Doman Building Materials Group Ltd

TSX:DBM

Earnings Call Transcript 2020-Q2

[Operator]

Good day, and welcome to the CanWel Building Materials Group Ltd. Second Quarter 2020 Financial Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the call over to Ali Mahdavi. Please go ahead.

[Ali Mahdavi, Head of Investor Relations]

Thank you. Good morning, everyone, and thank you for joining us for CanWel Building Materials Second Quarter 2020 Financial Results Conference Call. Joining us this morning 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 after the close of markets yesterday, 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 of August 14.Following the presentation, we will conduct a Q&A session for analysts only. Instructions will be provided by the operator 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 uncertainty 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'd like to turn the call over to Amar. Amar?

[Amardeip Singh Doman, Chairman & CEO]

Thanks, Ali. And good morning, everybody, and thanks 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 second quarter, how we managed to optimize our business during the global pandemic and what we are seeing so far in the third quarter, which gives us continued confidence across our business segments. After that, I'll hand the call over to Jay Code, who will drill further into the numbers.On the back of a strong first quarter and despite the impact of COVID-19 global pandemic, we had a robust second quarter with record and near-record results across our key metrics. We continued seeing an increased upward momentum in pricing, which combined with good volumes across the board, resulted in a very strong quarter.As you may recall during our first quarter conference call, we were abundantly clear about our concerns and strategies to work through the unknown and unmeasurable impact of COVID-19 global pandemic on our business. Despite the impact of the global pandemic across various geographies and end-markets, our business was classified an essential service, experienced record growth at the top line during the quarter and surpassed the $1.4 billion mark on a trailing 12-month basis. We accomplished this with relentless focus on margins, cost management, reducing our working capital requirements, which resulted in robust quarterly performance.During the second quarter, we experienced continued resilience across our business segments, with steady end-market demand, resulting in a 7% increase in sales when compared to the same period in 2019. Our treated wood business had a particularly strong performance during the period due to the positive impact from increased demand and volumes coming from consumers spending more time and efforts on home renovation and repair projects. This quarter "stay at home and do it yourself renovation and repair market" has been and continues to be extremely robust and we continue to see this trend moving into the third quarter.And as a result, I'm pleased to report that during the second quarter we again achieved very strong results across our key financial metrics, with revenues increasing 7% to $413 million, gross margin dollars increased 8.3% to $58.9 million or 14.3% of revenues, EBITDA increasing 20% to $32.8 million, and net earnings increased 62.8% to $12.7 million and a 14% -- $0.14 per share dividend was paid to all shareholders on July 15.Back on June 15, our Board of Directors adjusted the company's quarterly common share dividend from $0.14 to $0.12 per share effective for the dividend which is expected to be paid on October 15, 2020, to shareholders of record on September 30, 2020. The adjustment to the dividend in the third quarter was a prudent measure to enhance our capital and financial flexibility given the general uncertainty surrounding COVID-19 and we believe it's for the benefit and in the best long-term interest of all of our shareholders and other stakeholders.We are extremely encouraged with our second quarter and year-to-date results and continue to build on the decisive steps taken beginning in the first quarter. Through a responsive and focused efforts on operational efficiencies, cost savings, capital expenditure focus and working capital optimization, we successfully reduced our loans and borrowings by approximately $90 million when compared to the same period in 2019. We are particularly proud that we were able to deliver the strong operating results with leaner inventory levels while continuing to meet or exceed customer expectations of product availability.And looking ahead, the commodity pricing environment continues to show upward momentum, which is carrying into the third quarter. We remain very confident in our ability to work through these volatile times and unprecedented environment. We will continue to protect our balance sheet to enable us to be well positioned to take advantage of measured growth opportunities.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 and financial results in greater detail, and then we will open the call for questions. Thanks, and over to you, Jay.

