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Good day, ladies and gentlemen. Welcome to the CanWel Building Materials Group Ltd. Fourth Quarter and Full Year 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ali Mahdavi, Investor Relations. Please go ahead.
Thank you. Good afternoon, everyone, and thanks for joining us for CanWel Building Materials' Fourth Quarter and Full Year 2017 Financial Results Conference Call. Joining me this afternoon are CanWel's Chairman and Chief Executive Officer, Amar Doman; and Chief Financial Officer, Jay Code. If you've not seen the news release which was issued after the close of markets today, it is available on the company's website at www.canwel.com, as well as on SEDAR, along with our MD&A and audited financial statements, which we expect to have filed shortly and available to you. I would also like to remind you that a replay of this call will be accessible until midnight on March 22. Before we begin -- sorry, following the presentation, we will conduct a question-and-answer session for analysts only. Instructions will be provided at that time for you to join the queue for questions.Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of CanWel Building Materials Group Ltd. and all of its representatives on 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 management's discussions and analysis, 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.
Thank you very much, Ali, and good afternoon, everybody. Thank you for joining us on today's call. Let me begin by highlighting some of our key financial metrics, followed by some color on our operations during the fourth quarter and what we are seeing which gives us continued confidence across our business segments. Then I will hand the call over to Jay Code who will drill further into the numbers.Following the finish -- it's a very strong finish to 2016, fueled by robust organic growth and strategic acquisitions. In 2017, we maintained our focus and disciplined approach in the continued pursuit of growth, profitability and shareholder value creation. Nearly all of our key financial metrics, including revenues, gross profit and EBITDA, approached or exceeded record levels. Despite some softness in the Canadian economy and the impact of external factors such as a weak Canadian dollar and only slowly improving oil prices, our performance led to robust financial results in 2017 as a result of CanWel's resilient business foundation.As you may recall, we further strengthened this foundation in the third quarter with CanWel's entry into the Hawaiian building materials market through the acquisition of Honsador Building Products Group, which ultimately expanded the geographic footprint of the company beyond the West Coast of the United States. This acquisition contributed greatly to our success in late 2017 while complementing our California Cascade operations.Our focus on organic growth, complemented with our disciplined acquisition strategy and ongoing cost management, resulted in annual revenues, gross margin and adjusted EBITDA approaching or exceeding record levels at $1.1 billion, $149 million and $63.7 million, respectively, in 2017. I'm particularly pleased with our performance in 2017, given we were able to achieve these near-record or record results in certain instances despite the weather and wildfire-related events, which had some negative effect in our Forestry business during the first 9 months of the year. The net impact of our acquisitions to date provided us the foundation for these improved returns, a vaster footprint and deeper brand awareness in many parts of Canada, and now in the U.S. Going forward, we expect continued progress, growth and performance on these acquisitions to contribute to our growth profile while reducing CanWel's dividend payout ratio. The 12 -- the trailing 12-month revenues once again exceeding the $1 billion mark for the third consecutive quarter. It is important to note that our various business segments continue to perform well, in line or exceeding our expectations. Our unwavering focused (sic) [ focus ] on cost optimization has enabled us to translate our success at the top line into improved margins and earnings growth. As such, I am pleased with our efforts during the fourth quarter when revenues increased, call it 29% to $276.2 million; gross margin increased to 15.6% from 12.3% in Q4 2016; the adjusted EBITDA increased 43% to a record $13.4 million; and our net earnings increased 23.5% to $7.1 million before nonrecurring items.During the quarter, our core distribution business continued to perform in line with our expectations. We are pleased with the recent performance of our Forestry business segment and remain very enthusiastic and confident about the growth prospects ahead. We look forward to further demonstrating the strength and leverage available in our business model as we continue to take advantage of all sensible organic opportunities as well as strategic scenarios where we can accelerate growth. The capital markets continue to be supportive of our strategy in 2017. We successfully completed 2 bought deal equity financings totaling $97.2 million, with the proceeds being used in part to fund much of the acquisition of Honsador and also to reduce the