive growth with attractive opportunities in both our core and complementary businesses. In late December, as highlighted on Slide 5, we capitalized on one of these opportunities and announced our agreement to purchase Kamco Supply Corporation, a leading distributor of building products in the New York City market. We are very excited about the prospects of this transaction, which we expect to close in the coming days. Kamco's values and highly regarded execution discipline align very well with our own and we are pleased to welcome the company's leadership and employees as they join GMS. Bringing Kamco into the GMS family of brands represents a unique opportunity to advance our strategic priorities, including expanding share in our core products and geographic expansion in the highly attractive New York City market. Additionally, as we continue to drive complementary product sales, this transaction will present cross-selling opportunities with other GMS operations in the area, including further expanding our leadership position in wallboard. We are very excited about becoming one of the top distributors in this key region and will look to leverage Kamco's excellent reputation for customer service and operational execution as a base for further organic and inorganic expansion. Before turning the call over to Scott, who will cover more on this exciting transaction and our business results, I want once again to thank our team for maintaining our high level of service and performance during the quarter. We again successfully demonstrated the benefits of our end market balance and the flexibility and expertise we have in servicing each one. I am confident that we will continue to drive further growth and profitability as we execute on our strategic priorities. With that, I will turn the call over to Scott.
Scott Deakin: Thanks, JT. Good morning everyone. As just mentioned, in late December we entered into an agreement to acquire Kamco Supply Corporation and affiliates for a purchase price of $321.5 million inclusive of additional consideration in connection with the exit of a legacy pension fund. Kamco, which generated $235 million in revenue during the 12 months ended December 31st, 2023 has four legacy locations in the greater New York City market, including yards in Brooklyn, Manhattan, Long Island, and Paterson. Plus, they recently added an important new greenfield location in the Bronx, which we believe will meaningfully add to Kamco's top-line growth. Before any expected synergies, Kamco has historically generated EBITDA margins roughly in line with the broader GMS business. In addition, over the next 24 months to 36 months, we expect this transaction to generate cost and revenue synergies through the integration of our distribution networks and purchasing programs, cross-selling opportunities, notably for wallboard and complementary products, and SG&A savings. Moreover, as an asset transaction, we will have substantial tax benefits from intangibles amortization. All in including these synergies and tax attributes, we expect to pay just above a 7.5 times pro forma EBITDA multiple for this business. We expect to fund this transaction with cash on hand and from borrowings under our ABL, which we expect would, all else being equal, briefly raise our net debt leverage ratio by less than one-half turn before warrant returning to our current level over approximately the next year. We are very pleased to be nearing the close of this highly strategic transaction. With that, let me move on to our results for our fiscal third quarter. Starting with Slide 6, net sales for the quarter increased 1.9% to $1.3 billion as volume growth across all of our major product categories, coupled with resilient pricing for nearly all of our product lines helped to offset an estimated $55 million of steel price deflation, assuming current volumes have been sold at prior year prices. Also, as JT mentioned, in mid-January, harsh weather conditions across much of our service territory delayed project demand and slowed delivery execution, pushing an estimated $15 million of net sales into our fiscal fourth quarter. This also forced some temporary operational inefficiencies as our teams added weekend and overtime hours to keep our customers' projects moving forward. Commercial and multi-family activity levels remained solid during the quarter. While the sentiment around single-family demand is improving. Our recent acquisitions such as EMJ and Tanner also contributed positively to our quarter's results. Organically consolidated sales were essentially flat as compared with the same period a year ago. From US end market perspective, multi-family sales dollars grew 8.2% year-over-year, while single-family sales dollars declined 6.1%, resulting in a total residential sales dollar decline of 2.4%. Commercial sales dollars in the US grew 1.7% as increased sales volumes were muted by significant steel price deflation. Wallboard sales dollars of $520.7 million were up 4% over the same period last year, with multi-family and commercial volumes up 12.7% and 7.9%, respectively. Single-family volumes were down only 2.3% year-over-year, and based on our current run rates, given increasing sequential growth, we expect this comparison to turn positive for our fiscal fourth quarter. Organically third quarter wallboard sales were up 3.5% compared with the prior year period, comprised of a 3.6% increase in volume with a nearly flat price and mix component. For the third quarter, the average realized wallboard price was $473 per thousand square feet, flat with a year ago and down slightly from our fiscal second quarter. Overall, wallboard pricing continues to be resilient despite year-over-year