[James S. Code, Chief Financial Officer]

Thank you, Amar, and good morning, everyone. Sales for the quarter ended June 30, 2020 were $412.9 million compared to $385.7 million in the same period in 2019, representing an increase of $27.2 million or 7.1% due to the factors to be discussed.Despite the general economic impact of the pandemic, sales for the distribution segment increased by $31.3 million or 8.4%, demonstrating the company's continued resilience and steady overall end-market demand for its products. The year-over-year increase in the company's sales is attributable to improvements in both sales volumes and pricing.Quarantine-related home improvement activities resulted in increased demand from consumers spending more time and effort on home renovation and repair projects. Additionally, construction materials pricing generally increased during the second quarter of 2020 as the economy began to reopen in certain jurisdictions that previously had restricted activity.The company's sales by product group in the quarter were made up of 67% construction materials compared to 62% during the same quarter last year, with the remaining balance resulting from specialty and allied products of 28% and forestry and other revenues of 5%.Gross margin dollars increased to $58.9 million in the quarter compared to $54.4 million in the same quarter of 2019, an increase of $4.5 million. Gross margin percentage was 14.3% in the quarter, an increase from the 14.1% achieved in the same quarter of 2019. The year-over-year increase in gross margin is mainly attributable to the previously discussed improvements in sales volumes and construction materials pricing during the second quarter of 2020.Overall expenses for the quarter ended June 30, 2020, were $37.2 million as compared to $37.6 million for the same quarter in 2019, a decrease of $425,000 or 1.2% due to the factors discussed below. As a percentage of sales, expenses were 9% in the quarter compared to 9.7% during the same quarter in 2019.Distribution, selling and administration expenses increased by $868,000 or 3.2% to $26.1 million in the second quarter of 2020 from $27 million in the same period of 2019. During the quarter, the company continued to take steps to mitigate the pandemic's impact, including implementing salary and working hours reductions, evaluating ongoing cost savings opportunities, ultimately resulting in lower distribution, selling and administration expenses. As a percentage of sales, these expenses were 6.3% in the quarter compared to 7% in the same quarter in 2019.Depreciation and amortization expenses increased by $403,000 or 3.8% from $10.6 million to $11 million in 2020. Finance costs for the second quarter of 2020 were $4.2 million compared to $6 million in the second quarter of 2019, a decrease of $1.8 million or 29.3%, partly due to lower interest rates on the company's variable rate revolving loan facility and partly due to lower average borrowings during the period. The significant decrease in debt was largely a result of the company's successful reduction of its working capital levels in response to the pandemic as total loans and borrowings decreased by $89.9 million relative to June 30, 2019.EBITDA was $32.8 million compared to $27.3 million in the comparative quarter of 2019, an increase of $5.5 million or 20.1%, 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 during the second quarter of 2020.As a result of these factors, net earnings for the 3-month period ended June 30, 2020, were $12.7 million versus $7.8 million in the comparative period of 2019.Turning now to the statement of cash flows. In the first 6 months of 2020, operating activities generated $42.2 million in cash before noncash working capital changes compared to $31.3 million during the same period in 2019. 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 ordinary seasonal factors relating to the company's business cycle.The change in working capital in the 6-month period in 2020 was comprised of an increase in trade receivables -- trade and other receivables of $131 million, a decrease in inventory of $74.7 million, a decrease in prepaid expenses and deposits of $72,000 and a net increase in trade and other payables and performance bond obligations of $39.8 million.Financing activities consumed $17.8 million of cash compared to generating $88.2 million in the same period in 2019. The revolving loan facility increased by just $19.2 million over the 6-month period compared to an increase of $124.3 million in the same period in 2019. The significant year-over-year decrease in net advances from the revolving loan facility is a result of the previously discussed inventory reductions during the second quarter of 2020 in response to the pandemic. The company was not in breach of any of its lending covenants during the 6 months ended June 30, 2020.Net repayment of equipment loans amounted to $1.6 million compared with $1.1 million in 2019. Payment of lease liabilities, including interest consumed $12.6 million of cash compared to $11.4 million in 2019.There were no common shares repurchased during the 6-month period ended June 30, 2020, compared to $616,000 in cash consumed to repurchase common shares under the company's normal course issuer bid in 2019.Dividends paid to shareholders during the quarter amounted to $10.9 million, consistent with the same period in 2019 and the dividends declared and paid on a per-share basis were unchanged from 2019.As Amar mentioned, on June 15 as part of the company's balance sheet flexibility and protection strategy the Board of Directors adjusted the quarterly dividend from $0.14 per common share to $0.12 per common share beginning in October 2020.Investing activities consumed $1.4 million compared to $17.9 million in the same period in 2019. Investing activities in 2019 included the Lignum acquisition for a net amount of $14.1 million with no acquisitions in the 6-month period ended June 30, 2020. The remaining decrease in investing activities is largely the result of the company's minimizing its capital expenditures in response to the pandemic.Purchases of property, plant and equipment of $1.3 million in the first 6 months of 2020 compared favorably to purchases of $3.6 million in 2019.This concludes our formal commentary, and now we'd be happy to respond to any questions you may have. Thank you. And operator?

