Good day, and welcome to the Doman Building Materials Group Ltd. Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ali Mahdavi. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us for Doman Building Materials Third Quarter 2021 Financial Results Conference Call. Joining me this morning are company Chairman and Chief Executive Officer, Amar Doman, and the Chief Financial Officer, James Code. If you've not seen the news release, which was issued after the close of market 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 November 19th. Following management's presentation of the third quarter results, we will conduct a question-and-answer 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 concerning 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. 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. Thanks for joining us on today's call. On the back of a solid second quarter with record results stemming from strong pricing and volumes, which started to normalize late in that period and that were complemented by steady demand, the third quarter started off as what I would qualify as expected. Our expectations were that we would see the pricing normalization caused by a temporary slowdown in demand across various markets to continue until end users came back to the market once a healthy equilibrium was reached. This trend was exactly what we experienced in the third quarter. Given the continued downward pressure on pricing going into the third quarter, we prudently managed working through our inventories and contracts and protecting gross margins to the extent possible.
Mid-quarter, we started seeing signs of pricing stabilizations at levels which are very healthy for our business and market demand for our products to resume, which sets up well going into the fourth quarter with less price volatility, normalized margin levels, and robust market demand in our key markets. Despite some of the industry-wide challenges around pricing and demand dynamics during the quarter, I should say, sales reached CAD 625 million. Our recent acquisition at Hixson Lumber was a major contributor to our revenue growth in the quarter, and our integration efforts at Hixson Lumber continue to be carried out as planned, and we remain very excited about this latest addition to the Doman family.
We remain very much on track to deliver on our internal synergy targets and look forward to realizing and reporting on the full value and impact of this strategic acquisition in the coming quarters. I am both pleased with and very proud of our financial performance during what I continue to consider a challenging quarter, where we have had to be extremely responsive to industry-wide price volatility while ensuring that our first-class level of service remains on point. As a result of our collective efforts, revenues amounted to a record CAD 625 million. Gross margin was challenged, per my earlier commentary on inventories and pricing dynamics at just under 13% or CAD 80.7 million. Adjusted EBITDA, CAD 34.5 million, net earnings CAD 7.7 million, and lastly, paid a quarterly dividend totaling CAD 0.12 a share.
Looking ahead, we remain excited and optimistic as we believe that the pricing environment and market demand has reached that equilibrium at healthy levels while we continue to manage our costs and always look for growth opportunities. A little bit of color on how the fourth quarter has started off so far. We are feeling quite optimistic based on the pricing environment, inventories, and importantly, the demand profile we are seeing on both sides of the border. End markets and users who may have been on the sidelines waiting for some normalcy in pricing seem to be back in the flow with purchasing and the activity levels returning to normalized levels.
As noted in our earnings news release, I am very pleased to report that based on the proven resilience of our business model and confidence in the performance of the business going forward, the board of directors approved increasing our dividend from CAD 0.12 back to CAD 0.14 per share starting in the fourth quarter of 2021, which will be paid on January 14, 2022 to shareholders of record on December 31, 2021. As always, we remain confident in our ability to work through volatile 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. With that, I'd like to ask Jay Code, our CFO, to take over and provide a review of the company's third quarter 2021 financial results in greater detail.
We're gonna open it up for questions from the analysts. Over to you, Jay.
Thank you, Amar, and good morning, everyone.
Sales for the quarter ended September 30, 2021 were CAD 625.3 million compared to CAD 472.2 million in the comparative period in 2020, representing an increase of CAD 153.1 million or 32.4%. The increase in revenues was largely due to the contributions from the newly acquired Hixson Lumber and LA Lumber Treating, which were partially offset by a decrease attributable to the company's legacy operations, driven by industry-wide declines in both volume and pricing for construction materials during the quarter. The company's sales by product group in the quarter were made up of 66% construction materials compared to 65% last year, with the remaining balance resulting from specialty and allied products of 30% and other product sales of 4%.
