Foxtons Group PLC

LSE:FOXT

Greetings, and welcome to the GMS Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Carey Phelps, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Darryl. Good morning. Thank you for joining us for the GMS earnings conference call for the third quarter of fiscal 2025. 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 we issued this morning, you can find a set of PowerPoint slides to accompany this call in the Investors section of our website at www.gms.com.

Now looking at 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 of the company's 10-K and other periodic reports.

Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call for the third quarter of fiscal 2025 relate to the quarter ended January 31, 2025. Once we begin the question-and-answer session of the call, we kindly request that you limit yourself to one question and one follow-up in the interest of time.

With that, I'll turn the call over to John Turner, who will begin on Slide 3. JT?

Thank you, Carey. Good morning, and thank you all for joining us. I'd like to begin with a review of our third quarter performance, which overall came in below our expectations as we continue to face a challenging macro environment. I will then turn the call over to Scott for a closer look at the financial results before concluding with an overview of our outlook. .

As highlighted in our press release this morning, results for our fiscal third quarter reflect the impact of demand conditions that deteriorated meaningfully starting in December, continuing through the end of the quarter and through today, this ultimately led to reduced sales volumes and gross margin for the quarter versus prior year. Uncertainty, general affordability and tight lending conditions, combined with an estimated $20 million negative impact -- revenue impact from weather, resulting also from holiday timing, all contributed to project delays and slower activity in each of our end markets.

We reported net sales of $1.3 billion for our third quarter, which was roughly flat compared to the same period a year ago, including the benefits of recent acquisitions. Organic sales declined 6.7% for the quarter. Gross margin of 31.2% for the quarter was slightly down from the 31.4% we reported in our fiscal second quarter. Given vendor incentive headwinds and transactional price cost pressure and was down from 33% a year ago. Despite the challenging demand backdrop outside of steel, pricing generally remained resilient during the quarter as prices in ceilings continued their notable pace of consistent increases. Favorable pricing for insulation and lumber helped offset decreases in other products within our complementary products category. We also recorded price increases on a like-for-like product basis in Wallboard. While there have been additional recent manufacturer price increase announcements, given the recent pullback in demand, it is possible that the implementation of these pricing actions may get delayed beyond the typical 3- to 6-month absorption cycle, but it is too soon to speculate. Regardless, there are no signs at this point that prices will move backward.

Looking at end market demand dynamics. First, with commercial. It's notable that the Architectural Billings Index has been below 50, indicating a month-to-month sequential decline, 17 out of the last 18 months. As such, our U.S. commercial revenues were down 7.8% organically as compared to last year, with activity levels that are expected to remain constrained until lending costs and standards loosen, and greater confidence returns to the economy. The office category, in particular, which was our largest commercial vertical prior to COVID, continues to suffer, but we believe it also represents a large potential opportunity in the future given the shifting viewpoints surrounding in-office work. To share some perspective, at the end of calendar 2019, there was approximately 160 million square feet of office space under construction. That compares to only around 40 million square feet today. As the return to office movement continues to evolve, we will be ready to take advantage of any improvement in this space for both new and repair and remodel should it materialize. In the meantime, with runway still ahead, well-funded mega projects and those that are not otherwise dependent upon private financing, such as those in public education, health care and infrastructure continue to dominate the commercial landscape. Data centers, especially are expected to continue to grow with one analyst recently estimating a current backlog of 7 years of construction at the 2024 build rates. Separately, one of the leading investment banking and consulting firms for the construction industry projects that data center construction will grow more than 10% through 2026. Data centers are an attractive business for us as they require both our higher-end, more energy-efficient core products as well as complementary products.

Turning to residential activity. Although December housing starts rebounded nicely from November, driven by a 61% month-over-month increase in multifamily, January starts reverse course as frigid temperatures, winter storms, continued macro uncertainty and persistently high mortgage rates suppressed demand. This said, given record high absorption levels for multifamily during the calendar fourth quarter and the continuing need for affordable housing across North America, we are hopeful that we are nearing the bottom of the cycle for this end market. Year-over-year comparisons will still be challenged likely until at least late in the calendar year, but we are optimistic that we will start to see sequential unit growth closer to the end of calendar 2025 or early 2026.

For single-family, despite the considerable well-documented need for housing in both the U.S. and Canada, demand in this end market continues to be negatively impacted by affordability challenges driven in large part by high mortgage rates, but also currently hampered by widespread economic uncertainty, heightened by questions around the pace of inflation and the scale, scope and impacts of potential tariffs and other policy decisions. The latest builder sentiment numbers, which had been gaining steadily since August on the hope of lower mortgage rates and potential pro development policies took a negative turn in its most recent survey. With sales expectations from builders for the next 6 months, declining to their lowest level since 2023. As a result, while we continue to believe that the solid underlying demand fundamentals of the housing market will support longer-term growth, we expect that single-family housing starts will remain muted for at least this calendar year.

