Doman Building Materials Group Ltd. (CWXZF) CEO Amar Doman on Q2 2022 Results – Earnings Call Transcript

Doman Building Materials Group Ltd. (OTCPK:CWXZF) Q2 2022 Earnings Conference Call August 5, 2022 11:00 AM ET

Company Participants

Ali Mahdavi – Investor Relations

Amar Doman – Chairman & Chief Executive Officer

James Code – Chief Financial Officer

Conference Call Participants

Steve Hansen – Raymond James

Ian Gillies – Stifel

Zachary Evershed – National Bank Financial

Operator

Good day, and welcome to the Doman Building Materials Group Limited Second Quarter 2022 Financial Results Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Ali Mahdavi. Please go ahead.

Ali Mahdavi

Thank you. Good morning, everyone and thank you for joining us this morning for Doman Building Materials Second Quarter 2022 Financial Results Conference Call. Joining me this morning are the company’s Chairman and Chief Executive Officer, Amar Doman; and Chief Financial Officer, James Code.

If you have not seen the news release which was issued after the close of markets yesterday, it is available on the company’s website as well as on SEDAR along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on August 19. Following management’s presentation and commentary of the second quarter results, we will conduct a question-and-answer session for analysts only. Instructions will be provided at time for you to join the queue for questions.

Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Doman Building Materials Group Ltd and all of its representatives on this call. Remarks and answers to your questions today may contain forward-looking information about future events or the company’s future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Any information regarding forward-looking statements is made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the forward-looking statements and risk factors in the MD&A as these outline the material factors which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today’s call, and management does not anticipate providing guidance in future quarterly or interim communications with investors.

I’ll now turn the call over to Amar.

Amar Doman

Thanks very much, Ali and good morning, everybody. Thanks for joining us on today’s call. On the back of a solid first quarter with record results, stemming from strong pricing, which started to normalize late in that period, they were complemented by steady plan. The second quarter started off is what I would qualify as expected. Our expectations were that we could see pricing normalization caused by macroeconomic headwinds triggered by interest rate hikes and concerns around demand slowing down and overall risks of a downturn in the housing and construction markets. This trend was exactly what we experienced going into the second quarter with downward pricing being the theme as we work through inventories in the period.

Given the continued downward pressure on pricing going into the second quarter, we prudently managed working through our inventories and protecting gross margins to the extent possible. Mid-quarter, we started seeing signs of pricing stabilization at levels, which are very healthy for our business and market demand for our products remain robust, which sets up well in a stable pricing environment with less price volatility, normalized margin levels and robust market demand in our key markets.

Despite some of the industry-wide challenges around pricing and demand dynamics during the quarter, our sales reached $871 million. Our recent acquisition of Hixson Lumber was a major contributor to our revenue growth in the quarter and our integration efforts at Hixson Lumber continue to be carried out as planned.

I am both pleased with and very proud of our financial performance during what I continue to consider a challenging quarter, specifically from a pricing trend perspective, where we have had to be extremely responsive to industry-wide price volatility while ensuring that our first-class level of service remains on point.

As a result of our collective efforts, our revenues amounted to $871 million. Our gross margins were challenged from my earlier commentary on inventories and pricing dynamics to just under 12% or $103 million. Our adjusted EBITDA amounted to $52.1 million and our net earnings came in at $21 million. And lastly, we paid a quarterly dividend totaling $0.14 per share.

Looking ahead, we are cautiously optimistic as we believe that the pricing environment and market demand is nearing an equilibrium at healthy levels, while we continue to manage our costs and always look for growth opportunities. Our balance sheet optimization strategy is also tracking well, with nearly $100 million of debt reduction over the past 12 months, which is a key priority for us and we look forward to having the solid growth-friendly and fire-ready balance sheet for opportunistic acquisitions.

