Doman Building Materials Group Ltd
TSX:DBM
Earnings Call Analysis
Q4-2023 Analysis
Doman Building Materials Group Ltd
The company entered 2023 following pricing peaks in 2020 and 2022, to navigate a markedly lower pricing environment for construction materials. Despite this headwind, the company demonstrated stability, recording strong results across key financial metrics like revenue, gross margin, EBITDA, and net income.
The fourth quarter showed commendable results with revenues of $527 million and a gross margin of 15.3%, culminating in net earnings of $10.5 million. This was bolstered by the company's focus on operational efficiencies and cost management, which also allowed for a continued quarterly dividend of $0.14 per share.
The company has strengthened its balance sheet, enabling strategic opportunities such as the all-cash acquisition of Southeast Forest Products Treated Limited, poised to extend their operational footprint into new geographical markets and improve capacity by a substantial margin.
Year-end sales saw a decrease of 18%, a reflection of lower pricing. Gross margin fell slightly, yet showed improved percentage margins due to a stabler pricing environment. Expenses saw a nominal increase, and finance costs grew by 7.9% due to rising interest rates, although this was mitigated by reduced borrowings.
The company reduced its net debt by $56.9 million and upheld its dividend commitment, marking 55 consecutive quarters of returning capital to shareholders. Investment in property, plant, and equipment rose to $14.1 million from $4.5 million the previous year, signifying ongoing growth and development.
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Welcome to the Doman Building Materials Group Limited Fourth Quarter and Full Year 2023 Financial Results Conference. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ali Mahdavi. Thank you. Mr. Mahdavi, you may begin.
Thank you very much. Good morning, everyone, and thank you for joining us for Doman Building Materials Fourth Quarter and Full Year 2023 Financial Results Conference Call. Joining me this morning are Amar Doman, Chairman and Chief Executive Officer; and Jay Code, Chief Financial Officer of Doman Building Materials. If you have not seen the news release, which was issued yesterday, it is available on the company's website at domanbm.com as well as on SEDAR, along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on March 22. Following the presentation of the 2023 fourth quarter and full year financial results, we will conduct the 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 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 MD&A as these outline the material factors, which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today's call, and management does not anticipate providing guidance in future quarterly or interim communications with investors. I'll now turn the call over to Amar.
Thanks, Ali, and good morning, everyone. Thanks very much for being on today's call. And let me begin by highlighting some of our key financial metrics, followed by some color on our operations during the fourth quarter. And then I'll hand the call over to our CFO, Jay Code, who can review the numbers in further detail. 2023 would be best described as a challenging year vis-a-vis pricing and several macroeconomic headwinds. We entered 2023 following an extended period of premium pricing levels for building material products, which began in 2020 and lasted into early 2022, including some periods of above-average volatility. I'm very pleased and encouraged with our ability to demonstrate stability and strength in our financial performance given pricing levels for lumber, OSB and panel markets in 2023, which were meaningfully lower when compared to 2022. While pricing levels are nowhere near their 2020 -- sorry, 2022 peak, the combination of a more stable pricing environment, our continued action towards executing our strategic growth objectives, managing costs and optimizing operational efficiencies resulted in strong financial results as we closed out the year. Despite the impact of the lower pricing environment for construction materials on a year-over-year basis, we exited 2023 with strong performance across all of our key financial metrics, including revenues, gross margin, EBITDA, net income, also while paying our shareholders a quarterly dividend of $0.14 per common share or $0.56 per common share on an annual basis. I'm very proud of the company's performance throughout 2023, given the reversal and decline in the pricing for lumber, OSB and panel markets more so when compared to our record results from 2021. Despite the pricing declines we experienced during the year, we remained encouraged and pleased with the resilience of our diversified business model withstanding these macroeconomic cycles resulting in annual revenues, gross margin, adjusted EBITDA and net earnings totaling $2.5 billion, $402.7 million, $196.1 million and $75.8 million. Now Focusing on the most recent fourth quarter results, strong