Gross margin dollars were CAD 80.7 million dollars in the quarter compared to CAD 86.8 million dollars in the same period of 2020, a decrease of CAD 6.1 million dollars. Gross margin percentage was 12.9% in the quarter, a decrease from the 18.4% achieved in 2020, largely a result of the previously discussed decline in construction materials pricing, which was partially offset by contributions from our recent acquisitions. Expenses for the quarter were CAD 63.5 million dollars compared to CAD 40.7 million dollars for the same quarter in 2020, an increase of CAD 22.8 million dollars due to factors to be discussed. As a percentage of sales, expenses were 10.2% in the quarter compared to 8.6% in 2020.
Distribution, selling and administration expenses increased by CAD 16.4 million - CAD 46.2 million in the third quarter of 2021 from CAD 29.8 million in 2020, largely due to additional DS&A from the acquisitions. As a percentage of sales, these expenses were 7.4% in the quarter compared to 6.3% in 2020. Depreciation and amortization expenses increased by CAD 6.5 million from CAD 10.9 million - CAD 17.3 million, largely as a result of the acquisitions. Finance costs for the third quarter of 2021 were CAD 8.7 million compared to CAD 3.5 million in 2020, an increase of CAD 5.2 million, largely as a result of additional finance costs related to the May 2021 issuance of new unsecured notes.
EBITDA for the third quarter of 2021 was CAD 33.2 million compared to CAD 57 million in the comparative quarter of 2020, a decrease of CAD 23.8 million. EBITDA this quarter included non-recurring, directly attributable acquisition-related costs of CAD 1.3 million. Adjusted EBITDA before these non-recurring costs was CAD 34.5 million compared to CAD 57 million in the same period in 2020, a decrease of CAD 22.5 million. As a result of these factors, net earnings for the quarter were CAD 7.7 million compared to CAD 31 million in 2020, a decrease in net earnings of CAD 23.3 million. Turning now to the statement of cash flows. The significant factors affecting the company's operating activities in the first nine months of 2021 were improved earnings and working capital changes.
Operating activities generated CAD 144.2 million in cash before non-cash working capital changes this year to date, compared to CAD 95.9 million during the same nine-month period of 2020. Year-to-date changes in non-cash working capital items used CAD 128.4 million in cash compared to generating CAD 36.1 million in the same period in 2020. The increase in cash used in non-cash working capital was largely due to a combination of the results from the acquisitions, a significant increase in both the levels of accounts receivable and the overall average unit cost of inventory on hand at September 30, 2021. Construction materials pricing remained comparatively high versus the same period last year, despite the price decline since May 2021.
Relatively lower sales volumes in the third quarter of 2021 resulted in higher levels of residential lumber inventory at period end. In comparison, the prior year period included a significant reduction in non-cash working capital as the company successfully adjusted its working capital levels in response to the economic uncertainty caused by the onset of the pandemic in March of 2020. Notwithstanding the impact of the market pricing and the pandemic, the company generally experiences higher levels of non-cash working capital during the first and second quarters, and a decrease in non-cash working capital during the third and fourth quarters due to ordinary seasonal factors relating to the company's business cycle.
The changes in working capital in the first nine months of 2021 was comprised of an increase in trade and other receivables of CAD 82.3 million, an investment in inventory of CAD 74 million and a decrease in prepaid expenses and deposits of CAD 2.3 million and a net increase in trade and other payables of CAD 25.6 million dollars. The increase in cash consumed by seasonal working capital changes resulted in the company's increased utilization of its loans and borrowings. Additionally, the company employed its existing loan facilities to finance the Hixson and LA Lumber acquisitions. As a result, the company generated CAD 489.6 million of cash from financing activities compared to using CAD 126 million in the same period in 2020.
