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Good day, and welcome to the CanWel Building Materials Group Ltd. Fourth Quarter 2020 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.
Thank you. Good morning, everyone, and thank you for joining us for CanWel Building Materials' Fourth Quarter and Full Year 2020 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, it is available on the company's website at canwel.com as well as on SEDAR along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on March 26. Following management's presentation, we will conduct a Q&A session for analysts only. Instructions will be provided at that time for you to join the queue for questions. Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of CanWel Building Materials Group Limited and all of its representatives on this call. Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Any information regarding forward-looking statements is made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the forward-looking statements and risk factors in the MD&A as these outline the material factors which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today's call, and management does not anticipate providing guidance in future quarterly or interim communications with investors. I'll now turn the call over to Amar.
Thanks, Ali, and good morning, everyone, and I appreciate everyone joining the call. I'm going to start by highlighting some of our key financial metrics, followed by some color on our operations during the fourth quarter, and then I will hand the call over to Jay, who can review the numbers in further detail. I'd like to start by highlighting the efforts of all of our employees across the various business segments during these extraordinary times in which we are living. Our team's steadfast focus and attention on health and safety, combined with solid execution on all business fronts, resulted in yet another strong quarter of financial results and with all key financial metrics surpassing previous levels on an annual basis. The strength in our Q4 results came from the combination of continued strong pricing and volumes in all of our markets, which resulted in full year revenues exceeding $1.6 billion. Further, our ongoing cost management and focus on operational efficiencies enabled the company to realize much of the revenue line gains to the EBITDA and bottom lines. In summary, and to reiterate some of my earlier commentary, we are very proud of the strength of our Q4 income statement and believe that there's a lot to be gained from the strength and momentum, which has resulted from our success in the quarter. During the fourth quarter, we continued to experience top line growth, posting an increase of 37% when compared to the same period in 2019. Our treated wood business had 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, along with super strong housing starts activity, I should say -- pardon me, on both sides of the border, which continue today. The stay-at-home and do-it-yourself for innovation in repair market remained extremely robust, and we continue to see this trend moving into the first quarter of 2021, albeit at lower pricing levels, which are frankly closer to normalized levels and healthier from a sustainability perspective. As a result of our focus and discipline during an unprecedented year of global concerns and volatility, I am pleased with the resilience of CanWel's diversified business model in withstanding these types of external factors, which resulted in record results across the board. Focusing on the fourth quarter and most relevant period, where as I mentioned, we continue to see robust demand and strong pricing resulting in once again achieving strong fourth quarter results with revenues of $402 million, gross margin of 16.7% or $67 million, adjusted EBITDA amounting to $36.7 million, net earnings came in at $15 million, and lastly, our quarterly dividend was paid at $0.12 per share. We're extremely encouraged with our fourth quarter and full year results and continue to build on these decisive steps we took earlier in the year. Through our 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 $87.5 million when compared to the same period in 2019. We were able to deliver these strong operating results of leaner inventory levels in certain categories while continuing to meet or exceed our customer expectations of product availability. Looking ahead, despite the volatility in the commodity pricing environment in recent weeks, which continues to be at healthy and premium levels, combined with the robust demand we are seeing in our key markets, we remain excited and optimistic as we enter the new year. We remain confident in our ability to work through these extraordinary times diligently while protecting our employees and serving our customer needs with the highest level of service. We look to the future with optimism as our balance sheet provides us the flexibility to pursue organic and acquisition growth opportunities in support of our customers and suppliers. And with that, I would like to ask Jay Code, our CFO, to take over and provide a review of the fourth quarter and full year financial results in greater detail, and then we will open the call up for questions. Thank you, and over to you, Jay.
