Doman Building Materials Group Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Doman Buildings Materials Group Limited Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ali Mahdavi, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning and good afternoon to everyone depending on where you are. Thank you for joining us today for Dolman Building Materials' 3rd quarter 2020 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 and A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight November 17.

Speaker 1

Call. Before we begin, we are required to provide the following statements regarding forward looking information, 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 and A As these outline the material factors which could cause or would cause actual results to differ.

Speaker 1

The company will not provide guidance regarding future earnings during today's call, Management does not anticipate providing guidance in future quarterly or interim communications with investors. I'll now turn the call over to Amar.

Speaker 2

Thanks, Ali, and thank you for joining us on today's call, everyone. I'd like to, first of all, thank all of our great employees, our customers and partners of the company for their efforts and continued partnership with Dolmen. On the back of a strong second quarter, the Q3 was similar in terms of our focus on optimizing operational and financial performance Inflationary pressures and concerns around the risks of a recession. Throughout the Q3, we continued to work through the impact of challenging year over year pricing comparatives, Largely due to the impact of construction materials pricing, which peaked in the Q1 of 2022. These trends continue to exist in our day to day activities Back to vis a vis our financial performance in the Q3, the seasonally adjusted annualized rate for single detached housing starts in Canada, which is a A relevant leading indicator for our business was 52,000 for the Q3 of 2023 versus 75,000 quarter of 2022, some are now down 35%.

Speaker 2

Despite these external pressures impacting our top line numbers, Our focus remains on what we can control to ensure we maximize margins, free cash flow generation. Inventory and overall cost Management were once again key contributors to our success in the Q3, resulting in another period of strong gross margin performance. While we continue to see more of a cautious tone and sentiment from customers and how they are working through some of the same macroeconomic headwinds, demand remains steady across all key End markets during the quarter with volumes in various categories remaining range bound. However, given the lower pricing for construction materials on a year over year basis, Revenues were lower in the Q3 when compared to the same period last year, but at improved margins. To put this in numbers, gross margin for the 3rd quarter was 15% compared to 12.3% a year ago.

Speaker 2

Despite the lower pricing and concerns caused by the global macroeconomic environment, I remain pleased and encouraged By the strength of our business model and our ability to perform, while ensuring that our first class level of service remains on point to our customers. As a result of our collective efforts, our revenues amounted to $644,000,000 Gross margin remained strong at 16% or 102,000,000 EBITDA, dollars 52,000,000 net earnings, just over $21,000,000 And lastly, we paid a quarterly dividend of $0.14 per share. I believe that's our 56th straight dividend. Speaking of financial performance, I'm also very pleased with our relentless focus on balance sheet management and optimization. To this point, during the last 12 months, while working through some of the challenging market dynamics, we were able to reduce our debt by $122,000,000 We work through the macro related and pricing related dynamics, while we continue to manage our costs and always look for growth opportunities.

Speaker 2

We are aware of external pressures, which may come into play not only into our industry, but any other others that touch similar end customers. As always, we remain confident in our ability to work through volatile markets diligently, while serving our customers' needs at the highest level of service. We remain excited about our growth profile and the overall prospects of the business, and we'll continue to look for strategic growth opportunities visavisacquisitions. With that, I would like to ask Jay Code, our CFO to take over, provide a company overview of the Q3 financial results in greater detail, And then we're going to open up the call for questions. Jay?

Speaker 3

Thank you, Amar. Good day, everyone. Sales for the quarter ended September 30, 2020 3 were $643,900,000 compared to $744,100,000 in 2022, Representing a decrease of $100,200,000 or 13.5 percent, Largely due to the impact of the previously discussed construction materials pricing declines, which resulted in lower average pricing for lumber and panels During the quarter, the company's sales by product group in the quarter were made up of 72% construction materials Compared to 66% last year with the remaining balance resulting from specialty and allied products of 23% And other product sales 5%. Gross margin increased to $102,800,000 versus $91,500,000 in 2022, an increase of $11,300,000 Gross margin as a percentage of sales was 16% in the quarter, an increase from the 12.3% achieved last year. The relatively stable pricing environment during the current quarter resulted in both higher percentage and dollar margins realized by the company, contrasted with the significant price volatility experienced last year.

