Good day, and welcome to the Doman Building Materials Group Ltd. fourth quarter 2021 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn comments over to Ali Mahdavi. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us for Doman Building Materials Group Ltd. Q4 and full year 2021 financial results conference call. Joining me this morning are Amar Doman, Chairman and Chief Executive Officer, and James Code, Chief Financial Officer. If you have not seen the news release which was issued yesterday, it is available on the company's website as well as on SEDAR, along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on March 18. Following management's presentation, 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 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'd like to turn the call over to Amar now. Amar?
Thanks, Ali, and good morning, everybody, and thank you for joining us on the call today. 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'm gonna hand the call over to James Code, who will review the numbers in further detail. I'll start by highlighting the efforts of all of our employees across the various business segments during these continued extraordinary times in which we are living. Our team's steadfast focus and attention on health and safety, combined with solid execution on all business fronts, resulted in yet another strong quarter of financial results and with some of our key financial metrics surpassing previous record levels on a quarterly and annual basis.
Overall, I am very pleased with how our growth strategy continues to unfold, resulting in record annual sales and net earnings while remaining focused on margin protection. The price volatility we experienced from May to August subsided in the fourth quarter, resulting in improved gross margin levels when compared to the third quarter. We continue to see robust activity and pricing in our markets. However, we're also very mindful of the macroeconomic backdrop of increasing interest rates and other similar factors which may impact market dynamics. The strength in our full-year results came from the combination of continued strong pricing, albeit with some volatility and strong volumes in all of our markets, which resulted in full year revenues exceeding CAD 2.5 billion.
Further, our ongoing cost management and focus on operational efficiencies enabled the company to realize much of the revenue line gains to the 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 2021, and particularly in the fourth quarter as we pave the path forward into 2022. Despite these challenging times, we maintain focus and discipline on servicing the needs of our customers with the utmost level of quality and service while working through a highly volatile pricing environment for our wood products throughout the year. In parallel, we continued our pursuit of strategic growth opportunities, which resulted in a significant expansion of our footprint and presence in the U.S. market through the acquisition of Texas-based Hixson Lumber Sales.
The combination of these efforts resulted in revenues, gross profit, EBITDA, and net earnings reaching new record levels. As a result, during the fourth quarter, we continued to experience top-line growth, posting an increase of 60% when compared to the same period in 2020. We continued to see robust demand and strong pricing resulting in once again achieving excellent fourth quarter results with revenues increasing 60% to CAD 642 million, gross margin at 13.8% or CAD 88.7 million, adjusted EBITDA increasing to CAD 37.1 million. Net earnings came in at CAD 11.6 million. Lastly, our quarterly dividend of CAD 0.14 per share was declared. We are extremely encouraged with our fourth quarter and full year 2021 results and continue to build on the decisive steps we took earlier in the year.
We were able to deliver these strong operating results with leaner inventory levels in certain categories while continuing to meet or exceed customer expectations of product availability. Despite the daily headlines concerning procurement, logistics issues, and challenges, we have and continue to maintain pace across all of our plants and distribution centers on both sides of the border, and we've done everything we can to provide best-in-class reliable supply and service to our customers. Looking ahead, despite the continued volatility in commodity pricing around the world, we continue to be at healthy and premium levels. Combined with the robust demand we are seeing in our key markets, driven by the do-it-yourself and home renovation end user, we remain excited and optimistic as we enter the new year.
We remain confident in our ability to work through these extraordinary times diligently while protecting our employees and servicing our customers' needs with the highest level of service. Lastly, let me touch on inflation. We are certainly in an inflationary environment, and there is no shortage of economic indicators and commentary to support this. We are also seeing this in our markets. However, we are not seeing consumer behavior shifting when it comes to their spending habits and patterns when it comes to home projects. We are off to a roaring start in 2022. With that, I would like to ask James Code, our CFO, to take over, provide a review of the company's fourth quarter and full financial results in greater detail, and then we look forward to opening up the call for questions for everybody. Jay?
