Doman Building Materials Group Ltd

TSX:DBM

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the CanWel Building Materials Group Ltd First Quarter 2021 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, sir.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. Good afternoon, everyone, and thank you for joining us for CanWel Building Materials First Quarter 2021 Financial Results Conference Call. Joining me on today's call 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 on Friday, May 7, it is available on the company's website at canwel.com 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 May 24. Following the presentation of the first quarter results, we will conduct a Q&A session for analysts only. 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 Limited 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 would like to turn the call over to Amar now. Amar?

[Amardeip Singh Doman, Chairman & CEO]

Thanks, Ali, and hello, everybody, and thank you for joining us on today's call. Let me begin by highlighting some of our key financial metrics, followed by some color on our operations during the first quarter, and then I will hand the call over to Jay Code, who can review the numbers in further detail.As always, I would like to start by highlighting the efforts of all of our employees across the various business segments during these extraordinary times in which we are in. Our team's clear focus and attention on health and safety, combined with solid execution in all business fronts resulted in yet another very strong quarter of financial results.Now let me briefly discuss the first quarter results and what we are seeing in the market and how supply and demand looks as we push through into the second quarter. The strength in our first quarter results came from the combination of continued strong pricing and volumes in all of our markets, which resulted in record financial performance across all of CanWel's key metrics.Further, our ongoing cost management and focus on operational efficiencies enabled the company to realize much of the revenue line gains to the gross margin, EBITDA and net income lines. Simply put, we optimized the use of all the levers available to us in our resilient business model to maximize margins out of a strong market, which drove large revenue growth on the back of strong pricing and broad market demand in Canada and in the U.S.During the first quarter, the momentum in top line growth resulted in a 59% year-over-year increase in revenues. Our treated wood business continued to deliver strong performance during the period due to increased demand and volumes coming from consumers continuing to spend more time and efforts on home renovation and repair projects, along with strong housing start activity on both sides of the border, which continue today.The stay at home and do-it-yourself renovation and repair market was a key contributor. It was extremely robust during the first quarter, and we see this trend continuing in the second quarter and possibly the rest of the year. I am both pleased with and very proud of our employees on both sides of the border for their hard work and attention in serving our customers during what I would consider a unique market environment, which has resulted in unprecedented demand for products across our portfolio. As a result of our collective efforts, our revenues amounted to $520 million; gross margin remained strong at 17.4% or $90.4 million; EBITDA of $60.1 million; net earnings came in at $34.2 million; and lastly, we paid and combined a quarterly and special dividend totaling $0.16 per share subsequent to the first quarter.Now let me touch on some strategic growth opportunities and how we have strengthened our balance sheet to be well positioned to take advantage of such opportunities. As most of you listening in on this call know, CanWel has always been and continues to be a disciplined buyer of strategic assets and operating businesses in Canada and in the U.S. At any given time, we have a fairly active pipeline of opportunities and in dialogue with businesses where we see value creation, potential for the business and an ultimate goal to further enhance shareholder value.Based on the strength of our share price, strong market conditions and the various opportunities we have been tracking, subsequent to the end of the quarter, we announced a $75 million bought deal equity offering as well as a $325 million senior unsecured note offering, which in combination enables us to pay down our current revolving credit facility at an attractive cost of capital, while providing us with meaningful added funding capacity to execute on future acquisition opportunities that fit our strategic, financial and operating parameters. Both offerings were well received, and I am pleased to note both were oversubscribed.Looking ahead, we remain excited and optimistic as we continue to manage our costs, take full advantage of this robust market dynamic we are living through. We remain confident in our ability to work through these extraordinary times diligently while protecting our employees and serving our customers' needs with the highest level of service. We look to the future with optimism, especially with the added balance sheet strength that now provides us the flexibility to pursue organic and acquisition growth opportunities in support of our customers and suppliers.And with that, I would like to ask Jay Code, our CFO, to take over and provide a review of the company's first quarter 2021 financial results in greater detail, and then we're going to open the call up for questions from analysts. Jay?

[James S. Code, Chief Financial Officer]

