Doman Building Materials Group Q3 2024 Earnings Call Transcript

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November 8, 2024

There are 8 speakers on the call.

Operator

Greetings and welcome to the Doman Building Materials Group Third Quarter 20 24 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow Please note this conference is being recorded. I will now turn the conference over to your host, Ali Mahdavi, Head of Investor Relations. Thank you.

Operator

You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us this morning for Dohmen Building Materials' Q3 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 market yesterday, it is available on the company's website as well as on SEDAR along with our MD and A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on November 22nd.

Speaker 1

Following management's presentation of the Q3 results, we will conduct a Q and 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 Dohmen 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.

Speaker 1

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 and 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 now turn the call over to Amar.

Speaker 2

Thanks, Eli, and good morning and thank you everyone for joining us on today's call. On the back of a steady yet challenging Q2 in volatile market conditions, the Q3 was similar in terms of our focus on optimizing operational and financial performance on both sides of the border, while navigating through volatility and general activity and lower average pricing when compared to the Q3 of last year. Throughout the Q3, once again, we continued to work through the impact of challenging year over year pricing comparatives, largely due to the impact of construction materials pricing, which on average was higher across all categories for most of 2023. Overall, we continue to see weakness in the North American market due to cooling customers demand, which placed downward pressure on materials pricing during the quarter. Despite these external pressures impacting our year over year financials, our focus remains on what we can control to ensure we maximize margins and free cash flow generation.

Speaker 2

Inventory and overall cost management were once again key contributors to our success in the Q3, resulting in another period of gross margin performance within our target range. While we continue to see more of a cautious tone and sentiment across the industry, we are encouraged with some early positive indicators of construction materials pricing firming up in certain categories as well as steadier activity in our key markets. Despite the lower pricing and macroeconomic concerns, I remain pleased and encouraged by the strength of our business model and our ability to perform while ensuring that our 1st class level of service remains on point. As a result of our collective efforts, revenues amounted to $663,000,000 gross margin remained strong at 15.5 percent or 103,000,000 dollars Adjusted EBITDA amounted to just under $48,000,000 Net earnings came in at $14,600,000 And lastly, we paid another quarterly dividend totaling $0.14 per share. Speaking of financial performance, I am pleased with our continued focus on balance sheet management and optimization.

Speaker 2

To this point, during the last 12 months, while working through some of the challenging market dynamics, we were able to effectively manage debt levels, thanks to the strength of our free cash flows. During the quarter, we announced the closing of a $265,000,000 senior unsecured note offering, which went towards the reduction of amounts outstanding under our credit facility, as well as buying back and canceling $52,300,000 of our 2026 senior notes. As a result of our efforts to maintain an optimal and growth friendly balance sheet at all times, after quarter end, we announced the acquisition of Tucker Lumber, a leading family owned lumber and treated wood supplier and a large producer of specialty value added products ranging from lumber, fencing, deck components and plywood operating in the Eastern United States with 3 very large lumber treating plants, specialty sawmilling and a captive trucking fleet. We welcome all new 450 team members to the Doleman team. In addition to being immediately accretive to EBITDA, free cash flow and earnings per share, this highly strategic acquisition complements Filament's existing Central and West Coast operations in the U.

Speaker 2

S. With immediate scale in 10 new states including South Carolina, North Carolina, Florida, Georgia, Virginia, West Virginia, Delaware, Maryland, New York and Pennsylvania. Looking ahead, we are very excited as we work through the integration of Tucker in demonstrating our improved earnings profile. 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 very excited about our growth profile and the overall prospects of the business.

Speaker 2

And with that, I would now like to ask Jay Code, our CFO to take over and provide a review of the company's Q3 2024 financial results in greater detail, and then we will open up the call for analyst questions. Jay?

Speaker 3

Thank you, Amar, and good morning, everyone. Sales for the quarter ended September 30, 2024 were 663,100,000 versus 643,900,000 in Q3 last year, representing an increase of $19,200,000

Speaker 2

or 3%.

Speaker 3

This quarter's lower average pricing for lumber and panels was more than offset by higher volumes driven by contributions from the recently acquired Southeast Forest Products facilities. The company's sales by product group in the quarter were made up of 74% construction materials compared to 72% last year, with the remaining balance resulting from specialty and allied products of 21% and other sources of 5%. Gross margin dollars were $103,000,000 in the quarter versus $102,800,000 last year, a slight increase of $173,000 Gross margin percentage was 15.5 percent in the quarter compared to 16% achieved in 2023 with the decrease in margin percentage largely due to the impact of the previously discussed decline in construction materials pricing. Expenses in the quarter were $73,500,000 compared to $67,600,000 in 2023, an increase of $5,900,000 or 8.7 percent. As a percentage of sales, expenses were 11.1% compared to 10.5% last year.