Thank you, Amar. Good morning, everyone. Sales for the year ended December 31, 2021 were CAD 2.54 billion versus CAD 1.61 billion in 2020, representing an increase of CAD 930 million or 58%. The increase is largely due to the results from our acquisitions in 2021, with the balance attributable to improvements in product pricing experienced by the company's legacy operations. Quarantine-related activities continued to drive both demand and unprecedented price escalation through the first half of 2021 before reaching a peak in May and declining sharply until August, but only partially offsetting the earnings impact of the pricing increases in the first half of the year.
The company's sales by product group in the year were made up of 74% construction materials compared to 65% in 2020, with the remaining balance resulting from specialty and allied products of 22% and other sources of 4%. Our gross margin increased to CAD 391 million in the current year versus CAD 256.2 million in 2020, an increase of CAD 134.8 million. Our gross margin percentage was 15.4% during the year, a slight decrease from the 15.9% achieved in 2020. The company's margins benefited from the results achieved by our acquisitions, as well as improvements in construction materials pricing for the company's legacy operations during the first half of 2021.
These price-driven margin improvements in our first half were partially offset by the impact of price declines during the second half of the year, driving lower margin percentages for the third and fourth quarters of 2021 relative to the same periods in 2020. Expenses for this year were CAD 219.1 million versus CAD 157.8 million in 2020, an increase of CAD 61.3 million or 39% due to factors to be discussed. These expenses amounted to 8.6% of sales in 2021 versus 9.8% in 2020. Distribution, selling, and administration expenses increased by CAD 50.9 million or 45% to CAD 164.1 million versus CAD 113.2 million in 2020, largely due to additional expenses of the acquisitions.
The DS&A expenses were 6.5% of sales in 2021 compared to 7% in 2020. Depreciation and amortization expenses increased by CAD 10.4 million or 23.3%, from CAD 44.6 million to CAD 55.1 million. Finance costs for 2021 were CAD 27.1 million versus CAD 15.7 million in 2020, an increase of CAD 11.4 million or 73%, largely as a result of the additional finance costs related to our 2026 unsecured notes issued in May of 2021. Our 2021 EBITDA was CAD 220.7 million, and adjusted EBITDA was CAD 225.6 million, compared to EBITDA and adjusted EBITDA of CAD 142.4 million and CAD 143 million, respectively, in 2020.
The increase in adjusted EBITDA of CAD 82.5 million was driven by strong contributions from our newly acquired businesses, as well as Doman's legacy operations. Our net earnings in 2021 were CAD 106.5 million versus CAD 59.6 million in 2020, an increase of CAD 46.9 million. Turning now to the statement of cash flows. The significant factors affecting the company's operating cash flows in 2021 were largely related to significantly improved net earnings, offset partially by changes in net non-cash working capital. Operating activities before these non-cash working capital changes generated CAD 163.8 million in cash compared to CAD 129.8 million in 2020.
In 2021, we made a net investment in non-cash working capital totaling CAD 114.5 million compared to a net reduction in non-cash working capital of CAD 34.4 million in the prior year. Moving now to the financing section. The company generated a total of CAD 454.5 million of cash from financing activities compared to using CAD 157.7 million of cash in 2020. This year, shares issued net of transaction costs generated CAD 82 million of cash compared to CAD 671 thousand in 2020, largely as a result of our public share offering completed in May of 2021. In 2021, the company borrowed an additional CAD 131.6 million on its revolving loan facility compared to net repayments of CAD 83.1 million in 2020.
The significant year-over-year increase in usage of the revolving loan facility is a result of the previously discussed increase in working capital investments, as well as utilization of our revolver as partial financing for the Hixson and L.A. Lumber acquisitions in 2021. The issuance of the previously mentioned 2026 unsecured notes in May 2021 resulted in net proceeds of CAD 316.5 million of cash, while scheduled repayments of our non-revolving term loan consumed CAD 2.7 million, which was consistent with 2020. We also note the company's equipment loans were fully repaid during the fourth quarter of 2021. The company was not in breach of any of its lending covenants during the year ended December 31, 2021. Dividends paid to shareholders during the year amounted to CAD 42.6 million compared to CAD 42 million in 2020.