With a similar underbuilt and pent-up demand situation, interest rate cuts and other pro development policies are serving as an economic catalyst in Canada as residential building permit activity ended calendar 2024 on a high note, with a total value of permits reaching their highest level since 2017. In December, building permits there surged 11% sequentially. Directionally, we continue to expect for the U.S. to eventually follow suit, particularly if we see similar expansionary efforts to improve affordability and ease development burdens for builders.

As our team works diligently through this economic backdrop, we remain confident that we have the right strategy in place, which is highlighted on Slide 4. Through our execution of our 4 strategic pillars to expand share in our core products, grow our complementary products category, expand our platform and drive improved productivity and profitability, we see additional long-term growth opportunities for the company and value creation opportunities for our stakeholders.

Given that we expect the current macro conditions to continue through the bulk of calendar 2025, we are taking actions to further align and rationalize our operations with the market realities of today. As such, leveraging our previous investments in technology and efficiency optimization, we are implementing an additional estimated $20 million in annualized cost reductions, which would bring our total annualized run rate of cost reductions to $50 million since the start of our fiscal year. Amidst the down cycle in our markets, a bright spot is our ability to continue generating significant cash. This, along with our solid balance sheet provides the foundation to enable the continued execution of our strategic pillars to pursue long-term growth opportunities while utilizing a balanced approach to capital allocation, ultimately delivering value for shareholders.

Before turning the call over to Scott, I would like to take a moment to thank the entire GMS team for their continued commitment to providing the highest levels of service to our customers even during these difficult market conditions. I'd also like to thank our customers and our suppliers who are also feeling the impacts of softening business conditions. All in, we believe that we are well positioned to pivot up or down as demand levels continue to change. We believe this flexibility will enable us to capitalize on opportunities as demand returns.

With that, I'll now ask Scott to take you through the detailed results of our quarter.

Thank you, JT. Good morning, everyone. Starting with Slide 5. Net sales for the quarter were nearly flat compared to a year ago, at $1.3 billion. While the third quarter is seasonally our softest as JT discussed, activity levels in each of our end markets deteriorated during the last half of the quarter, even more than we had anticipated, as the midweek holidays resulted in almost complete shutdowns at many project sites for the entire 2-week period. These soft conditions continued through the end of the quarter. Additionally, we estimate that adverse winter weather together with the holiday timing effect negatively impacted net sales by approximately $20 million during the quarter.

Other than for Ceilings, which benefited from project mix and the, Kamco acquisition, volumes declined across our other major product categories during the quarter. Organically, sales for the company declined 6.7% as compared with the third quarter of fiscal 2024.

Given continuing market declines and broad economic uncertainty, as JT mentioned, we are implementing another $20 million in annualized cost reductions, including further steps to reduce back-of-house overhead expenses and we are consolidating several yard locations. We expect to realize a mature run rate of these savings in our first quarter of fiscal 2026. In addition to these cost reduction efforts, we are also continuing our subsidiary consolidation program, which we expect will drive additional efficiencies over time. Region by region, we are consolidating many of our U.S. subsidiaries, streamlining our processes and removing organizational complexity to better leverage scale, service our customers and reduce costs. While these consolidation activities are ongoing, the early results are very encouraging. Where complete, we are seeing the benefits of data standardization, better inventory management and enhanced pricing and purchasing practices, enabling us to successfully reduce overhead and improve productivity metrics.

With that, I'll move on to the rest of our third quarter, noting first that we did have the same number of calendar days, selling days year-over-year. First, looking at our end markets. In the U.S., using our organic Wallboard results as a proxy, multifamily revenues were down 27% as compared with a year ago, while single-family revenues were up 1.9%, resulting in a total U.S. residential sales dollar decline of 6.4%. U.S. commercial sales dollars also fell by 7.8% as compared with a year ago. Anecdotally, conditions in Canada are more positive, indicative of pro development policies in that country. As an example, after 6 rate cuts by the Bank of Canada, amounting to a reduction of about 2.25% in total, housing sales data in Ottawa indicate reductions in market inventory. And in Ontario and British Columbia, we've seen a surge in residential construction permits. While there is risk that tariff negotiations could hamper these efforts, we are encouraged by these pro development policies.

Now on a product line basis. Wallboard sales dollars of $501.7 million were down 3.6% as compared with the same period last year, comprised of a 4.9% decline in volume, partially offset by a 1.3% increase in price and mix. Organically, third quarter Wallboard sales were down 7.4%, with an 8.8% decline in volume, partially offset by a 1.4% increase in price and mix. Multifamily Wallboard volumes led the organic decline with volumes down 31.4%, commercial Wallboard volumes were down 9.4%, and single-family Wallboard volumes were down 3.7%. The average realized Wallboard price for the quarter was $479 per thousand square feet, which was up 1.3% as compared with the prior year period. Although end market mix drove the net of price and mix down just slightly from the end of our fiscal second quarter, on a like-for-like basis, prices were up marginally on a sequential basis.

