Doman Building Materials Group Ltd

TSX:DBM

Q2-2025 Earnings Call

[Operator]

Good morning, and welcome to the Doman Building Materials Group Limited Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ali Mahdavi, Investor Relations. Please go ahead.

[Ali Mahdavi, executive]

Good morning, everyone, and thank you for joining us this morning. Joining us on today's call 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 market on Wednesday, 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 everyone that a replay of this call will be accessible until midnight on August 21.

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'll now turn the call over to Amar.

[Amardeip Doman, executive]

Great. Thanks very much, Ali, and good morning, everybody. Thank you for joining us. On the back of a solid first quarter, the second quarter of 2025 started in a similar fashion with tempered buying activity across North American markets due to a combination of cooling housing demand, high mortgage rates and of course, tariff uncertainty. However, production cuts and supply shortages and steady export demand have put upward pressure on prices during that quarter. While volatility remains, modest gains are expected during the remainder of the year with housing activity rebounds and policy conditions, including tariffs and trade measures stabilize. These factors, combined with our ongoing focus on operational efficiency and cost management resulted in yet another strong first quarter. In Canada, lumber, plywood and OSB prices remained relatively stable through 2025 to date, but decreased towards the end of the second quarter, reflecting a steep decline in construction material demand amid disruptive trade policies. However, in the U.S., Southern Yellow pine lumber pricing weakened in the back half of Q2 and Western species remained a bit weak throughout the quarter. These trends remain today.

Overall, despite the various macro and geopolitical headwinds and headlines that have influenced our markets, Ultimately, on consumer spending, we are encouraged with, let's say, a moderate or decent level of activity as we experienced during the quarter, resulting in record revenues while maintaining strong margins at the gross profit and EBITDA line. Our focus remains on what we can control to ensure we maximize margins and free cash flow generation. Our team's strong focus on inventory management with the goal of optimizing gross margin performance, combined with our constant efforts on overall cost management were contributors to our strong second quarter results. Let's put this all into numbers.

In the second quarter, the revenues amounted to $886 million. Gross margin was strong 16.1% or just under $143 million, adjusted EBITDA of $80 million, net earnings just under $28 million. And lastly, we paid a quarterly dividend of $0.14 per share being our 61st consecutive quarter of paying dividends. Looking ahead, we are cautiously optimistic as we navigate through current markets, while we continue to manage our costs and always look for growth opportunities. Our balance sheet optimization strategy remains a key priority as we look forward to having a solid growth-friendly and fire-ready balance sheet for acquisitions. As always, we remain committed to 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. When interest rates begin to creep down, again, we believe housing demand on both sides of the border will benefit Doman and our industry at large as we recover from this weakness and uncertainty. Even though this difficult period, we have -- even through this difficult period, I should say, we have performed well, and I want to thank all of our great employees, customers and supplier partners for our successes. With that, I'm now going to ask Jay Code, our CFO, to take over and provide a review of the company's second quarter 2025 financial results in greater detail, and then we're going to open the call for analyst questions. Jay?

[James Code, executive]

Thank you, Amar, and good morning, everyone. Sales for the 3 months ended June 30, 2025, were $886.7 million versus $689.8 million in 2024, representing an increase of $196.9 million or 28.5%. The sales increase was primarily driven by contributions from Doman Tucker Lumber, which we acquired on October 1, 2024, and consequently was not included in the prior year comparative quarter. Our sales in the quarter were made up of 82% construction materials, with the remaining balance resulting from specialty and allied products of 15% and other sources of 3%. Our gross margin was $142.7 million in Q2 '25 versus $108.1 million in 2024, an increase of $34.6 million, again, benefiting from the results achieved by the Doman Tucker Lumber acquisition as well as ongoing execution of the company's margin enhancement strategies.

Gross margin percentage was 16.1% for Q2 '25 compared to 15.7% last year. Expenses for the quarter were $87.9 million compared to $75.1 million, an increase of $12.8 million or 17%. And as a percentage of sales, this quarter's expenses were 9.9% compared to 10.9% last year. Distribution, selling and administration expenses increased by $5.2 million or 9% to $62.7 million this quarter from $57.5 million in 2024, mainly due to the addition of expenses related to the Doman Tucker Lumber acquisition. As a percentage of sales, DS&A was 7.1% this quarter compared to 8.3% in '24.