The company updated its dividend policy during the fourth quarter of 2021, resulting in a quarterly dividend increase from CAD 0.12 to CAD 0.14, beginning with the dividend paid on January 14, 2022. Payment of lease liabilities, including interest, consumed CAD 23.6 million of cash compared to CAD 24.7 million in 2020. The company's lease obligations generally require monthly installments, and these payments are all current. Investing activities consumed a total of CAD 503.3 million of cash compared to CAD 2.9 million in 2020. Investing activities in 2021 included the Hixson and L.A. Lumber acquisitions for total cash consideration of $498.3 million, whereas 2020 included the much smaller Island Truss acquisition.
Cash investments in property, plant, and equipment, net of proceeds from dispositions, were CAD 5 million this year compared to CAD 682,000 in 2020. This concludes our formal commentary, and we'd now be happy to respond to any questions you may have. Thank you. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please pick up your handset and make sure mute function is turned off so that your signal reaches our equipment. Again, it is star one if you would like to ask a question, and we'll pause just for a moment to allow everyone an opportunity to signal for questions. We'll go ahead and take our first question from Hamir Patel with CIBC Capital Markets. Please go ahead.
Hi. Good morning. Amar, you sounded quite upbeat about the demand that you're seeing. I was just wondering, you know, what are your home center customers planning for in terms of volumes this year? Are they, you know, pointing you towards sort of volume year-over-year growth, or kind of in line with 2021?
Yeah, pretty much in line with 2021, Aamir. We think that, listening to our partners in the big box channel, certainly, you know, we'll be very, very happy if we get those levels or even a little bit of a bump up after all of the new housing that's coming in. A lot of our product lines go into, you know, the fencing side, the decking side, which are usually done custom after a home is built. We're pretty excited about even the overhang of houses that are completed that haven't got their decks and fences finished in all markets, despite what housing starts do as well. We believe along with our big box partners, we'll at least do 2021.
Great. Thanks, Amar. That's helpful. You know, just turning to the cost side, in terms of the chemical inputs, you know, what sort of inflation are you seeing there? What's the sort of, you know, sort of lag or pricing protection that you have? Is that gonna hit you more in the back half of this year? Or should we assume pretty much immediate to Q1 impact?
No, no impact at all. We're contracted and protected right through 2022. As we reset into 2023 in the new contracts, we'll pass those chemical increases onto our customer base next year.
Yeah. Are you able to speak to sort of the magnitude of chemical increases you're seeing for some of the major inputs?
Well, we're not having any, so I can't speak to that. You know, we won't get next year's pricing till the fall of this year. You know, we're protected, so it's not really on our worry list.
Okay. Fair, fair enough. Just a last question for Jay. Can you give us an update on expected CapEx for
2022, are there any larger capacity expansion initiatives as part of the budget?
Sure, Amir. You should think about CapEx along the lines of about CAD 5 million-CAD 6 million in 2022. No major initiatives. We're continuing to implement new technology as part of the Hixson integration and rolling that forward through other U.S. operations in 2022. That's probably the most significant project on the horizon unless something changes.
Yeah, the second project would be kiln capacity. We're doubling in Plumerville, Arkansas, at our sawmill there. That's gonna have a good impact for later in the year as far as us being able to hopefully double our production at that particular facility.
Great. That's all I had. Thank you.
Thanks, Amir.
We'll go ahead and take our next question from Zachary Evershed with National Bank Financial. Please go ahead.
Morning, everyone. Thanks for taking my question.
Yeah. Good morning, Zach.
Given the shift in pricing in the second half of Q4, we were thinking gross margins might come in a little stronger, especially with how fast your inventory is turning. Could you walk us through the mechanics and timing of how the pricing on inventory purchases flows through to pricing to customers in your major product categories again?
I mean, it does vary a little bit with all the different markets we're in. Of course, geographically, Canada was, you know, in December, you're not moving a lot of treated lumber or November for that matter. We still had overhang. That's what caused that kind of minor gross margin pain, which has turned around and it's well behind us now. The cycle, you know, we like to try to say it's at 3-4 weeks in those busy times. You know, construction season is in full swing. It obviously gets a little more weighted in the winter. We were fortunate that the weather in the U.S. was quite favorable to building all the way through Christmas.
A little colder recently, but our turns have been good, our margin is back and strong, and our volumes are high. So again, we've got a very strong start to the first quarter here, and I'm here to see, you know, a nice recovery back to our traditional stronger margins and all of that's in the rearview mirror.