[Operator]

[Operator Instructions] We'll take our first question from Paul Quinn, RBC Capital Markets.

[Paul C. Quinn]

Just -- you guys were very prudent in the quarter around COVID, taking salary reductions and the hours. Should we see a reversal of that in the back half of the year, because obviously the quarter was great and Q3 is looking almost even better at this point?

[Amardeip Singh Doman, Chairman & CEO]

Yes, I don't think you're going to see a full SG&A complement come back. There's areas that we're going to continue to remain lean and mean in. But at the same time, Paul, the business has grown and is so busy right now that obviously it's self-funding. So at the end of the day, it's not going to matter because the business is so strong.But we're going to come out of this definitely a leaner machine than we were before, and you will see some permanent SG&A reductions going forward. I can't give you the number, but it will be reduced from what it was in 2019 no matter what the business outlook looks like.

[Paul C. Quinn]

Okay. And then you guys are very close to your customers. So I'm just wondering what your level of visibility is on the sustainability of the current strength in wood products?

[Amardeip Singh Doman, Chairman & CEO]

Yes. So we're spending a lot of time on that. Certainly, myself and our management team are in daily conversations with our business partners and customers. It's extremely strong, Paul. I don't know how else to put it. I don't want to be promotional, but I haven't seen this in 30 years. It is an incredible home improvement run in North America and all we're hearing from our customer base is ship us faster and ship us more.

[Paul C. Quinn]

All right. And I guess maybe lastly just the question around the reduction in the dividend on June 15. It seemed like a prudent measure. But now we're in this super cycle of wood products. Any plan to move that back up or are you happy with the $0.12 a quarter?

[Amardeip Singh Doman, Chairman & CEO]

Yes, I think myself and the Board are very happy with the reduction for the long term. And we'll take that extra working capital that we'll generate. We'll get our payout ratio into a much more respectable neighborhood, let's say, that we're aiming towards. I think we're there now. No plans to adjust it.

[Paul C. Quinn]

Really looking forward to your Q3 results.

[Operator]

We'll take our next question from Yuri Lynk with Canaccord.

[Yuri Lynk]

And congrats on a strong quarter. Maybe just following up on Paul's question. Across all your product lines, how is availability from your suppliers right now?

[Amardeip Singh Doman, Chairman & CEO]

Yes. So on the wood product side, it's definitely harder to achieve prompt material for everybody just because the sales surge has been so high coming into March. Housing was extremely hot. It dipped and then kept going and may have reaccelerated here from what we can see.So when we look at the wood product side, some items were 6 to 8 weeks out. Having said that, we do have inventories. And thank god we have a lot of contracts with our great sawmill suppliers, so we're receiving wood on a regular basis. On the spot market, you'd be in trouble trying to find wood today.When you get into our allied lines, we don't see as much tension there, whether it's roofing insulation. Those products are readily available. But it's really the wood product side, be it lumber, plywood or OSB, where that realistic tough shortage is today. But the rest of the items is in pretty good shape in getting them and turning those over.

[Yuri Lynk]

And can you give us a flavor for some of the product lines that are doing especially well in this environment?

