Greetings, and welcome to the Doman Building Materials Group Limited third quarter 2026 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ali Mahdavi from Doman Building Materials Investor Relations. Thank you. You may begin.
Thank you, operator, and good morning, everyone. Thank you for joining us for Doman Building Materials third quarter 2026 Financial Results Conference Call. Joining us this morning are the company's Chairman and Chief Executive Officer, Amar Doman, and Chief Financial Officer, Darren Gwozd. If you have not seen the news release, which was issued after the close of markets on Friday, 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 November 23rd. Following the presentation of the third 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.
Thanks, Ali, and good morning, everybody. Overall, our third quarter performance demonstrates the strength of our business model and product offering. Despite ongoing uncertainty across the construction markets and continued pressure from certain cost inputs, we delivered higher year-over-year revenues and improved net earnings.
While margins were impacted by lower lumber pricing in the back half in all species and increased transportation costs, our business continued to benefit from strong customer relationships, a broad product offering, and an established market position across North America. Our ability to generate revenue growth in an environment characterized by uneven demand and ongoing economic uncertainty reflects the strength of our distribution network, the breadth of our product portfolio, and the long relationships we have developed with customers across our markets. Gross margin dollars increased modestly to CAD 124.8 million compared to CAD 123.1 million in the prior year quarter.
However, gross margin percentage declined to 14.8% compared to 15.5% in the third quarter of 2025. This decrease was primarily attributable to much lower lumber pricing across the board, together with higher freight and fuel costs, including increased diesel expenses driven by global events. These pressures impacted our overall margin performance during the quarter. Nevertheless, we remain focused on disciplined pricing, effective inventory management, procurement strategies, and operational efficiencies to help mitigate cost pressures and protect profitabilities.
Managing these factors will remain an important priority as we navigate the current operating environment. These results also demonstrate our ability to maintain relatively stable gross margin dollars and improve net earnings despite ongoing cost pressures and challenging market conditions. As we look across to our end markets, we continue to closely monitor housing starts, interest rates, and broader trends in construction activity.
Higher borrowing costs have the potential to weigh on demand in certain segments, and we recognize that market conditions remain uneven. At the same time, the longer-term fundamentals of the building materials market continue to provide reasons for confidence. We remain focused on responding effectively to changing market conditions while positioning the company to benefit when demand strengthens. Our priorities remain unchanged.
We continue to emphasize disciplined execution, operational efficiency, prudent working capital management, and exceptional customer service. We are also maintaining a close focus on freight, fuel, and procurement costs, recognizing the importance of managing these expenses in an environment where transportation and commodity pricing can have a meaningful impact on margins. Strategic opportunities will always be a focus for Doman, and we continue to analyze strategic acquisitions as we remain in growth mode, no matter the environment. This is how we have built the company.
Our balance sheet and cash generation continue to support our capital allocation strategy, including our commitment to returning capital to shareholders. In addition, we are pleased to highlight an important development that further demonstrates management's confidence in the company's long-term prospects and commitment to shareholder alignment. Effective December this year, I have established an automatic securities purchase plan under which 100% of my net after-tax base salary will be used to purchase common shares of Doman Building Materials in the open market.
I believe this arrangement represents a meaningful demonstration of long-term commitment to the company and further aligns my personal financial interests with those of shareholders. It also reinforces our confidence in the company's future and our commitment to creating sustainable long-term shareholder value. Looking ahead, while we recognize that near-term market conditions remain uncertain, we believe the company is well-positioned to navigate the current environment.
Our diversified product mix, broad geographic footprint, established customer relationships, and experienced management team provide a strong foundation as market conditions continue to evolve. In closing, I'd like to thank our employees for their continued dedication and commitment, our customers and supplier partners for their ongoing trust, and our shareholders for their continued confidence and support. We remain committed to building on our strong foundation and delivering long-term value for all of our shareholders. With that, I'll now turn the call over to Darren, our CFO, to review the financial results in more detail, and then we'll open up the line for analyst questions. Thanks very much. Darren?
Thank you, Amar. Good morning, everyone. Sales for the three months ended September 30, 2026, were CAD 841.7 million versus CAD 795.1 million in 2025, representing an increase of CAD 46.6 million or 5.9%, largely due to the increases in year-over-year commodity pricing in certain U.S. construction material categories. The company's sales in the quarter were made up of 81% of construction materials, with the remaining balance resulting from specialty and allied products of 15% and other sources of 4%, which is generally in line with previous quarters. Expenses after gross margin for the three months ended September 30, 2026, were CAD 87.1 million as compared to CAD 86.1 million, an increase of CAD 1 million or 1.2%. As a percentage of sales, 2026 expenses were 10.3% compared to 10.8% in 2025.