balance of a revolving credit facility earlier in the year.The recent financings have -- which have helped fund a series of accretive acquisitions and strengthened the balance sheet, have also significantly improved the liquidity profile of the company's listed shares, with the average trading volume steadily improving when compared to previous years. We are encouraged and thankful for the continued support of the institutional equity markets and the overall investment community for taking part in funding the growth of our business as we push forward as a major industry player in North America and focus on building an even brighter and stronger future for our company. On the heels of RBC Capital Markets' launch in coverage on CanWel during the fourth quarter, subsequent to year-end, we were extremely pleased to have CIBC World Markets initiate coverage on CanWel in late February. This marks the second major Canadian bank to provide research on our company. We look forward to working with all of our financial partners as we continue to strengthen and grow our company.We continue our disciplined approach in managing and growing our core business while tracking and executing on accretive growth opportunities, further strengthening our financial performance and enhancing shareholder value based on a fundamentally sound and sustainable growth plan. In 2017, CanWel enjoyed a very strong year with all of our key financial metrics meeting, and in certain instances, beating our expectations. We are tracking well as we continue the path into building a bigger, stronger and more sustainable CanWel for our shareholders for the future. We remain quite excited with the prospects of showing you record highs across our various key financial metrics in the quarters and years to come. 2018 is off to a strong start and we have a bright future ahead of us. We look forward to sharing our continued success and performance with you as we push forward in 2018. With that, I would like to ask Jay Code, our CFO, to take over and provide a review of the company's fourth quarter financial results in greater detail, and then we will open up the lines for your questions.
Thanks very much, Amar, and good afternoon, everyone. Just a reminder that CanWel's fourth quarter and full year 2017 results will be released shortly, and these results are presented in accordance with International Financial Reporting Standards and presented in Canadian dollars unless otherwise noted. Please also note our operations are, at times, impacted by the seasonal nature of our industry, and accordingly, our operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.Sales for the year ended December 31, 2017, were $1 million -- or sorry, $1,136,000,000, which compares to $978.3 million in 2016, an increase of $157.7 million, or 16.1%, due to the factors I'll discuss below. Sales for our Building Materials Distribution segment increased by $142.4 million or 15.2%, largely due to the company's continuing focus on its product mix strategy and target customer base, the continued strengthening of U.S. housing markets, the results from the Honsador and TFI acquisitions, as well as an upward trend in construction material pricing.Sales for the Forestry segment increased by $15.2 million or 37.7%. And we note that our Forestry segment commenced operations on May 13, 2016, and therefore accounted for only 7.5 months of activity in the comparative prior year versus the full year in 2017. Sales for the segment were negatively affected by adverse weather conditions and regional wildfires at various times during the year. We note that direct damage resulting from the 2017 wildfires to the company's forest labs was minimal.The seasonally adjusted annual housing start rate for the year was approximately 11% higher than last year and the company's sales for the year were made up of 62% construction materials compared to 61% in 2016, with the remaining balance of sales resulting from specialty and allied products of 32% and Forestry products of 6%. Gross margin dollars increased to $152.2 million in the year compared to $124.5 million in 2016, an increase of $27.7 million or 22.2%. Gross margin percentage was 13.4%, an increase from the 12.7% achieved in 2016. The increase in margin dollars and percentage is mainly due to contributions from our 2016 and 2017 acquisitions, the previously discussed upward trend in construction material pricing, and a change in the company's sales mix within the general categories of construction materials and specialty and allied products.Expenses for the year ended December 31, '17, were $105.8 million as compared to $85.9 million in 2016, an increase of $19.9 million or 23.2%. And as a percentage of sales, expenses were 9.3% this year compared to 8.8% in 2016. Distribution, selling and administration expense increased by $16.7 million, or 22.8%, to $19.2 million, from $73.5 million in 2016. The increase is primarily related to additional expenses from the operations of our acquisitions.As a percentage of sales, these expenses were 7.9% in the current year compared to 7.5% in 2016. Depreciation and amortization expenses increased by $2.3 million or 18.9%, from $12.4 million in 2016 to $14.8 million in 2017.Nonrecurring restructuring costs