declines in single-family wallboard volumes for now five consecutive quarters. With continued improvement anticipated in the single-family space and a developing renewal of price-increased negotiations, we expect for wallboard pricing to improve at least slightly both sequentially and year-over-year, for our fiscal fourth quarter. Ceiling sales of $155.7 million in the quarter were up 6.1%, all from the benefit of increased volumes as any price benefits were offset by mix. Organic sales in ceilings grew 4.2%, with a 4.3% increase in volumes slightly offset by a 0.1% decrease from price and mix. Third quarter steel framing sales of $203.4 million were down 13.3% versus the prior-year quarter as deflationary pricing drove a 24.3% decline in price and mix while volumes increased 11%. Organically. Steel Framing sales were down 14% with a 24.2% decline in price and mix, partially offset by a 10.2% increase in volume. While prices for steel framing products were down 21.9% year-over-year and 4% on a sequential basis, multiple framing manufacturers have issued notices of upcoming price increases. As a result, we expect for the year-over-year declines in pricing to continue to moderate as we finish out fiscal 2024, with some sequential improvement expected for our fourth quarter. Complementary product sales of $378.6 million for the quarter grew 7.3% year-over-year in total and 1.8% on an organic basis, representing the 15th consecutive quarter of through-the-cycle growth for this category. Expansion of complementary products, particularly through tools and fasteners EIFS and stucco and insulation continues to be a key element of our strategic priorities. We are sharing commercial and purchasing best practices across the organization to promote the advancement of these product lines, building on our desire to expand this margin-accretive category through both organic and inorganic means. Now turning to Slide 7, which highlights our profitability for the quarter. Gross profit of $414.7 million increased 3.1% compared to the prior year quarter, reflecting improved volumes and the associated attainment of calendar year end volume and center targets, partially offset by deflationary dynamics in steel pricing. Gross margin of 33% was up 40 basis points as compared to 32.6% a year ago. Despite the steel deflation, incrementally benefited mostly from a realization of the purchasing incentives. Selling, general and administrative expenses were $295.7 million for the quarter, an increase of $28.3 million over the prior year quarter, nearly $10 million of that increase related to recent acquisitions and newly opened greenfield locations. The remaining organic increase was primarily driven by labor and other expenses, particularly those elevated by the higher cost to serve mix and high volume of commercial and multi-family end market demand. SG&A as a percentage of net sales was 23.5%, an increase of 180 basis points from the third quarter of fiscal 2023. Along with the items I just noted for SG&A expenses, reduced revenue from steel price deflation negatively impacted SG&A leverage by 100 basis points, and the weather-related revenue delays and associated operational inefficiencies had an estimated 30 basis points of additional unfavorable impact. Adjusted SG&A expense as a percentage of net sales of 22.9% increased 150 basis points from 21.4% in the prior year quarter. All in and with 10.9% higher interest expense, net income decreased 19.9% to $51.9 million for the quarter or a $1.28 per diluted share, compared to net income of $64.8 million or a $1.53 per diluted share a year ago. Adjusted EBITDA of $128 million decreased 9.1% or $12.8 million as compared with a year ago, and adjusted EBITDA margin decreased to 10.2% compared to last year's third quarter level of 11.4%. Now, shifting to our balance sheet, which is highlighted on Slide 8. At January 31st, we had cash on hand of $88.3 million and $866.3 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 improved from 1.6 times a year ago. Given the approaching Kamco transaction closure, we expect to end the fourth quarter with net debt leverage of approximately 1.8 times before moderating back to back towards our current level over the next 12 months or so. Just after the end of our third quarter, we opportunistically repriced our Term Loan B at SOFR plus 2.25%, successfully achieving a 75 basis point improvement which represents a $3.7 million annualized interest expense savings as compared to the prior terms, or a $2.6 million annual benefit to net income. Our loan agreement will expire in May of 2030, consistent with its prior term. For the quarter cash provided by operating activities was $104.3 million compared to $134.1 million a year ago. Free cash flow was $94.1 million compared to $122.5 million for the same period last year. For the full year, we expect free cash flow generation of approximately 55% to 60% of adjusted EBITDA. Capital expenditures of $10.2 million for the quarter compared to $11.6 million a year ago. We continue to expect that for the full year fiscal 2024, capital expenditures will be approximately $56 million to $58 million. We repurchased another 370,000 shares of stock during the quarter for $24.8 million and had $216.5 million of share purchase authorization remaining at January 31. We have a solid balance sheet with no near-term maturities and an attractive capital structure providing an effective foundation for the execution of our strategic priorities. Of note, on the strength of our business and the health of our balance sheet, GMS was upgraded earlier this month by Moody's Investor Service to Ba1, putting us now only one notch below investment grade. Looking forward, we