Given escalating cost to manufacture wallboard and relatively solid industry capacity utilization even under softer market conditions, all of our major wallboard manufacturing suppliers have announced price increases. However, as JT mentioned, given the soft demand conditions and uncertainty in the macro environment, it is too soon to know how successful the adoption of these increases will be in the near term. For now, given the economic backdrop, along with the normal timing of 3 to 6 months for price increases to reach our customers, we are assuming only a very slight sequential improvement in like-for-like wallboard product pricing for our fiscal fourth quarter.

For Ceilings, including acquisitions, sales were up [indiscernible] 6.7% decrease in volume given the restrained commercial activity, but price and mix increased 11.1%, driven by an outperformance of higher-cost architectural specialties products. These stronger results in our ceilings product category continued to be driven by commercial projects such as those for data centers health care and education, which are not as reliant upon private financing. I'll also note that on top of the normal pricing actions that we would expect for ceilings due to the steel content within suspension grid and other ceilings materials, the largest manufacturer in this space has announced product-specific price increases for their metal products as well.

Steel framing sales were down 11.6% for the quarter as year-over-year price deflation drove a 6% decline in price and mix as volumes also declined 5.6%. Organically, steel framing sales were down 17.9% with a 15.1% decline in volume and a decline in price and mix of 2.8%. While steel pricing was down 2.3% sequentially, tariffs and resultant inventory management practices are widely expected to drive future steel price increases. However, because it is impossible to know the timing and extent of these increases over the supply chain impact, we are assuming roughly flat sequential improvement off of the quarter ending price for steel framing. Volumes are expected to increase sequentially, consistent with normal seasonality as we move off of the declines in late December and January.

Complementary product sales of $398.6 million for the quarter grew 5.3% year-over-year as we continue to invest in this margin-accretive category, representing its 19th consecutive quarter of growth. Sales decreased 4.3% on an organic basis due primarily to the soft commercial and multifamily conditions, partially offset by some improvement in pricing. Our team remains focused on driving growth in complementary products, particularly for tools and fasteners, EIFS and stucco and insulation. These subcategories benefited from our recent acquisitions and collectively grew faster than the overall category and 8.6% for the quarter.

Now turning to Slide 6, which focuses on this quarter's profitability. Gross profit of $393.1 million decreased $21.6 million from the prior year quarter. Gross margin was 31.2%, down 180 basis points as compared to 33% a year ago. Gross margins contracted across all major product lines as compared with the prior year period, driven mostly by weak demand and continued year-over-year pricing cost pressure, predominantly in Wallboard. Relative to our previously provided expectations, however, the core drivers of our margin were largely aligned with relatively stable price and cost dynamics, yielding consistent transaction level margins. However, we did receive less vendor incentive income during the quarter than expected due to weaker volumes in wallboard and steel towards the end of the calendar year. Additionally, inventory adjustments and the negative impact of a relative shift in sales mix with softer sales of complementary products than forecasted further contributed to the overall margin compression as compared to our prior expectations.

Selling, general and administrative expenses were $310.8 million for the quarter, up from $295.7 million. Of the $15.1 million year-over-year increase, approximately $24 million related to recent acquisitions, $4 million related to higher-than-usual insurance claim development and $1.2 million related to an increase in severance costs, primarily associated with the previously disclosed cost containment actions. Organically, despite the headwind of unfavorable weather and holiday timing related inefficiencies, we fully offset these increases in other inflationary pressures with lower overall operating costs, reflective of the realized savings from the previously disclosed cost reduction actions and reduced activity given the changes in demand. SG&A expense as a percentage of net sales increased 120 basis points to 24.7% for the quarter compared to 23.5% for the prior year quarter. In what is typically our seasonally slowest quarter, our results for Q3 were further impacted by several unusual items, including greater than normal operational disruptions from winter weather in the midweek holidays along with higher-than-usual insurance claims development, which together contributed 70 basis points of deleverage. General operating cost inflation, principally from higher rent expense also contributed 70 basis points of deleverage, 50 basis points of which was offset by structural cost improvements from our previously announced restructuring actions. Onetime costs, primarily severance related to the restructuring efforts negatively impacted SG&A leverage by 20 basis points. And finally, net product price deflation with steel declines more than offsetting Wallboard improvements was also unfavorable to SG&A leverage by 10 basis points. Adjusted SG&A expense as a percentage of net sales of 23.9% increased 100 basis points from 22.9%.

