Doman Building Materials Group Inc. (DBM), a leading supplier in the construction industry, has reported its financial results for the second quarter of 2024. The company saw a decline in sales by 2.9% year-over-year, earning $689.8 million, with a gross margin percentage of 15.7%. Adjusted EBITDA also fell by 23.4% to $50.6 million.
The decrease is attributed to a slowdown in the construction materials market, impacting sales volume. However, Doman Building Materials is actively managing costs and working to optimize margins in the face of these headwinds. The company highlighted its recent acquisition in the Southeast and a partnership with AZEK, signaling a strategic focus on growth through acquisitions and an expansion into the composite materials market.
Key Takeaways
- Doman Building Materials reported a decrease in sales and adjusted EBITDA in Q2 2024.
- The company is experiencing a slowdown in the construction materials market.
- Focus remains on cost management and margin optimization.
- The company completed an acquisition in the Southeast and is pursuing more opportunities.
- Doman is partnering with AZEK to distribute composite materials in Canada.
- Gross margins are expected to stay within 14%-16%, with potential volatility.
- A typical working capital release pattern is anticipated for the second half of the year.
Company Outlook
- Doman Building Materials expects flat to slightly lower volume trends in the latter half of the year.
- Treated lumber prices in the South are projected to improve.
Bearish Highlights
- The company faced a 2.9% decline in sales compared to the same quarter in the previous year.
- Adjusted EBITDA decreased by 23.4% from the previous year.
Bullish Highlights
- Doman Building Materials completed an acquisition in the Southeast and is looking at additional opportunities.
- The partnership with AZEK is expected to bolster growth in the composite materials market.
Misses
- Sales and adjusted EBITDA fell short of last year's figures due to market challenges.
Q&A highlights
- CEO Amar Doman discussed the acquisition landscape post-pandemic, noting an increase in opportunities.
- Doman provided updates on the company's Hawaiian projects, including supplying a rebuilt school.
- The potential Canadian rail strike could positively impact lumber prices.
- Management thanked participants and opened the floor to questions.
Doman Building Materials Group continues to navigate a challenging market environment with strategic initiatives aimed at growth and efficiency. The company's partnership with AZEK and its focus on acquisitions demonstrate a commitment to expanding its product offerings and market presence. Despite the current market slowdown, Doman's management remains focused on leveraging opportunities and managing the business to mitigate the impact of lower sales volumes.
Full transcript - None (CWXZF) Q2 2024:
Operator: Greetings, and welcome to the Doman Building Materials Group Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ali Mahdavi, Investor Relations. Please go ahead.
Ali Mahdavi: Thank you, operator. Good morning, everyone, and thank you for joining us for Doman Building Materials' second quarter 2024 financial results conference call. Joining me this morning are the company's Chairman and Chief Executive Officer, Amar Doman, and Chief Financial Officer, James Code. If you have not seen the news release, which was issued after the close of markets on Friday, it is available on the company's website, as well as on SEDAR, along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on August 26. Following the presentation of the second quarter results, we will conduct a Q&A session for analysts only. Instructions will be 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 Doman 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 will now turn the call over to Amar.