A little bit of color on how the third quarter has started off. We continue to see a healthy level of activity and pricing trends seem to be leveling off of what we would consider healthy levels. However, there are still macroeconomic-driven factors that could stir up volatility and we are monitoring and managing inventory levels closely to ensure we minimize any impact to our financial performance.

As always, we remain confident in our ability to work through volatile markets diligently while serving our customers’ needs with the highest level of service. We remain very excited about our growth profile and the overall prospects of the business. We have built a solid diverse and resilient business in North America with a broad and growing footprint, which we are extremely proud of

And with that, I would like to ask Jay Code, our CFO to take over and provide a review of the company’s second quarter 2022 financial result in greater detail and then we will open up the call for any questions you might have. Jay?

James Code

Thank you, Amar. Good morning, everyone. Sales for the quarter ended June 30, 2022 were $870.7 million, compared to $756.8 million in the comparative period in 2021, representing an increase of $113.9 million or 15%. The increase is largely driven by contributions from our June of 2021 acquisitions. The company’s sales by product group in the quarter were made up of 77% construction materials compared to 76% in the same quarter last year with the remaining balance resulting from specialty and allied products of 20% and other sources of 3%.

Gross margin dollars decreased to $102.7 million in the quarter compared to $131.2 million in the same period of 2021, a decrease of $28.5 million. Gross margin percentage was 11.8% in the quarter, a decrease from the 17.3% achieved in 2021. The company’s margins were impacted by the Q2 declines in construction materials pricing, which drove the lower overall margin percentages for the quarter relative to 2021.

Expenses for the quarter were $67 million compared to $47.9 million for the same period in 2021, an increase of $19.1 million or 40%. As a percentage of sales, expenses were 7.7% in the quarter compared to 6.3% in 2021. Distribution, selling and administration expenses, increased by $14.6 million or 41% to $50.6 million this quarter versus $36 million in 2021, largely due to the inclusion of a full quarter’s operating expenses from our 2021 acquisitions.

Recent inflation pressures have also contributed to higher expenses during the current quarter. DS&A expenses were 5.8% of sales in the quarter compared to 4.8% in Q1 2021. Depreciation and amortization expenses increased by $4.4 million or 37% from $11.9 million to $16.4 million.

Finance costs for the second quarter were $9.6 million versus $6.5 million last year, an increase of $3.1 million, largely as a result of additional finance cost related to our 2026 unsecured notes, which were issued on May 10 2021, and partly due to higher interest rates on the company’s variable rate loan facilities.

Second quarter EBITDA was $52.1 million compared to $90.4 million in 2021. The decrease is largely due to the impact of the previously discussed construction materials pricing declines going into and throughout the quarter. As a result of the foregoing, Doman’s net earnings in the second quarter of 2022 were $20.7 million versus $53.1 million in the same period last year.

Turning now to the statement of cash flows. The significant comparative factors affecting our year-to-date operating activities were largely related to improved working capital performance, partly offset by lower net earnings. Net cash flows from operating activities, including non-cash working capital changes, improved by $127.7 million versus last year.

Moving to the financing section. The company generated $5 million of cash from finance — financing activities compared to $643.1 million in the same period in 2021. In the first six months of 2022, the company borrowed an additional $43.2 million on its revolving loan facility compared to additional borrowings of $280.2 million in 2021.

The year-over-year decrease in net advances from the revolving loan facility is partly a result of our focused efforts to reduce inventory volumes and partly due to construction materials pricing declines during the current period. Additionally, the prior year comparative period included the use of the revolver as partial financing for our 2021 acquisitions.

Shares issued during the quarter, generated $618,000 compared to $81.6 million in 2021, as a consequence of our public share offering in May of last year. Scheduled repayments relating to our non-revolving term loan consumed $1.3 million, which was consistent with 2021. The company was not in breach of any of its lending covenants during the six months ended June 2022.

Dividends paid to shareholders during the six-month period totaled $24.3 million compared to $21.8 million in the prior year’s first half. And as a reminder, the company updated its dividend policy for the fourth quarter of 2021, resulting in a quarterly dividend increase from $0.12 to $0.14 per share, beginning with the dividend paid on January 14, 2022.