During the quarter, given the softness stemming from high interest rates and other economic factors impacting the markets our business serves, we recognized a $42.5 million noncash goodwill impairment charge. This, together with a $7.4 million gain from the sale of a noncore installed insulation contracting business during the quarter and a $4.3 million increase in interest expense, we recorded a GAAP net loss of $21.4 million compared to net income of $51.9 million in the prior year period. The higher effective tax rate also contributed to the decline in net income given the nondeductibility of the goodwill charge. We still expect our normalized cash tax rate, excluding the impact of acquisition accounting and certain other deferred tax amounts to be in the 26.5% to 27% range for full year fiscal 2025. Adjusted EBITDA of $93 million decreased 27.3% year-over-year and adjusted EBITDA margin declined from 10.2% to 7.4% this quarter.

Now continuing to the balance sheet on Slide 7. On January 31, we had cash on hand of $59 million and $469.7 million of available liquidity under our revolving credit facilities. Following the acquisition of Kamco, Yvon and R.S. Elliott, coupled with share repurchase activity and an increase in capitalized equipment leases, along with lower year-over-year adjusted EBITDA, our net debt leverage was 2.4x at the end of the quarter, up from 1.5x a year ago. Cash provided by operating activities for the quarter was $94.1 million compared to $104.3 million in the prior year quarter. We also generated a significant level of free cash flow of $83.1 million, which was 89% of our adjusted EBITDA for the quarter, the highest third quarter level of performance we've ever had for this metric since the start of COVID. This compared to $94.1 million, which was just over 70% of adjusted EBITDA in the prior year quarter. For the full year fiscal 2025, we now expect free cash flow to total approximately 60% to 65% of adjusted EBITDA. We also, on a nonoperating basis, generated an additional $12.5 million in cash flow from the sale of the installed insulation business.

Capital expenditures for the quarter were $11 million compared to $10.2 million a year ago. We currently expect the capital expenditures will be approximately $45 million to $50 million for full year fiscal 2025. During our fiscal third quarter, we repurchased 445,000 shares of stock from $39.3 million at an average price of $88.31 per share. At January 31, there was $218.4 million of share repurchase authorization remaining. Looking forward, we expect to maintain our balanced approach to capital allocation as we intend to continue to invest in the business, pay down debt and opportunistically leverage favorable market conditions to repurchase shares, while ensuring our continued ability to complete strategic M&A transactions to help drive long-term growth in the business.

With that, I'll turn the call back over to JT who will start on Slide 8.

Thank you, Scott. Given today's rapidly evolving macro backdrop featuring an abundance of uncertainty, it has been and will continue to be particularly difficult to forecast in the near term. But I will share with you our expectations based on what we are currently hearing from our team, our suppliers, our customers and other industry sources. With no apparent near-term catalyst to reverse course, the challenging demand backdrop we experienced during the last half of our fiscal third quarter is expected to continue through the end of our fiscal year in April and most likely beyond. As such, here is what we are currently expecting for our fiscal fourth quarter results, which will have 1 less selling day as compared with the prior year period. All volume and price/mix projections I will provide are on a per day basis.

Starting with organic wallboard growth. Using our U.S. business as a proxy, where we experienced a strong prior year comparison across all end markets and with weather disruptions and soft activity levels that continued through February, we expect our fourth quarter single-family volumes to be down high single digits versus the prior year period. Multifamily Wallboard volumes are expected to be down about 35% as compared to the all-time high level of multifamily volumes we experienced during the fourth quarter of fiscal 2024. Commercial Wallboard volumes are expected to be down around 20%, again, as we anniversary our strongest commercial quarter since before COVID. As a result, including Canada, total organic wallboard volumes are expected to be down mid-teens, and total wallboard volumes, including acquisitions, are expected to be down low teens for the quarter. Because of implementation timing and because demand levels have significantly deteriorated since our manufacturing partners issued their most recent price increase announcements, we are not, at this time, assuming any meaningful price lift in our fiscal fourth quarter. However, given the structural changes we've seen in the wallboard space as a result of rising input costs and relatively high capacity utilization, we are expecting continued resilience in wallboard pricing on a like-for-like product basis. In total, we expect wallboard price and mix to be flat to up slightly from the fourth quarter a year ago with positive pricing offsetting what we expect will be unfavorable mix.

In Ceilings, with the anniversary of our Kamco acquisition on March 1, we expect fourth quarter volumes per day to be roughly flat year-over-year with a slight low single-digit increase in price and mix. For steel framing, soft conditions in commercial and multifamily activity are expected to hold back demand. As a result, volumes for our fiscal fourth quarter are expected to be down low double digits. And while rolled steel pricing is already up significantly this calendar year as a result of trade policy changes, the true impact for framing steel in our markets remains to be seen. Therefore, for now, we have assumed stable sequential prices and expect fourth quarter price and mix for steel framing to be down low double digits as compared to the same period a year ago.

