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Doman Building Materials Group Ltd
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Good day, and welcome to the CanWel Building Materials Group Ltd. First Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ali Mahdavi. Please go ahead, sir.
Thank you. Good afternoon, everyone, and thanks for joining us for CanWel Building Materials First Quarter 2018 Conference Call. Joining me this afternoon are CanWel'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 earlier today, it is available on the company's website at www.canwel.com as well as on SEDAR, along with our MD&A and audited financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on May 22, 2018.Following the presentation, we will conduct a Q&A session. Instructions will be provided at that 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 CanWel 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 management's discussion and analysis 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'd like to now turn the call over to Amar.
Thank you very much, Ali. Thanks, everyone, good afternoon, and thank you for joining us on today's call. Let me begin by highlighting some of our key financial and operational performance during the first quarter, we can then have Jay Code provide a more thorough review of our financial performance and condition in the first quarter. I'm pleased to report that 2018 has started off on strong footing for CanWel with our financial and operational performance resulting in record Quarter 1 revenue and EBITDA when compared to our first quarter performance history. For those of you who've been following for -- us for a while, you would recall that Q1 was always noted as one of our seasonally slower periods. However, over the years, we'd focused on executing a growth strategy which has led to a far more diverse and strengthened business model, resulting in less vulnerability to certain macroeconomic factors. This really speaks to the resilience of our business model, which resulted in Q1 with revenues increasing just under 33% to a record $295 million, gross margin dollars increasing 67.4% to $45.7 million or the percentage of revenues, the gross margin came in at a record 15.5% of revenues.EBITDA increased just under 91% to a record $15.6 million. Net earnings increased just under 300% to $6.5 million. During the quarter, we maintained focus on operational efficiencies and cost controls as we always do, while our core distribution business continued to perform with strength and in line with our expectations. Sales for the Distribution segment increased by $74.4 million or 35.9%, largely due to the inclusion of the results from Honsador Acquisition, an upward trend in construction material pricing and the company's continuing focus on its product mix, strategies and target customer base.Overall, we continue to be very pleased with the net impact of our acquisitions and integration efforts to date, which have provided us with these improved returns, a vaster footprint and deeper brand awareness in many parts of Canada and growing visibility in the Western United States. We continue to monitor the North American landscape for opportunistic and strategic growth opportunities to further fuel the growth of the company.As we've done so in the past, we will remain extremely disciplined on pricing and evaluating any and all growth opportunities that may become available to us, with sustainable value creation being at the forefront of anything we elect to advance on.In recent months, there has been quite a bit of noise and speculation about tariffs being imposed on certain products and industries by the current U.S. administration. I want to be clear that none of the contemplated tariffs have any impact on our business mix. I would also like to touch on the unfortunate volcanic developments in the state of Hawaii. The recent activities and earthquakes resulting from the Kilauea volcano have not impacted any part of our Honsador operations. However, we are keeping a close eye on the situation and our thoughts are with the communities impacted.As previously discussed, we are off to a good start in 2018, evidenced by the reported record financial performance. We remain solidly positioned and confident about the future prospects of our business as we push forward into our seasonally busier periods. Our key priorities in 2018 are geared towards our relentless focus towards growth and profitability with the goal to reduce our dividend payout ratio. We're tracking well on all these fronts and look forward to sharing our successes with you on the coming periods.With that, I would like to ask Jay Code, our CFO, to take over and provide a review of the company's first quarter financial results in greater detail, and then we will open the call for analyst questions. Jay?
