Doman Building Materials Group Ltd
TSX:DBM

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Doman Building Materials Group Ltd
TSX:DBM
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Earnings Call Transcript

Earnings Call Transcript
2022-Q1

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Operator

Good day, and welcome to the Doman Building Materials Group First 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, sir.

A
Ali Mahdavi
executive

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

If you've not seen the news release which was issued 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 May 18. [Operator Instructions]

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?

A
Amardeip Doman
executive

Thanks, Ali, and good morning, everybody, and thanks for joining us on the 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'm going to hand the call over to Jay Code, who can review the numbers in more detail.

Let me start by briefly discussing our first quarter results, what we are seeing in the market and how supply and demand looks as we push through into the second quarter. To strengthen our first quarter results came from the combination of the impact of our strategic acquisitions, continued robust pricing, albeit volatile in volumes in all of our markets which resulted in record revenue performance in the quarter.

Further our ongoing cost management focus on operational efficiencies and successful integration efforts in synergy realization enabled the company to draw up much of the revenue line gains to the gross margin EBITDA and net income lines. Simply put, we optimize the use of all the levers available to us in our business model to maximize margins out of a busy market, which drove strong 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 and top line growth resulted in a 64% 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 time and efforts on home renovation and repair projects, along with strong housing start activity on both sides of the border, which continues today.

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 times where many companies are faced with challenges surrounding global supply chains, logistics, and overall product movement.

Despite these challenges, we recorded revenues amounting to $851 million, gross margin remains strong and on target at 15.5% -- 15.6% I should say, or $133 million, EBITDA amounted to $78 million, and net earnings came in at $42 million. And lastly, we pay a quarterly dividend of $0.14 per share in the quarter and have now been paying dividends for over 12 years straight.

The top line results are demonstrative of continued activity in the strength of our business platform in Canada and the U.S. I'm extremely pleased with our financial performance and the integration efforts around our recent acquisitions, which has resulted in the continued successful unfolding of our overall growth strategy although the economy is performing while we are seeing general economic headwinds manifesting in inflation, increased interest rates along with price volatility in certain product categories. We remain focused on adapting and performing during these uncertain times.

Looking back at the quarter and looking ahead, we saw some evidence of these headwinds, which we are cognizant of and their potential impact on performance. Despite the current market environment we are operating in, as always, we remain confident, focused and disciplined on closely managing our costs and servicing the needs of our customers with the utmost level of quality in service as we have done in the past. We remain excited and optimistic as we continue to take full advantage of this robust market dynamic that we are living through.

With that, I would like to ask Jay Code, our CFO, to take over, and provide a review of the company's first quarter '22 financial results in greater detail, and then we'll open up the call for questions from analysts. Jay?

J
James Code
executive

Thank you, Amar. Good morning, everyone. Sales for the quarter ended March 31, 2022 were $851.3 million versus $519.9 million in the comparative period in '21, representing an increase of $331.4 million, or 64%. 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 81% construction materials compared to 72% in the same quarter last year, with the remaining balance resulting from specialty and allied products of 16% and other sources of 3%.

Gross margin increased to $132.6 million in the current quarter versus $90.4 million in 2021, an increase of $42.2 million. Our gross margin percentage was 15.6%. During the quarter, a decrease from the 17.4% gross margin realized in 2021. The company's margins benefited from the results delivered by our acquisitions. However, the late Q1 declines in construction materials pricing drove overall lower margin percentages for the quarter relative to 2021.

Expenses for the current quarter were $70.7 million versus $14.7 million last year, an increase of $30 million, or 74% due to the factors to be discussed. These expenses amounted to 8.3% of sales this quarter versus 7.8% last year. Distribution selling and administration expenses increased by $24.1 million, or 79% to $54.5 million this quarter versus $30.4 million in the same period in '21 largely due to the additional operating expenses of our 2021 acquisitions.

The SNA expenses were 6.4% of sales in the quarter compared to 5.8% in Q1 '21. Depreciation and amortization expenses increased by $5.9 million, or 57% from $10.3 million to $16.2 million. Finance costs for the first quarter of '22 were $8.4 million versus $3.6 million in '21, an increase of $4.8 million, largely as a result of additional finance costs related to our 2026 unsecured notes issued in May of 2021.