Finally, net sales for our complementary products are expected to be roughly flat with the fourth quarter of fiscal 2024, with acquisition gains offsetting declines in organic volume. All in, and as shown on Slide 9, we expect our fiscal fourth quarter net sales to be down high single digits as compared with a year ago, with organic sales down low double digits. While we continue to work to improve gross margin, transactional price cost pressures remain and demand headwinds will continue to put vendor incentives at risk in the near term. Therefore, we expect gross margin for our fiscal fourth quarter to be similar to what we reported for our fiscal third quarter at around 31.2%. Finally, adjusted EBITDA for the quarter is expected to be in the range of $100 million to $110 million, with EBITDA margin that should improve sequentially to around 8%.

These expectations for our fourth quarter are not indicative of what we believe the company's capabilities are in a normalized environment. We remain optimistic about future growth as we work through the current uncertainty that we are seeing at this point in the cycle. Starts activity across all of our end markets suggest that given typical lag times for our products to deliver, absent broader impacts that might come from recent policy implementation, we should be nearing the bottom of this cycle, positioning us well for the end of calendar 2025 and moving into calendar 2026. In the meantime, we are taking actions to address the headwinds in front of us, and we are making significant strides toward becoming a leaner organization.

Through our subsidiary consolidation efforts, investments in technology, deployment of best practices and cost reduction efforts, we are enhancing the overall efficiency of our operations. Additionally, we are generating significant levels of cash flow, allowing us to maintain a solid balance sheet. We expect our business to be well positioned when the demand environment improves.

I would like to thank our dedicated team once again as we navigate these challenging times. With that, I will ask the operator to please open the line for questions.

[Operator Instructions] Our first questions come from the line of David Manthey with Baird.

As it relates to steel, last quarter, I think you said you were seeing month-to-month improvement and then MarinoWARE and ClarkDietrich announced 10% April price increases. Assuming that tariffs would augment those higher prices even further, I'm just trying to challenge you on the flat expectation for steel going forward, shouldn't the weakness that you experienced recently be resolved in the next few months or quarter as we go forward? What are your thoughts on that?

I think you're right. We're already into the first week of the second month of the quarter. So I don't think we're going to experience a lot of inflation in March and April. I certainly think that if the tariffs are in place and what we're seeing from lead times, rolled steel lead times are out to 13 weeks, I think, recently, I think we will see inflation, but it's probably going to be post this quarter. There could be a little bit in April, but I don't think it will be all that meaningful. As you know, we have a pretty good book of business already presold in the commercial space with a lot of protection. And I also think that people like Clark and MarinoWARE, et cetera, had plenty of inventory on the ground in this environment where you're seeing demand down 20%. So I think that it will come through the supply chain. It's probably just not the next 6 weeks.

Okay. Second, as it relates to the April quarter outlook, I think you did a pretty good job of outlining what you're thinking there. But in broad strokes, are you essentially thinking that we're just going to straight line third quarter for the most part and the trends you're seeing in February into the April quarter? And I think Scott said that the next $20 million run rate of cost reductions hits fully in the first quarter of fiscal '26. I wanted to make sure on that fact as well.

Yes, we can confirm the second point. What I would tell you is that we believe that on a year-over-year basis, we're kind of entering into what should be the bottom of this quarter and probably into fiscal Q1 based upon all the starts information we've seen. The calendar Q4 commercial and multifamily starts were pretty bad. And we're not seeing the offset we'd all hope for. Middle of last year, the offset in single-family just isn't materializing. And we could get surprised with a really strong spring selling season, although I don't think the early indications are that, that's materializing. And so I do think this quarter, we're in. Well, quarter we just finished really deteriorated pretty significantly, late December through January. February moved sequentially as we would expect, but no big recovery at all. And now we're moving this month's first few days, pretty weak, but sequentially, as you would expect. So I think we're pretty much last quarter that we just reported, quarter that we're in, probably our fiscal first quarter, the bottom, and then we're going to start to see improvement on a year-over-year basis from there, not growth on a year-over-year basis, but improvement until we get to the end of this calendar year. '25 and '26 -- late '25, '26 is shaping up pretty good as all this demand just keeps getting pushed out. But at the moment, this is probably the bottom of this cycle next couple of quarters.

And on the $20 million, yes, we'll get the full run rate of that in the first quarter with maybe 1/3 of it in this fourth quarter, but definitely in the implementation phases of that. So see the full maturation of that in the first quarter.

Our next questions come from the line of Keith Hughes with Truist Securities.

You notably moved your expectations down in commercial. I know that's for the fourth quarter guide, but it seems like it's going to continue for the rest of the year, down almost 20% versus I think it was single digits last time. What specific sectors do you see deteriorating from your last use of pretty substantial production?

