Doman Building Materials Group Ltd.

Greetings. Welcome to Doman Building Materials Group Limited's first quarter 2024 financial results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. I'll now turn the conference over to Ali Mandaya. Please go ahead, Ali. Thank you.

Thank you. Good afternoon, everyone, and thank you for joining us for Dolman Building Materials' first quarter 2024 financial results conference call. Joining me this morning are Amar Dolman, Chairman and Chief Executive Officer, and James Coat, Chief Financial Officer of the company. If you have not seen the news release, which was issued yesterday, it is available on the company's website at dolmanbm.com, as well as on CDAR Plus, 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 May 24th. Following the presentation of the quarter, pardon me, following the presentation of the first quarter 2024 financial results, 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 Dolman 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 to result to defer material. 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 Omar.

Thanks, Ellie, and thanks, everybody, for joining us on today's call. Since we spoke last during our fourth quarter and year-end 2023 results conference call, We remain focused and excited with the business across all divisions and on both sides of the border. Despite the impact of a slowing construction materials market, our business units continue to show resilience and volumes while delivering very strong gross margin performance. Our financial and operational performance in the first quarter continues to be a testament to our ability to challenging conditions and our team's track record on managing the business through these types of cycles. Throughout the quarter, we remain focused as always on gross margin and optimizing our balance sheet. The strength in our first quarter results came from the combination of the impact of our strategic acquisitions, steady volumes in key markets, and ongoing disciplined inventory management. Further, our ongoing cost management focused on operational efficiencies and successful integration efforts enabled the company to realize strong gross margin and EBITDA margin performance. 2020-2024 is off to a decent start. We are encouraged with the overall level of our activity in our end markets, and we delivered strong performance across all of our key financial metrics, including revenues coming in at just over $600 million, gross margin at 16.7%, just over $100 million, adjusted EBITDA at $45.6 million, net earnings of $14.4 million, and lastly, another quarterly dividend of $14.4 million. cents per share was declared. These results basically are on the back of our continued strength of our business platform in Canada and the US. I am extremely pleased with our financial performance which has resulted in the continued successful unfolding of our overall growth strategy. As always, we remain confident, focused and disciplined on closely managing our costs and servicing the needs of our customers with the highest level of quality and service as we have done in the past. During the quarter, we also completed the acquisition of Southeast Forest products, including two large lumber treating plants in Richmond, Indiana and near Birmingham, Alabama. We are very excited with this acquisition. The plants complement our central U.S. operations and strengthen our footprint by introducing coverage in eight new states, including the strong southeastern U.S. markets and select eastern states. This strategic acquisition exemplifies our strategy of adding scale and volume to to our U.S. operations and pressure treated lumber and specialty wood products. The acquisition is in line with our growth strategy and consistent with our view of value for what we are purchasing and value creation for our shareholders. Our integration efforts are on track and coming together successfully and pretty much we can say we fully integrated the company within 60 days. The lumber markets have been very soft in Q2 as we know and as always we do remain confident in our ability to work through good and challenging markets diligently while serving our customer needs with the highest level of service. We believe the market is starting to bottom out here on lumber, and we'll talk about that in the Q&A, I'm sure. We remain excited about growth profile and the overall prospects of the business. And with that, I would now like to ask Jay Cote, our CFO, to take over and provide a review of the company's first quarter 2024 financial results in greater detail. And then we're going to open the question, sorry, we're going to open the call for questions. Jay, over to you. Thank you, Lamar. Good day, everyone.