Thank you, Amar, and good morning, everyone. Sales for the year ended December 31, 2020, were $1.6 billion versus $1.33 billion in 2019, representing an increase of $279.6 million or 21% due to the factors to be discussed. Despite the general economic impact of the pandemic, sales for the Distribution segment increased by $292.1 million or 22.7%, demonstrating the company's continued resilience and steady overall end market demand for its products. The increase in sales is attributable to improvements in both sales volumes and pricing, driven by strong home improvement activity and strong housing starts. Sales for the Forestry segment decreased by $11.9 million or 23.6% versus 2019. The decrease in sales relative to 2019 was largely driven by decreased demand for timber from regional sawmill customers, reflecting production curtailments experienced across the industry in the spring of 2020. In addition, third quarter 2020 Forestry sales were negatively affected by extremely dry conditions in British Columbia, with harvesting activities temporarily halted due to increased provincial fire risk ratings, resulting in decreased timber harvest and customer delivery levels. The company's sales by product group in the year comprised 65% construction materials compared to 58% in 2019, with the remaining balance from specialty and allied products of 29% and forestry and other sources of 6%. Gross margin dollars increased to $256.2 million in the current year versus $191.9 million in 2019, an increase of $64.3 million. Gross margin percentage was 15.9% in 2020, an increase from 14.4% achieved in 2019. The company's margins in 2020 benefited from the previously discussed general improvements in construction materials pricing during the year. Expenses for 2020 were $157.8 million versus $147.6 million in the prior year, an increase of $10.2 million or 6.9% due to the factors to be discussed. As a percentage of sales, 2020 expenses were 9.8% versus 11.1% in 2019. Distribution, selling and administration expenses increased by $7.4 million or 7% to $113.2 million versus $105.8 million in 2019, mainly due to increased sales activity resulting in higher personnel costs. This increase was partially offset by a decrease in certain other nonessential operating expenditures as the company continued strict cost management measures in response to the pandemic. As a percentage of sales, these expenses were 7% in the year compared to 7.9% in 2019. Depreciation and amortization expense increased by $2.8 million from $41.8 million to $44.6 million. The increase is largely a result of certain previously acquired assets having been placed into use and the addition of timber licenses acquired at the end of 2019. Finance costs for 2020 were $15.7 million versus $21.9 million in 2019, a decrease of $6.2 million or 28.2%, partly due to lower interest rates on the company's variable rate loan facilities and partly due to lower average borrowings in 2020. The decrease in average revolving loan facility balance was largely the result of reducing working capital levels in response to the pandemic as the company decreased its total loans and borrowings by $87.5 million relative to December 31, 2019. EBITDA and adjusted EBITDA were $142.5 million and $143.1 million compared to EBITDA of $85.8 million and adjusted EBITDA of $86.2 million in 2019, an increase in adjusted EBITDA of $56.9 million or 66%, largely due to improvements in both sales volumes and construction materials pricing, driven by the previously discussed strong home improvement and housing start activity during 2020. As a result of these factors, net earnings for the year ended December 31, 2020 were $59.6 million versus $17.2 million in 2019, an increase of $42.4 million. Turning now to the statement of cash flows. Operating activities generated $129.8 million in cash before noncash working capital changes compared to $60.7 million in 2019. Changes in noncash working capital items generated an additional $34.4 million in cash compared to $7.2 million in 2019. In response to the economic uncertainty caused by the pandemic, the company successfully optimized its noncash working capital levels during 2020, resulting in a significant year-over-year increase in operating cash generated. The change in working capital in the year was comprised of an increase in trade and other receivables of $32.2 million, a decrease in inventory of $35.8 million, an increase in prepaid expenses and deposits of $2.4 million and a net increase in trade payables and performance bond obligations of $33.2 million. The company's strong operating cash generation performance translated into significant reductions in overall debt levels in 2020. The revolving loan facility decreased by $83.1 million compared to an increase of $29.6 million in 2019. The significant net repayments to the revolving loan facility in 2020 are a result of the previously discussed reduction in noncash working capital levels during 2020 in response to the pandemic. Repayments of the non-revolving term loan were $2.7 million versus $11.2 million in 2019. In October 2019, the company completed the sale of a parcel of timberlands to an entity that held an option to purchase the subject lands. Net cash proceeds of $10.6 million were used to partially pay down the non-revolving term loan, with the balance paid to satisfy pre-existing obligations to a former owner of the lands. Dividends paid during 2020 amounted to $42 million compared to $43.5 million in 2019. The company updated its dividend policy during 2020, resulting in a quarterly dividend reduction from $0.14 to $0.12, beginning with the dividend paid on October 15, 2020. Investing activities consumed $2.9 million of cash compared to $10.4 million during 2019. The company's lease obligations require monthly installments, and these payments are all current. And this concludes our formal commentary, and we would now be happy to respond to any questions that you may have. Thank you. Operator?