[Amardeip Singh Doman, Chairman & CEO]

I would say all product lines are. The emphasis would be on lumber, whether it's whitewood. Our treated lumber plants, all 13 are going full blast. The U.S. business is extremely strong on treated lumber. Plywood, it's nonexistent, you can't find it. OSB is extremely busy. These are all construction materials.And then you add in that backyard stuff that we do a ton in. So let's take a quick look at treated lumber, composite fencing. Those items are selling at a pace I've never seen before, and we're in the right spot at the right time for that activity in your backyard.

[Yuri Lynk]

Yes, certainly. Last one for me. Just -- obviously, generating a lot more cash now. What do you see in the horizon in terms of M&A and any change in your stance from the last couple of months?

[Amardeip Singh Doman, Chairman & CEO]

We continue to work on M&A. As you know, that's been one of our focuses and will continue to be. We do see the M&A opportunities as they were pre-pandemic. We're going to be a little cautious just on kind of what we're looking and acquiring due to just -- I think everybody is in the same boat. We just don't have a gigantic outlook because we're just not in a normal world of what's going on.Having said that, there's some acquisitions that are "tuck-ins" for us that are strategic, that we will continue to execute on within the next 12 months. And we've I think done a good job in resetting the company not only on the cash flow with the dividend, the debt reduction is giving us a lot of room for these opportunities without having to really look towards equity markets, et cetera. So we're in the best shape we've ever been for them and we'll continue to look at them. But I think, Yuri, probably smaller and more strategic than anything larger at this point.

[Operator]

We'll take our next question from Zachary Evershed with National Bank Financial.

[Zachary Evershed, Analyst]

Congrats on the quarter. So what proportion of your employees are still on reduced hours or salary?

[Amardeip Singh Doman, Chairman & CEO]

Yes. I don't have an exact number on that one, Zach. It varies by region. It's maybe 4% or 5% overall at the most, I would say. We've had to call a lot back in the last 60 days, obviously evidenced by the higher sales and volumes. Any other color, Jay?

[James S. Code, Chief Financial Officer]

No.

[Amardeip Singh Doman, Chairman & CEO]

Yes, I'd agree with that mark.

[James S. Code, Chief Financial Officer]

Yes.

[Zachary Evershed, Analyst]

And we've got a lot of people back in the last 6 days. Is there a plan in place for bringing the remaining 4% to 5% back on a time line?

[Amardeip Singh Doman, Chairman & CEO]

Sorry Zach, I couldn't quite hear you there.

[Zachary Evershed, Analyst]

I was sort of cutting out here. For the remainder, the 4% to 5% who are still impacted, is there a time line for bringing them back to work?

[Amardeip Singh Doman, Chairman & CEO]

I think the business activity will dictate when they come back, just depending on volumes, et cetera. Again, it really depends on where we're sitting geographically on those layoffs. And a lot have come back already, again evidenced by the sales activity being so strong.

[Zachary Evershed, Analyst]

Absolutely. So what's your view on CapEx in the back half of 2020?

[Amardeip Singh Doman, Chairman & CEO]

Yes. We've put some CapEx projects on hold. Maintenance, of course, we're continuing to take care of those things. We're just being a little careful with the cash. We're always careful, but we're being extra careful just on any large projects whether it be IT. Things that are more want to do, not need to do, we put those on the backburner and we'll start looking at some of those things maybe in the fourth quarter as we head into 2021.But I think our CapEx rate will probably be one of the lowest years you've seen. And we're doing less with more right now or more with less, however you want to look at it. But we're just keeping the wallet in our pocket right now and again just being careful. We just don't understand this environment completely.

[James S. Code, Chief Financial Officer]

I'd also add we're looking at longer term. We're looking at contractor models in our forestry division that would in the long term reduce our CapEx needs for that segment.

[Zachary Evershed, Analyst]

Awesome. Thank you. And speaking of sawmill, what do you see in terms of demand from original -- some of your customers for your forestry segment?