Amar Doman: Great. Thanks, Ali. Good morning, everybody, and thank you for joining us on today's call. On the back of the first quarter, which was in line with our expectations, the second quarter was similar when considering the pricing environment, increases in interest rates, and the slowing North American housing market. These factors, combined with the ongoing concerns of a possible recession, have cooled consumers demand, putting downward trends on materials pricing for the second quarter of 2024. To note, Southern Yellow (OTC:YELLQ) Pine is off 30% year-over-year. As a result, during the quarter, not dissimilar to our disciplined approach on tight inventory management, our customers also remained conservative and replenished only when needed, keeping inventories light. During the quarter, we saw more price stability in Canada across all wood products. However, in the States, lumber prices which have risen slightly in the first quarter due to supply tightness have since pushed back down as exchange -- sorry, as changing expectations for the timing of federal monetary policy easing resulted in weaker lumber demand. Overall, despite the various macro headwinds and headlines that have influenced on our markets and ultimately on consumer spending, we're encouraged with the continued level of activity we experienced during the quarter, resulting in modestly lower sales when compared to the same period in 2023. These trends continue to exist in our day to day activities. However, our focus remains on [indiscernible] control to ensure we maximize margins and free cash flow generation. Our team's focus on optimizing gross margin performance combined with our constant efforts on overall cost management were key contributors to our second quarter results. However, the slowing in the construction market was a key factor in the lower sales on a year-over-year comparative basis. Our financial and operational performance in the second quarter is a testament to our ability to work through volatile markets and our team's track record on managing the business through similar cycles. Our ongoing cost management focus on operational efficiencies and successful integration efforts will continue to enable the company to optimize gross margin and EBITDA margin performance. Put all of this in the numbers, our revenues amounted to $690 million. Despite market conditions, gross margin remained solid at 15.7% or $108 million, adjusted EBITDA of $50.6 million, and our net earnings came in at $17 million, and we paid a quarterly dividend of $0.14 per share. Looking ahead, we are cautiously optimistic as we navigate through what seems to resemble volatile markets, while we continue to manage our costs and always look for growth opportunities. Balance sheet optimization strategy remains a key priority as we look forward to having a solid growth-friendly and fire-ready balance sheet for opportunistic acquisitions. During the second quarter, we successfully renewed and amended our existing revolving loan facility, extending the maturity date from December 6, 2024 to April 30, 2028, while all other material terms, including the maximum available credit of $500 million, remained unchanged. As always, we remain confident in our ability to work through volatile markets diligently while serving our customer needs with the highest level of service. We remain excited about our growth profile and the overall prospects of the business. We have built a solid, diverse, and resilient business in North America with a broad and growing footprint, which we are extremely proud of. With that, I would like to have James Code, our CFO, to take over and provide a review of the company's second quarter financial results in greater detail, and then we're going to open up the call for analyst questions.
James Code: Thank you, Amar, and good morning, everyone. Sales for the three-month period ended June 30, 2024 were $689.8 million versus $710.7 million in 2023, representing a decrease of $20.9 million or 2.9%, largely due to the impact of the previously discussed slowing in the construction materials market, which was partially offset by contributions from the Southeast Forest Products acquisition, which closed in March of 2024. Our sales in the quarter were made up of 76% construction materials, consistent with Q2 last year, with the remaining balance resulting from specialty and allied products of 20% and other sources of 4%. Gross margin dollars were $108.1 million in the quarter versus $121.2 million in 2023, a decrease of $13.1 million. Gross margin percentage was 15.7% in the quarter compared to 17% last year. Expenses for Q2 were $75.1 million compared to $72.5 million in '23, an increase of $2.6 million or 3.6%. As a percentage of sales, expenses were 10.9% compared to 10.2% in the prior year. Distribution, selling and admin expenses increased by $2.3 million or 4.2% to $57.5 million from $55.2 million in '23, mainly due to broad inflationary pressures and the addition of Southeast related costs. As a percentage of sales, DS&A was 8.3% compared to 7.8% last year. Depreciation and amortization expenses increased slightly by $312,000 or 1.8% from $17.3 million to $17.6 million, driven mainly by purchases of property, plant and equipment related to the Southeast acquisition. Finance costs for Q2 were $12.6 million compared to $10.5 million for the same period in '23, an increase of $2.1 million or 19.8%, largely due to average net -- higher average net debt versus the comparative quarter and slightly higher interest rates on the company's variable rate who owned facilities. This quarter's EBITDA was $50.2 million