expect to maintain our balanced approach to capital allocation as we intend to continue to invest in the business, seek additional M&A opportunities, and opportunistically leverage favorable market conditions to repurchase shares. I want to thank our team for the remarkable efforts to flex our operations as demand has shifted over time and for their commitment to drive improved profitability, all while maintaining exceptional levels of service. Before turning the call over to JT to provide a review of our outlook and fourth quarter projections, let me highlight two housekeeping items. First, please note that there are 64 selling days during the fourth quarter of fiscal 2024 as compared with 63 in the prior year period. And second, the projections that JT will provide exclude any potential benefits from the Kamco transaction. However, once the transaction closes, likely in the next few days, we would expect Kamco to add approximately $20 million in net sales with approximately $2 million to $2.5 million of adjusted EBITDA for each full month as part of GMS during our fiscal Q4. With that, I'll now turn the call over to JT. He will start on Slide 9.
John Turner: Thank you, Scott. Looking forward, we are encouraged by what we believe lies ahead for GMS. On our call in December, we spoke about the likelihood of a potential air pocket in commercial activity starting sometime during calendar 2024. While still a likely eventuality, at some point it appears to be further down the road than we would have expected, and likely less pronounced in both duration and severity. The strength in the US economy, the myriad large-scale infrastructure stimulus programs, and the expectation of reduced interest rates and loosening lending conditions in the back half of 2024 provide more optimism than previously anticipated. Assuming that the still present risk of a broad contagion of commercial loan defaults is avoided. And in the very near term, our backlog would indicate similar levels of commercial activity in Q4 as in our previous quarter. Our commercial volumes remain solid, with particularly high demand for steel products. Also, February has proven to be a strong month not only for commercial but across our other end markets, albeit in part due to the work that was weather-delayed at the end of our Q3. Single-family demand is improving and we expect it to show year-over-year improvement for the full calendar year of 2024. For multi-family, despite a reduction in starts, its current backlog continues to drive construction activity, and we expect it to do so for at least the next couple of quarters. Given this backdrop and starting with wallboard volumes, we anticipate commercial to be up mid to high single digits for our fiscal Q4 on a per day basis. Multi-family wallboard volumes are expected to grow low single digits as compared with the prior year period as we are progressively facing much tougher year ago comparisons. And single-family wallboard volumes are expected to be up low single digits, which, if realized, will represent the first positive year-over-year comparison for single-family wallboard volume in a year and a half. In total, wallboard volumes are expected to be up low single digits per day as compared with the Q4 of last year. Pricing for wallboard is expected to remain resilient with price increase negotiations currently underway. As such, for our fiscal Q4, we expect wallboard prices to be up slightly in the low single digits both sequentially and as compared to a year ago. In ceilings given our expectation of continued solid demand in our commercial land market, we expect low to mid-single-digit per day increases year-over-year for volume and a mid-single-digit increase for price and mix. We are still claiming as I stated earlier, demand is expected to remain solid with per day volumes up in the mid-teens for the fourth quarter. While our prices appear to have stabilized in steel framing for now, they still lag last year's level with a year-over-year decline in the low teens expected on a per day basis. Finally, net sales for our complementary products are expected to grow high single digits on a per day basis as compared with the fourth quarter a year ago. All in as shown on Slide 10, including the additional sales dollars that were pushed into Q4 due to weather delays and factoring in an expectation for approximately $25 million of year-over-year deflation in steel pricing, we anticipate net sales per day to increase mid-single digits as compared with a year ago. We also expect that the steel price deflation will negatively impact SG&A as a percentage of sales by an estimated 40 basis points. For gross margin without the benefits we saw in Q3 when we achieved new volume tiers associated with year end incentives and as single-family begins to increase as a component of our mix, we expect our gross margin to be approximately 32.2% for the fourth quarter. Altogether, adjusted EBITDA is expected to be in the range of $145 million to $150 million for the fourth quarter. Looking ahead to fiscal 2025, we believe that we will again see the dynamics of our end market shift with strength building for single-family, while construction will likely reach completion by calendar Q3 on a substantial portion of what remains of the multi-family backlog. We are currently expecting commercial to continue with activity levels that are similar to what we just reported for at least the next couple of quarters. Given that with a balanced mix of end markets, our team is ready for these expected shifts and has demonstrated our ability to flex as needed to best serve our customers. Thank you for joining us today. Operator, we are ready to open the line for questions.