That's great, Colin. Thanks. I guess on that point, we're seeing very strong cash lumber prices and an uptick in back month lumber futures across the board, but not to the same level. What's your take on the supply demand balance and where prices are going? What are you hearing from customers in terms of backlogs, and does that align with your order book?
Yeah, there are some backlogs certainly, but when we look at SPF in isolation, which is the futures market, it's been wounded, as we know, here in BC because of transportation, rail car shortages and snafus there with the floods that tangled up a lot of shipping here. The rest of the market, when you're looking at SYP or green Doug fir on the west or Hem-Fir, they're strong and building season is extremely strong already there in the States, so we're getting good takeaway. Spruce we've got to be a little careful on, and we're being very careful with our inventories because, again, it's more of a not is there enough wood out there problem, it's there's no way to get it to market right now problem.
West Fraser, you might have seen, has gone down to three shifts a week just because they're piling so much wood up. It's sold, but they can't get the rail cars to move it. We're a little careful on spruce. We're watching that one, and we're behaving very responsibly with our SPF woodpiles.
That's actually a great segue to my next question. How are you guys navigating the freight disruptions, particularly in the rail space?
Yeah. You know, we're using a lot more trucks. We're utilizing different mills that have trucks available, more Alberta product when we can, but everybody's after the same truck. There is a truck shortage, but we're gonna be in good shape for spring. We don't see any issues in our inventories as far as having any holes. We should be pretty good here. Again, speaking of SPF and then the Western market, Hawaii and the Hixson landscape, we're in pretty good shape with the exception decking is tight in the U.S., but we're hoping to get some new strategies to move some other species around to get that back in order as well. The demand is there, Zach, and we're gonna be ready for a good spring market here.
That's great news. You're not too worried about sales being pushed to the right with delivery delays?
No, we're gonna be okay. You know, I think, you know, these rail things, you know, has happened in 2018, not as severe, but it'll solve itself at some point, and the cars will get there. But nobody knows when. But in the meantime, I'm not panicked about us being out of material, at any of our facilities. We're just gonna carry lighter.
Thanks for answering my questions. I'll turn it over.
Thanks, Zach.
I'll go ahead and move on to our next question from Paul Quinn with RBC Capital Markets. Please go ahead.
Yeah. Thanks very much. Morning, guys. Just question on outlook for Q1 here. Last year, you generated CAD 60 million. You know, it looks like the setup is pretty similar to last year. In fact, you know, building material prices have tracked up higher earlier for Q1, and plus you've got the acquisition of L.A. Lumber and Hixson. Just wondering how you're thinking about Q1 and as well as Q2.
Yeah. You know, it's been a very strong start to the year from all angles, whether it's volume, pricing, margin. We're having a very good first quarter. So, you'll see, I think some good numbers here, you know, carrying on into Q2, unless there's a major collapse or a world event, we think the first half's gonna look pretty good. Looking at it year-over-year, not having Hixson in, of course, last year, et cetera, you know, I think we'll have a pretty special first quarter here as we navigate with nice inflation on lumber and, more importantly, the margin side is all back cleaned up and looking good.
Okay. In the release, you mentioned the information technology strategy at Hixson. What is that, and what are you doing across your business lines?
Yeah. When we bought the company, there was, you know, some more older, let's say, antiquated technologies there. We studied that in our due diligence, and we put in the DMSi system which we use. It's called Agility. We use it on the West Coast of the U.S. We now have it operating at three facilities. We'll have all 19 up and running by the end of April, and then we'll go into the sawmills, and get those done, on the more complicated Hixson lines, which will help us achieve a lot of efficiencies, real-time information. This was all planned for. It's not a risky one going in. We know the system, we use it, and it's a much newer version than we even use on the West Coast, and implementation has been going well.
Okay. Just so I understand it, that DMSI system is more on the sales side or it's more on the production side?
It's all angles. It's soup to nuts system. It tracks every piece of lumber through, you know, your whole manufacturing process from receipt to ship to inventory, VMI. It controls everything and has excellent reporting. We're gonna start scaling all of our plants, pool purchasing on supplies. There's a lot of great things we're gonna get to once this technology is deployed, which is happening now. Again, it's already in place.
Paul, it's Jay here. Just wanna let you know too that that system is being utilized in California Cascade. So we're very familiar with the product, and it's working well for us in California. So it's not like it's a new product to us.
