Doman Building Materials Group Ltd
TSX:DBM

Watchlist Manager
Doman Building Materials Group Ltd Logo
Doman Building Materials Group Ltd
TSX:DBM
Watchlist
Price: 8.34 CAD
Market Cap: 728m CAD
Have any thoughts about
Doman Building Materials Group Ltd?
Write Note

Earnings Call Analysis

Summary
Q2-2024

Second Quarter Performance Declines Amid Construction Market Slowdown

During the second quarter of 2024, sales decreased by $20.9 million to $689.8 million due to a slowdown in the construction materials market. Gross margin fell to 15.7%, resulting in $108.1 million, down from $121.2 million the previous year. Adjusted EBITDA decreased by 23.4% to $50.6 million, and net earnings dropped by 41.8% to $17 million. The company emphasized ongoing cost management and operational efficiencies. Looking forward, management remains cautiously optimistic, focusing on balance sheet optimization and potential growth opportunities, while navigating volatile markets .

Earnings Call Transcript

Earnings Call Transcript
2024-Q2

from 0
Operator

Greetings, and welcome to the Doman Building Materials Group Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ali Mahdavi, Investor Relations. Please go ahead.

A
Ali Mahdavi
executive

Thank you, operator. Good morning, everyone, and thank you for joining us for Doman Building Materials Second Quarter 2024 Financial Results Conference Call. Joining me this morning are the company's Chairman and Chief Executive Officer, Amar Doman; and Chief Financial Officer, James Code.

If you have not seen the news release, which was issued after the close of markets on Friday, 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 August 26. Following the presentation of the second quarter results, we will conduct a Q&A session for analysts only. Instructions will be 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 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 will now turn the call over to Amar.

A
Amardeip Doman
executive

Great. Thanks, Ali. Good morning, everybody, and thank you for joining us on today's call. On the back of the first quarter, which was in line with our expectations, the second quarter was similar when considering the pricing environment: increases in interest rates in the slowing North American housing market. These factors, combined with the ongoing concerns of a possible recession, have cooled consumers' demand, putting downward trends on materials pricing for the second quarter of 2024. To note, Southern Yellow Pine is off 30% year-over-year.

As a result, during the quarter, not dissimilar to our disciplined approach on tight inventory management, our customers also remain conservative and replenished only when needed, keeping inventories light. During the quarter, we saw more price stability in Canada across all wood products. However, in the States, lumber prices, which had risen slightly in the first quarter due to supply tightness, have since pushed back down as changing expectations for the timing of federal monetary policy easing resulted in weaker lumber demand.

Overall, despite the various macro headwinds and headlines that have influenced on our markets and ultimately on consumer spending, we're encouraged with the continued level of activity we experienced during the quarter, resulting in modestly lower sales when compared to the same period in 2023. These trends continue to exist in our day-to-day activities. However, our focus remains on [indiscernible] control to ensure we maximize margins and free cash flow generation.

Our team's focus on optimizing gross margin performance, combined with our constant efforts on overall cost management, were key contributors to our second quarter results. However, the slowing in the construction market was a key factor of lower sales on a year-over-year comparative basis. Our financial and operational performance in the second quarter is a testament to our ability to work through volatile markets and our team's track record on managing the business through similar cycles.

Our ongoing cost management focus on operational efficiencies and successful integration efforts will continue to enable the company to optimize gross margin and EBITDA margin performance. Put all of this to the numbers, our revenues amounted to $690 million. Despite market conditions, gross margin remained solid at 15.7% or $108 million, adjusted EBITDA of $50.6 million, and our net earnings came in at $17 million, and we paid a quarterly dividend of $0.14 per share.

Looking ahead, we are cautiously optimistic as we navigate through what seems to resemble volatile markets while we continue to manage our costs and always look for growth opportunities. Balance sheet optimization strategy remains a key priority as we look forward to having a solid growth-friendly and fire-ready balance sheet for opportunistic acquisitions.

During the second quarter, we successfully renewed and amended our existing revolving loan facility, extending the maturity date from December 6, 2024 to April 30, 2028, while all other material terms include the maximum available credit of $500 million remained unchanged. As always, we remain confident in our ability to work through volatile markets diligently while serving our customer needs with the highest level of service.

We remain excited about our growth profile and the overall prospects of the business. We have built a solid diverse and resilient business in North America, with a broad and growing footprint, which we are extremely proud of.

With that, I would like to ask James Code, our CFO, to take over and provide a review of the company's second quarter financial results in greater detail, and then we're going to open up the call for analyst questions.