Sales for the three-month period ended March 31st, 2024 were $602.5 million versus $609.1 million last year, representing a year-over-year decrease of $6.6 million or 1%. The impact of a slowing construction materials market was partially offset by contributions from our March 1st, 2024 acquisition of Southeast Forest Products. Doman's sales composition in the quarter included 76% construction materials compared with 75% last year, with the remaining balance of sales driven by specialty and allied products of 20% and other sources of 4%. Our gross margin was 100.4 million versus 98.2 million last year, an increase of 2.2 million dollars. and gross margin percentage was 16.7% in the quarter, an improvement from the 16.1% achieved last year, largely driven by disciplined and strategic inventory purchasing and our continuing focus on sales of value-added products. Expenses in the quarter were $72.3 million compared to $70.5 million last year, an increase of $1.8 million, or 2.6%. Expenses equated to 12% of sales in the quarter compared to 11.6% last year. Distribution, selling, and administration expenses were subject to broad inflationary pressures over the previous 12 months, and we continue to manage this category very tightly in this environment. As a percentage of sales, DS&A, Expenses were 9.1% in the quarter compared to 8.8% last year. Finance costs for our first quarter were $10.8 million compared to $10.6 million last year, an increase of 2.7% largely related to higher year-over-year interest rates on our variable rate loan facilities. Q1 2024 adjusted EBITDA was $45.6 million compared to $44.8 million last year. Adjusted EBITDA excludes acquisition-related costs of $817,000 in the current quarter. This quarter's slight increase in adjusted EBITDA was driven by stronger gross margins and disciplined expense control practices. despite broad inflationary pressures. Adjusted net earnings before these non-recurring acquisition costs were $15 million this quarter, slightly above last year's comparative net earnings. Turning now to the statement of cash flows, operating activities before non-cash working capital changes generated $37.8 million in cash, largely in line with the $38.1 million generated last year. Seasonal increases in non-cash working capital items consumed $167.6 million in cash compared to $114.4 million in the prior year. Increased strategic spring buildup of inventory this year contributed to the increased use of cash. Overall financing activities generated a total of $153.5 million in cash compared to $77.4 million in Q1-23. We borrowed $171.6 million on our revolving loan facility compared to $96.2 million last year, largely reflecting the previously discussed seasonal working capital changes. We note that the purchase price consideration for the Southeast acquisition was funded by the company's cash on hand. Doman was not in breach of any of its lending covenants during the quarter and subsequent to quarter end. On April 30th, we reported that our revolving loan facility was renewed and extended through April 2028. This marks the seventh consecutive renewal of the $500 million ABL facility, spanning over a 25-year relationship with lead lender Wells Fargo. Shortly after the renewal of the revolver, rating agency Moody's issued a ratings upgrade for Doman, increasing our corporate family rating by one notch to BA3 from B1, and increasing the rating on our 2026 senior unsecured notes by two notches to B1 from B3. Moody's reported that the upgrades reflect Dolman's strong operational performance despite a trough pricing environment for wood products, as well as continued progress in reducing debt. The company also returned $12.2 million to shareholders through dividends paid during the quarter consistent with 2023, and payment of lease liabilities including interest consumed $6.6 million of cash, largely in line with last year. We note that the company's lease obligations generally require monthly installments, and these payments are 100% current. Investing activities consumed a total of $63.8 million of cash this quarter, including payment for the southeast acquisition as well as ongoing purchases of new property, plant, and equipment. This concludes the formal commentary, and we would now be happy to respond to any questions that you may have. Thank you. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Thank you, and our first question is from the line of Yuri Zareta with Canaccord Genuity. Please proceed with your questions.

Thank you, and good morning, everyone.

Good morning.

So last quarter, it seemed like you were seeing strong demand activity across the board with construction materials pricing declines being the main headwind. Q1 against an easier pricing comp, however, was slightly lower year on year. So I was just wondering if you could provide more color on where that weakness is coming from.

Yeah, certainly can. And, you know, we're off, you know, 1% sales, so I'm not, you know, really crying too much about that in this environment. So, you know, really, when you look at across the regions, there's certain pockets. It's variable across different markets. Canada was a little bit weaker, longer winter, et cetera, but now we're seeing those volumes pick up nicely here in Q2 and recover as they always do, depending on how long the winter goes. And then certain states, it was just sporadic. Some were up, some were down, and we're starting to get the northern states Illinois, Missouri, those states where they open up a little bit later start to kick in. Texas has kicked in and Arkansas and some of the new states we're in as well. We're starting to see good volumes there. So not too concerned about the start of the year with lower lumber prices, you know, hopefully bottomed maybe last week. We're kind of feeling that a little bit and starting to see curtailments take effect. You know, I think you might see a little bit more buying activity happen while pricing is favorable to the buy side.

Okay, thank you. That's helpful. So as a quick follow-up, so based on your answer, you're seeing those volumes perhaps start to pick up. How are the pricing dynamics looking, and would you say your expectations for the year remain largely unchanged in the sense of being flat?