Finance costs in the quarter were $19.3 million compared to $12.6 million in 2024, an increase of $6.7 million, largely driven by additional interest costs related to last year's financing of the Doman Tucker Lumber acquisition. This quarter's EBITDA was $80 million compared to $50.2 million in '24, an increase of $29.8 million or 59.5%. Doman's net earnings for the quarter were $27.7 million compared to $17 million in 2024, an increase of $10.7 million. Turning now to the statement of cash flows.

Operating activities before noncash working capital changes generated $100.7 million in cash for the first 6 months of 2025 compared to $68.9 million for the same period in '24. Operating cash flows during the period were positively impacted by this year's partial and full inclusion of the results from the acquisitions of Southeast Forest Products and Doman Tucker Lumber, respectively.

Seasonal changes in noncash working capital items consumed $114.9 million in cash compared to $127.8 million in the first 6 months of 2024. Overall, financing activities generated net positive cash of $6.9 million compared to $93.9 million for the comparative 6-month period in 2024. Net advances on our revolving loan facility were $46.8 million compared to $132.2 million in the comparative prior year period.

Shares issued net of transaction costs generated $808,000 of cash compared to $701,000 in 2024, and the company returned $24.5 million to shareholders through dividends paid during the 6-month period, largely in line with 2024 amounts. Payment of lease liabilities, including interest, consumed $15.8 million of cash compared to $13.5 million in 2024. The company's lease obligations generally require monthly installments, and these payments are entirely current. We also note the company was not in breach of any of its lending covenants during the 6 months ended June 30, 2025.

Overall, investing activities generated $8.6 million of cash compared to consuming $67.5 million last year. Investing activities in the first 6 months of 2025 included the sale of a portion of the company's timberlands for total cash proceeds of $14.4 million, whereas investing activities in the first 6 months of 2024 included the Southeast Forest Products acquisition for total cash consideration of $62.3 million. Additionally, the company invested $6.1 million in new property, plant and equipment during the period compared to $5.5 million in 2024. This concludes our formal commentary, and we would now be happy to respond to any questions you may have. Thank you. Operator?

[Operator]

[Operator Instructions] The first question comes from Kasia Kopytek with TD Cowen.

[Kasia Trzaski Kopytek, analyst]

It's I want to get first your thoughts on the balance sheet. Do you have a target for leverage? And if so, when do you expect to get there?

Yes, we do. And frankly, we're heading that way. As you know, we acquired Tucker Lumber last year, and we took our leverage up a little bit. And of course, now with the EBITDA filling that back in the free cash flow grinding it back down. We want to get sort of into the low 4s and into the 3s within 18 months. Any other commentary there, Jay?

[James Code, executive]

Yes, I think that captures it Amar. We expect to continue to work down the amount of net debt on the balance sheet with free cash flow generation. Dividend payout ratio is below 30% so far this year. So all of that excess cash continues to go to pay down debt.

[Kasia Trzaski Kopytek, analyst]

Great. Amar, you said a lot of constructive things around the balance sheet on your M&M this morning also. But you said one other thing I just want to double check on. You said that you're an acquisitive company and that you hope to delever through free cash flow, but irrespective of what's happening in the market, if you see the right acquisition, you'll buy it. So I just want to understand that a little better. I understand maybe irrespective of what's going on with market conditions, but do you have some sort of level for debt that you want to see yourselves get down to first before you become acquisitive again?

[Amardeip Doman, executive]

No, we don't. We tend to just generate free cash flow, and we find a way -- we've been doing this for a long time, Kasia. So we certainly will find a way to finance the right acquisition. The key in our acquisitions, we're paying fair prices for great companies, and we don't get carried away. So we stay in that strike zone of our EBITDA purchase multiple, knowing where we can fold it in, also knowing where we can reduce cost, overheads, eliminate excess reductions, all those types of things. So all that factors in when we buy it. So the leverage, obviously, we keep our eye. We're never going to bet the farm and be irresponsible. But certainly, it's been working for us. We're going to carry on, and we don't want to miss opportunities as we continue to consolidate our space.

[Kasia Trzaski Kopytek, analyst]

Okay. So there's no ceiling. I mean, how big of a bite would you be willing to take off? How high would you be willing to bring that to?

[Amardeip Doman, executive]

Well, I think we were at the peak probably a couple of quarters ago. Now we're bringing it down. So that would probably be as high as you'd ever see us go.