Thank you, Amar. Just a reminder that CanWel's first quarter results were released earlier today. The results are presented in accordance with International Financial Reporting Standards and presented in Canadian dollars, unless otherwise noted.Please note our operations are at times impacted by the seasonal nature of our industry and accordingly, our operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. Revenues for the first quarter were $295 million compared to $223 million, representing a 32.4% year-over-year increase. Sales for the Distribution segment increased by $74.4 million or 35.9%, largely due to the inclusion of the results from the Honsador Acquisition, an upward trend in construction material pricing and the company's continuing focus on its product mix, strategies and target customer base. The company's sales in the quarter were made up of 59% construction materials compared to 60% in Q1 2017, with the remaining balance of sales resulting from specialty and allied products of 33% and Forestry and other revenues of 8%.Gross margin dollars increased to $45.7 million in the quarter compared to $27.3 million in the same quarter of 2017, an increase of $18.4 million or 67.4%. Gross margin percentage was 15.5% in the quarter, an increase from the 12.3% achieved in the same quarter of 2017. This increase in margin dollars and margin percentage is mainly due to the positive contributions from the Honsador Acquisition as well as the aforementioned upward trend in construction material pricing. Expenses for the quarter ended March 31, 2018, were $34.4 million as compared to $23 million for the same quarter in 2017, an increase of $11.4 million or 49.6% due to the factors discussed below.As a percentage of sales, expenses were 11.7% in the quarter compared to 10.3% during the same quarter in 2017. Distribution, selling and administration expenses increased by $10.9 million or 56.8% to $30.1 million in the first quarter of 2018 from $19.2 million in the same period of 2017. The increase is primarily due to the additional expenses relating to the Honsador Acquisition operations. As a percentage of sales, these expenses were 10.2% in the quarter compared to 8.6% in the same quarter in 2017.Depreciation and amortization expenses increased by $483,000 or 12.5% from $3.9 million to $4.3 million. Depreciation and amortization expense for the Distribution segment decreased -- or sorry, increased by $1.2 million or 63.1%, mainly resulting from depreciation on the additional assets related to the Honsador Acquisition. Depreciation and amortization expenses for the Forestry segment decreased by $763,000 or 40%, mainly due to the disposal of certain equipment during 2017.Finance costs for the first quarter of 2018 were $2.4 million compared to $1.9 million for the same quarter in 2017, an increase of $528,000 or 28%, mainly due to the higher average of borrowings on the company's revolving loan facility during the current period. As a result of the aforementioned, EBITDA for the quarter ended March 31, 2018, was $15.6 million compared to $8.2 million in the same quarter of 2017, an increase of $7.4 million or 90%. The increase in EBITDA relates largely to the aforementioned improvements in the quarter as well as the results from the recent Honsador Acquisition.As a result of the foregoing factors, net earnings for the quarter ended March 31, 2018, were $6.5 million compared to $1.7 million in the same quarter of 2017, an increase of $4.8 million or 290% due to the foregoing factors impacting the overall financial performance of the company.Dividends paid to shareholders amounted to $10.9 million compared to $8.6 million during Q1 2017. The increase in dividends paid was due to the aforementioned 2017 private placement and 2017 public offering, resulting in a higher weighted average number of shares in the current period.As at May 8, 2018, there were 77,693,735 common shares issued and outstanding. With regards to our first quarter cash flow, operating activities generated $10.1 million in cash, before noncash working capital changes compared to $3.7 million in the same quarter of 2017. This increase in cash generated is primarily the result of the aforementioned year-over-year increase in net earnings.During the quarter ended March 31, 2018, changes in noncash working capital items used $116.8 million in cash compared to $61.8 million in the same period in 2017. The year-over-year $55 million variance in cash consumed by the changes in noncash working capital was driven by this year's increased business activity levels in the company's legacy business units and recently acquired entities as well as the aforementioned upward trend in construction materials pricing.The company generally experiences higher levels of noncash working capital during the first and second quarters and a decrease in noncash working capital during the third and fourth quarters due to the ordinary seasonal factors relating to the company's business cycles. The change in working capital in the quarter was comprised of an increase in trade and other receivables of $71.6 million, an increase in inventory of $52.3 million, an increase in prepaid expenses and deposits of $617,000, partially offset by an increase in trade and other payables of $7.7 million.Our capital expenditures continue to be planned and managed prudently and deliberately to ensure capital is effectively deployed to provide long-term sustainable value to the business.This concludes our formal commentary, and we would now be happy to respond to any questions that you may have. Thank you. Operator?
[Operator Instructions] Okay, our first question comes from Charan Sanghera from RBC Capital Markets.
Just looking at the revenue growth, overall good quarter...
Could you start the question over, Charan?
It seems that we've lost you. Our next question comes from Hamir Patel from CIBC Capital Markets.
Amar, I was just curious, it looked like revenues at Honsador were sort of in the $42 million range, a little bit lighter than what I was expecting. Just curious, how do we think about seasonality in that business? Because I was under the impression that there wasn't much for -- in Hawaii?