Yeah, you know, the one thing we can't control, of course, is the base price. We move along up with that or down with that as things go along. But as you can see, five straight quarters through some pretty, you know, different gyrations of the market, one way or the other, we're steady hitters through these kind of markets. So I think you'll continue to see that. And, yeah, we haven't really changed our outlooks as far as internal goes. And, you know, we believe the lumber market's, you know, bottomed. Do we see it running up? No, we just don't. There's a lot of production. it seems to be in a nice back and fill area. The producers, some of them are feeling these lower prices right now and hence the curtailments, which we need to, I think, shore up the price on the base. But we don't see a big rally coming. That's just a personal opinion from our office. We think we're coming off the bottom here now, but prices are going to be lower for longer. And I think there's a bit of an interest rate cloud on housing, which is kind of holding back new builders doing big projects and things like that. But The repair and renovation market for us seems to be still carrying on decently, and everyone's watching their inventories on the customer side. So we don't expect people to be loading up on lumber in this environment. You know, they're selling to and buying to, and that's just the way it works.

Okay. Thank you. That's helpful, Kohler. I'll turn it over.

Thanks. Our next question is from the line of Amir Patel with CIBC Capital Markets. Please proceed with your questions.

Hi, Amar, how did your organic sales fare in Q1 if you strip out the Southeast Steel? And, you know, any comments you have on how the sort of organic business is faring here in Q2 compared to a year ago?

Yeah, you know, just slightly off in the first quarter. And, you know, first quarter is obviously our weakest quarter with weather and everything like that. It's a tough, you know, yardstick to use. but off maybe very low single digits in some markets on volume. But really, again, if you're 1% to 3% here and there in different markets to us, we don't really stay awake worried about that. And we started to see the momentum come back in Q2. We don't see the market being super strong on lumber. We don't see it being super strong on takeaway. Just a steady year is kind of how we're seeing this in the fifth month of the year now, organically and through acquisition.

Great. Thanks, Mark. That's helpful. And, you know, we saw Home Depot make a large acquisition in the distribution space and looks like they're paying quite a high multiple. Do you see any impact from that transaction on your own business?

Zero. Those are categories we're not in at all. It's more of a roofing and other products that we really don't participate in, and so it was a non-event for us. Fair enough.

That's all I had. I'll turn it over.

Thanks.

Thanks, Samir.

The next question is from the line of Zachary Evershed with National Bank Financial. Please receive your questions.

Thank you. Good morning, everyone. Afternoon now. Yes. So as we start pricing on cash lumber, take a dip in Q2, how are you thinking about the sustainability of your 16% plus gross margins going forward?

Yeah, you know, in down markets, it's always a little bit more of a challenge because you can't quite always be, you know, on the mark. Having said that, you know, we've seen the market decline and go back up and decline in the last five quarters, and you've seen our margins decline. kind of hold in here. I wouldn't see them moving up past that, Zach. I wouldn't be afraid or excited, let's say. I think we're going to be in those zip codes somewhere near that in this type of an environment. On southern yellow pine, it got pretty tough. There was two handles on lumber, which we haven't seen since 2013, so that kind of surprised the whole market, how cheap certain grades and tallies got. Spruce was a bit better. Doug fir started to peel off, so Yeah, we can't say that margins are going to go up from here. We don't see any kind of collapse happening, but be a little softer, I think, just a little bit, Zach, as we unfold into Q2 and Q3.

That makes sense. Thanks. And so given that backdrop, what are your working capital expectations in 2024 versus 2023?

Hi, Zach. It's Jay here. So, you know, we haven't altered those working capital expectations somewhat at all, actually, from our internal projections, other than to allow for a little bit more working capital from the Southeast acquisition. So these prices are kind of within the range of what we planned for, maybe a little bit on the low side right now as it bottoms out, but you should see the usual seasonal working capital fluctuations with peak working capital around that last week of April, first week of May, and then it starts to come off through November. And that range from peak to trough is generally going to be in the $100 million to $120 million range. That's good color.

Thanks. So I think you addressed this fairly directly in terms of the pricing trends that you're seeing. You think that we're maybe bottoming out here, and volumes have been fairly uninspired thus far, given the cloud from interest rates. Do you have hope for a pickup in the back half, maybe as we see backlogs come through?