for the year ended December 31, 2017, were up $834,000, related to the closure of certain noncore Forestry operations earlier in the year.Finance costs for the current year were $8.3 million, consistent with 2016, and acquisition costs were $3 million compared to $2.6 million in 2016, an increase of $396,000 or 15.4%. These costs include management resources as well as legal, environmental, financial and other advisory services directly attributable to acquisitions. In 2016, these costs were primarily driven by acquisitions -- by the acquisitions of CanWel Fibre and Total Forest Industries, while this year they primarily related to the Honsador acquisition. Our EBITDA for the year ended December 31, 2017, was $59.9 million compared to $68.6 million in 2016, a decrease of $8.7 million or 12.7%. EBITDA in 2017 was impacted by certain nonrecurring items, including the previously discussed acquisition costs of $3 million and restructuring costs of $834,000. EBITDA in 2016 was impacted by acquisition costs of $2.6 million and a gain on bargain purchase of $24.2 million, both relating to the acquisition of Jemi Fibre in May of that year.Adjusted EBITDA, which excludes these nonrecurring items, was $63.7 million in 2017 compared to $51 million in the prior year, an increase of 12.7% or 24 -- $12.7 million or 24.9% compared to 2016. Our net earnings for the year, excluding the impact of these nonrecurring items, would have been $31.6 million compared to $21.8 million in 2016, an increase of $9.8 million or 45%.With regards to our cash flow for the period ended December 31, 2017, operating activities before cash -- noncash working capital changes generated $32.9 million in cash compared to $28.8 million in the same period last year. This improvement was primarily the result of our year-over-year increase in net earnings when factoring out 2016's noncash gain on bargain purchase.During the year ended December 31, 2017, financing activities generated $75.9 million of cash compared to $10 million in 2016; shares issued, net of issuance costs, generated $91.9 million of cash compared to $78.9 million in 2016, relating to this year's public offering and private placement compared to last year's public offering and a private placement in the prior year as well. Dividends paid to shareholders aggregated to $36.1 million compared to $27.7 million in 2016. The increase in dividends paid was due to the higher weighted average number of shares in the current year, driven by these equity offerings. The company's revolving loan facility increased by $31 million compared to $25.8 million in 2016. And we note, the company was not in breach of any of its loan covenants in either 2016 or 2017.Repayments of our nonrevolving term loan consumed $2.7 million compared to net funds received of $39.3 million in 2016. These funds were -- in 2016, these funds were used to pay a portion of Jemi Fibre's callable loan, which consumed a total of $52.2 million of cash in the prior year. Repayments of our CanWel Fibre division's equipment term loans consumed $3.5 million compared to net funds received last year of $5.4 million. In 2016, early repayment of the company's convertible debentures and related interest consumed a combined $45.6 million of cash, and there was no comparable transaction to this during 2017. Investing activities consumed a total of $103.9 million of cash compared to $13.3 million in 2016. Investing activities this year include the expenditure of CAD 102 million for the acquisition of Honsador, whereas 2016 included $8.2 million for the TFI acquisition. Cash purchases of property, plant and equipment were $6.5 million compared to $4.9 million in 2016 and proceeds from disposition of property, plant and equipment were $3.5 million, largely related to equipment sold with respect to the previously discussed closure of noncore CanWel Fibre operations earlier in the year.This concludes our former -- our formal commentary and we would now be happy to respond to any questions that you may have. Operator?
[Operator Instructions] And we'll go first to Steve Hansen with Raymond James.
Quick ones -- quick couple for me, if I could. Just first, maybe on Honsador and you've got a few months under your belt now. Just wonder if you'd describe where you're at with the integration process there. You outlined a couple of things you wanted to get under your belt when you first made the transaction, just trying to get a sense for where you're at on those milestones. I recall chemical sales being one; treatment plant operating rates, a few others.
Yes, Steve, it's Amar. So yes, certainly, day 1, we had our chemical pricing brought into sort of a family rate, if you will. So that's been taken care as of October 2. So that's in place and in motion. Second of all, we've started to make improvements at the large treating plant we now own in Honolulu. And we have made some large strides; more to come, with very, very minimal capital investing. And I can tell you that we're on track there. And of course, there's not a lot of integration to do, Steve. It's just more improving on the buy side, which we're working on with our vendors, starting to change arrangements and get more direct, than go through brokers. So everything is on track at Honsador.