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please while we poll for questions. The first question comes from the line of David Manthey with Baird. Please go ahead.
David Manthey: Thank you. Good morning, everyone. JT, I think you just said that wallboard, you expected it in the fourth quarter to be up low-single digits year-over-year and quarter-over-quarter. I want to check if I have that right. And also I have 4.81% per 1,000 in the last fourth quarter. I just wanted to check those facts. Is that correct?
John Turner: Are you talking volume and price or just price?
David Manthey: There, I'm just talking price.
John Turner: Yes. So sequentially, we expect it to improve, and year-over-year, we expect it to be up slightly. I'm looking to see if that quarter number was right.
Scott Deakin: 4.81%, and just so we ended the third quarter at a roughly 4.80%, and February is tracking higher at closer to 4.90%.
David Manthey: Okay. Yes, that was the -- just the question was the customer reaction to those February increases must be fairly good, given that you're already seeing an effect here just four weeks in, right?
John Turner: Yes. I mean, customer reactions are never good to price increases, but the reality is there are parts of the market where we are able to get slightly better prices at the moment.
David Manthey: Got it. Okay. And then second question, and although it's negative for revenues and operating margins, does lower steel pricing have a positive mix effect on your gross margin? And if you can just remind us in stack rank terms, where the steel ranks relative to your other segment, and your product segments?
John Turner: It's third, but its gross margins are pretty good. So complementary products, wallboard, steel, very close to wallboard actually at this point in gross margin percent. And then ceilings is the lowest of the gross margin percentages.
David Manthey: Okay. So with steel being down in the mix, that actually might be slightly gross margin accretive when you think about the effect of that?
John Turner: I mean, slightly, right? I mean...
David Manthey: Slightly.
John Turner: It depends on the growth in the other categories. But yes, with all that volume growth, though, the sales dollars will still be pretty significant. So it's 10 basis points maybe the max right kind of deal, not a lot.
David Manthey: Okay. Got it. Thanks very much.
John Turner: Yes, thank you.
Operator: Thank you. Next question comes from the line of Noah Merkousko with Stephens, Inc. Please go ahead.
Noah Merkousko: Good morning, and thanks for taking my questions.
John Turner: Hi, Noah.
Noah Merkousko: So first, I wanted to touch on the wallboard price again, really encouraging to see some improvement here finally seems to be corresponding with single-family. But I guess, as we think longer term throughout calendar year 2024, I think we should continue to see strong single-family volumes. Is that kind of low-single digit growth, a good kind of ballpark to think about just in terms of holding on to that price and that you got here in the fiscal 4Q as we look to maybe in the next three quarters?
John Turner: I would say, yes. And you're right, it's fully dependent on the strength in the single-family market.
Noah Merkousko: And just to follow up on that point, the -- that even consider some maybe mix impact as you see a negative mix impact as you see more single-family.
John Turner: That's right.
Noah Merkousko: All right. Great. And then one last one for me. It sounds like your commentary around commercial has really improved. And just hoping to get a little bit more detail there on what specific kind of end markets within commercial you're seeing in that strength? The leading indicator is still kind of point a not-so-rosy picture as we look forward. So maybe kind of help us understand what's driving your slightly differentiated view here.