[Operator Instructions] And we'll take our first question today from Hamir Patel with CIBC Capital Markets.
Amar, do you think R&R volumes this year could actually be higher than kind of the record year in 2020?
Hard to call, Hamir. I can tell you that the overlap in trends in sales have continued into Q1 and will continue into Q2. With the result of all the new housing starts, that drives a lot of -- whether it's backyard activity and a bunch of different things that comes behind a surge already in backyard activity. Having said that, these stay-at-home strategies, yes, they're going to get released later in the year or and next year and the world will slowly reset. But I don't think it really changes a lot of the drivers that brought home improvement back to the household and strategies to stay-at-home. So I think it's going to be very healthy for at least the next number of years, followed by housing starts, which, as we know, are extremely strong.
That's helpful. And I want to ask about -- we've seen a couple of the major composite decking producers increase capacity this year, kind of 50%, 70%. Do you think wood decking is at risk of losing share to the composites if they're looking less expensive now, just given the movement in lumber prices?
Yes. Yes, a couple of things on that. So number one, we distribute a ton of composite decking, and we'll continue to do that. And remember, your substructure is all pressure-treated, so it's a combination factor. Even when you put a deck board down, it's not wood. Number two, it just improves the whole industry. So the more products that come out for decking get people interested in having a deck and doing things. So we frankly like that space. And of course, we distribute that and we'll continue to do that. But as far as the price point, it's still very expensive. It's still a class product, not a mass product. It will continue to come down over time. But again, your substructure is treated, your posts are treated. It's a very heavy product. And it's still difficult to penetrate. It's still at about 12% of the market. It's growing a little bit, but treated lumber is not shrinking. It's growing as well. So they're both great categories for CanWel.
Next, we'll hear from Steve Hansen with Raymond James.
Just a couple of follow-ups. Amar, is there some way you can give us a sense for how tight it still is out there? I mean, we can obviously see the lumber price start to understand that perspective. But from your side, on the treated, in particular, are order books extending right now? Are they contracting? Are you similar to where you were in the fall last year? You described the degree of normalization in your remarks. That's the nature of the question here. I'm trying to get a sense of how tight the market really is.
Yes. I think we're in -- number one, on pricing, we're in just sort of the new normal pricing today. Whether it's 1,000 or 1,000, the order files are real. On treated, we're sold out. We can't take on any more business this year. So frankly, that's the evidence of the longevity of the market to me is exactly our order file. And our order file is big. It's never been bigger. When we look at lumber pricing today, is it a bit toppy? Probably. But again, if you want to get prompt material, you can't find it. U.S. housing starts are so strong, which is the driver here. And they're continuing to build. Homebuilders are delayed. Labor is delayed. They're all waiting for material, and the mills are running at full capacity, and they have been now for months. And they can't keep up with the demand. And obviously, interest rates are a huge driver of this whole thing. Steve, it just looks like it's one of these periods where it is a demand-supply situation, and it just can't get caught up. Our inventories, as indicated, are lower than they've ever been. We don't have big piles to start off with, and we're in the whole in a lot of areas in our company right now. We're behind, and that's never happened before.