compared to $66 million last year. A decrease of $15.8 million or 24%. EBITDA for the second quarter of '24 was impacted by non-recurring acquisition-related costs of $371,000. Adjusted EBITDA before these non-recurring costs was $50.6 million compared to $66 million in the same period in '23, a decrease of $15.4 million or 23.4%. The decrease in adjusted EBITDA was mainly due to the previously discussed overall reduced gross margins in the quarter and an increase in expenses due to the broad inflationary pressures. Net earnings for the quarter were $17 million compared to $29.2 million in '23, a decrease of $12.2 million or 41.8%. Net earnings for Q2 '24 were impacted by the previously discussed acquisition-related costs of $371,000. Adjusted net earnings before these non-recurring costs were $17.3 million, a decrease of $11.9 million or 40.9% due to the foregoing factors. Turning now to the statement of cash flows. The following activities accounted for changes in cash in the first six months of 2024: Operating activities before non-cash working capital changes generated $68.9 million in cash compared to $85.8 million in the first half of '23. The decrease in operating cash generated was largely a result of the previously discussed lower net earnings due to the slowing in the construction materials market. Changes in working capital consumed $127.8 million versus $92.5 million in the first half of last year. Overall financing activities generated net cash of $93.9 million from equity and debt stakeholders compared to $8.8 million in the comparative six-month period in 2023. Shares issued net of transaction costs generated $701,000 of cash compared to $609,000 last year, and the company returned $24.4 million to shareholders through dividends paid during the period, largely in line with the same period in 2023. Payment of lease liabilities, including interest, consumed $13.5 million of cash, consistent with last year. The company's lease obligations generally require monthly installments, and these payments are all current. The company borrowed $132.2 million from its revolving loan facility during the first half of '24 compared to $120.5 million in the same period in 2023. The year-over-year increase in net advances from the revolving loan facility is largely due to the previously discussed working capital changes resulting in the company's increased facility utilization. We note that the purchase price consideration for the Southeast acquisition in March of '24 was funded by the company's cash on hand, and therefore, had no impact on our loan facility usage. We also note the company was not in breach of any of its lending covenants during the six months ended June 30, 2024. Finally, we invested a total of $67.5 million of cash in the first half of '24, which included the Southeast acquisition as well as ongoing maintenance CapEx, net of proceeds from dispositions. This concludes our formal commentary, and now -- and we'd now be happy to respond to any questions that you may have. Thank you. Operator?
Operator: Thank you. [Operator Instructions] Our first question is coming from Matthew McKellar from RBC Capital Markets. Your line is now live.
Matthew McKellar: Hi, good morning. Thanks for taking my questions. First, can you maybe just talk about what you're seeing in terms of the landscape for acquisitions and maybe what your sense is of how seller expectations might be trending?
Amar Doman: Yeah, for sure, and thanks for the question. We are seeing more opportunities in the acquisition market as things have normalized coming out of COVID, and we've had some runway now behind us post pandemic. So, we're starting to get back into the strike zone. Of course, we consummated the Southeast acquisition this year and we are working on others all the time. So, the environment is healthy now, I believe, for further M&A activity for our company.
Matthew McKellar: Great. Thanks very much. And then maybe next, it's been about a year since the tragic fire in Hawaii, I think. Could you maybe provide some color on how your business there has evolved over the past year? And maybe just talk around your expectations for how business trends through the balance of the year given the pace of rebuilding activity you're seeing?
Amar Doman: Yeah. Doman is slowly coming back. We've supplied the first school that was rebuilt immediately under sort of a hustle order, if you will, to get done. There are some construction coming up with some small apartment buildings that we are contracting to supply, but no boom in Hawaii, so things do move slowly down there. Very tragic, but we'll have a lot of years of rebuild coming out of that, again through tragedy sadly, but Lahaina will be a good spot for us, both on the electrical side and the wood side as the years and permitting starts to unfold.
Matthew McKellar: Okay. Thanks very much. And then, last one for me. Could you maybe just speak to what you think the implications to your business might be if we see a Canadian rail strike?
Amar Doman: Yeah. I think on our side, we've got pretty good supply even via truck if that happens, but that would certainly give lumber a heroin shot in Canada. So, if that happens and we're starting to see SPF creep up, if I know you follow it, so you're seeing a creep up in the cash markets, everybody is under bought. That looks like a legitimate strike, could happen here. So, that will certainly impact the SPF market immediately. And I think we're going to be okay on the supply side, but heading into fall, it might balance a little bit depending on how long it goes, but certainly it wouldn't hurt the lumber market at all.