Payment of lease liabilities, including interest, consumed $12.2 million of cash compared to $11.6 million in 2021 and the company’s lease obligations generally require monthly installments and these payments are all current.

Investing activities consumed $2.9 million of cash compared to $500 million in the same period in 2021, representing the purchases of property plant and equipment net of proceeds from disposition this year whereas the prior year comparative period included proceeds paid for our 2021 acquisitions.

This concludes our formal commentary and we would now be happy to respond to any questions that you may have. Thank you. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we can go straight to Steve Hansen of Raymond James.

Steve Hansen

Yeah. Good morning guys. Thanks for the time. Amar, just curious about how you’re feeling about the US footprint nowadays. I recognize the macro backdrop is still a bit volatile but Hixson has been under your belt for a period of time now. How are you feeling about that broader position that you have today and whether you would like to continue augmenting in the future?

Amar Doman

Yeah, we’re feeling really good about it. 13 months in I mean look we all know what’s going on in the macro markets. But certainly the strength of the business unit down there and the geographical expansion that we’ve moved into is excellent. The team is excellent. The IT now employed is excellent and we will be augmenting through strategic acquisitions down there despite what the market does like we have for years. So, we’re certainly in the new territories and business has been strong, and our customers down there and the areas that we are still quite strong. I think we’ll have a little bit of a slowdown coming up as we all know for who knows for how long. But certainly right now the momentum is excellent and we couldn’t be more pleased with the acquisition.

Steve Hansen

That’s great perspective. And just curious how you feel about inventory positions on both sides of the border now and in your prepared remarks you talked about getting those rightsized. But are you at levels now where you feel like you’re in a good position to manage the sort of the ongoing volatility? Pricing, of course, has continued to bounce around and even be stronger of late. So just curious in the context of the activity versus pricing?

Amar Doman

Yeah. We’re in good shape on inventories meaning that we’re rightsized now as we head into the fall coming up and we’ll start to reload for 2022. The balance sheet has never been stronger. We’re in good shape and we started to strategically push down our inventories in certain categories. Not everything of course because we’re busy. As you can see our sales numbers are up. And we’ve embarked on that a couple of months ago and our team has done a great job of reducing and being careful of selling three, buying one where needed.

As the market resets and we go into new levels more on the wood products side, the allied side on our CanWel distribution business has been very strong and busy. We’re still on allocation on certain items. So believe it or not even in the environment that you read in the papers there’s still a lot of product items we’re having trouble getting just due to supply chain issues. So inventory — long answer to your question Steve, we’re in good shape. We’ll push them down a bit further in third quarter then start to build up a bit in the fourth.

Steve Hansen

Okay, great. And then just lastly if I may is just, how do you think about the margin progression from here? Is the bulk of the hit been taken in the context of the recent market, or how do you feel about it next quarter or two?

Amar Doman

It has and we took a lot of medicine in the second quarter as evidence there. Sales up, margin down. I mean SYP dropped over 40%. I mean, the other species did almost the same. It was another hammer. I think we managed very well. Obviously, still very positive. A lot of free cash flow came out. So managed a pretty rough storm again this time better prepared with less inventory going in et cetera, et cetera. So as we come into the third quarter, we should start to get back into our normalized margins and for the rest of the year.

Steve Hansen

Great. Appreciate it. Thanks.

Amar Doman

Thanks Steve.

Operator

Our next question comes from Ian Gillies of Stifel.

Ian Gillies

Good morning guys.

Amar Doman

Good morning, Ian.

Ian Gillies

There’s been some discussion around margin already and the last few years have obviously been abnormal. But as we think with Hixson being rolled in and in the context of history, now looking forward, do you think margins on a normalized basis are a bit better than they were call it prior to that 2020 period with this new larger business and a larger operational footprint and economies of scale and so forth?

