Doman Building Materials Group Ltd

TSX:DBM

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the CanWel Building Materials Group Fourth Quarter and Full Year 2018 Financial Results Conference Call. Today's conference is being recorded.At this time, I'd like to turn the conference over to Ali Mahdavi. Please go ahead.

[Ali Mahdavi, Head of Investor Relations]

Thank you. Good morning, everyone, and thanks for joining us for CanWel Building Materials' Fourth Quarter and Full Year 2018 Financial Results Conference Call.Joining me 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 yesterday after the close of market yesterday, it is available on the company's website at www.canwel.com as well as on SEDAR, along with our MD&A and audited financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on March 20.Following the presentation, we will conduct a question-and-answer 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 Ltd. and all of its representatives on the 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.

[Amardeip Singh Doman, Chairman & CEO]

Thanks, Ali, and good afternoon -- I guess, good morning, everybody. Thank you for joining us on today's call.Let me begin by highlighting some of the key financial metrics followed by some color on our operations during the fourth quarter and what we're seeing so far, which gives us continued confidence across our business segments. I will then hand the call over to Jay Code to drill further into the numbers.Following a strong finish to 2017, fueled by strong organic growth and strategic acquisitions, in 2018, we maintained our focus and disciplined approach in the continued pursuit of growth, profitability and shareholder value creation. All of our key financial metrics, including revenues, gross profit, EBITDA and net income, reached record levels, all while paying our shareholders a quarterly dividend of $0.14 per common share or $0.56 per common share on an annual basis.2018 did come with a set of macroeconomic challenges. During the third quarter, we saw a nearly unprecedented reversal and decline in the pricing of lumber, OSB and panel markets. Despite the severity of the pricing decline, I am pleased with the resilience of CanWel's diversified business model withstanding these types of external factors and volatilities, which combined with our focus on organic growth, complemented with our disciplined acquisition strategy and ongoing cost management, resulted in annual revenues, gross profit, adjusted EBITDA, net income to exceed record levels at $1.3 billion, $192.9 million, $72 million and $30 million, respectively, in 2018.The aforementioned pricing pressures in the lumber, OSB and panel markets did have an impact in our fourth quarter results as the pricing environment continued to deteriorate at more than 50% lower when compared to the corresponding period in the previous year. This, combined with the fourth quarter, being one of CanWel's seasonally slower quarters, resulted in revenues amounting to $264 million; gross margin remaining robust at 14.6%; adjusted EBITDA amounting to $8.8 million; net earnings coming in at $373,000; and lastly, a quarterly dividend of $0.14 per share being paid.During the quarter, our core Distribution business continued to perform in line with our expectations. We also remained pleased with the overall performance of our forestry business segment. We remain very enthusiastic and confident about the growth prospects ahead and look forward to further demonstrating the strength and leverage available in our business model as we continue to take advantage of all sensible growth opportunities as well as strategic scenarios where we can accelerate growth.I'm pleased to report that the commodity pricing environment has meaningfully improved from where we thought the prices had overcorrected. While current prices have significantly improved since late 2018, they are still below where they were a year ago, however, at par or higher than the latter part of '18 depending when one wants to compare it to.We continue our disciplined approach in managing and growing our core business while tracking and executing on accretive growth opportunities, further strengthening our financial performance and enhancing shareholder value based on a fundamentally sound and sustainable plan.Despite the aforementioned pressures in the back half of the year in 2018, CanWel enjoyed a very strong year with all of our key financial metrics meeting and, in certain instances, [indiscernible] our expectations. We are tracking well as we continue the path in building a bigger, stronger, and more sustainable CanWel for our shareholders in the future.Given the strength and proven resilience of our business model, combined with the pricing environment showing signs of improvement subsequent to the lows in the fourth quarter, we remain quite excited and look forward to demonstrating continued, measured, disciplined growth and value creation for our shareholders.We look forward to sharing our continued success and performance with you as we push forward into 2019.With that, I would like to ask Jay Code, our CFO, to take over and provide a review of the company's fourth quarter and full year financial results in greater detail, and then we will open the call for questions. Thank you.