activity across all business divisions are ongoing cost management and focused on operational efficiencies enabled the company to realize strong revenue performance while showing robust levels of the gross margin, EBITDA and bottom lines. We are very proud of the strength of our financial performance and believe that there is a lot to be gained from the strength and momentum, which has resulted from our successes in recent years. As a result of these efforts, during the fourth quarter, we continued to see strong demand for our product categories resulting in revenues coming in about $527 million, gross margin at 15.3% or $80 million, adjusted EBITDA at $33 million and net earnings of $10.5 million. And lastly, as previously mentioned, our quarterly dividend of $0.14 per share was declared. Our ability to withstand market pricing volatilities during the price -- sorry, during the previous and most recent market cycles as a result of our tireless focus on operations, gives credit to successful acquisitions we have completed throughout the years, which have [Technical Difficulty] and continue to diversify our business model and as such, have enhanced shareholder value. We remain very enthusiastic and confident about the prospects ahead and look forward to further demonstrating the strength and leverage available in our business model as we continue to be well positioned to take advantage of sensible organic growth opportunities. On the heels of successfully integrating [Technical Difficulty], our relentless focus on paying down debt and strengthening our balance sheet has resulted in our once again being in a strong position to take advantage of strategic opportunities. Given the strength of our balance sheet and our continued quest to take advantage of strategic growth opportunities, subsequent to quarter end, we announced the all-cash acquisition of Southeast Forest Products Treated Limited, in Richmond, Indiana and near Birmingham, Alabama. The plants complement our central U.S. operations and strengthen our footprint by introducing coverage in 8 new states, including the strong Southeastern U.S. markets in select Eastern states. This strategic acquisition exemplifies our strategy of adding scale and volume to our U.S. operations and pressure-treated lumber and specialty wood products headquartered in Dallas. We welcome all of our new great employees from the acquisition. Thanks for coming on. I also hope that you've noticed our updated branding in logo, which was recently launched to properly reflect our evolution and expanding operating footprint in [ Canada ] and the United States. The Doman brand now represents the majority of our business divisions under one banner as the leading supplier of choice for construction and building materials in North America for generations to come. Overall, I continue to be pleased with how our growth strategy continues to unfold, resulting in strong sales and earnings in the face of a tough year-over-year pricing environment while we remain focused on margin protection during these times. And with that, I'm going to ask Jay Code, our CFO, to take over and provide a review of the company's fourth quarter and full year financial results in greater details, and then we'll be pleased to open up the call for further questions. Jay?
Thank you, Amar. Good morning, everyone. Sales for the year ended December 31, 2023, were $2.49 billion versus $3.04 billion in '22, representing a decrease of $547.9 million or 18%, largely due to the impact of construction materials pricing declines. This year-over-year lower average pricing, which range from 26% to 50%, depending on the product category, was partially offset by increased overall unit volumes during '23. The company's sales in the year were made up 74% construction materials compared to 76% last year, with the remaining balance of sales resulting from specialty and allied products of 22% and other sources of 4%. Doman's gross margin was $402.7 million in the current year versus $408.8 million in '22, a decrease of $6.1 million. This year's 16.2% gross margin represents a significant increase from the 13.5% achieved in '22, mainly due to the reduced volatility in construction materials pricing and the relatively stable pricing environment during the year led to higher percentage margins realized by the company. However, the previously discussed decrease in sales driven by lower average pricing, resulted in slightly lower overall margin dollars in 2023. Expenses for 2023 were $274.7 million versus $272.5 million in '22, an increase of $2.2 million or a little under 1%. As a percentage of sales, 2023 expenses were 11% versus 9% in the previous year. Within the expense category distribution, selling and administration expenses increased by $1 million or 0.5% to $206.6 million versus $205.6 million in '22. Recent broad inflationary pressures contributed to higher expenses during the period, but these were largely offset by the company's continued efforts to evaluate and pursue cost savings opportunities. As a percentage of sales, DS&A was 8.3% in '23 compared to 6.8% in the prior year. Depreciation and amortization expenses increased by $1.2 million or 1.8% from $66.9 million to $68.1 million, largely due to the impact of fluctuations in foreign exchange rates on the translation of Doman's U.S.