Thank you, Amar, and good day, everyone. Sales for the quarter ended March 31, 2021, were $519.9 million versus $326.7 million in Q1 2020, representing an increase of $193.2 million or 59% due to the factors to be discussed. The year-over-year growth in sales demonstrates the company's continued resilience and strong overall end market demand for its products. The increase in sales is attributable to improvements in both sales volumes and pricing.Quarantine-related home improvement activities and strong housing starts resulted in increased demand from consumers spending more time and efforts on home renovation and repair projects. Additionally, construction materials pricing generally continued to increase during the first quarter of 2021 at an exceptional pace.The company's sales by product group in the quarter were made up of 72% construction materials compared to 62% during the same quarter last year, with the remaining balance resulting from specialty and allied products of 23% and other revenues up 5%. Gross margin was $90.4 million in the current quarter versus $43.5 million in Q1 2020, an increase of $46.9 million.Gross margin percentage was 17.4% during the quarter, an increase from the 13.3% achieved in Q1 2020. The company's margins benefited from the previously discussed improvements in construction materials pricing during the first quarter of 2021 and ongoing implementation of the company's strategies. Expenses for the quarter ended March 31, 2021, were $40.7 million versus $37.2 million in Q1 2020, an increase of $3.5 million or 9% due to factors to be discussed. As a percentage of sales, this quarter's expenses were 8% versus 11% in Q1 2020. Distribution, selling and administration expenses increased by $3.5 million or 13% to $30.4 million in the first quarter versus $26.9 million in Q1 2020, mainly due to increased sales activity, resulting in higher personnel costs. This increase was partially offset by a decrease in certain other nonessential operating expenditures as the company continued strict cost management measures in response to the pandemic.As a percentage of sales, DS&A expenses were 6% in the current quarter compared to 8% in Q1 2020. Depreciation and amortization expenses were $10.3 million, largely in line with the first quarter of 2020. Finance costs for the quarter ended March 31, 2021, were $3.6 million versus $5 million in Q1 2020, a decrease of $1.5 million or 29%, partly due to lower interest rates on the company's variable rate loan facilities and partly due to lower average borrowings.The decrease in average revolving loan facility balance was largely the result of reducing working capital levels in response to the pandemic as the company decreased its total loans and borrowings by $2.8 million relative to March 31, 2020, despite the comparative strength in current pricing for construction materials. EBITDA was $60.1 million compared to $16.5 million in the comparative quarter of 2020, an increase of $43.5 million, largely due to the improvements in both sales volumes and construction materials pricing as a result of the previously discussed quarantine-related home improvement activities and strong housing starts during the first quarter of 2021. As a result of these factors, net earnings for the quarter ended March 31, 2021, were $34.2 million versus $850,000 in the same quarter of 2020, an increase of $33.3 million.Turning now to the statement of cash flows. In the first quarter of 2021, operating activities before noncash working capital changes generated $42.4 million compared to $13.4 million in the first quarter of 2020. Seasonal and pricing-related increases in noncash working capital balances consumed $197.6 million this quarter compared to $74.8 million in the same period in 2020. We note that the overall growth in noncash working capital was driven by significant increases in accounts receivable and the unit cost of inventory as construction materials pricing experienced unprecedented inflation through the first quarter resulting in the $122.8 million year-over-year variance in cash consumed.With respect to financing activities, the pricing related and seasonal buildup of noncash working capital was supported by the company's revolving credit facility which increased by $168.7 million during the current quarter versus $80.2 million in 2020. This was the primary contributor to the $167.3 million overall increase in loans and borrowings during the quarter.The company also returned $9.4 million in dividend payments to shareholders compared to $10.9 million in the same quarter of 2020. The company updated its dividend policy in 2020, resulting in a quarterly dividend reduction from $0.14 to $0.12, beginning with the dividend paid on October 15, 2020. Additionally, on March 11, 2021, the company announced a onetime special dividend of $0.04 per share payable subsequent to Q1 2021 to shareholders of record at the close of business on March 31, 2021.The company was not in breach of any of its borrowing covenants during the 3 months ended March 31, 2021, liquidity measures including optimization of noncash working capital levels, combined with the company's continuing cash flows from operations are expected to be sufficient to meet our operating requirements and remain compliant with lending covenants.The company's lease obligations require monthly installments, and these payments are all current. Investing activities primarily related to the purchase of property, plant and equipment consumed $1.3 million of cash compared to $908,000 in the same period in 2020.This concludes our formal commentary, and we would now be happy to respond to any questions that you may have. Thank you. Operator?

[Operator]

[Operator Instructions] And we start with our first question from Paul Quinn, RBC Capital Markets.

[Paul C. Quinn]

Amar, you've been through a couple of cycles. Just wondering how you view the current unprecedented cycle. And what do you think is the sustainability of it?

[Amardeip Singh Doman, Chairman & CEO]

Yes. I think, Paul, like everyone else, we're learning on the job with this one. But the way I see it is these order files are out long. The demand continues to build. Projects are not stalling. Lumber is being consumed as fast as it's produced, both sides of the border. I think as long as the stimulus are still in with low interest rates and things like that, this will continue. I haven't seen anything that tells me the market is going to catch up, and futures keep telling us the same thing. It's a real demand-driven rally, and I see it continuing into the summer.

[Paul C. Quinn]

Okay. And then in terms of your inventories, are you having issues on getting enough lumber to meet your customer demand as well as panels and other products?