Matthew McKellar: Thanks very much. I'll turn it back.
Amar Doman: Thanks.
Operator: Thank you. Our next question is coming from Yuri Zoreda from Canaccord Genuity. Your line is now live.
Yuri Zoreda: Hey, good morning, and thanks for taking my questions. So overall, I know that pricing has been a big headwind, but just curious as to how volumes are faring and your expectations for the second half based on what you're seeing so far?
Amar Doman: Yeah, I think the volume trends will be continue -- sorry, continue to follow Q2, flat to off a few percent. It's just a little sluggish. We had some pickup down in Texas with the hurricane that hit Houston really hard in the associated areas. So, we did have a volume pickup there, obviously, in our fencing items and some decking items for sure. But really we see this sort of flat boring pace for the rest of the year, on pace with Q2, with some pricing appreciation on the lumber side is what we're forecasting internally, kind of came off the bottom a few weeks ago.
Yuri Zoreda: Thanks. That's very helpful. And just briefly, looking at the SG&A line, you've been delivering on the cost containment front. It was just a bit higher this time around, and I understand that partly reflects Southeast, if not mostly. So, just curious as to whether there was anything else there that was one-time in nature or is that a good rate -- good run rate for the business going forward.
James Code: Yeah, that's -- yeah, it's Jay here. Yuri, that's correct. That was almost a 100% driven by the acquisition of Southeast Forest Products in the quarter. So, you could expect to see a similar number going forward, of course, keeping in mind that there is some seasonality to SG&A with us. We tend to ramp up some costs in the summer months and then back off a little bit in the slower colder months of the year.
Yuri Zoreda: Okay. That's all very helpful. Thank you, guys. I'll turn it over.
Operator: Thank you. [Operator Instructions] Our next question is coming from Ariana Milin from CIBC Capital Markets. Your line is now live.
Ariana Milin: Hello, good morning. So, last quarter, you had mentioned that regional volumes were a bit weaker in Canada. Did you see this persist in the quarter?
Amar Doman: Yes, we did. All across Canada, volumes were a little bit weaker. We have seen in the third quarter a pickup kind of mid-July into now in the East and in the West. So, it was a bit of a late start for whatever reason, but the volumes have picked up again in Canada. We don't see a runaway strong volume third quarter, but certainly it's healed and recovered from that sluggishness of Q2 here in Canada.
Ariana Milin: Okay. Thanks. That's helpful. And then, how do you see treated lumber prices faring in the South during the second half of 2024?
Amar Doman: Yeah, I think better than the first half. We're seeing that uptick slowly come now, but no runaway market. No crystal ball here, but we certainly bottomed, I believe, three weeks ago, and it's sort of just depending on the item or dimension that you're looking at whether it's 4x4 or certain different items have more strength than others, but it's still just a -- it's not a good lumber market as we all know. It's just -- it's oversupplied. And if we hear of some more curtailments, I think that's what's going to steady to up the market even a little bit more. But right now, it's just -- it's firmed up from where it was and it's better. It's not good, but it's better.
Ariana Milin: Okay, fair enough. Thanks. That's all I have for now. I'll get back in the queue.
Amar Doman: Thanks.
Operator: Thank you. Next question is coming from Zachary Evershed from National Bank Financial. Your line is now live.
Zachary Evershed: Good morning. Thanks for taking my question. Amar, following up on your curtailment comment, could I get your thoughts around sawmill cost curve versus current pricing levels? Where do you think the floor is?
Amar Doman: Yeah, I think right now Southern Yellow Pine is just profitable and SPF is still looking like it's printing in the red for the major saw millers. So, there's still, I think, some pain there. But I think it's getting closer to breakeven costs, which is good and bad. The good news is that's good for those great suppliers of ours, but the bad news is it may allow them to keep cutting which will kind of put a lid back on the price. So, a double-edged sword a little bit there, but we're thinking that we still want higher lumber prices and healthier lumber prices and healthier sawmills. So, the trend is still better for all of us involved and I think they are around those breakeven levels to answer your question.