Speaker 3

Distribution, selling and administration expenses increased by $4,700,000 or 9.3 percent to $55,500,000 compared to $50,800,000 in Q3 'twenty three, mainly due to broad inflationary pressures and additional DS and A related to Southeast Forest Products operations. As a percentage of sales, DS and A was 8.4% this quarter compared to 7.9% last year. Depreciation and amortization expenses increased by $1,200,000 or 7 percent from $16,800,000 to $18,000,000 mainly due to additions of property, plant and equipment from the Southeast acquisition. Finance costs for Q3 'twenty four were $11,800,000 compared to $10,100,000 in 2023, an increase of $1,700,000 or 16.3 percent, largely due to higher interest rates on the company's variable rate loan facilities during the quarter. Q3 EBITDA was $46,300,000 compared to $52,000,000 last year, a decrease of $5,700,000 or 11%.

Speaker 3

Q3 EBITDA includes acquisition related costs of $1,200,000 Adjusted EBITDA excluding these acquisition costs was $47,400,000 compared to $52,000,000 last year, a decrease of $4,600,000 or 8.8%. The decrease in EBITDA and adjusted EBITDA was mainly due to previously discussed overall pricing declines as well as an increase in expenses driven by broad inflationary pressures. As a result of these factors, net earnings through Q3 were $14,600,000 compared $21,200,000 in 2023, a decrease of $6,600,000 Excluding this quarter's acquisition costs, adjusted net earnings were $15,400,000 dollars a decrease of $5,700,000 Turning now to the statement of cash flows. The following activities accounted for changes in cash during the 9 month period ended September 30. Operating activities before non cash working capital changes generated $108,900,000 in cash compared to $132,200,000 in the same period in 2023.

Speaker 3

The decrease in operating cash generated was largely driven by this period's lower net earnings compared to 2023. Changes in non cash working capital items generated 12 point $2,000,000 in cash versus consuming $4,500,000 in the same period in 2023. The net improvement in cash generated from non cash working capital was largely due to management's continued efforts to optimize working capital levels while maintaining the highest standards of customer service. Overall financing activities in the 9 month period resulted in net repayments of $55,700,000 compared to net repayments of $117,000,000 in the same period in 'twenty 3. On September 17, 2024, we completed the issuance of new 20 29 unsecured notes, resulting in gross proceeds of $265,000,000 The new issuance was debt neutral given that cash proceeds net of issuance costs were used to repurchase a portion of our 20 26 unsecured notes in the amount of $52,300,000 and to reduce drawings on our revolving loan facility.

Speaker 3

The increase in net debt during the 9 month period amounted to $13,900,000 compared to a decrease of $69,000,000 in the comparative period in the prior year. The variance in net debt movement between the 9 month periods is largely due to this year's purchase price consideration for the Southeast acquisition and the decrease in net earnings partially offset by improvements in non cash working capital management. The company was not in breach of any of its lending covenants during the 9 months ended September 30, 2024. Shares issued net of transaction costs generated $1,400,000 of cash compared to $1,200,000 in 'twenty 3. The company also returned 36.6 $1,000,000 to shareholders through dividends paid during the period, largely in line with the same period in 2023.

Speaker 3

Payment of lease liabilities including interest consumed $21,300,000 of cash compared to $19,800,000 in 2023 and the company's lease obligations generally require monthly installments, all of which remain current. Investing activities for the 9 month period consumed $71,300,000 of cash compared to $10,400,000 in 2023. Investing activities in the 1st 9 months of 2024 included the Southeast acquisition for total cash consideration of $62,300,000 Additionally, the company invested net cash of $9,200,000 in new property, plant and equipment during the period compared to $10,400,000 in 2023, representing purchases net of proceeds from dispositions. As a result of these cash flow activities overall, we ended the 3rd quarter with a net cash balance of $25,000,000 compared to net bank indebtedness of $4,400,000 in September 2023. This concludes our formal commentary and we'd now be happy to open the call to any questions that you may have.

Speaker 3

Thank you. Operator? Thank

Operator

first question comes from Jerry Saeta with Canaccord Genuity. Please state your question.

Speaker 4

Good morning and congrats on the good quarter. Yes, so just looking to get more detail on the year on year revenue increase, seems like it implies some improvement in the trends observed in the core business against the last few quarters. So is that the case or was there anything else in particular that made Southeast contribution stronger?

Speaker 2

Yes. Thanks, Sherry. It was some acquisition of Southeast Forest Products that certainly increased the revenues against declining pricing. So certainly we were pushing more units through to get those revenues up to $663,000,000 for the quarter.

Speaker 4

Okay. So in terms of volumes of the underlying business, do you say that that remains as we've observed in the last couple of quarters?