First quarter EBITDA was $78.1 million, compared to $60 million in 2021. The increase of $18.1 million was mainly driven by the 2021 acquisitions partially offset by the construction materials pricing declines we saw late in the quarter.

Doman's net earnings in the first quarter were $42 million, versus $34.2 million in the same period of '21, an increase of $7.9 million.

Turning now to the statement of cash flows, the significant factors affecting the company's operating cash flows in the first quarter of '22 were largely related to improved net earnings, offset partially by normal seasonal increases in net noncash working capital. Operating activities before these working capital changes generated $62.1 million in cash, compared to $42.4 million in '21.

In the first quarter of '22, we made a net investment in noncash working capital totaling $187.1 million, compared to a net investment of $197.6 million in the prior year.

Moving now to the financing section. The company generated $107.9 million of cash from financing activities compared to $152.5 million in the same period in '21. In Q1 '22, the company borrowed an additional $127.2 million on its revolving loan facility compared to additional borrowings of $168.7 million in 2021. The year-over-year decrease in net advances from the revolving loan facility were a result of the previously discussed improvements in cash generated from operating activities, resulting in this quarter's reduced revolver utilization.

Shares issued during the quarter generated $632,000 of cash compared to $393,000 in 2021, while scheduled repayments related to our nonrevolving term loan consumed $667,000, consistent with 2021. We also note the company's remaining outstanding promissory notes were fully repaid during the first quarter of 2022.

The company was not in breach of any of its lending covenants during the quarter. Dividends paid to shareholders during the first quarter totaled $12.1 million compared to $9.4 million in the prior year's first quarter. The company updated its dividend policy during 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 $6.1 million compared to $5.8 million in 2021. The company's lease obligations generally require monthly installments, and these payments are all current.

Investing activities consumed $2.2 million compared to $1.3 million in the same period of '21, representing purposes of property, plant and equipment, net of proceeds from dispositions. 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 will take our first question from Paul Quinn from RBC.

P
Paul Quinn
analyst

I just want to understand a little bit more detail around the current market conditions, how difficult it is securing product, whether that's lumber or OSB, other, the materials? And then what are your customers saying current demand here, especially in this rising interest rate environment?

A
Amardeip Doman
executive

So to answer the first part, some of the transportation snafus have become unlocked. BC is still a little bit tough getting some material out of the mills for some of our operations, but we're not in dire straits by any means. We've had a slower spring as we know the weather hasn't been great across Canada and the U.S. kind of north. So that's kind of offset that. So that's not really causing our semi trouble. We think that's slowly catching up hopefully, by late summer, things will be back in to order there.

But on customer demand, slower spring in Canada again, weather related, but we're not seeing demand drop off in the U.S. whatsoever. Things are strong down there. And I think interest rates over time will probably cool things off a little bit. But so far, so good and really the momentum and activity down in all regions for us now. It's very good momentum.

P
Paul Quinn
analyst

Okay. And then specifically on the pressure treating side or the R&R market, others have reported slowdown in big box volumes. Just wondering whether you're seeing the same thing or it's more consistent for you guys?

A
Amardeip Doman
executive

That's been more consistent. We're not seeing a falloff. It just depends. It seems like some weeks, we're seeing these big numbers and then they're cooling off and then they're big again. So hard to read it. It's still early in the year for this really to get going now in May, June, July, August, will tell us the story. But no fall off.

Last year, when the lumber market came off, that demand stopped. The number was sky high. We've seen lumber correct a little bit, as we know, kind of in the back half of March into April and then stabilize, which makes the lumber more affordable on DIY side. So it's nice to see that and our orders have not plummeted like they did last summer when the market collapsed. So there's a lot of takeaway going on.

P
Paul Quinn
analyst

Okay. And then just lastly, has the Hixson integration coming along? Is that fully integrated with your appetite for additional acquisitions?