J
James Code
executive

Thank you, Amar, and good morning, everyone. Sales for the 3-month period ended June 30, 2024, were $689.8 million versus $710.7 million in 2023, representing a decrease of $20.9 million or 2.9%, largely due to the impact of the previously discussed slowing in the construction materials market, which was partially offset by contributions from the Southeast Forest Products acquisition, which closed in March of 2024.

Our sales in the quarter were made up of 76% construction materials, consistent with Q2 last year, with the remaining balance resulting from specialty and allied products of 20% and other sources of 4%. Gross margin dollars were $108.1 million in the quarter versus $121.2 million in 2023, a decrease of $13.1 million. Gross margin percentage was 15.7% in the quarter compared to 17% last year.

Expenses for Q2 were $75.1 million compared to $72.5 million in '23, an increase of $2.6 million or 3.6%. As a percentage of sales, expenses were 10.9% compared to 10.2% in the prior year. Distribution, selling and admin expenses increased by $2.3 million or 4.2% to $57.5 million from $55.2 million in '23, mainly due to broad inflationary pressures and the addition of Southeast-related costs. As a percentage of sales, DS&A was 8.3% compared to 7.8% last year.

Depreciation and amortization expenses increased slightly by $312,000 or 1.8% from $17.3 million to $17.6 million, driven mainly by purchases of property, plant and equipment related to the Southeast acquisition. Finance costs for Q2 were $12.6 million compared to $10.5 million for the same period in '23, an increase of $2.1 million or 19.8%, largely due to higher average net debt versus the comparative quarter and slightly higher interest rates on the company's variable rate loan facilities.

This quarter's EBITDA was $50.2 million compared to $66 million last year, a decrease of $15.8 million or 24%. EBITDA for the second quarter of '24 was impacted by nonrecurring acquisition-related costs of $371,000. Adjusted EBITDA before these nonrecurring costs was $50.6 million compared to $66 million in the same period in '23, a decrease of $15.4 million or 23.4%. The decrease in adjusted EBITDA was mainly due to the previously discussed overall reduced gross margins in the quarter and an increase in expenses due to the broad inflationary pressures.

Net earnings for the quarter were $17 million compared to $29.2 million in '23, a decrease of $12.2 million or 41.8%. Net earnings for Q2 24 were impacted by the previously discussed acquisition-related costs of $371,000. Adjusted net earnings before these nonrecurring costs were $17.3 million, a decrease of $11.9 million or 40.9% due to the foregoing factors.

Turning now to the statement of cash flows. The following activities accounted for changes in cash in the first 6 months of 2024: operating activities before noncash working capital changes generated $68.9 million in cash compared to $85.8 million in the first half of '23. The decrease in operating cash generated was largely a result of the previously discussed lower net earnings due to the slowing in the construction materials market.

Changes in working capital consumed $127.8 million versus $92.5 million in the first half of last year. Overall financing activities generated net cash of $93.9 million from equity and debt stakeholders compared to $8.8 million in the comparative 6-month period in 2023. Shares issued net of transaction costs generated $701,000 of cash compared to $609,000 last year, and the company returned $24.4 million to shareholders through dividends paid during the period, largely in line with the same period in 2023.

Payment of lease liabilities, including interest, consumed $13.5 million of cash, consistent with last year. The company's lease obligations generally require monthly installments, and these payments are all current. The company borrowed $132.2 million from its revolving loan facility during the first half of '24 compared to $120.5 million in the same period in 2023. The year-over-year increase in net advances from the revolving loan facility is largely due to the previously discussed working capital changes resulting in the company's increased facility utilization.

We note that the purchase price consideration for the Southeast acquisition in March of '24 was funded by the company's cash on hand, and therefore had no impact on our loan facility usage. We also note the company was not in breach of any of its lending covenants during the 6 months ended June 30, 2024. Finally, we invested a total of $67.5 million of cash in the first half of '24, which included the Southeast acquisition as well as ongoing maintenance CapEx net of proceeds from dispositions.

This concludes our formal commentary, and we'd now be happy to respond to any questions that you may have. Thank you. Operator?

Operator

[Operator Instructions] Our first question is coming from Matthew McKellar from RBC Capital Markets.

M
Matthew McKellar
analyst

First, can you maybe just talk about what you're seeing in terms of the landscape for acquisitions and maybe what your sense is of how seller expectations are likely trending?