Speaker 2

Yes. What we found, Yuri, in the kind of the middle part of the Q3, we started to see some volumes pick up in certain areas down in the U. S. And across Canada, which was pleasantly surprising to us as we were looking towards more of a flat to off year by a few percent. And as we get closer to the year end finish, we may be close to even to last year as far as our volumes go system wide.

Speaker 2

So we're pretty proud of that, and that's without the acquisition. So yes, the volumes have healed up and the customers started to come back kind of later this season and we'll happily take that business.

Speaker 4

Okay. That's good to hear and that's great color. And last one just quickly for me. Last quarter you were mentioning some volume pickup from the hurricane in Texas. And I was wondering if you're seeing more of that in Q4, especially now that you have Tucker and given that the season continued to hit the U.

Speaker 4

S. East Coast, especially toward the end of September. So just wondering if you're seeing any of that in the current quarter?

Speaker 2

Yes, we are. And certainly, we don't like grabbing business due to hurricane and damage, but certainly, it's there. Texas has been very strong the last 6, 7 weeks as has our new business in the Carolinas. It's busy, it's active. The weather actually has been very nice post those storms and hurricanes.

Speaker 2

And so we're seeing our volumes look pretty sharp as the Q4 started.

Speaker 4

Okay, that's great. Thank you guys. I'll jump back on the queue.

Speaker 2

Thanks.

Operator

Our next question comes from Zachary Evershed with National Bank Financial. Please state your

Speaker 5

So from the new acquisitions, are they bringing anything to the table in terms of new processes? Obviously, there's some expansion in the product portfolio, but maybe you could flag that for us.

Speaker 2

Yes, absolutely. So, with the acquisition of Centimeters Tucker on October 1, we're seeing now our company be involved with robotics. We're producing 150,000 balusters a day, which are servicing a lot of distribution centers in the area going down as far as Florida and as far north into the Northeast New York area in Pennsylvania. So, with all of these new product lines that we've discussed, whether it's balusters, spindles, stair stringers, ball tops, all things that are made in house, we are very much technology forward with this acquisition and we think we can start over time to bring those technologies to other divisions as Centimeters Tucker is really leading the industry as far as technology goes, production efficiencies and we're very proud to have that in our family and we want to emulate what the Tucker family has built and we're going to do that over time. And furthermore, we're also going to try and cross pollinate some things we have going on with dolmen lumber in the mid part of the country with our specialty sawmills producing fence and the like.

Speaker 2

And we see ourselves moving east with some of those strategies as time unfolds and the marriage comes together.

Speaker 5

Great color. Thanks. And then if we zoom out and look at the whole vertical, could you maybe frame the current environment for lumber and sawmill curtailments and closures in a historical context? Like when was the last time you saw an environment like this and how did it affect your strategy?

Speaker 2

I don't think I've seen an environment where there's been so many moving pieces at the primary level, meaning permanent closures here in British Columbia at home and then seeing the rapid expansion of sawmill production in the U. S. South of Southern Yellow Pine. This is a transition. I don't think there's anything to compare it to, Zach.

Speaker 2

This is a very different longer term platform for sawmilling. And there's a lot of tough decisions being made in those boardrooms right now to get this right and for the future. So, I don't think we've been through this. I certainly have not seen the industry fundamentally so different and change. And I think one thing that we saw over the past full of 5, 6 weeks was the evidence of production either being strained or closed in certain areas.

Speaker 2

A little bit of demand comes and man does the rally happen fast. And it's showing that when we get a recovery, I think back on the new housing side on both sides of the border, lumber could be looking pretty handsome at some point.

Speaker 5

So definitely sensitive to increases in demand. So I guess it really depends on do you think that an inflationary environment makes affordability worse and lowers demand or that lower regulation south of the border potentially stimulates homebuilding? Obviously, this is all crystal ball territory, but what's your point of view?

Speaker 2

The new home piece is obviously important to our business, but just as is the repair and remodel, which when we look at the U. S, over 83% of all mortgages are financed under 2% during COVID, right? And Canada had a similar number. We've got refis coming up here, which could put a bit of a strain on it. But down south, there's a lot of extra money in people's pockets.

Speaker 2

They're not moving around, which isn't great for our business, but it hasn't really hurt in the past couple of years, but our volumes continue to be solid. And whether it's the repair and renovation market or the new home market and then of course with these storms we're getting volumes that way as well, which is unexpected volume. So when you add all that up, it's good news for Dauman.

Speaker 5

Got you. Thanks. And just one last one for me. Following Southeast Forest Products and Tucker, how many similar opportunities do you still see in the market? How's the pipeline looking?