[Amardeip Singh Doman, Chairman & CEO]

It's strong. It went from -- I think this is part of the cause of lumber being so strong right now when all of the majors in the B.C. shut down -- half the mills -- for, call it, 8 weeks. Now it's gangbusters and "Please give us logs as fast as you can." It went from crickets to full bore. So we're just struggling trying to now keep up and try to get our harvesting in motion faster at this point. So there's a large demand as you would expect now with lumber prices where they are. Mills are dying for logs and we're just trying to get harvesting as efficient as possible and as quick as possible right now.

[Zachary Evershed, Analyst]

Great color. Thanks. One more for me. Will these new inventories be the norm going forward?

[Amardeip Singh Doman, Chairman & CEO]

Yes. Great question, Jack. I would say that, look, a couple of things that have happened. We're not only reducing our inventories and getting leaner. You see the lumber prices today. So that combined with that reduction of $90 million with lumber almost doubling from its lows, same with panels and OSB -- we've done a hell of a job here.Now can we run with this forever? I'm not sure. I know that talking to our big box customers, our pro dealers, independents -- we don't want to be out of stock and we haven't been. It's been tough because sales are up so strong on seasonal items.I can definitely assure you that the run rate will continue to be lower. Is it $90 million? I think recently we're down another $20 million. And it's going to move around, but we will definitely run at a much lower rate than we were before just because we have found out there's areas where we can be better and we can be more nimble and turn faster. But again, having said that, if the sales pace continues, we definitely have to lay down some more inventory earlier for 2021 than we would have in 2019 for 2020. So I can't put it into a number, but we're definitely going to be significantly lower going forward.

[Operator]

We'll take our next question from Anoop Prihar with Stifel GMP.

[Anoop Prihar, MD & Special Situations Analyst]

Amar, just one question. You said earlier on the treating plants were all running full. Do you expect those facilities to be basically fully booked for the balance of the quarter? Do you have that level of visibility at this point?

[Amardeip Singh Doman, Chairman & CEO]

Yes, we do, Anoop, and 100% full, busy. Our biggest issue is trying to get whitewood sort of treating plants. They're booked right through the third quarter.

[Anoop Prihar, MD & Special Situations Analyst]

And do you have any visibility yet into Q4?

[Amardeip Singh Doman, Chairman & CEO]

We don't. Talking to our retail partners and contractors, there the demand seems to be getting stronger as we're even in July and August. So there's no chatter of a slowdown. I think we all read the same [indiscernible]. The backyard stuff is real. People wanting to get out and have houses as opposed to condos. There's all this stuff. Rates are low. Interest is free. There's a lot of good juice going into this economy from the governments and the juice seems to be working.So right now, I couldn't predict any kind of a slowdown. In fact, we may be in a recovery along this year. So fourth quarter I think will be decent. Lumber pricing is the one thing that keeps me up at night because I've never seen a demand rally like this in 30 years. I just -- I don't know how long that's going to go. But from what I can see, this is a true shortage. So this rally will continue until production catches up with demand, which I don't see happening anytime soon.

[Operator]

We'll take our next question from Steve Hansen with Raymond James.

[Steven P. Hansen, MD & Equity Research Analyst]

Just a couple of follow-ups on the earlier questions. I've also been hearing that there's been some sharp increases in the chemical supply side. Amar, are you guys seeing that in the treatment plant at all? And are there any other shortages we should be mindful of as we go through the balance of the season here?

[Amardeip Singh Doman, Chairman & CEO]

Good question. The good news on both fronts there: we have multiyear contracts with fixed pricing, so we're safe; number two, we don't use some of the chemicals that have been shorted in the U.S. So we're using copper azole C in California now and we're no longer using ACQ. And in Canada, we're pretty much 100% MicroPro Sienna with a little bit of CCA on the industrial side. So we're good, no shortages. And we talk to our chemical supplier, being coppers, weekly and no issues.

[Steven P. Hansen, MD & Equity Research Analyst]

Okay. Great. And just maybe as a dovetail to that is I've been hearing some bizarre logistical gymnastics that are taking place to get product from west to east and I think even to some degree north to south or -- what is the logistical network like on the rails right now? Are you getting railcars available and how are you seeing that?