Yeah, I think what will drive that, Zach, we need some more information as far as, I would say, curtailment announcements and the realities of those, not just extended mill holidays or the odd weekend, long weekend and shutting the mills down. If we see some serious production come off, you'll see a torque up because the volumes haven't collapsed. It's just that everybody's in kind of a rhythm of back and fill. No one wants to over inventory. So if you start pulling a lot of material off from the The sawmill side, you will see a torque up. I can't say we're counting on it. We're counting on kind of maybe up 10 to 15 percent here as a peak towards the, you know, maybe mid part of the year if the curtailments come in. Otherwise, we're going to kind of bump along where we are. I think I said last quarter we're going to be range bound. I think we're going to be range bound with a $50 bill. That's just kind of how it feels internally. And that's kind of what we're looking for. Um, you know, are we getting some, uh, you know, good deals from mills that need to move material? Uh, yes, we are. So we, we try to take advantage and help our sawmill partners when they've got some stuff to move and, and maybe a little bit underneath print. So that can help us. So we're trying to do those things and take some chances when needed to buy under, uh, or being conservative as well. But until we see our containment announcements and some serious ones, uh, I think we're just going to be range bound and no, uh, trajectory to the sky here on lumber. So kind of steady and boring as she goes, Zach.

Good enough for me. Then just one last one. We're hearing commentary from other distributors that early stage construction products are moving quicker than late stages as construction times are kind of blowing out in new residential. Are you guys seeing that bifurcation in your own catalog?

Well, you know, a lot of our, you know, material, you know, in Canada, of course, is driven towards a new home start with our distribution activities, you know, with plywood, studs, OSB, those types of items, insulation. And then, of course, the majority of what we're doing with the pressure-treated category is your backyard. So a lot of that can be repair and remodel, which is disconnected from that timing cycle that you're mentioning. It's just people doing R&R. And when lumber is low like this and the retailers move their sets down, you know, decks go back into the $20,000. It starts to really make it hard to price against composite where composite is still five times the cost of wood. That gap widens and it makes lumber more attractive. So, you know, there is a benefit, you know, in lower lumber prices, if you will, because of that demand picking up because it's cheaper and people can do projects. And in this inflationary world, you know, a lot of people don't have a lot of extra dollars floating around. And so, When things are cheaper, I think it just helps the consumer, quite frankly.

Appreciate the call. Thanks. I'll turn it over. Thanks.

Thank you. Our final question is from the line of Matthew McKellar with RBC Capital Markets. Please proceed with your questions.

Hi. Thanks for taking my question. Most of what I had has been asked and answered, but maybe a question on your private stimulants. Any early thoughts on Canada's improved forest management and private land protocol that was recently introduced? With that, would you expect to evaluate any opportunities to develop forest carbon projects?

Yeah, Jake can chime in here as well. We've had several interested parties approach us, and we've been studying our timberlands to see what is the the best use for that asset that we're proud to have. And I could say that we're just kind of in early innings of that exploration. And maybe Jay can finish up.

I'd echo what Amar's described there. Certainly the interest in carbon credits that comes our way is very active right now. And we're not really seriously considering that at this point. But as that market develops, we certainly will continue to monitor the carbon markets and be prepared to look at that more seriously.

What I can tell you is on the standing timber that we provide to sawmill partners in the area is The demand for that has been very strong due to the British Columbia public cutback of the AAC, the annual allowable cuts, almost in half from where they were a couple of years ago. So our pricing on our timber, it's been slow getting out of it because of the weather. But when we're delivering our pricing on timber, we have a lot of customers pulling for our logs. So it's nice to see those yields and margins on the timber increasing. We just need some clear weather, which is approaching now and getting it out of the bush. But that side of it will go well.

Yeah, I would add that we discussed curtailments. We're certainly seeing no curtailments in the region of our private managed forests. So the demand is still strong for our timber.

Great. Thanks very much for your comments. I'll turn it back.

Thank you. At this time, we've reached the end of our question and answer session, and I'll hand the floor back to Ali Mondavi for closing remarks.

Thank you. On behalf of the domain building materials team, thank you again for joining us today. We look forward to speaking with you all during our second quarter financial results conference call. That concludes today's call. I will turn it over to the operator.

Thank you. Today's conference has concluded. You may now disconnect your lines at this time and have a wonderful day.