-based operations. Finance costs for this year were $40.5 million versus $37.6 million in '22, an increase of $3 million or 7.9%, largely due to higher interest rates on the company's variable rate loan facilities, which was partially offset by lower average loans and borrowings in '23. EBITDA for the year was $196.1 compared to $203.2 million in '22, a decrease of $7.1 million or 3.5%, mainly due to the previously discussed changes in construction materials pricing, which were partially offset by increased unit volumes. As a result of these factors, net earnings for the year ended December 31, 2023, were $75.8 million versus $78.7 million in '22, a modest year-over-year decrease of $3 million relative to the pricing-related revenue decline of $548 million. Turning now to the statement of cash flows. Doman's ongoing cash flow -- free cash flow generation combined with prudent working capital management drove an overall full year net debt reduction of $56.9 million, inclusive of paying a total of $48.7 million in dividends to our shareholders. Operating activities before noncash working capital changes generated $151 million in cash compared to $138.9 million in '22. The increase in 2023 was driven by significantly reduced income tax payments, partially offset by higher finance costs. Changes in noncash working capital items consumed $15.7 million in cash compared to generating $83.3 million in the prior year. And we note during 2022, we initiated efforts to reduce inventory volumes in anticipation of a potential slowing of market activity, resulting in a significant reduction in working capital and the related increase in cash generated last year. During 2023, management continued these efforts to optimize inventory volumes while maintaining the highest standards of customer service. With respect to overall financing activities, Doman made net payments to equity and debt stakeholders totaling $85.8 million during 2023. This year, we borrowed an additional $62.7 million on our revolving loan facility, which we utilized to redeem the outstanding $60 million 2023 unsecured notes and to repay the $14.1 million balance of our nonrevolving term loan both in the month of June 2023. We note the company was not in breach of any of its lending covenants during the year ended December 31, 2023. Shares issued net of transaction costs generated $1.2 million of cash and payment of lease liabilities, including interest, totaled $26.3 million this year. The company's lease obligations generally require monthly installments, and these payments are all current. We also note that our quarterly dividend payments totaling $48.7 million in 2023, mark 55 consecutive quarters of returning capital to the company's shareholders. Investing activities this year included the purchase of $14.1 million in new property, plant and equipment compared to $4.5 million in '22, representing purchases net of proceeds from disposition. This concludes our formal commentary, and we would now be happy to respond to any questions that you may have. Thank you. Operator?
[Operator Instructions] Our first question comes from the line of Yuri Zoreda with Canaccord.
I was just hoping to get a bit more color on the pressure treating plants acquired from Southeast Forest Products. I understand it expands your traded with capacity by 16-ish percent. But given that you have your other allieds and distribution, just how should we think of it in terms of potential revenue contribution?
Yes, we're not going to forecast revenue contribution. But as noted in our press release, it will be immediately accretive. We started invoicing under our brand on Monday of this week, and we're very excited about adding in capacity of 300 million feet for our operations and growth into 8 new states and virtually 0 overlap. So we're very excited about that. Our goal is to get the production in those 2 facilities higher over the years. But certainly, you can factor in growth this year, but I can't disclose any numbers at this point.
Okay. That's fair. And one more for me. Nice cost containment is in a quite low at $47 million prior quarters, it was around the $50 million to $55 million. So I was just wondering if there was anything [indiscernible] there that brought that further down? And how should we think of that line going forward?
I think that going forward, Yuri, you could expect to be sort of in that range of what you saw in the fourth quarter and the prior year. I wouldn't expect to be as low as the fourth quarter going forward, maybe slightly higher, but we did -- we were successful in reducing costs in a lot of areas during the year.
Our next question comes from the line of Hamir Patel with CIBC.
Amar, are you able to comment on what the purchase price was of the Southeast transaction?