I think it's a combination of the fact that we're rolling over all-time record wallboard shipments in the commercial space since COVID. And by the way, we still never got back to volumes. I'm talking about volumes now. We still never got back to pre-COVID volumes. So this peak is lower than the previous peak. Retail is absolutely dead. Private financing projects, dead. Office is dead. And the high rise, there's a combination of multifamily in our commercial as well, that's the high-rise mixed-use stuff. That high-rise mixed-use stuff is really soft. So those are really the areas that are dragging us down right now. Health care is flat. Public education is okay. Data centers are great, still. So it's really a combination of the deterioration of some of those earlier -- those other projects I talked about and the fact that we're rolling over the all-time strength in the fourth quarter of last year.

Okay. And 1 other question. You've highlighted the $50 million, I think that's a run rate number of cost saves. Could you tell us how much you've already realized, so I guess...

On an annualized basis, the $30 million is fully in, that probably kicked in, I don't know, July, August, maybe it was August, probably. So this quarter, as you could see this quarter, our organic costs were actually overall lower than previous year. So it's fully in, in this quarter, that $30 million annualized run rate, and that started in that July, August time frame, August, let's say. So you can expect that to continue until we anniversary that. And then the $20 million kicks in on top of that really at the end of this quarter.

A little bit this quarter with the full maturity of it into the first.

So I mean, is that -- I mean we're looking at $12 million to $15 million a quarter. I know it probably moves around, it's not a good average.

Across the entire 50?

Yes, 12 to 15.

Yes, that's about right. .

It's not lumpy, or super lumpy is kind of what I'm getting to.

No, it should be pretty well. I mean it should tie to our standard seasonality, but it should be like you're talking about 12 to 15 every quarter. .

Our next questions come from the line of Brian Biros with Thompson Research Group.

On Ceiling pricing seemed to be a standout product for the quarter, price/mix super strong there. I think you talked in the prepared remarks about the mix aspect. Can you just expand on that dynamic a little bit, if that was maybe timing of a large project and more of a onetime aspect? Or maybe there's something more systemic across the entire market that's been a mix shift?

I mean we've been focused on architectural specialties for 3 or 4 years now. We've talked about it multiple times, and our sales teams continue to become more successful in closing that work. So I think that you'll continue to see that trend. This last quarter was particularly strong. There were a couple of large projects in the quarter. But I don't see any reason why that's both an industry trend and an internal trend. So as a total percent of mix going forward, if the projects that are creating the demand remain the same, which are things like these big airports, a lot of airport activity out there. You need to read about all the airport remodels, et cetera. A lot of those types of projects are ceilings related. And so I think we're doing a great job as a team of closing those and being able to supply that architectural specialty. So I don't think that trend is going to reverse. I think it's going to stay the same as we go forward because both the industry is moving more towards architectural specialties and we are following the industry and trying to actually be better and gain share in that area.

Understood. And then on -- I guess, further on wallboard pricing, it seems like you only need a little bit of volume growth, maybe low single digits to see a better pricing backdrop. If pricing gets better within one end market, is that enough to -- or if volumes get better in one end market, is that enough to see pricing backdrop? Or do you need kind of volume, low single-digit growth across all three end markets at a consolidated level to really provide a solid backdrop for pricing?

Well, I mean, I certainly think growth across the entire industry would be helpful. Now one thing to remember about the industry is we don't participate to a significant extent in residential repair and remodel, but that is roughly 20% of the volume in the wallboard industry. And that's the one area right now that is forecasted to see some growth as new single-family and multifamily continues to struggle on a year-over-year basis, that R&R, residential R&R business will improve. So from a total capacity utilization perspective, that's a bright spot for the manufacturers. My view is that it's more challenging, obviously, to take price in an environment where you're in a deteriorating volume situation. But we're in the middle of the gray area of that right now as we speak, trying to go out and make that happen. How successful we'll be, I guess we really don't know because it's just the first week of March, and it's really just happening now. So it's very difficult to give you an idea of that. But we did say, I think, fairly confidently, we don't see wallboard pricing backsliding. And so we would love to see some growth in the industry. I think if you look at the starts forecasts this year, both Dodge and ConstructConnect are pretty strong in their conviction around the value of starts this year, next year and the year after, those forecasts are very bullish. So we think that there is certainly over time an inflationary environment for Wallboard.

I'll just add that volume increases across any of the three end markets will be beneficial to price and the dynamics there in. We've talked about before, the leverage impact of single family is the biggest driver, given the consumption of Wallboard in single-family versus the other end markets.

Our next questions come from the line of Trey Grooms with Stephens.

So guide 4Q calling for 8% EBITDA margin. It sounds like price cost is going to continue to be a headwind. At what point do you expect to see maybe a bottoming out on the price cost front? And then is there opportunity at some point to kind of see some catch up there and what kind of is do we need to see in order for that to you to be able to do that?