Okay, great. And your lumber prices have had a pretty extraordinary move here over the past several months. We all know that you benefit from higher building materials prices. But is there an additional upside that you capture as prices get to such high levels up here? I'm just trying to get a sense for -- if there's any sensitivity changes as prices move to the degree they have recently.
Well, I think that when markets are moving to the upside, you're always capturing a little extra margin, certainly. So we're certainly benefiting from that. It's not material, but the trend is our friend, so to speak, and we like these strong prices because, of course, in our fixed margin business, which is most of it, we're getting gross margin dollars due to the nice tailwinds the lumber, plywood and the OSB market is providing for us in the Canadian distribution system.
Okay, great, helpful. And then just the last one and I'll just jump back in the queue. But just curious if you've seen or have you been impacted by any of the rail and transport congestion issues that have hit Western Canada here the last 3 to 4 months, there's been some pretty intensive outages -- or service outages by a few of the carriers. Just wondering if that's impacted any of your operations at all.
Yes, I'm not sure we have a large financial impact, but there is a direct and indirect impact there. So let's talk about the direct impact. [ Out right ] now, we're having difficulties getting railcars into our Prince George treating plant to [ chute ] out to our Prairie operations. So there's certainly lag time on getting centerbeam cars. And the indirect is us trying to get lumber out of the mills. So I think a lot of the mills you probably cover, Steve, or your group does, is -- you're reading about it in the paper. There's just a car shortage to get material out of mills, which is frustrating the lumber market even more and I think causing some of these higher gyrations that we see in prices. So affecting it, I'm not saying it's harming CanWel, but it's certainly alive and well, and it's mildly painful for us. But it's certainly keeping the inflation [ train going ] .
Our next question will come from Charan Sanghera with RBC Capital Markets.
Just first on SG&A margin. It seems like it -- naturally should have gone up with the Honsador acquisition, but at around like 10% of revenue, does that kind of -- was there anything extra this quarter that we should look to adjust down over 2018? Or is that about the run rate we should expect?
Yes. Thanks, Charan, it's Jay here. That should be pretty typical of what we expect going forward with the addition of Honsador now. You should expect to see things around this level.
And any steps that you would take to maybe bring that down lower over the next year?
Yes, I don't see a ton of that. As mentioned on the Honsador strategy there, it's a business that runs on its own, but certainly we're going to be looking at other strategies to expand the gross margin over time. But buying the business certainly wasn't a cost-cutting exercise, except for the efficiencies and obviously the capital pricing that we can deliver at the treating plant operation. But...
And Charan, the SG&A levels at Honsador are certainly -- they're not a surprise to us. They're as expected. And just as a reminder, Honsador, the model for Honsador is a one-step distributor. So they're selling directly to builders. So that requires a heavier SG&A line to pick smaller orders, et cetera, than what we do, say, for example, in Canada, with our sales to retailers. With Honsador, higher margin and higher SG&A.
Got it. Just maybe shifting gears to the Forestry division. It seems like -- I haven't gone through the numbers fully, but it seems like you've had no rebound in Q4 as expected. Any other further commentary on the Forestry division and how it's performing right now?
Yes. Just -- it's performing as expected due to us having the appropriate weather conditions. So it's been nice and cold in the [ East curtains ] where we are. And so we're back harvesting in, I would say, a very decent fashion as we started to indicate in the fall, and we're still carrying on quite nicely. So polar opposite from last year and -- where we had a lot of mud, a lot of rain and then just way too much snow. We've got great, great conditions currently.
What about on the pricing side?
Yes, the pricing side has been strong. We've had increases on all of our products going off the timberlands and our post and pole operations as well. So we're certainly seeing inflation, which bodes well for the division.
And just touching on Steve's question on higher lumber prices. Lumber has hit like multiyear records and Random Lengths are saying that composite is at all-time highs. Are you seeing any impact on volumes, by any chance, in Canada?