A
Amardeip Doman
executive

Yes. The team at Hixson is doing a fantastic job in integrating, implementing the technology. So we just don't have all of our operations up there's 5 to go that will be done by the end of the second quarter, then we'll all be up on our new system, which is a familiar system to us that we use in the Western U.S., a modern system. So we're very excited to open the data that's coming out of that already. So Hixson is running very, very well.

When we look at other acquisition opportunities, obviously, still digesting Hixson, but we do see a few things out there that we're in discussions with. So we'll just stay patient on these. We're wondering how the outlook is as we go forward and look at acquisitions and valuation. So we'll stick to our value line. And if a couple come up this year, great, if they don't great, but we're going to pay the right value for our shareholders for those assets.

Operator

We will now take the next question from Hamir Patel from CIBC Capital Markets.

H
Hamir Patel
analyst

I wanted to follow up on Paul's question about R&R. I'm just curious if from your channel partners, are you hearing of any sort of major differences between demand from, call it, maybe DIY customers versus the Pro segment?

A
Amardeip Doman
executive

No, we track volumes for block stores and dealer stores, and it's very, very steady. In fact, as the weather picks up, it's getting busier. So I think this notion of it just falling off because people are going back to restaurants and flying is not true. It's active. And certainly, if housing slows down in the next couple of years on the start and with rates going up, which may not happen because of integration and everything else and the demand. But that happens, we'll certainly see regular patterns of R&R activity where people will stay around the house.

And I think I mentioned this in the past that when you got these big housing booms like we have now, the decks and fences, which were major in, they come later on. And we'll see a lot of that activity just continue through the decks, the fences, the outdoor landscaping is all comes later. So we like what we see, and we've got longevity here for our product lines.

H
Hamir Patel
analyst

Okay. Great. That's helpful. And I just want to ask about this construction worker strike now in Ontario and what potential impact that might have on your business in Q2?

A
Amardeip Doman
executive

Yes. A lot of our customers are further out in the world. So we're not really dealing with the downtown guys but are building towers and things like that. So I'm not going to say it would completely not affect us, but it's not really our world where those guys are striking.

Operator

And we will now take the next question from Ian Gillies from Stifel.

I
Ian Gillies
analyst

One of the things in the release you noted was the split between construction materials and allied products. I mean, it was certainly more weighted towards construction materials in the quarter. Should we think about that being a reasonably normal split moving ahead given what you know today? And can you maybe talk a bit about how that impacts the overall margin profile of the business and it's going to stay in and around those levels?

A
Amardeip Doman
executive

Yes. So I think the easy answer here is Q1 '21 didn't have extent, right? So we added Hixson and the gigantic volume in the U.S., and that pushes up the construction materials and percentage. But remember, Hixson is 100%, call it -- we'll call it 90% treated. So that has those higher margins associated with it. So don't misread that as we're selling more studs or something. It's definitely the treatment at in the Hixson acquisition that drove up that number.

I
Ian Gillies
analyst

Okay. That's helpful. Revenue was obviously really good in Q1 with the result in working capital drag based on kind of the way you guys are looking at the rest of the year. And do you think you get a pretty decent-sized working capital release that offsets back at least in the near-term quarters?

J
James Code
executive

Yes, Ian, it's Jay here. We do expect the usual seasonal release of working capital. We're just as we speak, reaching our normal seasonal peaks here in early May, so we will see significant release of working capital through to, right through the fall, November time frame between now and November, yes.

I
Ian Gillies
analyst

Amar, in the release, one of the things you noted was that Q1 housing starts in Canada. The data was showing that they were down quite a bit year-over-year. I know Q1 doesn't call a great story for Canada for the full year. But is there any other additional detail you can comment around on what may be transpire in Canada? Was it just supply chain issues that caused that decline? Or are you seeing anything else of note that you're keeping a close eye on?

A
Amardeip Doman
executive

Yes. I think supply chain is an issue as far as getting some houses finished for guys want to start more of them. There's no question, even when rates are today, they're still ridiculous lows. So it's not, I think, pushing people out of affordability. We would like to see how the prices come down a little bit, obviously everybody would from where they're at. But we don't see that as a gigantic splash of cold water on our business units. It's just -- it's been a slow cold. I don't need to tell the people that are in Atlantic and the Quebec and Ontario, about that the winter has been not long and it just hasn't gone away, and it's been a slow start on our seasonal products.