Yes, there's not a lot of seasonality down there but certainly, there's project-driven revenue that is lumpy. So quarter-by-quarter down there, you're going to see sometimes a lot of strength and sometimes it back off just when projects complete. And of course, when you do have severe weather down there and rain like Hawaii experienced, you will have some weakness here and there. But overall, the business in Hawaii is just fine, and we're working on efficiencies and different strategies as we talked about on sourcing and expanding. So we're pretty excited about what we see for opportunities, still early days in Hawaii.
Great. That's helpful. And just turning to the Forestry side, I know weather was more favorable in the quarter, but it looks like your harvesting volumes were down about 30%. Was that all the noncore operations that you closed? And how should we think about annual revenues in that business going forward?
Yes, correct. Two things. Most of that was the Mackenzie operations that were unprofitable when we bought Jemi Fibre and we've closed those operations, they're gone. So that was probably 3 quarters of it. And then some contract loggers that we traditionally had last year due to the weather last year and all the issues and the [ cutinise ] have moved up north so we lost some contractors, so we've replaced most of that now and certainly we're experiencing good healthy volumes now after we managed forest, so the weather has been good. Breakup so far has been close to a nonevent, so that's been very nice as well. So we're pretty happy with what's going on at the CanWel Fibre division.
And Amar, the stuff you've shed on an annual basis, what's -- what does that represent?
Well, that was custom logging, so it's not managed Forest revenue. It was logging revenue up in the North. So it's really -- it's not related to what we're doing in the east [indiscernible].
We have Charan back.
Better connection, I'm really far away down the street, but maybe it's the RBC phones. I just had a question on Canadian revenue growth, it seemed strong. I just want to look at -- can you kind of give a sense of how much is commodity-product driven and how much is on the treated-product side, which should see a seasonally stronger kind of order volume in Q1?
Yes, so the treated volumes, at the weather in Canada, are a little bit slower than last year, but we've had inflation so that's certainly taken our top line up in all of our product lines that are wood-based. I heard story in wood right now is extremely strong. And back to January, we're not where pricing is today as we sit here in May but certainly, selling ahead some of that material did have inflation in it, volumes were off a bit due to the severe winter, I mean just in Ontario, there was still snow on the ground 3 weeks ago, so we look at some of our major active areas are just starting to get going now. But revenue increased certainly, the inflation was driving a piece of that. But really, it's not the whole story there, we're starting to get going a little bit further now in April and May as the building season gets underway. So -- even though we had a nice top line push in the first quarter, we think if the weather had been better, we could've probably exceeded the numbers we had, but it is what it is.
Do you think maybe we could have bit of a pickup -- a bit of carry-forward activity into Q2?
Yes, I mean April is still a little rocky in the Canadian piece, the U.S. piece has been good. But we're going now with the weather breaking and more importantly, back east is breaking well. We think the second quarter is shaping up to be quite decent.
Okay. And then just touching on the U.S., California seems to be very strong again. I'm looking at over 20% revenue growth, kind of, back into it. How long can that continue? Like, is this a bit company-specific, you know things guys are doing? Or is it just the macro-environment in California right now?
No, it's combination of both. Our target customer base tends to expand as we move around in the different regions there. Certainly, us sourcing better, being able to buy from a wide variety of mills, much like we can for now, it's starting to work in California cascade pretty quickly and give us a bit of time on Honsador and you'll see the same start to see the same sort of results on the margins side. So the combination of things, the backdrop has been good, February was pretty wet in California. So some days were pretty sloppy, but overall, the economic activity is very, very strong in Southern California, Northern California, Arizona and Nevada, which are the markets we service. So we're pretty excited about the full year, not just the 90 days.
Our next question comes from Colin Healey from Haywood Securities.
Seems like my questions have been answered, but I thought maybe I'd ask you if you guys are seeing any interesting opportunities on the acquisition side of things? And how the pipeline looks and if we can -- if you're thinking more just focusing on the core business or if there is going to be any acquisition activity in 2018 potentially?