Speaker 3

Expenses for the 3rd quarter were $67,600,000 compared to $68,300,000 last year, a decrease of 700 $8,000 or 1%. As a percentage of sales, expenses were 10.5% in the quarter compared to 9.2% in 2022. Distribution, selling and Administration expenses decreased by $670,000 or 1.3 percent to $50,800,000 In the quarter from 51,400,000 last year, mainly due to the company's continued efforts to tightly manage controllable costs. As a percentage of sales, these expenses were 7.9% in the quarter compared to 6.9% in 2022. Depreciation and amortization expenses were $16,800,000 largely in line with the Q3 of last year.

Speaker 3

Finance costs this quarter were $10,100,000 compared to $9,800,000 last year, An increase of $298,000 or 3%, largely due to higher interest rates on the company's variable rate loan facilities, which was partially offset by lower average net debt in 2023. Q3 EBITDA was $52,000,000 compared to $40,000,000 in 22, an increase of $12,000,000 or 29.9 percent. This year's increase in is mainly a result of the previously discussed stronger margins and tight expense management realized during the quarter. As a result of these factors, net earnings for the Q3 were $21,200,000 or 11,600,000 Compared to $11,600,000 last year, an increase in earnings of about $9,500,000 Turning now to the statement of cash flows. Operating activities for the 9 month period ended September 30th generated $132,200,000 in cash compared to $126,200,000 during the same period in 'twenty two.

Speaker 3

Changes in non cash working capital items consumed $4,500,000 in cash Compared to generating $27,800,000 last year, management continued its efforts to optimize inventory volumes while The highest standards of customer service in 2023. Overall financing activities generated resulted in net payments To equity and debt holders totaling $117,900,000 in 2023 Compared to $156,000,000 last year, the company borrowed an additional $12,000,000 on its revolving loan facility compared to repaying $99,000,000 in 'twenty two. This year, Doman utilized its revolving loan facility to redeem its $60,000,000 20.23 unsecured notes And to repay the $14,100,000 remaining balance on its non revolving term loan In June of 2023, we also note the company was in compliance with all lending covenants during the 9 month period ended September 30, 2023. Domino returned $36,500,000 to shareholders through dividends paid during the 9 month period, Which translates to a $0.14 quarterly dividend per share consistent with 2022. Payment of lease liabilities, including interest consumed $19,800,000 of cash compared to 18 point $4,000,000 last year and the company's lease obligations are generally require monthly installments and these payments are 100% current.

Speaker 3

Finally, Domon invested net cash of $10,400,000 in new property, plant and This concludes our formal commentary and

Operator

Ladies and gentlemen, at this time, we will be conducting a question and answer Our first question comes from the line of Hamir Patel with CIBC. Please proceed with your question.

Speaker 4

Good morning. Mark, given the greater affordability headwinds in Canada, are you expecting A slowdown in the Canadian distribution business in 2024?

Speaker 2

No. In fact, we think we're going to be pretty decent, Hamir. The reason why is it's evidenced now with the slowing, it's already happening with housing starts here, especially the singles, but our LTL less Truckload business has picked up significantly. So when we have these sort of scared buyers, if you will, across the country, they tend to buy Less than truckload and that really assists our distribution business. That's been evidenced this year right across the country from BC right to Newfoundland.

Speaker 2

So This is where we do better and that helps our distribution margins as well with those nice mixed trucks of different Allied and construction materials that we ship out.

Speaker 4

Thanks, Maher. That's helpful. And as the rebuilding gets underway in Maui, how is the Haunt store business Position to assist there and how meaningful could the increased sales activity be there?

Speaker 2

Yes, for the Maui division, It'll be significant over time. Certainly, we don't like the morbid side of this, but really we wouldn't be shipping anything into Lahaina unless they got wiped out. Sadly, it's been wiped out and we will have new business going in there as they start to rebuild, work for their insurance and clear all the hazardous waste out. So we will get business there. It will matter in Maui.

Speaker 2

It will be good business for us. And Hawaii in general is doing very well on our electrical distribution side and our lumber side. So we're quite pleased with Hawaii's performance even without Lahaina rebuilding it.

Speaker 4

Great. Thanks, Maher. And just the last question I had for Jay. How are you thinking about CapEx for 2024?

Speaker 3

For 24, Hamir, we just we would expect to be steady as she goes, something in the $10,000,000 to 12 $1,000,000 annual CapEx spend range.

Operator

Our next question comes from the line of Paul Quinn with RBC. Please proceed with your question.

