Doman Building Materials Group Ltd

TSX:DBM

Greetings, and welcome to the Doman Building Materials Group Limited First Quarter 2025 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Ali Mahdavi, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us this morning for Doman Building Materials First Quarter 2025 Financial Results Conference Call. Joining me this morning are Amar Doman, Chairman and Chief Executive Officer; and James Code, 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 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 May 23, 2025. Following the presentation of the first quarter 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 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'll now turn the call over to Amar.

Thanks very much, Ali, and good morning, everybody. Since speaking to you last during our fourth quarter and year-end 2024 results conference call, very little has changed in that we remain focused and excited with the business across all divisions and on both sides of the border. Despite the impact of macroeconomic and geopolitical noise on demand and pricing volatility, our business units continue to show resilience in 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 work through uncertain market 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 certain markets and continued disciplined inventory management, which resulted in strong revenue performance in the quarter. Further, our ongoing cost management focus on operational efficiencies and successful integration efforts enabled the company to realize strong gross margin and EBITDA margin performance. Despite the daily uncertainties we all live in for Doman, 2025 is off to a strong start, evidenced by in Q1, we had revenues coming in at just under $800 million, gross margin at 16.7% or $132 million, EBITDA amounting to $70 million, net earnings of $23.6 million. And lastly, our quarterly dividend of $0.14 per share was declared.

Our top line results are evidence of the continued strength of our business platform in Canada and the U.S. However, with more emphasis with our rapidly growing footprint in the U.S., I'm 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. The cross-border tariff situation between Canada and the U.S. continues to be an evolving and fluid situation, to say the least. To reiterate our current position on this issue, our B2B business model on both sides of the border is Doman well positioned to be neutral at large, and we continue to operate accordingly with no direct material impact to our consolidated business.

Looking ahead, we remain optimistic as we work through decent levels of demand across the business, managing the pricing environment while we continue to manage our costs and always looking for growth opportunities. The momentum we've enjoyed in Q1 has kept pace. And so far, we are off to a good start in Q2, but we will continue to be cautious as we work through these uncertain times. We are cognizant of external pressures, which may come into play not only in our industry, but any others that touch similar end customers.

As always, we are confident in our ability to work through challenging markets diligently while serving our customers' needs with the highest level of service. We remain excited about our growth profile and the overall prospects of the business. And with that, I'd like to ask Jay Code, our CFO, to take over and provide a review of the company's first quarter 2025 results in greater detail, and then we'll open the call for analyst questions. Thank you, Amar.

Good morning, everyone. Sales for Q1 '25 were $793.2 million versus $602.5 million last year, representing an increase of $190.8 million or 31.7% driven by positive contributions from the recently acquired Southeast Forest Products and CM Tucker lumber as well as solid performance of our legacy operations, demonstrating continued resilience and strong overall end market demand. The company's sales in the quarter were made up of 81% construction materials compared to 76% during the same period last year, with the remaining balance of sales resulting from specialty and allied products of 15% and other sources of 4%.

Doman gross margin dollars were $132.5 million in Q1 '25 versus $100.4 million in 2024, an increase of $32.1 million, benefiting from the results achieved by the acquisitions as well as ongoing execution of the company's margin enhancement strategies. Gross margin percentage was 16.7% this quarter, consistent with 2024. Expenses for Q1 '25 were $87 million compared to $72.3 million, an increase of $14.7 million or 20.3% due to the factors to be discussed. As a percentage of sales, 2025 expenses were 11% compared to 12% last year.

Distribution, selling and administration expenses increased by $7.7 million or 14.1% to $62.5 million this quarter compared to $54.8 million last year, largely reflecting DS&A related to our recent acquisitions. As a percentage of sales, these expenses were 7.9% compared to 9.1% in '24. Depreciation and amortization expenses increased by $7 million or 39.8% from $17.5 million to $24.5 million, mainly due to additions of property, plant and equipment and intangible assets related to our 2024 acquisitions. Finance costs for the quarter were $19.4 million compared to $10.8 million in the previous quarter, an increase of $8.5 million, largely as a result of the additional finance costs related to the funding of the Tucker Lumber acquisition.

EBITDA for the quarter was $70 million, compared to $44.8 million in Q1 '24, an increase of $25.2 million or 56.4%. EBITDA in Q1 '24 was impacted by nonrecurring acquisition-related costs of $817,000. Adjusted EBITDA in the prior quarter before these nonrecurring costs was $45.6 million, which was $24.4 million less than Q1 '25. Our provision for income tax was $2.6 million this quarter compared to $2 million last year. Net earnings for the quarter were $23.6 million compared to $14.4 million in '24, an increase of $9.2 million. Turning now to the statement of cash flows. Operating activities before noncash working capital changes generated $44.5 million in cash compared to $37.8 million in '24.