[James S. Code, Chief Financial Officer]

Thank you, Amar, and good morning, everyone.CanWel's sales for the year ended December 31, 2018, were $1.29 billion versus $1.14 billion in 2017, representing an increase of $155.3 million or 13.7% due to the factors to be discussed below.Sales for the Distribution segment increased by $160.5 million or 14.9%, largely due to the inclusion of the results from the Honsador acquisition, higher construction materials pricing earlier in 2018 and the company's continuing focus on its product mix strategies and target customer base.Sales for the Forestry segment decreased by $4.4 million or 7.8%, inclusive of intersegment sales. The decrease in sales relative to 2018 is largely due to the elimination of nonprofitable sales from certain since-closed noncore Forestry segment operations, which were partially offset by an increase in sales due to comparatively more favorable pricing and weather conditions for harvesting during 2018. As was the case in 2017, third quarter 2018 sales were negatively affected by wildfires in British Columbia, with company harvesting activities temporarily halted due to forest area closures, resulting in decreased harvest and customer and delivery levels. Direct impact to the company's forest lands from wildfires was minimal.The company's sales by crop product group in the year were made up of 58% construction materials compared to 61% last year, with the remaining balance resulting from specialty and allied products of 34% and forestry and other sales of 8%.The seasonally adjusted annualized rate for overall Canadian housing starts was 212,843 in 2018 versus 219,763 in 2017, a decrease of 3.1%. The seasonally adjusted annualized rate for single-detached units, a more relevant indicator for CanWel, amounted to 62,520 units for the fourth quarter of 2018 versus 73,668 units in the same period of 2017, a decrease of 15.1%. The seasonally adjusted annualized rate for overall U.S. housing starts reached 1,256,000 units in the fourth quarter of 2018 versus 1,192,000 units in 2017.Gross margin dollars increased to $192.9 million in the current year versus $152.2 million in 2017, an increase of $40.7 million or 26.7%. Gross margin percentage was 14.9% during the year, an increase from the 13.4% that was achieved in 2017. This increase in margin dollars and margin percentage reflects the positive impacts from the Honsador acquisition as well as the aforementioned higher construction materials pricing earlier in the current year.Expenses for the year ended December 31, 2018, were $139.4 million versus $105.8 million in 2017, an increase of $33.6 million or 31.8% due to the factors to be discussed. As a percentage of sales, expenses were 10.8% versus 9.3% in 2017.Distribution, selling and admin expenses were $120.9 million versus $90.2 million in 2017, an increase of $30.7 million or 34%. The increase is primarily due to the expenses relating to Honsador's operations. As a percentage of sales, these expenses were 9.4% this year versus 7.9% in 2017.Depreciation and amortization expenses were $18.4 million compared to $14.8 million in 2017, an increase of $3.6 million or 24.3%.Restructuring costs in the prior year of $834,000 related to the aforementioned closure of certain noncore Forestry segment operations. Finance costs for the year ended December 31, 2018, were $11.7 million versus $8.3 million in 2017, an increase of $3.4 million or 41%, mainly due to higher average borrowings, higher interest rates on the company's variable-rate loan facilities and the issuance of the unsecured notes in the fourth quarter of 2018.The increase in the average balance of our revolving loan facility was primarily driven by the Honsador operations and higher construction materials pricing earlier in the year.Acquisition costs during the year were $753,000 compared to $3 million in 2017, a decrease of $2.2 million. These costs include management resources as well as legal, environmental, financial and other advisory services directly attributable to acquisitions. In 2017, these costs were primarily attributable to the Honsador acquisition. And in 2018, these were attributable to the Oregon Cascade and Woodland acquisitions.EBITDA for the year ended December 31, 2018, was $71.2 million compared to $58.8 million in 2017, an increase of $12.4 million or 21.1%, largely due to the inclusion of the results from