Okay, great. I appreciate you're still probably digesting Hixson and ramping, but what does the current M&A market look like right now?
Yeah, you know, we're in dialogue as always with different opportunities and, you know, we're certainly taking more of a blend on an average lumber price when we look at purchasing a business today. We're being conservative as we always are, you know, same kind of EBITDA multiple targets that we look at being responsible to our balance sheet. You know, we're seeing some things that could be interesting later in the year. Nothing right now. Again, to your point, we are working hard on Hixson and all the other divisions because we've got a lot of volume. It's busy and challenging with pricing levels and shipping shortages. We're just very busy.
you know, I think later in the year, you know, we'll get focused on a couple of more things. We're in dialogue on a couple of things, Paul, but nothing imminent.
Okay. That's all I had. Best of luck, guys.
Thanks.
Thank you.
We'll go ahead and take our next question, Steve Hansen with Raymond James. Please go ahead.
Yeah. Good morning, guys. Apologies if I missed it, but just thinking about any of the other constraints that might be in the system, how is the people situation down south in particular at Hixson? Are you in good shape there? Is that posing any challenges in terms of meeting the demand you've described?
Getting a little bit better, as people are coming back to work. It's still a challenge in certain regions, but not where it's wounding us. Of course, the COVID absences have declined now, and it looks like that's behind us, which is nice to see as well. Nothing that's penalizing us, Steve, to answer your question.
Okay, great. That's helpful. Just to follow up again on sort of the front half outlook for the year. I think you described it as being a very special first quarter. The margin expectations or sorry, the margins that we saw last year through the first quarter were obviously outsized again. Is it safe to say that those are gonna be too hard to reach again this time with Hixson involved, or is it still a possibility to get up to those same levels?
Yeah. You know, I think, you know, near that zip code, that was a pretty high watermark with what the lumber market was doing last, you know, 2020 to 2021, it was just, you know, on fire, where here it's moving up, but it's kind of been in the zip code for a while. We were getting some extra margin on that rocket launch of pricing and everyone was out of stuff. This year it's different. Everyone has material, but it's priced higher. You know, the margins are a little bit more normal. You know, having said that, our volumes will be a lot higher with Hixson, etc. You know, just seeing, you know, some of the guys on numbers just, I think, a bit too carried away. We're having fantastic results here.
It's just that the market's too high, I think, on lumber, and people have to be careful. I think just looking at their research that we're not a sawmill and, you know, we are value-adding and, you know, we've had the one bit of margin pain last year. We're through that, and we should be back into our traditional margin patterns, Steve, with a little bit of, I would say, extra push, because of the way the trajectory of the lumber market is today on panels and OSB.
Very good color. Appreciate that. Thanks, guys.
Thanks, Steve.
We'll go ahead and take our next question from Yuri Lynk with Canaccord Genuity. Please go ahead.
Hey, good morning, guys. Just housekeeping issue for me, I guess for Jay. D&A, Jay, it was down almost $2 million sequentially to about $10 million. Is that a good quarterly run rate excluding rate of use?
Yeah, Yuri, just keep in mind it's seasonally we would have a little bit of a decline in DS&A. As a run rate, it would increase a little bit as we go into the busier season, especially in Canada.
Got it. Makes sense. Any color on working capital for 2022, at least in the first half of the year? Should we expect a continued investment in working cap just given where pricing and volumes are?
Yeah, of course, it really depends where pricing goes for the balance of this year. You know, we put together a budget back in November, December, and we're already wrong on pricing on that. We would expect, if pricing stays at these levels, then, you know, working capital will be fairly flat year-over-year. You know, if it comes off to more historic pricing, then we could pick up some cash with the decline in pricing.
That's it for me. Thanks.
With that does conclude our question and answer session. I would now like to hand the call back over to Ali for any additional closing remarks. Please go ahead.
Thanks again, operator. On behalf of the management team, I'd like to thank you for joining us this morning for an update on the fourth quarter results. We look forward to speaking to you again on the back of our Q1 2022 financial results. That concludes today's call. I'll ask operator to wrap up the call. Have a great day.
With that does conclude today's call. Thank you for your participation. You may now disconnect.