In Canada, I would say no. It's kind of just carrying on the way it would this time of year. We don't sell a lot of material this time of year, as you know. It's -- fourth and first quarter, it's still pretty cold and there's not a lot of houses going up, except really in kind of BC. So I would certainly say that our less-than-truckload activity, this is where we make a little bit of extra margin too, in the shoulder seasons with lower volume. But I would say, overall, dealers aren't saying we're not buying because it's high, it's just because it's winter. So that could further tick prices up. Although Canada being a small consumer compared to the States, it's really about the States. But we'll see some more stockpiling coming on the buy side, we think, within 30 days as spring breaks.
Our next question will come from Leon Aghazarian with National Bank.
Just to pick up on an earlier question on the SG&A. You're referring to 10%, but obviously -- I mean, there's a seasonal adjustment, right, I mean, as we go through Q2 and Q3. Or is it 10% consistently throughout the year?
For sure, Leon. Q4 being seasonally one of our low quarters, along with Q1, that percentage is going to be higher, yes.
Yes, okay. Yes, I just wanted to clarify that.
Of course, yes.
Okay, that's helpful. And then just on your -- I mean, we don't have, I guess, all the financials just yet, but I mean, could you break down just kind of the organic growth by volume versus pricing? Or can you just give us a general idea as to the mix there, on the overall in the business?
Yes. Well, obviously, the big change this quarter, organic versus strategic, is Honsador. So Honsador was in for 100% of this quarter versus nothing in the comparative. So a big impact on Q4. We're not going to disclose the exact impact of our acquisitions. We don't segment the information, of course, that way, Leon. But the most significant impact was Honsador, followed by organic legacy growth.
Okay. So just to be clear, the split between -- so dollar-wise, if you take the growth, you're not willing to give us what the acquisition contribution was versus the organic? Or can I interpret the majority of that growth as being the acquisition contribution?
The majority was with respect to Honsador, but we're not going to break that down.
[Operator Instructions] We'll hear from Hamir Patel with CIBC Capital Markets.
Amar, could you maybe comment on what sort of organic volume growth you might expect this year in the Canadian distribution and maybe also on the treating side in both Canada and the U.S.? And any comments you might have on how the M&A pipeline is shaping up.
Yes. So we certainly don't put out numbers that we're looking for. We certainly have our budgets and what we're looking for inside the company, but we won't publicly state what organic growth targets we have. All I can tell you is, the Canadian housing market looks fairly, we think, similar to 2017, is kind of our outlook, with a little weakness in Ontario being picked up by strength in Quebec, and Atlantic and Alberta recovering, especially in the North. So we think Canada is going to be good and we think the U.S. will be strong. And from our standpoint, we think we'll have a decent year. And I think the other thing that is assisting everybody in the industry right now that's associated with wood products is the inflation. So as far as your crystal ball looks out, we're seeing a lot of good drivers towards higher highs and lower lows when you come into the Forest products segment as well. So it's pretty much all systems go for a good year in 2018, and we've got a nice start to it as well, I can add that in here.
Okay. And in terms of the M&A pipeline after all the tax reform in the U.S, has that changed maybe how you're thinking about it and how some of the vendors are thinking about valuations?
Yes, I don't think it's changed overnight. But certainly because we're looking at strategic smaller acquisitions that are "tuck-ins," there is some tax effect which will certainly help entrepreneurs if they're going to monetize their business with us being a natural buyer, we believe, in certain regions that we're interested in. So I think this will only help. I'm not saying the pipeline is tight, I'm just saying that it will help unlock value because if you're a seller now of your business, there's probably no better time [indiscernible], in fact, you're going to get with that release that's been brought in by the new administration. So I think it will help in our discussions when someone's looking what they're going to net out after we buy them out. And the pipeline, again, we sometimes don't do anything for a little while, sometimes we do a couple in a year, it just depends, but we stick to those metrics and we don't really move off of them and we remain very disciplined and very strategic on where our growth will come from.
And Jay, maybe just coming back to that SG&A question. I mean, is there sort of maybe an annual figure or an annual percent of revenues that you could point us to for 2018?
Yes, certainly, Hamir. We have internal targets for now. We have budgets for that, very detailed, but we're not -- our policy is not to share that publicly.