[Kasia Trzaski Kopytek, analyst]

Okay. Got you. And switching gears a bit to volumes. I understand you're having discussions now probably with your customers for 2026 volumes. How are those progressing? Do you see -- what is the upside to your normal volumes, let's say, from maybe any new revenue contracts with national accounts?

[Amardeip Doman, executive]

Yes. We just don't know. And internally, we're not really looking at 2026 yet. We've got a lot of runway left here in 2025, and our customers are scratching their heads and our suppliers, everybody just until we get certainty on trade relief. I think once that's steady, Kasha, I think we can start to look at outlooks. But right now, we're not really providing much of an outlook, whether it's to the Street internally. We're just trying to not miss an order, get everything done, maximize margin. We're just working hard behind the scenes and not looking too far ahead because you just can't right now.

[Kasia Trzaski Kopytek, analyst]

Right. Understood. So any opportunities with national accounts that would be more maybe more towards the end of the year when we get things a little more certainty on the macro front.

[Amardeip Doman, executive]

Exactly. Probably October, November, we'll start to have those discussions. And hopefully, that certainty will be in place on some of these trade matters.

[Kasia Trzaski Kopytek, analyst]

Got you. Okay. Last one for me. I think this is a Jay question. Jay, can you walk me through how working cap is expected to change in the back half here? Can we see a similar magnitude of unwind in Q3? And what should I be thinking about for Q4?

[Amardeip Doman, executive]

Right. Good question, Kasia. Yes, there's a pretty regular seasonal pattern to our working capital buildup. The trough is generally around October, November each year. And then the peak is May, early May, say. And so we're in the phase of releasing working capital and the biggest release quarter being Q3. So you'll see a big reduction in working capital this quarter, Q3 and sort of a low point going into the fourth quarter.

[Operator]

The next question comes from Ian Gillies with Stifel.

[Ian Gillies, analyst]

Acknowledging trade tensions are abundant right now, but it looks like the cost leverage you're getting off th[e Tucker acquisition is pretty robust. And have you put much thought or are you thinking about the need to increase kind of the run rate gross margin guidance of 14% to 16% because you seem to be holding in pretty well these days.

[Amardeip Doman, executive]

Yes, not really. I think that sort of -- we use the word guidance, but that's sort of ZIP code, if you will, is kind of where we're going to hold because lumber markets are doing -- one species is doing this, one is doing that. So in my commentary, I didn't want to be too specific to species because the West has been very, very, very tough. Canada was tough. It's been up, it's been down, depending on what news is coming out. And then Southern Yellow Pine weakened significantly kind of in the last 1.5 months. So there's been all sorts of stuff kind of all over the map. So we just don't want to start talking about growing gross margins when we're in a very uncertain lumber market and mortgage market, interest rate world, all of that. So I'd stick to that ZIP code of $14.60.

[Ian Gillies, analyst]

Sure. That's helpful. And are you willing to provide, I guess, any sort of detail around how daily sales volumes were trending in July? I mean we've seen a whole bunch of different numbers out of different building products companies to date. So I'm just curious how you may be faring.

[Amardeip Doman, executive]

Yes. The trends were fairly similar to May and June. Just pricing came off in Southern Yellow Pine, as you know, volumes have been okay. They're off a few percent year-over-year, and that's as expected. I think everyone is waiting for rates to come down and people have their wall at their pocket just kind of waiting. And now that I think we have almost some certainty that rates are going to come down, people are going to wait a little further until they do, and then it hits that mortgage number. So once we see in the U.S., the 30-year start to drop, which it has, I think we're going to get some more volume pickup. And who knows how we'll finish the year, but might be off a couple of percent. We'll take that in this environment.

[Ian Gillies, analyst]

That's helpful. And maybe last one for me. On the M&A side, as you look across the competitive landscape on the pressure-treated side, would you define most of the competitors at this point as being smaller single location or a few locations rather than large chunky operators?

[Amardeip Doman, executive]

There's a bit of both out there still, Ian, and we're in dialogue with a lot of the industry. We know everybody in the industry. So there's all shapes and sizes still out there. So we've got a lot of M&A runway ahead of us for at least another 5 years.

[Operator]

The next question comes from Matthew McKellar with RBC Capital Markets.

[Matthew McKellar, analyst]

First for me, last quarter, I think you talked about an initiative to optimize your freight costs in the United States. Can I please ask how far along you are in that process today versus what you hope to ultimately achieve and how meaningful the savings so far have been?