No, we're not. We're -- we've got an agreement, obviously, with the sellers there that we're going to be keeping that to ourselves. But you can just say it's in the range of our normal metrics of where we like to buy these types of assets. And certainly, it ticks all the boxes for us, and we're very, very proud to have these 2 large facilities in our fold. We're very excited.
Okay. Fair enough. And Amar, with the kind of expanded portfolio now in the U.S., are there still any particular geographies or product categories that you're looking to expand into?
Yes. We're looking at all markets, Hamir, and there's still so much growth for us even in the markets that we're already in, there's just endless growth for us. So we've got a strategic plan, we are executing that plan. Our Board has our plan, and we're moving at the right pace, at the right value. We're digesting these acquisitions. And frankly, we haven't done anything in a couple of years after we digest Hixson Lumber, which is now Doman Lumber. And we certainly -- our team there executed very well and has digested the acquisition and made the transition perfectly. And now we're continuing back on our M&A path, and you're going to probably see a few more things happening in the next 12 to 18 months, as we start to find value metrics back into our strike zone. We're patient when they're too high. And of course, when it falls into our value zone, Hamir, you're going to see us pounce on our balance sheet is ready for it.
Our next question comes from the line of Matthew McKellar with RBC Capital Markets.
First, could you provide a bit of color on what treated lumber demand has looked like to start the year? And what your expectations are right for that market in both the U.S. and Canada through the spring?
Yes. It's pretty early, Matthew, but I'll tell you what, our U.S. demand has certainly surprised us at the start of the year in all regions. We are starting the year very nicely on volume. And we're seeing takeaway at the store level. So we manage that with a lot of our customers so we can actually see it selling through to the consumer, much like 2022 and '23, the volumes came out fairly strong and remained strong. So we don't see anything different this year. We're very excited about not only the West Coast. When the sun is out in California, we are pushing a lot of material through whether it's treated lumber, composite railing systems, everything is going. And of course, in the central part of the country, it's been a soft winter and the demand is there and it's selling through more importantly. So that's great. And of course, with our our acquisition into 8 new states, we're just extremely excited about that. That's going to evidence here within a month of it in our first quarter. In Canada, it's been decent as far as takeaway. We gained some new organic growth in Ontario that we're excited about. So we're forecasting a good to slightly up volume year from '23, and I think we're going to hit those metrics pretty easily here.
That's really helpful. It sounds like you're sounding pretty confident you'll be active on the M&A front here over the next while. Are you seeing any changes in terms of the level of competition for acquisitions in the lumber treating or building products distribution space?
I wouldn't say it's any different than any other time. There's always -- there's people looking around to buy and there's some businesses that aren't for sale that just have different strategies longer term. Our goal is to become national and get closer to our national customer base. We have several large national customers, especially United States that continue to grow that we certainly want to partner with them across different regions and continue to grow with them, very important to us and our shareholders. So that's what we're focused on. And there's always competition for these things, but we stick to the metrics that we've talked about, you've heard us talk about over the years. And we're just going to carry on doing what we're doing, and that's the strategy.
Our next question comes from the line of Zachary Evershed with National Bank Financial.
On the topic of the acquisition, what kind of cost do you think can be taken out? And what's the opportunity for ramping up cross-sell synergies?
Yes. I think, number one, we're analyzing that right now as we've got a transition going on from their company to ours as far as functions go. So in a little while, we'll be able to prove out those numbers. We usually don't publicly disclose that. We just get our synergies done and it starts to evidence in our gross margins and our SG&A. And certainly, there's a similar opportunity to maximize efficiencies at the Southeast operations as we do with others. And then second of all, over time, we'd like to layer in, obviously, composite decking, maybe some redwood, some cedar and some railing systems to complement Southeast, which is purely treated. So there's that in some 1-inch programs that we'd like to put in as well, which is untreated wood, which we produce at Doman lumber in Texas and in Arkansas. So there's some pretty cool things, and we're very excited about having these opportunities for us as we go forward here.
Got you. And I think in the past, you've characterized it as roughly taking a full turn out of the acquisition multiple. Would you say that holds true here?