Honsador's operations.Adjusted EBITDA excludes restructuring costs, impairment losses and acquisition costs in 2017 as well as only acquisition costs in 2018. Adjusted EBITDA before these nonrecurring items was $72 million in 2018 compared to $63.6 million in 2017, an increase of $8.4 million or 13.1%.As a result of the foregoing factors, net earnings for the year ended December 31, 2018, were $30.0 million versus $28.8 million in 2017, an increase of $1.2 million or 4.2%, as previously discussed.With regards to our cash flow for the year ending December 31, 2018, operating activities generated $51.4 million of cash before changes in noncash working capital versus a $34.5 million in 2017. The increase in cash generated is primarily a result of the inclusion of Honsador operations and the positive impact of higher construction materials pricing earlier in the year.Changes in noncash working capital items consumed $55.5 million in cash versus $3.7 million in 2017. The increase in the changes in noncash working capital is primarily driven by a significant increase in inventory levels built up to address a strong order backlog with our treated lumber customers and to take advantage of favorable buying conditions in the fourth quarter of 2018.The change in working capital in the year was comprised of a decrease in trade and other receivables of $5.3 million, an increase in inventory of $54.9 million, a decrease in prepaid expenses of $1.8 million, a decrease in trade and other payables and income taxes payable of $5.9 million and a decrease in performance bond obligations of $1.7 million.Financing activities generated $25.4 million of cash versus $75.9 million in 2017. Shares issued during the year, net of issuance costs, generated $490,000 of cash compared to $91.9 million in 2017 as a result of the 2017 private placement and 2017 public offerings.Scheduled repayments related to the nonrevolving term loan consumed $2.7 million, consistent with 2017. Payment of finance lease liabilities consumed $1.7 million of cash in the current year versus $654,000 in 2017. Net repayments on equipment term loan and equipment lines amounted to $1.5 million compared to $3.5 million in 2017, including scheduled repayments, which were partially offset by funds drawn to purchase certain equipment.Scheduled repayments of promissory notes consumed $3.7 million of cash in the year compared to $2.7 million in 2017. Financing costs in respect to the issuance of the unsecured notes were $3.6 million compared to $1.2 million in 2017,related to various borrowings.Dividends paid to shareholders amounted to $43.5 million versus $36.1 million in 2017. The increase in dividends paid reflects the greater number of shares outstanding in 2018, resulting from a 2017 private placement and 2017 public offerings. The dividends declared and paid on a per share basis were unchanged from 2017 at $0.56 per share.The revolving loan facility increased by $21.5 million versus $31 million in 2017 due to the increased working capital needs of the company. The increase in the revolving loan facility was partially offset by the issuance of the aforementioned unsecured notes for gross proceeds of $60 million, which were used to pay down the facility. The company was not in breach of any of its loan covenants during the year ended December 31, 2018.Investing activities in the year ended December 31, 2018, consumed $27.9 million of cash compared to $103.9 million in 2017. Cash purchases of property, plant and equipment relating to the Distribution segment were $4.5 million versus $2.4 million in 2017. And cash purchases of property, plant and equipment relating to the Forestry segment were $5.7 million versus $4.1 million in 2017. Proceeds from disposition of property, plant and equipment were $502,000 versus $3.7 million in 2017.Investing activities in 2018 included the 2018 acquisitions, whereas in 2017, these included the Honsador acquisitions and related bank indebtedness acquired. The company's cash flows from operations and credit facilities are expected to be sufficient to meet operating requirements, capital expenditures and anticipated dividends. The company's lease obligations generally require monthly installments, and these payments are all current.This concludes our formal commentary. And we would now be happy to respond to any questions that you may have. Thank you, and operator?