Looking at this category in a bit more detail, distribution, selling, and administration expenses increased by CAD 4.2 million or 6.9% to CAD 65.2 million in the third quarter of 2026 from CAD 61 million in the same period of 2025, primarily due to higher energy costs and broad inflationary pressures.
As a percentage of sales, these expenses were 7.8% compared to 7.7% in the same quarter of 2025. Depreciation and amortization expenses decreased quarter-over-quarter by CAD 3.2 million or 12.8% to CAD 21.8 million for the three months ended September 30, 2026, compared to CAD 25 million for the same period of 2025, mainly due to asset dispositions and assets becoming fully amortized. Finance costs for the third quarter of 2026 were CAD 15.1 million compared to CAD 18.1 million in 2025, a decrease of CAD 3 million or 16.6%, primarily attributable to lower interest rates on loans and borrowings.
This quarter's adjusted EBITDA was CAD 60.1 million compared to CAD 62 million in the comparative quarter of 2025, a decrease of CAD 1.9 million or 3.1%. Adjusted EBITDA during the quarter was impacted by a steady quarterly decline in U.S. product pricing, higher freight and fuel, and energy costs, and other broad inflationary pressures. Doman's net earnings for the quarter were CAD 19.7 million compared to CAD 18.1 million for the same period in 2025, an increase of CAD 1.6 million. Beyond the slight decrease in adjusted EBITDA, results benefited from decrease in finance costs and depreciation and amortization as previously discussed, partially offset by higher income tax expense. Turning now to the statement of cash flows.
During the three months ended September 30, 2026, the company generated CAD 122 million of net cash flows provided by operating activities, down from CAD 161 million in the same quarter of the prior year, primarily due to a higher average cost of our inventory when compared to the prior year relating to our U.S. construction materials pricing. For the nine months period ended, we experienced net advances of the revolving loan facility of CAD 19.1 million compared to repayments of CAD 150.2 million in 2025, as last year's results included the application of the net proceeds from the sale of our timberlands. The company maintained its established dividend program, returning CAD 36.9 million to shareholders through dividends during the nine-month period, consistent with 2025.
We take pride in our track record of providing consistent shareholder returns, and the current dividend level remains aligned with the company's capital allocation objectives, with no changes anticipated in the near term. Turning briefly to investing activities for the nine months ended, the company invested CAD 25.6 million in property, plant, and equipment during the period, compared to CAD 14.7 million in 2025.
The increase is primarily attributable to the strategic land acquisition completed in the first quarter. Excluding this investment, capital expenditures remained modest and consistent with the company's disciplined approach to maintain capital, which is generally expected to remain below 1% of annual revenues. The company was not in breach of any of its lending covenants during the nine months ended September 30, 2026. This concludes our formal commentary, and we would now be happy to respond to any questions that you may have. Thank you, operator.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question is from Matthew McKellar from RBC Capital Markets. Please go ahead.
Hi, good morning. Thank you for taking my questions. To start with, just unpacking top line in the quarter a little bit. Could you talk about where you're seeing the strongest year-over-year increases in pricing for construction materials? And then just help us understand what you saw in volumes across the business. Maybe some regional commentary would be great. Thanks very much.
Yeah, good morning, Matthew. On lumber, the base prices are higher year-over-year, but the decline started kind of midway through the third quarter and has continued into the fourth. Lumber, if you are following Random Lengths, it is just a pile of negatives as you read it. There is not anything going up except two by 10 because two by 10 is short, just due to the lack of production. Otherwise, everything else is negative. That kind of affected, obviously, our margins and, of course, the fuel increases. Region by region, Canada picked up a lot in the second half, which was nice to see. We are tracking closer to our plan now, if not a bit ahead of plan in Canada.
But the U.S. side is still soft and murky just with the economic outlook, diesel, inflation, interest rates moving up a quarter and a quarter here now as well in Canada. You are seeing just kind of a It is just not a nice environment out there, so we are battling through it. I think we delivered an exceptional quarter in a tough environment.
Thanks for that. And just a Sorry, go ahead, Darren.
Yeah, sorry, I was just going to say on actual volumes itself, volumes were generally flat, kind of quarter or year-over-year. They were a little bit ahead kind of at the start of the year and maybe a little bit below for Q3. So, trending a little bit negative, but still very firm and consistent with prior year.