Yes. Trey, nice to talk to you this morning. I think there's an important dynamic at the moment that Scott mentioned, and that is that we are clawing back price. And this next quarter, we're still expecting the claw back price in spite of the negative mix impact when it comes to Wallboard. What's holding us back is going to be our volume incentive income as it looks like this is going to be a very difficult quarter shaping up for a more difficult year, and so that component is what's holding us back and letting us not improve the 31.2% sequentially gross margin. That's across wallboard and steel primarily, those two product categories. It's not really a price issue at the moment as well, steel has certainly been, but we would expect, as Dave mentioned earlier, that post this quarter, nothing changing, we're going to see steel pricing inflate and it could be fairly significantly, right? We just -- we don't know yet. But that's really what's holding us back. Conditions that will change that is volume growth in the end markets to the question that was just asked prior. And Scott's answered at the end is really the most pertinent answer, which is a decent recovery in single-family will really support Wallboard. Steel needs multifamily and commercial construction. But what it really means is it needs automotive, and it needs some of those larger categories of consumption, structural steel, et cetera. And when you look out at some of these commercial forecasts, Dodge, ConstructConnect, et cetera, if you believe they're '25 put in place, you believe they're '26 put in place, I think at that point in time, you're going to see some pretty big structural steel demand. And if we get rate reductions, short-term rate reductions, that's going to -- that should help with the automotive component as well. It just feels like the whole economy is being pushed out from a demand perspective based on high rates a year or so.

And uncertainty.

And now a lot of uncertainty every day, right, that -- I believe over the course of the next 6 months, right, we'll see where we're going to be from an uncertainty perspective, right? I think it will be clear. The fog will lift within 6 months. But it feels like this is our bottom into the next couple of quarters, what we just experienced. Maybe there was more weather impact. I don't know. It doesn't -- there was a lot of weather impact for sure. But it just doesn't feel like weather was more than 10% to 15%, 20% of what we've experienced. It just feels like those end markets are now deteriorating and getting into the bottom.

So is it -- and I understand all the puts and takes around the volume discounts and so forth. But with my question about timing, and I didn't mean to be redundant here. But my question is more around those things don't seem like they're changing anytime soon from a volume standpoint. Pricing is going to hold in, but if we're -- when we start to see a bottoming in the next couple of quarters from a demand standpoint, is that enough volume to shift that to where you can begin to benefit from those things or at least not be a headwind to you purely from a volume standpoint and the discounts you would receive there, combined with flat assumed pricing.

Yes. I mean, I think so. I think if you look -- again, barring anything that changes based on today's kind of strange policy situation that we're going through. If you look at what the builders are talking about for late in the year, I think everybody is talking about a late recovery for single-family starts, and if you simply straight line what's happened over the course of the last 6 months in multifamily starts, that will be enough to be pretty inflationary, I think, and that will be enough to help us get price pushed through the market.

Okay. And then the long-term guide, clearly, this isn't -- as you mentioned, it's a normal time necessarily, but long-term guide has been for a 10% EBITDA margin. That was the what was stated, I believe a few years ago as a long-term EBITDA margin guidance, is that still the expectation here for the business is something in that double-digit range?

Yes. I mean I think we're going to hit 9%, somewhere around 9% this year, even with this crappy forecast for this next quarter. We're still going to hit 9%. So longer term, we're definitely north of 10% particularly coming out of this environment with the more lean nature of our business, I would expect 10 plus to be very reasonable.

Yes. And last one, if you cut through -- I mean, I know the holiday timing, whatever wasn't really unknown. And then you had this weather in January, but if you can kind of cut through the weather, can you try to quantify maybe the underlying demand trend through January and then here, is it kind of fair to say that February has been trending similar to the kind of per day organic volume guide that you've given for the current quarter. Is that mid-teens down in volume, et cetera? .

February is in the books. So it's fully incorporated into the guide, right? So yes, I mean, we're just not seeing good conditions in the market whatsoever. And I think the surprise is the single-family component really. I think multifamily is probably a little worse than we thought it would bottom. I think we got through the backlog a little earlier than we thought we did. We're still hearing in the market, everything is being postponed, everything is being delayed, right, a lot of backlog that's not being built out on the multifamily side, and there's a lot of plans in place to start when interest rates adjust. So we're hearing that from all the developers for sure. But the bigger surprise is just to pullback in single family, which I think you can see that in the starts numbers through the fourth quarter. And now that's our expectation is we're going to be shipping those fourth quarter numbers here this quarter.

Yes. I guess my question is, was that the mid-teens, the volume down mid-teens in Wallboard specifically, does that assume a further deterioration from February? Or is that kind of what we were seeing in the month of February? Just trying to gauge your outlook for that, if it's going to be worse or is it kind of stabilizing at a bad level in February...

Is kind of stabilizing where we are. I mean multifamily that's probably going to be a tiny bit worse than it was. But really January, February, we're extrapolating that out, and we've gone back and we've really correlated to starts rates across the entire business again. And we feel like the January, February run rate is probably what we're going to experience, and that's what's in the forecast.

Our next question comes from the line of Matthew Bouley with Barclays.