[Amardeip Singh Doman, Chairman & CEO]

Yes. A couple of things there. Number one, we have contracts with a lot of our mill partners. So we are getting material on contracts. Spot buying is difficult because it's just being consumed, and order files are out. So if we had more, we'd be selling more, there's no question. But we're getting a lot of our programs looked after through contracts, which are paying off, and you can see it in our sales numbers.

[Paul C. Quinn]

Okay. And as the financials move up, does that suggest the potential M&A activity that you're likely to pursue those prices are going up as well? Or what's that market like?

[Amardeip Singh Doman, Chairman & CEO]

Yes. We've got a lot of stuff in the pipeline that we were talking about pre-COVID, and we've put a lot of those discussions back in place. So we'll hopefully get moving on some of those opportunities. When it comes to valuation, which is your question, we stay pretty disciplined no matter what the market is on our multiples and what we like to buy with a lot of diligence going in to see how this thing is going to look pro forma and post ownership. So we're not going to really move too far.We understand we're in an unprecedented place. We won't be here forever. CanWel will be here forever. So we want to make sure that we protect ourselves going forward with those same valuation metrics that you've heard us talk about on the buy side, on the acquisition strategy.

[Operator]

And we take our next question from Colin Healey, Haywood Securities.

[Colin Healey, Research Analyst of Mining]

Congrats on that quarter. Definitely came in ahead of our expectations when you announced previously. But just to follow up real quick on the last question there. What percentage of your sales are typically from contracted buying versus spot?

[Amardeip Singh Doman, Chairman & CEO]

Yes. So it's a smaller percentage. It would probably be in the 30%, 35% range, somewhere in there. We've had deep mill relationships that go way back for a long time. So we are a preferred customer, if you will, of the big mills. But certainly, those contracts are paying off now more than ever. Most mills have been on time and honoring pretty well, which is good, even through this price scenario. But certainly, those are paying off for us today.

[Colin Healey, Research Analyst of Mining]

In the spot market, does that give you some preferential or advantageous positioning? Or is it purely just auction?

[Amardeip Singh Doman, Chairman & CEO]

Well, a little bit, I would say. We're looking for different specialty items, more than just 2x4. We're looking for appearance grades, a lot of different things. So we do have long-term relationships on building programs with these key mills. But certainly, I would say that there's just too many people dog-piling to try and get wood today to really get in front of each other. It is -- I hate that word, but it's unprecedented, the demand, and it's just continuing to build. And I think there's been a lot of nonbelievers in lumber on the way up that didn't buy. We are now in a tough position where they have to finish projects, and that's continuing the demand.

[Colin Healey, Research Analyst of Mining]

Right. And are you seeing -- on the spot market, obviously, it's tight. And just wondering if you're seeing any of the bottlenecks kind of working their way out there? Or do you think that there's going to be more material available in the spot market into the summer? Or is it going to continue to be kind of at the levels you're seeing now? Or do you have that kind of insight?

[Amardeip Singh Doman, Chairman & CEO]

Well, we do have a bit of insight there. And I can tell you that it's for right now getting tighter, and that's what continues to push futures up. It is yes, it's crazy. There's a lot of jokes and things about lumber out there in the market and things like that. But it is really a supply shortage, and you're heading into prime building season in all regions in North America. Exports can't keep up. There's trouble with shipping worldwide. There's all these snafus everywhere and just adding into the cauldron here.So certain mills, you call today, they're not going to quote any material to you. They don't have anything. These are big, big producers that you know. And if you want to pay, you're going to probably pay $200, $300 over the market, and you're going to be into June, July and what's happening, guys don't want to go out that far at that higher price then eventually, they have to, and this thing keeps sustaining and feeding on itself.

[Colin Healey, Research Analyst of Mining]

Right. Okay. Just a last question for me. In terms of the potential acquisition strategy here, is there a focus on kind of pressure treating versus distribution opportunities? On the multiples that you talked about, are you seeing any differences there? Is there a better place to buy right now?

[Amardeip Singh Doman, Chairman & CEO]

A lot of these companies, they fit into our geography strategy and where we want to go alongside of our customer base. And there's a lot of other things that go into the cauldron. We like specialty distribution. So we like the backyard area, of course, and pressure treating, yes, of course, is our #1 growth area. We'll continue to see us execute on that strategy. And there's a lot of dialogues, again that we've reheated up since a year ago when we kind of put all the M&A files away. They're all back open again. And I can tell you that we're having some good dialogues, and we hope that some things come to fruition in the next 12 to 24 months.

[Operator]

It appears there are no further question at this time. And I'd like to turn the conference back for any additional remarks.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. That concludes this afternoon's call. On behalf of Amar, Jay and all of CanWel, thank you for joining us this afternoon. If you have any further questions, please feel to follow-up with myself, and we look forward to speaking with you again. Have a great afternoon. I'll hand it over back to the operator to close the call.

[Operator]

And this concludes today's call. Thank you for your participation. You may now disconnect.