Our next question will come from Anoop Prihar with GMP Securities.
Amar, just -- you spoke a little bit earlier on about Jemi -- I beg your pardon, CanWel Fibre. But can you just confirm, so far this quarter, so January, February, you've had no weather issues at all on the harvesting side?
No, on the harvesting side, no. On post-production, we had some days of close to minus 40 where the guys couldn't really operate outside, but it's nothing that would affect us. So no, we've had a great start to the year.
Okay. And so typically, from a seasonality perspective, then it's Q2 where you get a little bit of warmer weather which slows things down?
Yes, you can lose up to 3 weeks due to breakup, and that's just every year in history as you know. So when the roads begin to thaw out, you can't put any weight on them and they have load restrictions [ road band ]. It just depends on how long it takes to go from a frozen road to a firmer dry road, and that's anyone's guess. But we're starting to see 2, 3 weeks out now. You could -- when you look at the long, long-range forecast it's starting to -- getting into spring, so it will probably hit us later this month.
And we'll take a follow-up from Steve Hansen with Raymond James.
Yes. Sorry, just one quick follow-up. Amar, you've briefly touched on some of the activity levels in Canada. But can you just maybe give us a sense for how activity does look down south of the border, in California and Hawaii? Is it matching up to your expectations? There's been obviously a number of wildfires in California recently as well. Any sort of early-stage impact from that as yet? Or is that still a deferred sort of matter?
Yes. Let's start with Hawaii and then I'll move into California. So Hawaii, still relatively new into the business there. But looking back at a lot of their historical numbers, et cetera, Hawaii is a very project-driven state. So it takes months and months to get permitting, then all of a sudden you're building a whole bunch of units, then you sit on your hands. And also we have 14 locations, 7 being electrical and 9 being lumber and building products. So that's spread out over the islands, with Oahu obviously being the big driver. But I can tell you, the health of the business is good and the projects that are in the pipeline that we're quoting are large. We're quoting part of the lanai business as well, which is going to commence in about 2 years. So long term, the fundamentals in Hawaii are great. As we mentioned when we acquired the business, Hawaii isn't a state that's going to double their housing starts. The islands are slow and sleepy. But certainly we've got a big piece of the market share there, which we're very proud of. And we'll continue to execute and really deal with the contractors that build anything, that are large and have multi-units attached to them. So we're pleased there. Now when we get back to the mainland, when we look at California, Arizona, Nevada and Utah where we service, since we've been in the business, we haven't seen it this strong. So it's very, very busy. Labor is tight. We see a very strong 2018, followed by the last 3 years, which have been just up, up and away, and we're managing the business well. And I must say that our team is doing a great job there in a very, very strong housing economy. It's extremely busy, and the remodel side is just as busy as well for us. So I've got to say things look pretty good on the U.S. West Coast, Steve.
Okay, great. And just one final one, if I may, on the CapEx side. Can you just remind us the CapEx spend or planned spend for this year?
Yes. We tend to say that we're in and around that kind of $6 million mark, somewhere in that zone. That would include everything, including the Fibre division, which takes a little bit more CapEx. So that would include Hawaii, California, all the treating plants up there being 11, and the big distribution business...
It could be some small upgrades at Honsador as well. We're looking at that now.
Exactly. They'll all be in that number. And frankly, a lot of this is to make [ it ] improvements. One thing we like about investing capital in the U.S., again under the administration, is the 100% tax write-off, which is allowed on capital equipment spends as well. So if there are things within our budget we can do this year, we want to get them done or next year while these nice tax breaks are in place.
With no additional questions in the queue, I'll turn the floor back over to Ali Mahdavi for any additional or closing remarks.
Thank you. On behalf of the CanWel team, I'd like to once again thank you for joining us this afternoon. Our apologies for the filing of the documents initially just being a little bit delayed this afternoon, but they're all filed and uploaded onto SEDAR. So feel free to access them. If you have any questions, feel free to contact me directly, and we'll make sure to respond to all questions. We look forward to speaking with you again during the first quarter 2018 results conference call. Have a great evening. This concludes today's call.
Thank you.
Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.