Speaker 5

Your customers, maybe you could give us a little bit more detail on what you're seeing in each of the regions, whether it's Canada or the U. S. And east and west and mid on strengths and weaknesses in the market?

Speaker 2

Yes, it's been going on over a year, Paul. I think if we had this If we look back at our call a year ago, customers were cautious last year as rates were rising, etcetera. They're still just as cautious. So We look across the country and Canada, everybody is just sort of buying less more hand to mouth, including us. We've reduced our inventories.

Speaker 2

We're turning faster just like everyone is because nobody wants to have this big pile of inventory and be caught wrong. Now having said that, Looking at pricing across Canada and the U. S, we like lumber pricing down where it is just selfishly because we think it's Getting close to cost and we'd like to put some inventory on the ground now. But certainly, if we look across the U. S, it's the same feeling.

Speaker 2

Nobody is inventorying more than they need to. It is a buy to sell to thing and that's what's going on, Paul, everywhere, including the West Coast and Hawaii. Everybody is in the same mode across North America. I think everybody is just afraid of a looming recession that just seems to be pushed further and further out.

Speaker 5

Okay. Thanks for that. And I mean, you guys are a pretty big treater. Just wondering how you're thinking about the treating market for 'twenty four, whether your lumber inventory, Whether you build that up at the end of the year to be able to treat this to get it to the market next spring or is that going

Speaker 1

to be pretty similar levels to last year or

Speaker 5

is it going to be higher or lower?

Speaker 2

Yes, I think we'll be similar. We were quite pleased with the takeaway in most regions this year, up in a lot of regions with volume. So I think we're going to forecast flat and we'll build those inventories as such. And certainly, we might Buy a little bit more in the Q4 here. We'll just see how it goes with lumber pricing.

Speaker 2

Again, we like, again, selfishly where it is, because I think we're close to cost and in Some cases below cost as we saw last night with some of the sawmills printing. So we'll be cautious there, Paul, but long answer, but I think our outlook is flat. Okay.

Speaker 5

And then just lastly, it seems like it's been

Speaker 1

a couple of years since you've done some kind

Speaker 5

of M and A transaction. What is that environment looking like? Are you working on stuff right now?

Speaker 2

So when we bought Hixson 28 months ago, virtually doubled the company. We want to make sure that that execution It's gone well. The Hixson team has done a fantastic job integrating, putting the software in all the things that we wanted to have done. And now we're starting to see the results of those activities come forward. So we want to make sure that was done, but at the same time keeping our eye on M and A activity.

Speaker 2

And I can tell you that certainly we're in discussions with several acquisition opportunities. We have to make sure that they fit our core three Values on an acquisition, number 1, the sort of 4 to 6 times EBITDA. Number 2, does it fit in with our customers' needs? Number 3, Can we drive cost out and leverage the scale of the business? So none of that's changed.

Speaker 2

I think you'll see some stuff happen in 'twenty four As we're getting a little closer on a few things and frankly we've got a lot of available credit, so I don't see us going to the markets. I think we're going to be okay depending on the size Those acquisitions, but we're not going to stop.

Speaker 5

All right. That's all I had. It's all recorded. Thanks, guys. Good luck.

Operator

Our next question comes from the line of Zachary Evershed with National Bank Financial. Please proceed with your question.

Speaker 6

Thank you. Good morning, everyone.

Operator

Good morning, Zach.

Speaker 2

Good morning, Zach.

Speaker 5

Good morning, Zach.

Speaker 6

I was hoping you could give us a bit more color on in the top line at least what you're seeing in terms of price versus volume trends?

Speaker 2

Yes. So pricing, probably a good idea to peek at some of those charts again and you can see that Southern Yellow Pine and SBF year over year, some of them are down 45%, 50% year over year, not quarter over quarter. But we're seeing some Flattening and bottoming here now. We believe in lumber plywood and OSB on both sides of the border with different species. On the volume side, we've had a pretty good volume here, being honest here.

Speaker 2

So it just doesn't show up in the top line because of obviously the deflation that's happened. But volumes have been decent. We think they'll be flat into 2024.

Speaker 6

Thank you very much. And you guys were quite successful in holding on to 16% gross margins despite The pressure on pricing year over year, maybe you can speak to some of the strategies that are going into that and how sustainable you see that being in the coming quarters?