[Operator]

[Operator Instructions] We can now take our first question. It comes from Zachary Evershed of National Bank Financial.

[Zachary Evershed, Associate]

First question is on inventory in Q4. It looks like you loaded up a little more than you usually do in the quarter. And I'm wondering if that signals that you won't be increasing your inventory levels in Q1 or whether we should see that go up from here.

[James S. Code, Chief Financial Officer]

Zach, it's Jay here. Definitely, the buildup in Q4 will allow us to expend less in the first quarter because we've done it in advance of the first quarter of this year somewhat, so you'll see less of a ramp-up expected in Q1.

[Zachary Evershed, Associate]

And then as we move throughout the year and get towards the end of 2019, do you see the days of inventory decrease into levels consistent with 2016 and 2017? Or would 2018 be more than your normal run rate?

[James S. Code, Chief Financial Officer]

I think, Amar, maybe you could chime in as well, but I would expect things to level out. It was definitely an unusual year in 2018, and we would expect to return to somewhat of a more normal market in terms of working capital in 2019.

[Amardeip Singh Doman, Chairman & CEO]

Yes, I would agree with that. And I would just keep one thing in mind, Zachary, and that's the extreme winter we've had. So although we are pushing out our pressure treated requirements, it's definitely slower year-over-year just due to the fact that a lot of Canada is really buried under snow and cold. It's been what they call a real winter for sure. So once we get going in spring, I think everything will smooth out.

[Zachary Evershed, Associate]

Okay, that's great color. Given where you are in terms of leverage, do you see yourself slowing down on the M&A front at all?

[Amardeip Singh Doman, Chairman & CEO]

No. Again, we haven't really tried, I guess, to amp up or amp down or drive down acquisition that's strategic. And when they come up and they fit our model strategically and value-wise, we will fold in those companies. And we've got lots of room on our revolver now after we raised our $60 million in the fall to do strategic acquisitions at will. So I don't see us going to the equity markets for anything. I see us doing base hits like we have been as they come to us. So no change on our strategy. Long answer to your question, but no change.

[Zachary Evershed, Associate]

Appreciate it. Then last one from me. I know you don't provide forward-looking guidance, but in terms of IFRS 16's impact on EBITDA, would you be able to provide an estimate of what that would have been on 2017?

[James S. Code, Chief Financial Officer]

Yes, Zachary. It's Jay here. It's going to -- would have been in the range -- our lease payments run at about $22 million to $23 million a year, so that would come out of rent expense, go down to depreciation and interest, so quite a significant impact for us, at least on EBITDA.

[Operator]

[Operator Instructions] We'll then move along to our next question. It comes from Anoop Prihar of GMP Securities.

[Anoop Prihar, MD & Special Situations Analyst]

Just a couple of quick ones. Amar, the decrease in Q4 EBITDA, is that all price driven? Or is there something else going on in there?

[Amardeip Singh Doman, Chairman & CEO]

No. It's really the price moving through inventories. It's just -- it's the most painful market I've ever seen. And it just -- it started to rebound a little bit, but rebounding in December doesn't help CanWel very much when it's winter. But really price declines are all across the board, and that's really where the pain was whether it was in panels, OSB or lumber.

[Anoop Prihar, MD & Special Situations Analyst]

And I think in the end, you made a reference to the fact that you've changed a few of your business practices in an effort to alleviate some of this pain in the event that it occurs again. Can you talk a little bit more about what you're trying to do on that front?

[Amardeip Singh Doman, Chairman & CEO]

Yes. I wouldn't say it's anything dramatic. It's just we're going to be more cautious. When you go through a 50% to 60% decline in prices that was unprecedented on virtually 50% to 55% of our products, it makes you step back a little bit. But certainly, we did very well through that, so I'm really proud of the job CanWel did through that type of a situation. But certainly, we might just tighten up on certain inventories. And we also, as you see in the fourth quarter, might buy more inventory when it hits lows that we thought were unprecedented to stay out and they didn't. But it's good buying in the fourth quarter as well. So there's just obviously a deeper focus on our wood product segment within the company just due to the storm that went through.

[Anoop Prihar, MD & Special Situations Analyst]

Okay. And then just lastly, what's the status -- operating status of Oregon Cascade is currently at? Are they operating? Or are they about to start? Or where are they in their ramp?

[Amardeip Singh Doman, Chairman & CEO]

Yes. We've been shipping railcars out on sort of a more moderate level. So we do have certain chemicals and trading processes going on and we're selling material. We're not up at full production yet, but we should be sometime here in the next month, 1.5 months.

[Operator]

As we have no more questions, we're going to hand back to the speakers for any additional or concluding remarks. Thank you.

[Ali Mahdavi, Head of Investor Relations]

Thank you, operator. On behalf of the CanWel team, I would like to once again thank you for joining us this morning. We look forward to speaking with you again during our first quarter 2019 results conference call. Have a great day. This concludes today's call. Back over to you, operator.

[Operator]

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