John Turner: Yes, I think that if you look at just purely the ABI and you look at the impact of multifamily on the ABI, it's a huge drag. So what you're seeing is you're seeing a much bigger headline decline, and we've already kind of accounted for that expected multifamily decline, multifamily in our business, 15% to 17%. So we've kind of accounted for that and expect that in the back half. So it's not a huge drag for us as that headline ABI would indicate. Underneath that, you're seeing a lot of strength in those categories I talked about earlier. You're seeing a lot of mega project activity, chip plants and car plants and all of the supporting infrastructure around all of that out there. You're seeing strength in medical, you're seeing strength in data centers, no slowing down in data centers, right, particularly with this AI revolution going on. So a lot of the categories that have been driving the strength today continue to drive the strength tomorrow. And I think the mega projects probably offset a lot of the smaller commercial that's having a really hard time being funded. All that being said, the expectation is that you guys are probably watching the PCE this morning because I don't have my phone with me at the moment, but that's probably out already. So I do think that the interest rate environment, with the -- most of the expectations being a June start for the Fed funds rates to come back down again, I think that that would create this loosening of this tight funding situation that small commercial and medium commercial is facing. And that's important to happen, and I do think it's going to happen. But I think that's part of the positivity that I'm conveying is that large commercial already funded, already in the pipeline is going to continue. And hopefully, what we see is we see those interest rates moderate into the back half of this year and really more importantly, the lending environment improved for commercial activity. Those things all come together, and I believe we'll be fine. I think that, like we said, it's probably going to decline. It'll be an air pocket, but it will be later in the year, and it will probably be not as severe as I would have possibly thought at the end of the last -- end of the last quarter.
Noah Merkousko: Well, that's really encouraging. I appreciate all the color there. Thanks for the time.
John Turner: Absolutely.
Operator: Thank you. Next question comes from the line of Kurt Yinger with D.A. Davidson. Please go head.
Kurt Yinger: Great. Thank you, and good morning, everyone.
John Turner: Hi, Kurt.
Kurt Yinger: If we look at, I guess, the 80 basis point decline in gross margin that's expected in Q4, is that primarily the purchase incentives falling off and maybe a little bit of single-family mix dynamic there with wallboard? Or are there any other kind of big factors within that expectation?
John Turner: No, that's -- it's basically the expectation. We had a pleasant surprise last year in the achievement of some of these goals that happened in the fourth quarter. We probably don't expect to see that again. So that's really one of the biggest reversals from quarter-to-quarter and year-over-year.
Kurt Yinger: Okay. It makes sense. And then Kamco is a bit of a bigger deal. You talked about net leverage going up to just under 1.8 times. I guess, as you think about deleveraging from that, does that impact the appetite for M&A over the next couple of quarters as you integrate and work down that net leverage a bit? Or do you still feel pretty comfortable with where that stands? And if the right opportunity comes up, there wouldn't be a very much hesitancy?
Scott Deakin: Yes. First to clarify, I wouldn't say it's just under 1.8 times. I think, most probably 1.8 times is probably the better number. I don't want to oversell sort of what we'll be able to do there. But it doesn't lower our appetite at all. As we said, we'll be able to get over the year time based on combined cash flows of the business back to our current levels and on all of these strategic initiatives and deployment things that we're doing, it's still pedaled down. So we are really comfortable with our debt leverage. As we noted, we just got an upgrade from Moody's just based on the strength of our balance sheet. So we're content with where it's positioned, and I think it gives us a lot of platform to continue to do what we're doing strategically.
Kurt Yinger: Okay. Great. Thanks guys. I appreciate the color.
John Turner: Thanks.
Operator: Thank you. Next question comes from the line of Keith Hughes with Truist Securities. Please go ahead.
Keith Hughes: Okay. Thank you. Just a couple of questions, but one quick one. The guidance for fiscal fourth quarter, I assume that does not include Kamco. Is that correct?
John Turner: Yes, that's correct.
Keith Hughes: And when do you have any kind of update when you expect it to close?
John Turner: Within the coming days.
Keith Hughes: Okay. Short term. Okay.
John Turner: Yes.
Keith Hughes: And then your commentary on the -- well, let me back up the commentary on ceilings, I know there's some mix stuff going on here that's compressing the AUV. Is that something that's going to run long term? It's happened in past quarters. Is there something specific going on there? Or is this something that should change for you in the coming periods?