A
Amardeip Doman
executive

Yes, for sure. And thanks for the question. We are seeing more opportunities in the acquisition market as things have normalized coming out of COVID, and we've had some runway now behind us post pandemic. So we're starting to get back into the strike zone. Of course, we consummated the Southeast acquisition this year, and we are working on others all the time. So the environment is healthy now, I believe, for further M&A activity for our company.

M
Matthew McKellar
analyst

Great. And then maybe next, I think about a year since the tragic fire in Hawaii, I think. Could you maybe provide some color on how your business there has evolved over the past year? And maybe just talk around your expectations for how business trends through the balance of the year, given the pace of rebuilding activity you're seeing?

A
Amardeip Doman
executive

Yes. [ Lahaina ] is slowly coming back. We supplied the first school that has rebuilt immediately under sort of a hustle order, if you will, to get done. There are some construction coming up with some small apartment buildings that we are contracted to supply. But no boom in Hawaii. So things do move slowly down there. Very tragic, but we'll have a lot of years of rebuild coming out of that, again, through tragedy, sadly, but Lahaina will be a good spot for us, both on the electrical side and the wood side as the years and permitting starts to unfold.

M
Matthew McKellar
analyst

Okay. And then last one for me. Could you maybe just speak to what you think the implications for your business might be if we see a Canadian rail strike?

A
Amardeip Doman
executive

Yes. I think on our side, we've got pretty good supply even by -- via truck if that happens, but that would certainly give lumber a heroin shot in Canada. So if that happens -- and we're starting to see SPF creep up, if -- I know you follow it, so you're seeing a creep up in the cash markets. Everybody is underbought. That looks like a legitimate strike could happen here, so that will certainly impact the SPF market immediately. And I think we're going to be okay on the supply side, but heading into fall, it might balance a little bit depending on how long it goes. But certainly, it wouldn't hurt the lumber market at all.

Operator

Our next question is coming from Yuri Zoreda from Canaccord Genuity.

Y
Yurisleidy Zoreda
analyst

So overall, I know that pricing has been a big headwind, but just curious as to how volumes are faring in your expectations for the second half based on what you're seeing so far.

A
Amardeip Doman
executive

Yes. I think the volume trends will be -- continue -- or sorry, continue to follow Q2: flat to off a few percent. It's just a little sluggish. We had some pickup down in Texas with the hurricane that hit Houston really hard in the associated areas. So we did have a volume pickup there, obviously, in our fencing items and some decking items, for sure.

But really, we see the sort of flat borrowing base for the rest of the year on pace with Q2, with some pricing appreciation on the lumber side is what we're forecasting internally, kind of came off the bottom a few weeks ago.

Y
Yurisleidy Zoreda
analyst

That's very helpful. And just briefly looking at the SG&A line, you've been delivering on the cost containment front. It was just a bit higher this time around, and I understand that partly reflects Southeast, if not mostly. So just curious as to whether there was anything else there that was onetime in nature, or if that's a good run rate for the business going forward.

J
James Code
executive

Yes. It's Jay here, Yuri. That's correct. That was almost 100% driven by the acquisition of Southeast Forest Products in the quarter. So you could expect to see a similar number going forward, of course. Keeping in mind that there is some seasonality to SG&A with us, we tend to ramp up some costs in the summer months and then back off a little bit in the slower colder months of the year.

Operator

[Operator Instructions] Our next question is coming from Ariana Milin from CIBC Capital Markets.

A
Ariana Milin
analyst

So last quarter, you had mentioned that regional volumes were a bit weaker in Canada. Did you see this persist in the quarter?

A
Amardeip Doman
executive

Yes, we did. All across Canada, volumes were a little bit weaker. We have seen, in the third quarter, a pickup kind of mid-July into now in the East and in the West. So it's a bit of a late start, for whatever reason. The volumes have picked up again in Canada. We don't see a runaway strong volume third quarter, but certainly, it's healed and recovered from that sluggishness of Q2 here in Canada.

A
Ariana Milin
analyst

Okay. That's helpful. And then how do you see treated lumber prices faring in the South during the second half of 2024?

A
Amardeip Doman
executive

Yes. I think better than the first half. We're seeing that uptick slowly come now, but no runaway market. No crystal ball here, but we certainly bottomed, I believe, 3 weeks ago, and it's sort of just depending on the item or dimension that you're looking at, whether it's 4x4 or -- certain different items have more strength than others. But it's still just a -- it's not a good lumber market as we all know. It's oversupplied. And if we hear of some more curtailments, I think that's what's going to steady to up the market even a little bit more. But right now, it's just -- it's firmed up from where it was, and it's better. It's not good, but it's better.