This is Anika Dholakia on for Matt today. So first, I just want to go back to the cost. So looking at this incremental $20 million, are these more structural in nature? Or do you think we could see the return as when volumes recover? And then should we think about the $50 million annualized as a run rate in the coming years?

Yes. I think you would consider probably half of it is structural and half of it would be volume related. We will certainly be very conservative in putting it back, so it wouldn't be an immediate need. But certainly, we are adjusting for expected volumes and part of that are people that would be involved in servicing the delivery of those orders and trucks and things like that. So there's a component of it for sure, that's volume related that we're forcing out and then a component is structural. I'm going to give you half and half based upon the work we've done over the last 6 months.

Got it. That's helpful. And then second, I guess, just looking at M&A into other product categories you guys mentioned complementary. Are there any specific verticals to call out? And then what leverage would you be willing to get to get [indiscernible].

In this environment, that -- we've stated in the past at 1.5 to 2.5x kind of leverage guide, I think that's probably still what we'll do. So we don't have a ton of room at the moment being at 2.4. All that being said, if there was a good strategic opportunity and we always have those, we would consider it. There's nothing imminent. And so what I'm hoping is, over the course of the next 3 to 6 months, what we see is exactly what I'm thinking we're going to see, which is a bottoming, allowing us to be more comfortable in the M&A environment. We talk a lot about EIFS, stucco, insulation and tools and fasteners, and that remains our main focus for M&A in the complementary category.

I would just add in terms of the leverage piece of it, as we talked about, we are generating a lot of cash. We have been active on the share repurchase front. I think you'll likely see us temper that a little bit in favor of more debt reduction in this environment, just given some of the uncertainty out there, but it won't be a significant shift, but that should help us free up some capital to continue on the acquisition path as well.

Our next questions come from the line of Mike Dahl with RBC Capital Markets.

This is Chris on for Mike. Just going back to commercial and the outlook for next quarter. Could you help provide more color around the new commercial versus R&R split within that down 20% sales guide for Wallboard? And then when you think about your backlog today, does that suggest that these magnitude of declines are going to persist for the foreseeable future?

I mean I can't give you exact numbers. We've talked about the trending over the course of the last couple of years with the decline in office activity that new construction has been a much bigger component of our commercial business than it used to be. We used to be 2/3 to remodel. I think we're estimating today we're north -- we're roughly 50-50 now new. I think it's even trending more new today because of the data center activity that's out there versus repair and remodel. We mentioned in our prepared remarks that the office space could be something that unlocks over the course of the future, not the next 6 months, most likely, but certainly with people returning to work, we would expect to see returning to the office. Anyway, we would expect to see remodel activity pick back up and office was always the biggest component of remodel activity commercially. So I know that's not giving you an exact number, but I would say we're probably moving more towards a 60-40 mix of commercial new versus remodel. And again, that's really part of the guide to tell you the truth. We see no improvement in office going forward and no real improvement in commercial R&R. And really, we're relying almost all on near term.

I appreciate that. And then just on Wallboard price costs and your comments around pricing taking a little bit longer to pass through versus the 3- to 6-month norm. When you think about price cost this year, is your expectation that you'll see kind of a temporarily worsening price costs as you get through the year, just given the dynamics around price and potential increases on the OEM side? Are your clawbacks enough to kind of keep price costs more neutral?

Yes, we'll be able to keep it neutral. That's our view.

Our final questions will come from the line of Kurt Yinger with D.A. Davidson.

Great. Just one question around the consolidation of subsidiaries, Hoping you could maybe talk about that process a little bit more kind of how long that may take to be fully completed as well as some of the operational improvements that you might expect to come from it?

We will be fully complete by the end of calendar 2025. And most of the operational improvements come from the ability to have our data consolidated. So it's really around purchasing. There's a chance around pricing to improve beyond as we recover the end markets, right? That's the first most important thing. Beyond that, we will have better visibility into our complementary category in particular, and the -- some of the pricing dynamics there. And hopefully, we can find ways to optimize, and we've already seen some of that. But also, we have the ability to leverage the divisional inventory situation, accounts receivable situation, and we're seeing a lot of working capital benefits, which, in some respects, is why we think we can do 60% to 65% free cash flow conversion from EBITDA. Originally, I would tell you that was because of a lot of the good work that's going on in this area now because the market is slowing, and we are slowing, and we naturally do a lot of good cash generation as things slow down and we pull the balance sheet down. Some of it is more that than it is the good work going on in the consolidation. But also there's a cost-out component of it as well, just back of house efficiency.

And just to add for clarity, the end of calendar '25 is really about the data standardization element. The organizational realignment and the legal entity restructuring. All these things that JT talked about after that, those are essentially progressive and evolutionary from that standpoint. And even the divisions who started down this path are still learning and advancing on that every day. So there's more to come from that.

We have reached the end of our question-and-answer session. And with that, that does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Enjoy the rest of your day.