John Turner: It's just end market related, right? I mean it just depends on the activity for that individual quarter. We end up with more education or more of the low end, then the mix is down. If we get more office or we get more medical then the mix will increase. I think we're talking about having a more normalized mix this coming quarter when we gave the guidance there, which is pricing up and volume up. So we're not expecting to see a continuation, let's say, of a decline in mix over the long haul. It's really just project dependent.
Keith Hughes: Okay. And then, I guess, the final question. The view -- the short-term view of commercial -- excuse me, of well, just a generally constructive view on commercial in general. And are you seeing enough office remodel activity that that could be an actual growth sector for you in the next year or so? Is it big enough for this whole move to an office that's cheaper in price and all that stuff is going on? Is that big enough to offset whatever continued pressure we feel in new office construction?
John Turner: It's not realizing itself in activity yet, but it's certainly a lot of chatter, right, out there.
Keith Hughes: Right.
John Turner: And I wouldn't say that we have in our forecast considered a huge rebound in 2024 in office. I do think that in 2025 or maybe even in the late 2024, there will be some resolution in some of these larger markets with some of this empty space, as well as some of the lending situations around some of that -- those properties. If those properties move and/or change hands, regardless of what the price is, those new owners will do something with those buildings. And when that happens, that's good for us. But we're not -- we're not in my -- in my optimism. I'm not considering that in the 2024 calendar year, if that would be positive upside.
Keith Hughes: Okay. Great. Thank you very much.
John Turner: Thanks, Keith.
Operator: Thank you. Next question comes from the line of Steven Ramsey with Thompson Research Group. Please go ahead.
Steven Ramsey: Hi, good morning. I wanted to get a little more color on the Kamco deal. Good to hear that the margin profile is similar to yours. I'm curious if there is some margin enhancement opportunity there or if it's more volume growth or if it's shifting their mix to maybe look a little bit more like GMS with complementary products, just any way you want to elaborate on that?
John Turner: Well, it's all of the above. I'd say it's -- I would say that there's opportunity in all those areas. I think there's purchasing synergy here, a little bit of G&A, not a lot of G&A opportunity because of the unique geography. Here we don't have much overlap at all, in fact, we don't have any overlap at all in our businesses today. So from that respect, the G&A savings comes in things like insurance and smaller areas. But we also have the ability, we believe, to enhance the mix, but also drive some more volume in Wallboard. We called that out specifically. We think we might be able to help on the wallboard side.
Scott Deakin: I'll Just add too, Steven. We've got the overhead of the Bronx location in those margins as well. So that's an exciting new opportunity to serve that borough of the city. And as those revenues grow, we'll get a lot of air covers for revenues over those overhead costs that will help out the overall profitability of the business as well.
John Turner: Yes. I wouldn't call out anybody on the call listening from Kamco as well. Visits that we've had up there, that is an exceptional greenfield facility. One of the best I've ever seen being open in a very, very short period of time.
Scott Deakin: Okay. Great. And then zooming out on Slide 8, the three-year cash usage over 50% to acquisition, 18% to repurchases, 15% to capex. I'm curious just you foresee over the next three years that the capital usage could be something similar to that? Or if you think that mix morphs a bit over time?
John Turner: Well, I would guess it probably means if it's going to change, it's going to lean more towards M&A than anything else. And the -- we've got a strong backlog. We've got a good M&A engine. It's a core competency for us. And I think with rates moderating and coming down, I'd expect to see the M&A market also accelerate a little bit. So probably more towards M&A.
Scott Deakin: It wouldn't be a significant shift, maybe 5 points to 10 points of percentage, but directionally, that's spot on.
Steven Ramsey: Excellent. That's great color. Thank you.
Operator: Thank you. Next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.
Mike Dahl: H. Thanks for taking my questions. And I also wanted to ask about Kamco and my line just cut out for a minute. So apologies if even just asked this, but just in terms of their current mix of business, can you help us understand what the current mix is from a product category and an end market standpoint? And then on the recent trends, if the 2023 revenues are slightly down versus the prior kind of trailing 12-month numbers you had provided. And so a little more color on their organic trends currently and what you would expect organically for them in the upcoming quarters?