Zachary Evershed: Got you. Thanks. And so, it's really that difference in cost to produce that's driving the bifurcation between SPF and SYP?
Amar Doman: Yes.
Zachary Evershed: And I'm not sure if you're going to be able to disclose, but with Southeast, what's your rough split across commodities in the portfolio now?
Amar Doman: Yeah, I mean, Southeast is purely treated lumber in the two new markets, of course, Indiana and Arkansas. And for us, we talked about buying this business kind of midway through here in the season. So, we don't have any forecast to disclose really on those on that acquisition, but we can tell you that's really a 2025 strategy as we start to reset and go after a whole bunch of different customers that we've already been talking to for next year and starting to bring in our volume buying strategies before we brought in our chemical pricing to get the synergies that we've talked about. We've integrated the computer systems in under 60 days and the team did a great job at Doman Lumber to do that. And now we're looking forward to expanding the margins and growing the business into, again, a pile of new markets for us, which we're very excited about, but a lot of that's going to come next year.
Zachary Evershed: That's helpful color. Thanks. And then, just one last one for me on AZEK. Did that new contract change anything, bring in new business or exclusivity?
Amar Doman: Yeah. So, AZEK for Canada, we're partnered with AZEK down the US West Coast, and we have a great partnership. And up in Canada now, we're adjusting to the AZEK brand for our composite materials. It's going to be a strong brand for our Doman Building Materials division here in Canada and we're very excited to be partnered with, call it, 1 and 1A, Trex is 1, AZEK is 1A, growing rapidly. And we're very excited about 2025 in the composite materials we're going to be distributing across the country here.
Zachary Evershed: Thank you very much. I'll turn it over.
Amar Doman: Thanks, Zach.
Operator: Thank you. Next question is coming from Ian Gillies from Stifel. Your line is now live.
Ian Gillies: Good morning, everyone.
Amar Doman: Good morning, Ian.
Ian Gillies: I think it was exactly a year ago this quarter where you talked about gross margins being in that 14% to 16% range. We've obviously gone through a very volatile commodity price marker. Do you see any reason maybe to update that view or change it because they've generally been quite strong?
Amar Doman: Yeah, we think that's the neighborhood, and it just depends on the severity of the volatility of the lumber markets that's going to move that around a little bit. Now that we're through that COVID gyration stuff, this is our neighborhood. And again, the base price obviously being stronger benefits Doman. And if it's weaker, it weakens our gross margin dollars as evidenced here in Q2. We're starting to see the market pick up. But again, that is the neighborhood. I don't think we would adjust that. Jay, would you agree?
James Code: I would say so. And keeping in mind the 17% in the comparative for last year that was sort of a high watermark for us where everything kind of lined up perfectly from a gross margin perspective last year. So, at 15.7% for this quarter, we're very satisfied with that performance and we should be pretty typical going forward.
Ian Gillies: That's helpful. And then, as we think about the remainder of the year and the working capital release, do you think it's similar to prior what I would call normal years, or is there going to be anything unusual because of some of the commodity fluctuations through the first half of the year?
James Code: No, Ian, we think that -- it should be a pretty typical pattern that we'll see in the second half of '24, nothing unusual there. You get a little bit of timing difference on when it releases, but we expect that trough on working capital to, as it always does, come about in the November-December timeframe, and no reason not to think it will be a typical pattern.
Ian Gillies: Okay. Thanks very much. I'll turn the call back over.
Amar Doman: Thanks, Ian.
Operator: Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Amar Doman: Thank you...
Ali Mahdavi: Thank you, operator, and thanks everyone again for joining us today. Should you have any other follow-up questions, please feel free to reach out to us. That concludes today's call and we look forward to speaking to you again on our third quarter conference call.
Operator: Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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