Thanks for the detail. Just on the cost side, as we progress into Q4 here, how would you have us think about the impact of transportation costs? Is there anything you would like to highlight specifically around how you have changed procurement practices or how you are driving operational efficiency that we should be bearing in mind in the fourth quarter here? Thank you.
Yeah, I will go first, and then I will let Darren chime in as well. No wholesale changes. We are doing our best to pass along the increases to our customers. It is easier said than done with certain customers. So, we are working through that, and each week after week, we tend to get a little bit better on it, recover more. Eventually, this fuel thing will go away. It will be in our rearview mirror at some point.
Right now, we are doing the best we can to battle through it on those inflationary pressures. We are watching our costs, as we always do, but I do not think we are pulling any gigantic lever or panicked. You can see the volumes are, again, as Darren just mentioned too, decent. Activity is decent. We are just not seeing a big upswing with the whole environment. I will let Darren finish off.
Yeah, on just pricing in general, I mean, obviously, challenging to kind of battle the challenges with diesel prices and where our underlying commodity prices of lumber are going. On the things we can control a little bit more, we are spending more time focusing on those. I think where there is some opportunity is further integration of our previous acquisitions and getting scale of economies of scale on certain ancillary-type products or supplies. So, we are making a little bit of progress there, but nothing that is going to move the needle materially, but definitely pick up a few points.
Thank you both for the help. I will turn it back.
The next question is from Hamir Patel from CIBC. Please go ahead.
Hi, good morning. Amar, how much do you estimate the diesel and freight costs impacted you on gross margins in the quarter, and has that impact worsened here in Q4?
Yeah, it is kind of the same. It definitely had pulled down that gross margin percentage just with freight costs just continuing to rise and not going away. Yes, it is going to flow into the fourth quarter. I would not say that it is moving in a flare, but as the quarters go on, we are going to be recovering more, Hamir, so it is not going to get worse. I cannot say it got better, and it is not better yet, but it is increasing, and we are recovering better kind of every week. We are doing the best we can through this mess.
Okay, great. Maybe if you could just help us think about year-over-year sales comps here in Q4. It sounds like volumes were kind of flat to slightly down in Q3, and that trend has continued so far. Just given the pricing trends you referenced, how do you think about maybe across your product mix, the maybe year-over-year price change for Q4?
Yeah, the base price is still higher than last year, but it went up higher, but it's been coming down week after week. I know you're close to Random Lengths, so you're reading the same stuff. It's painful out there. I think fourth quarter's going to be challenging for lumber pricing for everybody involved in the game. The consumer will win there, but it's just soft out there. Year-over-year, we went into an up market kind of in fourth quarter and first quarter of last year.
This right now, we're still declining in lumber, so we're all battling through it. We're starting to see some kind of a leveling here. I think we might be kind of near the bottom where curtailments have arrived, and we're starting to see some kind of cheaper lumber tallies get cleaned up, and we're kind of feeling like we're getting close to the bottom, but it's just soft, Hamir.
Fair enough. Amar, are you starting to see the benefits from your fencing expansion, or will that be more kind of apparent next spring?
Yeah, you'll see more of that next spring. We were just with our board at our new sawmill there in Estill the other day, and production is ramping up very, very nicely. So, it looks very good there. We've had good customer reception on the production. There's more demand coming, so it'll be a 2027 story, and we'll continue to upgrade the other mills as well and carry on with our strategy.
Great. Thanks. That's all I had. I'll turn it over.
Thanks.
The next question is from Zachary Evershed from National Bank Financial. Please go ahead.
Good morning, everyone. Thanks for taking my questions. With your largest customer making up just under a third of your sales, any complications there in managing your cost pass-throughs in this environment? You said it was easier with some customers than others.
Yeah, it's kind of the same with a lot of the customers, depending on what region, et cetera. Hawaii is different than the West Coast of the U.S. The East Coast is different. Canada's different. It's a big mixed bag, Zach, but all customers immediately refuse fuel surcharges. This has been going on for months now. But as the days go on, as I just mentioned, we're starting to get some recoveries coming, which are much better, and it's helping us. Are we getting 100%? No. But are we starting to move towards that? Yes. Let's all hope this mess goes away and prices start to go down again. But for now, we're still battling through it, but we're getting there.
Got you. Just assuming that we kind of stuck to the same pace that you've been able to get acceptance, do you think you'd be able to close the gap by the end of Q4 and Q1 could be cleaner, or would you still be battling at that point?
I'm hoping we are there by the end of Q4. That's the goal, or even a bit sooner in December. We continue to work at it. Again, it's all situational with different customers. Because the end-use environment isn't super robust either, we're all fighting for orders at the pro dealer level, and it's just kind of one of those tough markets that we've been through before. But with interest rates going up a little bit, housing starts softening, lumber weak, it's a scrappy environment, Zach. Maybe I can put it that way.