Colin. As we mentioned last year, we're in digestion phase, certainly, of the Honsador Acquisition, the other acquisitions are integrated, we'd say, virtually 100% now. Honsador, we're spending time on that with our management to again get our strategies in, it's a big company. Certainly, we're having success there. We've increased our treated production significantly in the islands, our lead times and engineering wood. We've been doing a lot of operational performance work and I'll tell you, we've already brought that a long way but when it comes to the acquisition pipeline, as you know, we're always in a lot of talks on our strategic plan, which is the U.S. West Coast and Eastern Canada. And we still plan to try and digest 1 to 2 acquisitions per year that we think we can safely stomach and digest properly. So we hope to be on that pace even in 2018, 2019. We just want to make sure that it's the right strategic fit at the right price. And again, we're going to remain extremely disciplined on this acquisition opportunity, which has led us to where we are today. And we're just going to carry on the pace that we've been on and not really wear from what we're up to.
And our next question comes from Yuri Lynk from Canaccord Genuity.
Amar or Jay, is it possible to quantify the impact of the higher construction material prices on gross margin?
Yes, it really hasn't had a big effect. I think, the lift you see there, the record north of 15%, a lot of that's come from the strong margins out of the Honsador Acquisition. Of course, we're 1 step down there selling direct rate out of our 7 yards that are on the lumber side in our electrical division down there that has much stronger margins in LBM, so that push up is certainly being driven by that. But underneath that, we do have a margin increase on lumber. I'm not going to say it's gigantic to move the dial. We're having gross margin dollars, obviously, with the inflation of lumber products but it's not moving the dial too much but the gross margin dollars were up significantly. We love wood pricing where it is and we hope it continues. So -- but the majority of it, to answer your question, Yuri, is from Honsador.
And Yuri, it's Jay here. Just -- as we've discussed on previous calls, at CanWel we're also in the wood-treating business, and so the raw cost of the inputs on that side of the business experienced some inflation, which offsets the good news on the -- just the raw wood sales on the commodity side. So we've got a bit of a natural hedge going there that tempers the very strong markets for pricing.
Okay, no, I just wanted to make sure there was no change to your consignment inventory strategy on the lumber side, and that doesn't sound like there is.
No, there is not.
Okay. And just to help as we model going forward, I think there was a comment on the last call about SG&A about 10% of sales. That's on a -- is that on a full-year basis? And we should expect some quarterly variability around that number? Is that how we should think about it?
You'll see variability because of the seasonality in the business. So Q1 with lower sales, customarily, you're going to see the GS&A take up a higher percentage in Q1, and then it will fall in Q2, Q3 as our sales ramp up in Canada.
Right. And still comfortable with that 10% bogey, give or take?
Yes, for the year. Yes.
Okay. And Jay, last one for me. Obviously, an understandable large working capital investment in Q1, especially where commodity prices are, you guys did a real good job last year of unwinding that better than you had done in previous years. Do you think you can completely unwind the first half working capital build by year-end? Is that the goal or...?
We're on track, sort of, regular business cycles, everything is unfolding as we expect it will, in terms of unwinding, yes.
So we shouldn't expect a large working capital investment by year-end?
Extending on where commodity prices level out, it's going to affect our working capital, but it will still come off in the coming months as we sell into the busy season.
Yes, as we look at lumber, Yuri, in the last 2 years it's virtually doubled. And we move a ton of lumber, and -- so you're going to just see those peaks a little higher as the inflation is there for how long it's there and then -- but to Jay's point, you'll see the seasonal patterns be identical, just maybe higher highs and higher lows on that revolver.
And our next question comes from Anoop Prihar from GMP Securities.
Just a couple of questions. I'm looking at the note where you disclosed your revenue by geography, and you've got about $81 million of revenue coming from the U.S. on the distribution side. I'm assuming, just to be clear, that's all Honsador and CCI?
Yes.
Correct.
Okay. And then what is the U.S. Forestry operations, a little -- $2 million of revenue, what does that relate to?
Sure. The Forestry division sells a certain percentage of its products into the U.S. These would be either logs to sawmills or agricultural products.
Okay. So that's Jemi -- of CanWel Fibre then, is it?
Correct.
And ladies and gentlemen, at this time, we do not have any more time for any additional questions. Ali, please go ahead.
Thank you, operator. On behalf of the CanWel team, I would like to thank you again for joining us this afternoon to review the Q1 results. This concludes today's call. And we look forward to speaking with you again on our Q2 call in August. Thanks again, have a great afternoon.