[Amardeip Singh Doman, Chairman & CEO]

We're kind of at the mercy of our sawmill partners. And we heard -- you probably hear the same thing. Last month West Fraser got 45% of the cars that were required. So they go into truck to get to railcar reloads. We're feeling that pain because there's a lot of material we'd like to have quicker like everybody else. I just can't get a read on the rails and how real that is. I just know that it's an issue. I just don't know how big of an issue it is.

[Steven P. Hansen, MD & Equity Research Analyst]

Understood. And then just the last one for me is can you just maybe talk about the regional strength that you're seeing, perhaps Canada versus the U.S. West Coast? And sort of thought in my mind that the California would be much slower given the lockdown being more extended there. But it looks like the inventories are quickly evaporating on the availability side. It sounds like builders are ramping up. I'm just trying to get a better sense for the regional scarcity or demand.

[Amardeip Singh Doman, Chairman & CEO]

Good question, Steve. So Canada is extremely strong, especially in our seasonal products. The new housing stuff, a little bit off. But now, call it July heading into August, it's all ramped back up to 2019 levels. We may exceed those even on things like engineered wood, studs, things that go into a new home.As you look into California, quite frankly, our business there currently is at a 30% up pace, whether that's Oregon, California, Arizona. The backyard stuff, our Redwood products, our treated products, composite is extremely strong to the point where we have inventory issues trying to supply. And this will definitely go right into the fall and there's no question about that. So extremely strong pretty much everywhere, with Canada now catching up on the new housing side on those products as well.

[Operator]

We'll take our next question from Roshni Luthra with CIBC Capital Markets.

[Roshni Luthra, Research Analyst]

Congrats on the quarter. Amar, can you talk about revenue growth at Honsador and is it a positive in Q2? And how has that trended in July?

[Amardeip Singh Doman, Chairman & CEO]

Yes. So Honsador, a great question. Hawaii has strict lockdown measures. It's almost a bubble. Unfortunately, they quarantine much like Canada. So it's a bit locked off. Our business there is sort of flat, which we're pretty happy about at this point.Projects on the electrical side, we have an electrical business there. It's a bit slower than we'd like, but we haven't seen a plummet. And it's same with the new housing side in Hawaii. There's a lot of projects there that are continuing to go on. And of course, we sell to builder direct there, so we're right in tune with our customer base.Call it flat to off 3% to 4%. And again, for us at that pace, it's not worrisome for us. We just know that Hawaii will recover once they get tourism back and a whole bunch of things. But there's no panic button on Hawaii. We've reduced our SG&A. We did -- we had to do that to obviously offset a little bit of sales volume that's dropped. But if you look at our whole U.S. business unit, California and the U.S. Mainland being so strong for us it easily offsets any minor pain in the 50th state.

[Roshni Luthra, Research Analyst]

Okay. Great. Thanks. And then can you just talk about treated lumber sales to Lowe's and when shelves might be back in stock again on a consistent level?

[Amardeip Singh Doman, Chairman & CEO]

So whether it's Lowe's or any of our other customers, it is extremely hard to keep up to this pace because we usually come in very heavy with inventories starting to build in the fall and kind of deal out the cards as spring goes. The cards were dealt a long time ago. So right now, on the treated lumber, we are hand in mouth for all of our customers almost on an allocation basis. So whatever we produce is shipped. And it's hard because we have a lot of long-term customers that we want to take care of and it's sort of who gets what. So we really have to prioritize and try to evenly measure who gets our material. It's that busy. I've never seen like this.

[Roshni Luthra, Research Analyst]

Good luck for the next quarter.

[Operator]

That will conclude today's question-and-answer session. At this time, I'd like to turn the call back over to Mr. Madhavi for any additional or closing remarks.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. Once again, on behalf of Amar, Jay and myself, thank you for joining us on today's call. We look forward to speaking with you again on our third quarter conference call. That concludes today's call, and we wish everyone a happy long weekend in Canada.

[Operator]

Thank you. That concludes today's call. We appreciate your participation.