[James Code, executive]

Right. Thanks, Matthew. It's Jay here. That is correct. We did undertake an initiative to optimize freight, kind of two-pronged approach to that. We're using technology on one front, software applications to optimize freight routes and truck loading in -- this came out of an acquisition in '24, and we're moving that software throughout the organization in the U.S., at least to start. And then secondly, we're looking at going to third-party carriers in place of company-owned fleets in some locations, and we've started that initiative and so far getting very positive results out of that.

[Matthew McKellar, analyst]

Okay. Are you able to quantify, I guess, the savings associated with what you've done so far or what may be left to achieve or tough to say at this point?

[Amardeip Doman, executive]

Yes. No, we know the numbers right to the penny, but it's a little bit of our secret sauce internally. So we don't want our competitors to start copying us. We want to make sure we're beating up our competitors a little bit and keeping those good strategies in-house. But I can tell you, it's working well. It's reducing insurance costs, liability, a whole bunch of different things. And then on top of that, maximizing our loadings and making sure that our freight runs are going. We thought we're pretty good at it, but we're going to get a lot better at it. And that's going to just bode well over the next few years for Doman.

[Matthew McKellar, analyst]

Okay. Fair enough. And then last for me. I appreciate the commentary around demand conditions so far. Would you have anything, I guess, additional to say about Canada specifically and how conditions there have kind of evolved through Q2 and into Q3? It seems like you would have had some support from housing starts, but maybe what are you seeing on the R&R side in particular?

[Amardeip Doman, executive]

Yes, Matthew, thanks. That's a good question. R&R and housing starts, everything started off pretty poorly. We've seen multis take the number up in Canada a little bit. But really, it was a really slow, sluggish start, not only on lumber, treated lumber, allied, everything here. What we started to see late June and into July is a recovery in Canada, sort of a late start. There was obviously a long winter that didn't want to go away this year. It was longer than normal and it's just not good. adding the trade uncertainties, that didn't help things. So sluggish. Then we get into July and now into August, and we're starting to see recoveries not only on whitewood lumber for construction, but plywood OSB, siding, roofing, all of our other product lines, composites are kicking in, pressure treated really kicked in. So we're encouraged in Canada for the back half that we might catch some of the missed ground that we saw in the first 6 months. So pretty encouraged on that front.

[Operator]

The next question comes from Zachary Evershed with National Bank Financial.

[Zachary Evershed, analyst]

Congrats on the quarter. So I want to highlight OpEx control. It's been pretty impressive, especially with the uptick in the top line. What's driving that?

[Amardeip Doman, executive]

Yes. I think just our divisional leaders and team, we've got a culture in the company of really paying attention to cost no matter what it is, whether it's CapEx, whether it's trucking. Hey, you see our margins, we have to get this right. And that's a culture we've got inside the company, and everyone is delivering and thinking about it before we spend the dollar, no matter what we're spending it on. And that starts at my and Jay's desks and it goes all the way through. So I think just that operational performance and then starting to see and we don't disclose the synergies that come out of these good acquisitions that we've been doing. But over time, you just start to see that, and that's the stuff that Jay and I promise when we do, do an acquisition that you are going to see those types of synergies. So basically, we're delivering on what we said we're going to do, and then it starts to unfold into those cost reductions, giving us more gross margin dollars.

[Zachary Evershed, analyst]

Got you. And then, of course, very difficult to speculate given the constantly evolving trade tensions. But given the latest developments in the softwood lumber dispute, what's your best guess on what happens to supply on both sides of the border?

[Amardeip Doman, executive]

Yes. I think it's going to be very challenging here in Canada for the industry just due to the super penalties that are in place. I don't know how that gets negotiated away. I mean we certainly hope it does. We love our sawmill partners here, and they're getting severely penalized and we need them, and we don't like to see this happening. I really don't have a crystal ball, but with who's in office in the U.S., I I don't think things are going to get that much better. This is a tough President with this file, and he's been publicly commenting on lumber, which is not a good thing either. He's got his eye on it for some reason. And yes, if I had to bet, I'd say it's going to be status quo, which is not a great thing for Canadian sawmill producers, I believe.

[Zachary Evershed, analyst]

Got you. And then just with the shift of construction materials coming in at 82% higher than 76% last year and Specialty Products down. What kind of impact does that have on your gross margin profile?