Got you. Thanks. Last one for me. On the employee share-based compensation, any changes there in your compensation philosophy recently?
Yeah, you might have saw what we released there, so I think we put it in detail. I'll be receiving 100% of my post-tax salary all in Doman stock purchased on the market automatically. So, keeping my alignment with shareholders more than ever. I think that's a big positive and shows my belief in the business long term.
On the RSUs, PSUs, and DSUs there, will that be-
Yeah, I will let Darren speak to that side. Sure.
Yeah. We did get that plan approved in our AGM and did issue those to our employees this last quarter. We think that is a great incentive for our employees here. Our overall compensation strategy hasn't changed materially, but we think this does allow us to keep our key employees motivated and working in line with the business even more.
Thank you very much. I will turn it over.
The next question is from Frédéric Tremblay from Desjardins Capital Markets. Please go ahead.
Thanks. Good morning. Wanted to see if you could perhaps shed some light on inventory levels and the customer level. Are they using more conservative approaches on that front given the market uncertainty, or is there any sort of changes to highlight there?
Good question. Certain customers are inventorying less right now just because consumption is down on new housing. Repair and remodel is flat to off a couple percent. We are seeing a little more hand-to-mouth, if you will. Basically buy one, sell one, buy one, sell one. That is kind of going on in the industry. No one is positioning. What you will see us do at Doman, though, is lumber continues to be weak.
We will start locking and loading on certain items that we need, and we will buy heavy and start to lay it down, not only so we have got our supply in order for our customers, but also try to take advantage of a lower market in certain pockets when we can. We have been at this a while, so we have some strategies in place for that to help work through that. On the customer end, yeah, they are not piling anything down right now. It is really in and out.
Understood. With the leverage ratio improving in the quarter, wanted to get your most recent thoughts on potential acquisitions and, I guess, your preference from a geographic or product category perspective and how you think about generally being acquisitive in the current market environment. Thanks.
For sure. We are happy with our debt continuing to go down and improving on the ratios. We certainly have irons in the fire as far as M&A. That is what has built us to where we are today. We are not stopping here. We have conversations going on regularly with the opportunities, and I can tell you that we are not in any way, shape, or form stopping our growth trajectory here. When they arrive, they arrive, and we get it done.
Thanks. I will get back in the queue.
The next question is from Ian Gillies from Stifel. Please go ahead.
Morning, everyone.
Hey, Ian.
Amar, I know you've been really happy with some of the automation investments in the U.S. over probably the last couple years. Can you maybe provide a bit of an update on how you're thinking about 2027 and, I guess, where you are on that path right now?
Yeah, we're looking at one to two upgrades in the U.S. at our sawmills. We're looking at Arkansas and potentially another one in Texas to upgrade. The upgrades have gone well. You always have your startup hiccups, but we're through those, and the production's coming out very, very nicely. There's still strong tariffs on South American material coming in, so that's a nice benefit for us as our suppliers are looking for a more orderly American-made on that side of the border supply chain, and that really is going to bode well for us. Keep carrying on with that strategy. Obviously in a tough environment, but we're not going to stop with our operational efficiency upgrades at these mills, and we're excited about it.
Okay. Maybe switching gears to the trucking side a little bit. I am just curious on how you think about what has transpired maybe over the last couple months with fuel costs, you go into next year. Is there anything else going on there that might make you think about bringing any more of that in-house or doing a bit more yourself? I know it is a bit out of left field question, but just curious.
No, I think it is a good question, and it is something we talked about recently as well. But to right now go out and try and buy trucks for what could be just kind of a short-term blip here, I don't think oil has ever stayed up or down for too long, and I don't think we are going to be up here forever.
So, we do think that it has made us think about maybe adding some trucks over time in some other regions, just to have a little bit under the belt, so when these things happen, we have a little bit more control over things. Certainly doesn't offset the fuel increase. That is still a reality whether you own the truck or not, right? So, it can help in certain regions, but we are looking at that. But I wouldn't say there is a wholesale shift inside the business to go back to owning trucks everywhere. We still like having a mix of our own and third party.
Understood. Thanks very much, and appreciate all your candor on the state of the market earlier in the call.
Thanks, Ian.
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. Thank you, everyone, for joining us today and for your continued interest and confidence in Doman. Please feel free to reach out to me directly if you have any questions, and we look forward to updating you on our progress during our next quarterly call. That concludes today's call. I'll hand it back over to the operator.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.