Operating cash flows during the period were positively impacted by our acquisitions as well as continuing strong legacy contributions. Seasonal changes in noncash working capital items consumed $170.6 million in cash compared to $167.6 million in '24. The increase in cash used for noncash working capital was largely related to activities of the acquisitions, partially offset by the company's continued efforts to optimize working capital levels in anticipation of potential slowing of market activity. During the 3 months ended March 31, '25, we sourced net cash of $121 million from financing activities compared to $153.5 million in '24.

Net advances on the revolving loan facility were $140.8 million this quarter compared to $171.6 million in Q1 '24. Shares issued net of transaction costs generated $808,000 in cash compared to $698,000 in the prior year. The company also returned $12.2 million to shareholders through dividends paid during the quarter, largely in line with 2024. Payment of lease liabilities, including interest, consumed $7.9 million of cash compared to $6.6 million last year -- the company's lease obligations generally require monthly installments, and these payments are all current. We also note the company was not in breach of any of its lending covenants during the 3 months ended March 31, 2025. Investing activities generated net cash of $11 million compared to consuming $63.8 million in '24. Investing activities this quarter included proceeds from the sale of a portion of the company's timberlands for cash proceeds of $14.4 million, whereas investing activities last year included payment for Southeast Forest acquisitions -- acquisition on March 1, 2024.

Additionally, we invested $3.5 million in new property, plant and equipment in Q1 '25 compared to $1.6 million last year. This concludes our formal commentary, and we would now be happy to respond to any questions you may have. Thank you. Operator?

[Operator Instructions] Our first question comes from the line of Kasia Kopytek with TD Cowen.

First question is, how much support did currency tailwinds provide this quarter? Are you able to quantify the impact?

Foreign currency, it's generally been helpful for us this quarter, the weaker Canadian dollar, given that we're 70% U.S. on the top line now. So yes, there was a good tailwind from the movement in foreign exchange this quarter, Kasia.

Anything nonrecurring in the Q1 results that may have also provided support?

No. And as we indicated, we sold a small portion of our timberlands off for $14 million. That obviously doesn't affect the P&L. So it straight operating earnings, good margin performance, good volumes, good takeaway in the U.S., particularly. So just a very good quarter.

It's a long list of good things, Amar, -- good thing. 16.7% gross margin, you indicated margin enhancement initiatives. Any context you can provide around what those are exactly? And should we be orienting ourselves around -- still around a more sustainable range of 14% to 16%?

Yes. I think we'll talk about the range, and I'll get into the strategies in a moment here. So the range, I think, is still intact. This is a higher watermark for us on the quarter. We always shoot to be in that range. The lumber market can certainly play havoc with that once in a while. But certainly, now over the last number of quarters, we've evidenced a nice steady gross margin performance despite what the lumber market is doing or noise out of the White House. So we've been operating very well under these different environments. We come back to the margin enhancement strategies that we're doing internally, a couple of things there.

One, obviously, try to position our lumber when lumber is at attractive levels. positioning well on inventories. Our buyers are doing a great job of loading the gun, if you will, when needed. And then second of all, freight optimization all over the United States now with our plants. We're rejigging areas. We're looking at how we can optimize using some more third-party carriers, getting our freight rates down, getting our costs down, getting our insurance costs down. There's a whole bunch of initiatives now with our scale that are starting to evidence in lower SG&A costs and also increasing margin through optimization. So long answer, but there's a bunch of stuff going into the call room that's paying off.

I appreciate that context. That's very helpful. Switching tack a little bit. One of your larger traded competitors is talking about pricing pressures and demand being down in the low single digits in their near-term outlook. Is that consistent with what you are seeing?

It really depends on the region. We're not seeing any monster weakness. Canada has been a bit slower, just obviously, housing starts, sluggish economy, election. Here, it's been slower, longer winter. So the northern markets have been a bit slower. I can't say we're feeling price pressures or pain, no.

Our next question comes from the line of Zachary Evershed with National Bank Financial.

Congrats on the quarter. Would you say you're seeing more volume behind recent lumber prices? Or is it still kind of floating with not a ton of real volume behind it?

Yes. You know what, it's -- I would say our margin -- sorry, our volumes were decent compared to 2024, close to in line. Some markets, like I was mentioning in Canada have been a bit slower, offset by -- there's been some other growth areas in the U.S. and some of those hurricane damaged areas, we're seeing stronger order files coming out of there. So all to say, it's been kind of balancing into a good groove with the backdrop of not great lumber pricing. Southern Yellow Pine certainly had some strength compared year-over-year. The rest of the species are all off or down and are weak. But really, the story here is margin.

Got you. And then when you're dealing with your larger channel partners, retailers, obviously, you guys are doing a great job on the buyer front with loading the gun. What's the pricing discussion like with those larger retail partners?