[Amardeip Doman, executive]

Yes. It seemed to be okay. We obviously had a decent lumber market, which helped those construction materials on those percentages you're talking about. So things were okay. Beneath that, though, Canada was slower on those allied numbers, and that's why like our siding, roofing and things like that were just slower. We're going to start to catch that now. And those are better gross margin products, which will help offset some of the lumber weakness that has arrived kind of in June on some of the species.

So a bit of a mixed cauldron there, Zach. I know I'm not giving you a lot of clarity there, but we're starting to see those specialty products recover.

[Operator]

And we have a follow-up from Kasia Kopytek with TD Cowen.

[Kasia Trzaski Kopytek, analyst]

Just a follow-up for me. With all the noise going on, are you seeing any variations in inventory positioning from your buyers, maybe distinguish between some of the different channels, if that's relevant?

[Amardeip Doman, executive]

Good question. And sadly, we are. This goes back, I think, probably towards the start of the year and then when the gyrations came with all the tariffs and all of that. All of our customers are really buy to, sell to, buy to. And they are not buying for even with lumber markets getting weak in certain items. They're just not loading up. Nobody is. There's production available. So we have seen our end-use customers reduce inventories everywhere. And I think everyone is just a bit nervous, Kasha, about holding too much and getting caught. We're hoping we're somewhere in the trough here in the next 6 to 9 months of housing. And then we hopefully will see some good recoveries there in stronger markets. But everybody is down and we've reduced our inventories as such as well.

[Kasia Trzaski Kopytek, analyst]

Yes. I mean that makes a lot of sense. Amar, how do you compare it to previous troughs in terms of the bottom-up for inventories? Are we there yet? Are we lower than that? Like just trying to get a sense of magnitude here.

[Amardeip Doman, executive]

Yes, no crystal ball here, but I think we've had this kind of malaise going on, but it's hard to just see us come out of it comparing it to something else is hard because there's so many different factors with the U.S. administration resetting the trade table worldwide. It's just hard to see where we're all going to land and how the consumer feels. But kind of underneath all that, you see the stock market is doing well, and you see a lot of positivity for what's around the corner. We just don't know when we're going to go around the corner. So it does feel like when these rate cuts come in the U.S., I think that's going to give housing a little bit of a hero shot and that could give us a nice push.

[Kasia Trzaski Kopytek, analyst]

Okay. One final one, Amar. Earlier this year, you talked about opportunities for making your specialty sawmills more efficient. I think you spoke to 1-inch fencing products as an example. If this is not a meaningful driver, just let me know. But can you give an update on that? Any specific projects that are coming up?

[Amardeip Doman, executive]

Yes. We're converting a mill in Gilmer, Texas this fall to help automate our fence production. And this is proven technology. So we just want to make sure we get it in, it's running well, and then we look to extend it to all of our sawmills, which will reduce cost and create efficiencies. And with all of the tariffs that are coming into South America, if they hold, there's going to be a big shortage of production of fencing in the United States. And we want to be the benefit of that or the benefiter of that and ramping up our production and perhaps even starting a new fence mill somewhere in the East is something that we're studying right now and looking at that. because if Brazil gets shut off, there is a massive hole that needs to be filled. And some of our customers are asking us about that, and we're already ahead of it. We said a couple of quarters ago, we're going to invest in our sawmills, get them more efficient and produce more fencing in the United States for the United States.

[Operator]

And we have a follow-up from Zachary Evershed with National Bank Financial.

[Zachary Evershed, analyst]

Just wanted to touch on that potential for CapEx with another fencing facility. Any other major CapEx projects on the docket? And what kind of price tag would a new facility like that have?

[Amardeip Doman, executive]

Yes. We don't really talk about that, but it's in our kind of our usual CapEx, around $20 million this year, 2022, I think we will be. Currently, I think we're at $7 million or $6 million, somewhere in that zone. But really, we look at that, and there's a whole bunch of different activities going on with those CapEx. Some are sawmill upgrades, some are cylinder upgrades, just different things. There's maintenance going on. So this figure $20 million to $22 million, no massive project, Zach, if that's what you're looking for. We'll be in our strike zone.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Ali Mahdavi with for any closing remarks.

[Ali Mahdavi, executive]

Once again, thank you for joining us this morning. If you have any follow-up questions, by all means, feel free to reach out to me directly. This concludes today's call, and we look forward to speaking with you all during our third quarter 2025 conference call. I'll hand it over back to the operator to close the call.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.