But certainly, we'll see that demand pick up as soon as the weather comes up and see our order files to start to hit again. So we're not sitting here nervous that there's this hurricane of bad news coming. I think the obvious point is there's going to be a little bit of a slowdown in Canadian start, but I think some of it is driven to some guys just can't get stuff finished. And so it's difficult for some of the contractors right now. There's no question.

I
Ian Gillies
analyst

Perfect. And then last one for me. I mean, you had Hixson on the poll now for not quite a year, but I think if we're getting close. Are you seeing an increase in inbound calls for maybe smaller tuck-in acquisitions that could go along with Hixson from within the region that are looking interesting? Or has nothing really changed from that front?

A
Amardeip Doman
executive

No, it certainly has changed on that front. So certainly being on the map of the scale and of course, adding our Western U.S. operations in Hawaii and across Canada. And people take a look at us now, and certainly, we are a different business than we were even a year ago, 2 years ago, 5 years ago and continue to grow. So those inbounds are coming in, and we're meeting a lot of different folks in different regions. We want to grow alongside some of our national customers that are asking us, hey, if you guys were over in this region would give you a look at that kind of thing.

So we're really looking at this stuff deeply with the Hixson team and our Calcasa team in the west of where we need to plan some more flags and that's ongoing and we're a much different company than we were as I mentioned.

Operator

And we will now take the next question from Zachary Evershed with National Bank.

Z
Zachary Evershed
analyst

Congrats on the quarter. In your prepared remarks, you said you've seen some evidence of headwinds. Can you drill down into that for us?

J
James Code
executive

The headwinds certainly being rising interest rates for us, Zachary, it would be at the top of the list and somewhat the supply chain issues that Amar discussed would also impact us.

Z
Zachary Evershed
analyst

And in terms of that directly impacting your order books and your customers, are you seeing that manifest yet?

A
Amardeip Doman
executive

No, no, we're not. And I think the tail of the tape in a couple of years, we'll see how these rates are affecting things, but we haven't seen where our customers haven't told us, say, look, inventory less because we're going to be selling us. There's no -- there is any chatter about that at all. And our job obviously is to look out further, but certainly, we're not preparing for any sort of fall off a cliff type I guess, activity here.

But certainly, at the same time, we're being careful with our inventory, Zach, I think as we mentioned in some meetings recently that use of working capital is down. We are running less turning faster just because the lumber markets are extremely volatile. So that's something where we're having a difficult time forecasting more than worried about housing starts or interest rates. It's more of the lumber market and that volatility that continues to be there. And I think everybody is scratching our heads on a daily basis starting to figure out where this thing goes. We've given up on that.

Z
Zachary Evershed
analyst

That's fair. On that point, how far are you booked on your treating capacity?

A
Amardeip Doman
executive

Yes. I would say we're at a little bit less in Canada, even a slower start of spring, if you will, even here in Vancouver, but today it's 8 degrees. And it just hasn't sparked as strongly. But in the U.S., our numbers and volumes are extremely solid, and we're right on pace to have, I would say, a very normal order book files as traditional.

And it's really hard to compare to 2021 because you remember Zack last year, everything was out of control with the pandemic. The demand was ridiculous and then it fell off in May. This year, we're seeing a much steadier pace, and it's nice to see and it's again hard and maybe not even reasonable look comparables last year because it went from 100 miles an hour to 0 and then sort of to pick up again kind of late summer in the fall.

So very different here. We like the steady hitting, getting on base type activity, and we like what we see obviously, our first quarter was super strong, and we like the trends in the Q2.

Operator

And it appears there are no further questions at this time. So I would like to turn the conference back to our speakers for any additional or closing remarks.

A
Ali Mahdavi
executive

Thank you, operator. On behalf of the Doman Building Materials teams, I'd like to thank you all for joining us this morning. Should you have any questions, feel free to contact me directly. That concludes today's call, and we look forward to speaking to you during our second quarter 2022 conference call. Operator, over to you.

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.