Okay. That's really good perspective. And just thinking about growth here, Amar, going forward, what do you do with the additional balance sheet flexibility you've got now? You described a few different avenues for growth in the past that you'd like to focus on. Are those still the same today? How would they stack up? How would the pipeline stack up, say, relative to the past from an M&A perspective? And do you foresee any sort of organic growth initiatives to push ahead as well?
A couple of things. We're doing some reinvesting in our businesses and trying to modernize certain plants, et cetera. So we're going to deploy some of the excess cash into that. When we talk about the balance sheet, Jay and I are still reviewing acquisitions as we always do, and we'll continue to build the company through acquisition, primarily in the U.S. as Canada, we've run out of room, and you'll see us continue to build. And the pipeline is there. Everybody's busy, but we'll stick to our valuations as we always have and deliver our shareholders more acquisitions in the coming days.
Next, we'll hear from Paul Quinn with RBC Capital Markets.
Just [indiscernible] I look back on that 2017 to 2019, that's really generated above $50 million in EBITDA. I understand that there were constraints last year. Should we expect that to come up back at the previous level? And maybe can you just give us some color on where log prices are for you in that business relative to [indiscernible]
Paul, we're really having trouble understanding. The line is pretty bad.
Let's try it again. Just looking at your Forestry segment, if I go back to 2017 to 2020, you averaged over $50 million in EBITDA -- sorry, 2017 to 2019. And then had the dip in '20 for the reasons that you outlined. Just wondering what we should expect in '21 and where are log prices right now relative to the 2017-2019 period?
Yes, great question. So we were -- as articulated in my comments, the mill stopped receiving logs in 2020 for almost 10 to 12 weeks in certain areas. So we're shut down. When it comes to pricing, pricing is robust. It will continue to be strong in the interior, where we're already [indiscernible]. We see about a 10% to 12% increase in log pricing already. And we should have a very, very decent year. We've moved more towards a contractor model as well to get our costs fixed. And I think our EBITDAs will continue to strengthen. And our post and pole sales, we've never had a bigger order file both sides of the border. So you don't see that in the Forestry segment revenues, but extremely strong on the post and pole side as well. We're over 2,000 trucks this year, easily, of post and poles. So we should have a very good year in 2021.
Okay, that helps. And then just looking at some of the details on the results. It looks like your sales for Home Depot and Lowe's have been increasing. Just wondering if that's a conscious thing you're doing? Or if you're having any trouble with some of the smaller customers that you've got?
No. No trouble. I think the only trouble, Paul, is us not having enough inventory for everybody. And of course, Depot and Lowe's, being the strong machines they are, we're happily partnered with them and other retailers. We just need more products. So there is no issues. We're very strong with our customers. Number -- one our #1 strategies is that, it's just having more product. And last year, we just couldn't keep up, Paul. No one saw this coming, and we just wanted to make more. But again, we're just cleaned out pretty much everywhere, and our inventories have never turned faster. And it's evidenced -- 2021 looks like it's going to be better than 2020. Lumber pricing, I can't tell you where it's going to be. But volumes, I can tell you we're going to be up all across the board.
Okay. And just lastly on the M&A front, it sounds like you've got stuff to look at. Are you currently hampered by travel restrictions? Are you able to get out and see some businesses in the sites?
We've been able to make whatever we need to work as far as acquisition strategies. So the borders being closed is not negative on what we're trying to do. So conversations are open, people we know for a long time that we're interested in. And as you know, we have a long-term strategy of where we want to be and who we want to be. And we'll just carry on with that. And I think you'll see some exciting stuff here in 2021 happen.
Zachary Evershed with National Bank Financial has our next question.
It's actually Thomas calling in for Zach. Congrats on the strong quarter. Most of my questions have been answered. Maybe one last one for me with the -- has gross margins structurally improved versus the pre-pandemic environment? And what kind of drag would you expect if pricing retraced in the back half of the year?