Yes. So with the larger retail partners, we do contract and move with the markets. So we're in lockstep there. But when we can sort of buy under and mills need to move some volume, we've got that big buying power now with $3 billion of sales that we can really step in and get a good look here and there, and that's when we can buy some extra margin, and our guys have been doing that really well. And that's kind of been the story to assist. But really, we move with the market. So we're on market with those larger retail partners of ours.

Got you. And then balancing that against that, your days of inventory and accounts receivable have improved noticeably relative to pre-pandemic. Do you think there's more juice left to squeeze there on balancing working capital optimization versus fill rates?

Zach, it's Jay here. We've had a tremendous focus on that area, as we've said before. I don't see any material improvements in that. We'll just stay on top of it. And let's just say you won't see that deteriorate. We're just going to manage that very carefully.

That's clear. And I guess coming from the opposite direction, any concern on the inventory mix that you've stocked up on? And any concerns about moving through the potentially slower housing environment?

No. In fact, I think coming out of COVID, now it's kind of way in the rearview mirror. But really, we transform the company's inventory strategies, weekly meetings, all these different things where we're very, very focused on it. So no concerns over inventory slack or overages anywhere. We're in good shape.

Our next question comes from the line of Hamir Patel with CIBC Capital Markets.

Amar, the newly elected Government of Canada has outlined some pretty ambitious housing targets. Do you see any opportunities there for your business? I know it seems like the focus has been on kind of prefab housing.

Yes. I think we've had 11 years of those promises. So I'm not holding my breath that it comes through, but we obviously are in a housing shortage here. I'm not sure you can just set up modular tomorrow morning and educate builders in 5 minutes how to figure this stuff out. It's not LEGO. It's more complicated. So I hope that an organized slower strategy comes in but saying we're going to build 0.5 million houses real fast, it's just not going to happen. It's not reality.

But having said that, if we start somewhere and the government gets involved in the housing market, which I'm not a fan of, but if they do, we'll certainly be participating in some of that, probably more on our distribution side in Canada, more than the pressure treated side. So that would be our new home construction materials under our Doman Building Materials division in every city in Canada that's large. So that side would certainly get a benefit and also some takeaway on lumber in Canada wouldn't hurt either.

Fair enough. And Martin, do you see any potential -- the Section 232 tariffs, if they come in effect, how do you see that affecting your U.S. operations? And do you think that if they do take effect, they'll just be targeting lumber or potentially all forestry products?

Yes. Hard for me to speculate on that. But really, we're pretty much insulated. There'll just be inflation and deflation in the products we produce and sell. But really, we don't have a big dog in that fight as far as 232 and what's going to happen. It's really just kind of being the tail on the dog as far as pricing goes and the whipsawing of momentum like the stock market has been more than the realities of just hammers going into nails, nails going into wood and things being built. And for us, our outlook is still pretty decent here. We're just -- it's just hard to see what that consumer is thinking about more than the 232s and all the noise.

Our next question comes from the line of Ian Gillies with Stifel.

Are you able to indicate whether you've started to see any volume pull from some of the recent, I guess, disasters in some of the areas that you operate in? It had been thought of as perhaps a tailwind at some point. I'm just curious whether that's showing up yet.

Yes. We're starting to see that in some of the stores in those areas have been rebuilt like Ashleyville and the Carolinas, Northern Florida. We are seeing activity and orders come from those stores, again, where they were pretty much wiped out and slower as those events unfolded last year. So we are seeing that. And I think we're going to have multiple years of takeaway in those areas as they slowly rebuild. In some areas, they'll rapidly rebuild, but most areas with insurance issues and things like that, much like California, it takes a bunch of time. But we are seeing those volumes come back, and that's helping us, and we're in all those markets.

Our next question is a follow-up from the line of Kasia Kopytek with TD Cowen.

One follow-up for me. Mark, can you talk about if you're seeing anything different on your takeaways at box stores versus lumber yards? And are your channel partners still talking about a flattish year for 2025?

Yes. By the way, that's a great question. So number one, we did not expect to see the box store volumes be very healthy. They've been healthy right into April. And it's certainly not completely [indiscernible], obviously, but it's surprised us in a good way with those volumes at the box stores. And some of the pro dealers and lumber yards have been a little bit slower as projects and housing starts have been slowing, but the cash and carry business has been strong right from Hawaii right to the Carolinas. So I've got to say we're very pleased with the takeaway. And I think lower lumber pricing here that helps as well. People can afford the materials that are out there, and they're doing projects. So very pleased with that.

That concludes our question-and-answer session. I'll turn the floor back to Mr. Mahdavi for any final comments.

Once again, on behalf of the Doman team, thank you for joining us this morning. Should you have any further questions or inquiries, feel free to reach out. That concludes today's call, and we look forward to speaking to you again on our Q2 call. Operator?

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.