Yes, I think it will. And things like chemical inputs, reduction in cost on materials, all the usual. It doesn't happen day 1, but give us 12 to 18 months, and we'll get that job done.
And so volume sounds quite strong to start the year. What are you seeing in terms of commodity cash prices? And do you think that was a driver of the gross margin uptick in Q4?
Yes, there's a little bit of a lift there, even though fourth quarter started off very sloppy in lumber pricing, it was drifting down, drifting down, but our lumber buyers are going to give them credit. They stepped in and loaded at the right time. And we also have to produce over the sort of the softer months to get ready for the spring season. But we bought right, that helped. A little bit of an uptick here now. Lumber looks pretty firm, to be honest. I like the outlook for lumber right now. The pipeline, using that term, but everyone uses it because that's what it is. It's very dry. Everybody's hand-to-mouth, buy to sell to, and that's tightened up tons or curtailment, especially out of BC. And there's some down in the South. So we're seeing lumber be sneaky strong here and not a runaway rallies act, but certainly, we like the tailwinds we have. We bought well, and that's going to be evidenced as we'll have decent margins here, and we're pretty proud of what this year looks like already. So we're happy.
That's interesting. So inventory levels throughout the supply chain pretty tight. Maybe you could compare and contrast that to the average sentiment in your customers' outlook for the year?
Yes, everyone's -- I think since COVID, everybody is still cautiously optimistic. I think the long longer-term view is interest rates will come down. But the fact that they're not telling us the economy is good, which is good for Doman. So we're kind of happy with right where things are. It's just sort of a goldilocks here. We'll take it. Houses are being built. There's decks being built, fences being built. Lumber pricing is traditionally lower, as Jay indicated in his report here, over the last couple of years, we're back down. What that does is it increases our business where a customer can't spend $50,000 or $60,000 on a deck or their backyard, but they can spend $25,000 and they're spending it. So we're starting to see affordable lumber here increase our volumes, and we do very well in these types of situations and environments. So we like where we're at.
Our next question comes from the line of Ian Gillies with Stifel.
I was just curious if you're seeing differences and pull-through from your customers right now in Canada versus the U.S? I know it's earlier in the year and it's a tough quarter to tell. But the strength of consumer is quite different in each geography.
Yes. Canada, a little bit slower out of the gates, but the housing starts are still there. So of course, we've got large distribution activity in Canada. We're turning our inventories. It's still early, but kind of as the weather starts to unlock. We think we're going to have something fairly flat to 2023. I can't tell you we're overly bullish about Canada. It's just kind of stuck in a band here. But having said that, when we're a little bit slower on the takeaway level, our distribution activities pick up because the lumber yards aren't buying full trucks or anything. They're buying LTL, less than truckload. And that LTL business for us has been great in the third and fourth quarter of '23, and the LTL looks very good for us, and we can pick up a little bit of extra margin on that LTL as we do our mixed truckloads across the country here. So Canada, a bit softer. U.S., definitely looking pretty good out of the gates.
That's helpful. And then you talked a little bit about the M&A pieces. But on the organic side, like is there anything, I guess, you could target either, I guess, organically or from the M&A side on the allied piece that would be interesting right now.
Yes. I don't say there's any big drop in of a product line currently, Ian, but certainly, we can just continue to push into these new markets, we'll have new opportunities to grow, especially on the treated lumber side. But as far as allieds go, no, there's no earth-shattering moment on allieds, but certainly, the allied takeaway in Canada will be important to us as the year unfolds and our inventories are appropriate. They're not high, they're not low. I think -- and they're adhering to the volumes that we forecast. So I think allieds will have a pretty good year. Treated lumbers got a strong year.
There are no further questions at this time. I would like to turn the floor back over to Ali Mahdavi for closing comments.
Thank you, operator. On behalf of the Doman team, I'd like to thank you all for joining us today. If you have any questions or follow-ups, please feel free to reach out directly to myself. That concludes today's call. Wishing everyone a nice weekend. Operator?
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.