John Turner: They are more weighted towards, and again, we haven't closed. So I think, I don't have all the details sitting right in front of me, but they are more heavily weighted towards ceilings. They are an excellent ceilings distributor, probably the best from an independent perspective out there in an exceptionally strong market for ceilings. So they're a little more weighted towards ceilings. And the balance there -- and a little underweighted in complementary versus us and underweighted in wallboard versus us. And while we'll close in the next couple of days and get a lot more information on their sales, it would be a guess to tell you, but I believe it's the same steel conditions that we're facing, primarily.
Mike Dahl: Okay. That makes sense. And then looking at the numbers. So again, this is kind of back of the envelope, but it seems like you're suggesting their legacy EBITDA might have been around kind of mid-20s million. And if I look at your post-synergy multiple, it suggests you expect to get that up to around $40 million. And that's not insignificant in terms of the magnitude of synergies when you don't have current geographic overlap. So I know you articulated where they're coming from at a high level. Can you give us a little more color on the relative contribution of costs synergies, sales synergies? And then if the greenfield location is included in that number, and should we expect the greenfield to be about as it ramps to be about the same size as their legacy branches?
John Turner: Yes is the answer to the last question. It's a very large facility. Actually, it's an outstanding facility of beautiful building, well stocked, great operational capability. And yes, we've given them credit to that and the growth expectation there is included in our synergy number. A lot of effort, you can imagine trying to get a facility up and running in the Bronx, the years of effort that it takes through permitting and investments, et cetera. So we feel really fortunate about that opportunity. So wallboard opportunity is another significant synergy, both on the selling side, but also on the costs side there, as well as several other product cost opportunities. So if you were to look at purchasing synergy, the Bronx, that's the large majority of the synergy that we've got in there, as well as a little bit of overall growth in the market. And the least contributive is the G&A piece, which, again, as things more like benefits and scale advantages we have in leases and interest expenses and things like that.
Scott Deakin: Keep in mind, too, that because it's an asset transaction, we also get a significant tax amortization benefit from us, which is essentially locked in for the next 15 years. And so think about that as a more -- almost a reduction in price versus an EBITDA enhancement.
Mike Dahl: Okay. That all makes sense. And if I could just sneak one last one in. In terms of timing, obviously, to your best point, the tax savings is an ongoing one, but timing of realization for the other synergies, how should we think about that ramp?
John Turner: Well, I mean, purchasing synergies are fairly quick, right? They'll happen in the very near term over the course of the next quarter plus. We'll be doing that. Adn growth in the Bronx is growth in the Bronx. It's a startup operation. So that's kind of the tail end of the 24 months to 36 months we talked about. So you have the tax benefit on a kind of immediate basis. You've got purchasing synergies more on an immediate basis, small G&A savings on an immediate basis and then the ramp up in the Bronx is the one that's going to take the longer period of time.
Scott Deakin: And then the cross-selling ramp up of Wallboard and Complementary will take a little bit of time to get that foothold in place as well.
Mike Dahl: That's very helpful. Thank you.
Operator: Thank you. The final question comes from the line of Zach Pacheco with Loop Capital. Please go ahead.
Zach Pacheco: Hey, thanks for taking my questions this morning. I was wondering what are your current expectations on how long the multifamily backlog will last before any slowdown, if multifamily begins to show up in wallboard demand?
John Turner: Like calendar third quarter, I'd expect to see things start to soften.
Zach Pacheco: Okay. Understood. And then I know you said closing in a couple of days here, but just wanted to ask on the M&A pipeline, if you provide any more color on maybe improvement in seller expectations or kind of just your guys' sentiment moving forward? Thanks.
John Turner: I mean, there sellers' expectations vary depending on the market and the strategic nature of it to us, et cetera. But our pipeline is solid with our normal kind of range of multiples. And this one is unique because of that Bronx location. Really strong in Canada, where we're spending a lot of time and energy up there, really building our leadership position, but also very strong here in the US as well. So no shortage of opportunity when it comes to that.
Zach Pacheco: Understood. I appreciate it.
John Turner: Thanks.
Operator: Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
John Turner: Thanks, everybody.
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