James Code

Yeah. It’s sort of like give me a normal lumber market and I can answer that. It is really difficult to navigate through what we’ve gone through in the last 26 months. It’s been crazy down. So for us to say and come out — as long as we have call it a steady market in lumber plywood and OSB, the Hixson margins and our margins are going to be normal and they’ll be in that sort of 14-ish band again. But with these wild ups and downs, it’s just — it hasn’t been happening through COVID. But as we start to emerge out of it like we are now and things settle down those gross margins will recover.

Again, I can’t predict the volatility. We’ve given up on predicting the lumber market a long time ago here, but certainly those normalized patterns and Hixson will strengthen the overall gross margins. Obviously, with the amount of volume and top line they bring in, it lifts us up.

Ian Gillies

No that’s helpful. And to acknowledge around that especially around just thinking about ply lumber price. Amar this one maybe for you and maybe for Jay, but as you look through the rest of the year and if we assume lumber price is kind of where it is today, do you think you get continued working capital release from here? It was, obviously, very, very strong in Q2. And do you think you get a bit more through Q3 and Q4 based on what you know today?

James Code

Hi Ian, it’s Jay. I’ll take that one. Yes, certainly, we’ve benefited from the focused effort that we initiated in the second quarter. So you see that in the operating cash flows in these results. And then seasonally we’re going to continue to harvest further working capital — cash as we drive that down through to — usually the low point is in that November range and we expect the same seasonal pattern this year.

Ian Gillies

Okay. That’s all for me, and I’ll turn the call back over. Thanks very much guys.

Operator

And the next question comes from Zachary Evershed of National Bank Financial.

Zachary Evershed

Good morning, everyone. Thanks for taking my questions.

Amar Doman

Hi, Zachary.

Zachary Evershed

I’m hearing you on gross margins. Tough to call it given the volatility in lumber. I guess the flip side of that is, how flexible are your SG&A expenses? As pricing pushes the top line down, how much pressure will there be on operating leverage?

Amar Doman

Yes. I mean just like when it goes up we do benefit from it when it goes down. It stings us a bit, because you still need someone selling lumber if it’s a $1,800 or $800 right? So, we don’t have a lot of variable there. Where our variables are would be on our freight and logistics, things like that. Treating plants, we can kind of lean up as volumes are drying up in certain regions. If they do we can also add there. So that’s a little more elastic, but the rest of it is pretty fixed. It’s hard to drop bodies out just due to the commodity volatility.

Zachary Evershed

Makes sense. Good color. And then, about 30% of your sales in the quarter were with a single customer. What are you hearing from them in terms of end market demand and their inventory levels?

Amar Doman

It’s interesting. Despite all the bad news that we read, I think 2023 might be a bit softer on takeaway, but we’re busy everywhere. Canada has been a little bit slower, because there was excess inventory in the system last year speaking of it treated, but the building materials side in Canada has been good. The takeaway in California and the West Coast has been strong. Hawaii steady as she goes. And of course, Hixson has been very strong on volumes all the way through this as compared to last year.

So when we look at Q3 2021, we hit the wall. Volume-wise, price collapse, everything. And then, of course things started to pick up in Q4. Here we are in Q3 and the volumes are good. We had a decent July. August is starting out okay. But really the customers, we have not seen this drop off that we expect if you read a newspaper today.

Zachary Evershed

Great color. Thanks. I’ll turn it over.

Amar Doman

Thanks.

Operator

And as there are no further questions at this time, I’d like to turn the call back to Ali Mahdavi for any additional or closing remark.

Ali Mahdavi

Thank you, operator. Thank you again everyone for joining us for this morning’s call. Should you have any further questions or follow-ups, please feel free to reach out to myself. And that concludes today’s call. I’ll hand it over back to the operator to wrap things. Have a great day.

Operator

Thank you. Ladies and gentlemen, that does conclude today’s conference. We thank you all for your participation, and you may now disconnect.

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