Operator

Next question is coming from Zachary Evershed from National Bank Financial.

Z
Zachary Evershed
analyst

Amar, following up on your curtailment comment. Could I get your thoughts around sawmill cost curve versus current pricing levels? Where do you think the floor is?

A
Amardeip Doman
executive

Yes. I think right now, Southern Yellow Pine is just profitable, and SPF is still looking like it's printing in the red for the major sawmillers. So there's still, I think, some pain there. But I think it's getting closer to breakeven costs, which is good and bad. The good news is it's good for those great suppliers of ours, but the bad news is it may allow them to keep cutting, which will kind of put a lid back on the price.

So double-edged sword a little bit there, but we're thinking that we still want higher lumber prices and healthier lumber prices and healthier sawmills soon. The trend is still better for all of us involved. And I think they're around the breakeven levels, to answer your question.

Z
Zachary Evershed
analyst

And so it's really that difference in cost to produce that's driving the bifurcation between SPF and SYP?

A
Amardeip Doman
executive

Yes.

Z
Zachary Evershed
analyst

And I'm not sure if you're going to be able to disclose, but with Southeast, what's your rough split across commodities in the portfolio now?

A
Amardeip Doman
executive

Yes. I mean, Southeast is purely treated lumber into 2 new markets, of course, Indiana and Arkansas. And for us, we talked about buying this business kind of midway through here, the season. So we don't have any forecast to disclose, really, on that acquisition, but we can tell you that it's really a 2025 strategy as we start to reset and go after a whole bunch of different customers that we've already been talking to for next year and starting to bring in our volume buying strategies before we brought in our chemical pricing to get the synergies that we've talked about.

We've integrated the computer systems in under 60 days. The team did a great job at Doman Lumber to do that. And now we're looking forward to expanding the margins and growing the business into, again, a file a new market source, which we're very excited about. But a lot of that is going to come next year.

Z
Zachary Evershed
analyst

That's helpful color. And then just one last one for me. On AZEK, did that new contract change anything, bring in new business or exclusivity?

A
Amardeip Doman
executive

Yes. So AZEK, for Canada. We're partnered with AZEK down the U.S. West Coast, and we have a great partnership there. And up in Canada now, we're adjusting to the AZEK brand for our composite materials. It's going to be a strong brand for our Doman building materials division here in Canada, and we're very excited to be partnered with, call it, [ 1 in 1A ], Trex and AZEK's [ 1A ], growing rapidly. And we're very excited about 2025 and the composite materials we're going to be distributing across the country here.

Operator

Next question is coming from Ian Gillies from Stifel.

I
Ian Gillies
analyst

I think it was exactly a year ago this quarter where you talked about gross margins being in that 14% to 16% range. We've obviously gone through a very volatile commodity price marker. Do you see any reason maybe to update that view or change it? Because they've generally been quite strong.

A
Amardeip Doman
executive

Yes. We think that's the neighborhood. And it just -- it depends on the severity of the volatility of the lumber markets that's going to move that around a little bit. Now that we're through that [ COVID gyration ] stuff, this is our neighborhood. And again, the base price, obviously being stronger, benefits Doman. And if it's weaker, it weakens our gross margin dollars as evidenced here in Q2. We're starting to see the market pick up. But again, that is the neighborhood. I don't think we would adjust that. Jay, would you agree?

J
James Code
executive

I would say so. And keeping in mind the 17% in the comparative for last year, that was sort of a high watermark for us, where everything kind of lined up perfectly from a gross margin perspective last year. So at 15.7% for this quarter, we're very satisfied about performance, and it should be pretty typical going forward.

I
Ian Gillies
analyst

That's helpful. And then -- as we think about the remainder of the year and the working capital release, do you think it's similar to prior, what I would call normal years? Or is there going to be anything unusual because of some of the commodity fluctuations through the first half of the year?

J
James Code
executive

No. Ian, we think that's -- it should be a pretty typical pattern that we'll see in the second half. Nothing unusual there. You get a little bit of timing difference on when that releases, but we expect that trough on working capital to, as it always does, come about in the November, December time frame. And no reason not to think it will be a typical pattern.

Operator

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

A
Ali Mahdavi
executive

Thank you, operator, and thanks, everyone, again for joining us today. Should you have any other follow-up questions, please feel free to reach out to us. That concludes today's call, and we look forward to speaking to you again on our third quarter conference call.

Operator

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