Speaker 2

Yes. I think as we were seeing last quarter, we hit a bit of a higher watermark at 2017, but certainly this is the neighborhood we're in. And Just having a normal lumber market allowing us to do what we do best, which is produce pressure treated lumber and distribute building products in a steadier fashion instead of the big ups and downs of COVID really showed what we can do and that was the 2nd quarter in a row of kind of showing the new neighborhood that we're in. The Hixson acquisition certainly helped that More treated lumber going through the system and having a steady lumber market, I think, evidence. Anything to add, Jay?

Speaker 3

Just that as we go Through this period, we're updating contracts with customers, we're successfully renegotiating adders in the treated business In various regions, so that's contributing to the success on the margin percentage as well.

Speaker 6

Thank you. And then given the caution that you guys are seeing everybody being hand to mouth, would you say that you can keep your distribution selling and administrative costs fairly flat or

Speaker 3

Yes, we're just going into budgeting season here, Zach, and we think Just a small amount of inflation on SG and A, nothing to outsize. So We'll have more on that in the next couple of months.

Speaker 6

Good color. Thanks. And then just one last one for me. Last quarter, you talked about sellers' expectations being a little elevated, anchored to kind of 2022 results. Given the macro environment, are you starting to see that normalize?

Speaker 6

Are you getting closer together on expectations?

Speaker 2

Yes, I think a couple of things there, Zach, on the acquisition So number 1, good and bad. So 2023 was a pretty decent year for a lot of people in the industry that we're looking at acquiring. So, tough to kind of push down and paint a bad picture when they're printing good numbers. But having said that, the guys that have got a lot of debt that's free floating, I think there's some cash flow challenges that are starting to appear much like commercial real estate where the guys that are levered are starting to make some calls in because they're either going to have to re equity up Or maybe look at a sale. So I think that part of us having a super strong balance sheet, very good debt levels for us, I think provides opportunity in this environment.

Operator

Our next question comes from the line of Ian Giles with Stifel. Please proceed with your question.

Speaker 7

Good morning, everyone.

Speaker 5

Hi, Henry.

Speaker 7

With where the share price is and strength of the balance sheet and margin performance, have you put Much additional thought into reinstituting the NCIB or starting to use an NCIB in a more material way, it's looking pretty attractive here?

Speaker 2

Yes. So we just finished our Board meeting yesterday, as you know, and we reviewed that and we elected not to renew it. And here's why, The Board and myself and Jay, just bigger look. We pay a pretty healthy dividend being in industrial. We like our payout ratios.

Speaker 2

We're nice and safe there now. So now we look forward and say, okay, any extra dollar we have, we're going to put towards debt reduction, plain and simple. Dividend is going to stay where it is and let's continue to pay down Any excess debt that we have and we think paying a dividend and doing an NCIB may not be the smartest use of cash. And The shares are at certain point in time here. I agree that they look very valuable.

Speaker 2

So that it does kind of make you scratch your head a bit and what to do, but We made a decision to focus on debt reduction. Jay? Yes, that's exactly

Speaker 3

correct, Amar. Yes.

Speaker 7

And then with respect to how you want to position the business over the next, call it, 3 to 5 years, would you like to see a more even split in the business Between Allied Products and your more traditional pressure treated products or is there are you agnostic to that And you're just looking to find

Speaker 1

the right

Speaker 2

price? Well, a couple of things there. I think you'll see us continue to add more Allied products To some of our treated plants in the U. S, we started and introduced composite decking in Texas recently. So We're starting to do add ons because we're going to these customers every day with full trucks to treat it.

Speaker 2

And one of the strategies is to continue to partner with more Allied product lines in the U. S. Where it makes sense for the backyard space and that's what we're looking at and continuing to build on. So you'll see us There's not a focus one way or the other. We certainly want to buy more pressure treated plants and be more valuable to our larger customers in the States and all Over the next, not even 3 to 5 years, even sooner than that, and we think we'll grow the system sooner than that as well.

Speaker 7

That's helpful. Thanks very much. I'll turn the call back over.

Operator

There are no further questions in the I'd like to hand the call back to management for closing remarks.

Speaker 1

Thank you, operator. Thank you again, everyone, for joining us today. We look forward to speaking to you on our year end conference call, year end and Q4. That concludes today's call. Any questions, Feel free to reach out to me directly, and I'll turn it back to the operator to close the call.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Doman Building Materials Group Q3 2023
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