Sure. It's Jay here. That's a good question. Of course, gross margins have been structurally improving over the last several years as we've executed on our acquisition strategy of adding more value-added business into the sales mix. Each time we had a treating operation, of course, that brings with it higher margins versus the core distribution business which would historically carry with it lower margins. So yes, I would say, structurally, the margins are improving each year, we execute on our strategy.
Next, we'll hear from Anoop Prihar with Stifel GMP. .
Just with 2021 perhaps returning to a more normal basis, with respect to the balance sheet, you paid down a good amount of debt last year. I'm just wondering, is there a target capital structure that we should think about in terms of where you're targeting the operations for the balance of this year, either in absolute dollar terms or on a net debt-to-EBITDA basis?
We like to live in the 3 neighborhood, if you will. But pricing, Anoop, dictates kind of what we do. So it's pretty hard in our business. Remember, our debt's a credit card really. So we ebb and flow with that. Jay liquidated all those inventories here. Our long-term debt is minimal. So it's really working capital to run the business. So if lumber is at 200, 400 or 1,000, that's going to dictate our debt levels. What we really watch is how we operate the business because we can't control a lot of the other stuff. So pricing, we don't know what's going to happen tomorrow on lumber, plywood OSB like it is today. But what we can do is understand how many units we have on the ground and understand how we can run our business efficiently and keep our trucks full.
We have a question from Steve Hansen with Raymond James.
Amar, what's the key gating item for you guys right now? Is it feedstock for the facility? Is it capacity at your plant? So I'm just trying to understand what would limit you from producing more this year versus last, absent the shutdown, obviously, on the Forestry side. But just in more of the treated wood side. In other words, how do you think about your key bottlenecks at the moment?
Yes. I think some of the key bottlenecks, if there are some right now -- and it's not they're bottlenecks, it's just we all are supplied by big sawmills. And the big sawmills are short everywhere, evidenced by the pricing today. So the only strain is getting more material to our system. We're okay producing, but it's hand-to-mouth. So everything that we're producing is sold and it's out the door, which is great for our business model. But that's the only limitation. And it's -- for everybody, including the homebuilder today, that's waiting for engineered wood or a 2 by 10, there's so many different things that are short. There's resin problems, which is driving -- which is LSL and LVL and things like that, meaning laminated veneer lumber, for those who don't know those acronyms. So those are the issues. As far as our capacity, we just don't have big inventory to start off with as we've -- in the first quarter here in 2021. But I've never seen it stronger, and the outlook for this year looks extremely strong on the volume side. We're not waiting. So we're not sitting here doing nothing. It's just everything we make is sold.
Okay. No, that's really helpful. And just a follow-up on your valuation remarks earlier, recognizing, obviously, the sector is clearly more heated today than a year ago. How do you think about reasonable valuation levels for M&A? You've typically had a pretty consistent range. But does that edge up here a little bit just because of the strength of the cycle? Or how do you think about that?
With valuation, we do stick to our knitting. We will pay up for a company that's growing or an area that we can grow in. But otherwise, we stick in that sort of 4.5 to 6.5x multiples on the buy side and don't really move from that. These are industrial businesses. They require a bit of capital, et cetera. But they have to fit into our strategy and our geography of where we want to grow. So we're not going to move too much. The cycle gets hot. Private equity might move in and take some assets, that's fine. But we're going to stay disciplined because we're in this industry, and we're going to be here a long time.
And that will conclude today's question-and-answer session. I'll now turn the conference over to Mr. Mahdavi for any additional closing remarks.
Thank you, operator. On behalf of the CanWel team, I'd like to thank everyone again for joining us today. That concludes today's call, and we look forward to speaking with you again on our first quarter results conference call, which we tentatively planned for in May. That's it for today. I'll hand it back over to the operator to close the call.
Thank you. That will conclude today's conference. Thank you for your participation. You may now disconnect.