Speaker 2

Yes. Right now, we're focused on integration of Tucker and our new team members and gluing that together with our Dolmen Lumber operations as well where there's 19 facilities. So we're really working on that currently. And as far as other opportunities, yes, there's still opportunities out there and these things take time. And right now, we're focused on the matters at hand here and making sure that there's no disruption to our customers and our vendor side, employees and everything else.

Speaker 2

But certainly, we're not going to stop elephant hunting out there for sure.

Speaker 5

Perfectly clear. Thanks. I'll turn it over.

Speaker 6

Thanks.

Operator

Thank you. Our next question comes from Matthew McKellor with RBC Capital Markets. Please state your question.

Speaker 6

Hi, good morning. Thanks for taking my questions. I'd like to just follow-up on a couple of statements on the call so far. Maybe first, you talked about a pickup in volumes in both the U. S.

Speaker 6

And Canada starting in mid Q3. Was that pretty broad based or were there any product categories you'd call out as being in particular stronger or weaker?

Speaker 2

Yes, good question. So, yes, mid Q3, yes, and it was system wide. So, across Canada, U. S. West Coast and all across the U.

Speaker 2

S. Volumes have picked up and continue to be good when the weather is it's been a nice fall for weather and I guess some projects started to get either get finished or started. And I think we can correlate some of that to lumber is still being very fair priced. So, lumber isn't through the roof. So, I think some projects get completed at these lower pricing levels compared to couple of years ago.

Speaker 2

So I think when you add all that stuff together, it's certainly been a very nice catch up on these volumes in the Q3 and the Q4 started the same way.

Speaker 6

Great. Thanks for that color. Last one for me. You also talked about wanting to emulate some of the technology and automation at Sientucker across some of the rest of your business. Is there a good way to think about what that means in terms of potential capital spend or what kind of returns you might see on those investments?

Speaker 2

Yes, a bit early yet for those details, Matthew, but I can tell you that looking at the robotics and how much time and capital has been put in at Centimeters Tucker over the years and getting things right and trial and error for us to be able to emulate this, something we're very excited about and having their experience and their family involved with ours here is going to be pretty special. So, I don't have numbers today, but certainly we're going to zoom out and have some strategy sessions on this to see where it makes sense, what geography, but it's really exciting and we certainly invite you for a tour to take a look at these operations when you have time.

Speaker 6

Thanks very much. I'll turn it back.

Operator

Thank you. Our next question comes from Ian Gillies with Stifel. Please state your question.

Speaker 7

Good morning, everyone. Good morning. Could you maybe talk a little bit about some of the revenue synergies you hope to realize, whether it be through customers that Doman already has and or those that Centimeters Tucker already have and perhaps how long you think it takes for that to start to materialize?

Speaker 2

Yes. So, a couple of things on revenue. There's really no overlap, a tiny bit of overlap in geography, kind of near Indiana, Ohio, there's still a little bit there. But really, we've now been able to quote and it was pretty special for us to quote some national accounts in the U. S.

Speaker 2

From one end of the country to the other, which we are now doing with national customers, whether it's the U. S. LBMs, BFSs, 84s, Lowe's, you know, you go right across with different strategies now. That's very important to our customer base and there is no other treater in the U. S.

Speaker 2

That could do that. That was a goal of ours a number of years ago and we've got there with the C. M. Tucker acquisition. So, we are coast to coast and in Hawaii.

Speaker 2

So, having that national footprint is very valuable to our customer base and our supplier base. So, give us some time here and we'll be able to leverage that even further. But already in our fall negotiations for 2025, The offering is pretty solid. We're pretty proud of it and the strategy we believe is going to work to assist our customer base in what they're up to.

Speaker 7

That's helpful. Thank you. As you chunk down the leverage over the next 12 months, will you put any thought to an NCIB or do you really view Doman now as a roll up strategy and wanting to become that coast to coast provider?

Speaker 3

Matthew, it's Jay here. On the NCIB side of things, we actually discussed that yesterday in our quarterly Board meeting and decision was made not to renew the NCIB. Of course, we didn't renew it in 2024 as well for 2024. So no not really looking to go into the NCIB, but we do look forward to paying down debt as we have been doing since really since the Hixson acquisition. As you know, we've reduced debt significantly and Tucker, the Tucker acquisition is expected to have similar impacts on debt reduction going forward.

Speaker 7

Understood. Thanks very much. I'll turn the call back over.

Operator

Thank you. There are no further questions at this time. And I will now turn the call back to Aleema Davey for closing remarks.

Speaker 1

Thank you everyone again for joining us this morning. We look forward to speaking to you again on our year end conference call, which will be in the New Year. That concludes today's call. Enjoy the weekend, and I'll turn it back to the operator to close things off.

Operator

Thank you. All parties may now disconnect.

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