The issuance of the previously discussed unsecured notes resulted in net proceeds of CAD 317.1 million of cash, which were applied against the company's existing loans and borrowings. Scheduled repayments related to the non-revolving term loan consumed CAD 2 million, consistent with 2020, and net repayment of our equipment loans amounted to CAD 1.9 million, also consistent with 2020. Payment of lease liabilities, including interest, consumed CAD 17.7 million of cash compared to CAD 18.6 million in 2020. The company's lease obligations generally require monthly installments, and these payments are all current. The revolving loan facility increased by CAD 144.3 million compared to decreasing by CAD 71.3 million in the same period in 2020.
The significant year-over-year increase in net advances from the revolving loan facility is a result of the previously discussed increase in cash consumed by working capital changes during 2021, as well as the partial financing for the Hixson and LA Lumber acquisitions in June 2021. Shares issued net of transaction costs generated CAD 82 million of cash as a result of our public offering in May 2021. The company also returned CAD 32.2 million to shareholders through dividends paid during the nine-month period, compared to CAD 32.7 million in 2020. As a reminder, the company updated its dividend policy during the second quarter of 2020, resulting in a quarterly dividend reduction from CAD 0.14 cent - CAD 0.12 cent, beginning with the dividend paid on October 15th, 2020.
Additionally, on March 11th, 2021, the company announced a one-time special dividend of CAD 0.04 per share, payable subsequent to the first quarter on April 15th, 2021 to shareholders of record at the close of business on March 31st, 2021. The company was not in breach of any of its lending covenants during the nine-month period ended September 30th, 2021. Investing activities consumed CAD 501.8 million of cash compared to CAD 696 thousand in the same period in 2020. Investing activities in 2021 included the Hixson and LA Lumber acquisitions for total cash consideration of CAD 498.3 million, with no acquisitions in the nine-month period in 2020. Purchases of property, plant and equipment, net of proceeds from disposition were CAD 3.5 million compared to CAD 696 thousand in 2020.
This concludes our formal commentary, and we'd now be happy to open the call to any questions that you may have. Thank you. Operator?
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Hamir Patel from CIBC Capital Markets. Please go ahead.
Hi, good morning. Amar, I was wondering if you could give us a sense as to, you know, what your thoughts are on inventories in the channel for both building materials as well as treated lumber in the big box channel.
Sure. Building materials are tight, Hamir. Good morning. We're on allocation from a lot of our different allied vendors, Louisiana-Pacific, James Hardie, AZEK. A lot of the building materials have been like this for almost a year. We're selling pretty much out as much as we can get in, you know, which is a good thing, but we'd like more, certainly because the demand is there. On the pressure treated side in the U.S., inventories are lighter as we went through that kind of tough period in the summer and demand has picked up, it's super strong. We are actually out of some items right now in the U.S., and we are running hand to mouth. We're extremely busy and very confident about what's coming up and where we're at.
As far as Canada goes, it's sluggish on the treated side across Canada, just sort of trailed the U.S. on the kind of the market collapse of wood pricing. It's coming up a little bit slower than we'd like, but we look forward to next year and having sort of a normal year, and that's from what we can get indications from all the retailers. It seems like pretty good for 2022.
Thanks. Thanks, Amar. That's helpful. I wanted to get your thoughts on, you know, some of the recent developments we've seen in British Columbia with respect to old growth logging.
What do you think are the implications there for your own private timberlands in the province, as well as, you know, demand for treated lumber?
Yeah, for the industry, you know, definitely a tough blow. Who knows where this is all gonna land at the end of the day, but very tough on certain stakeholders. For us, selfishly, it's very good. We have a nice piece of private timber that we're harvesting and I think the value of our timber will move up being private and, you know, untouchable from the government. Quite frankly, we're, you know, pleased with it, but not pleased for our industry friends.
Do you see much, what sort of impacts would you expect on, you know, maybe to cedar production? Because I'd, you know, I'd imagine that any decline there could benefit treated lumber sales.
Yeah, that's a good point. We've been thinking about that. If cedar does, you know, get curtailed, you know, severely much like this announcement from the government would do, it would definitely bode well for treated and other alternative decking products. There's no question. Fencing as well and other things that cedar is used in railings. I think cedar could have a bit of a tough time here. There's no question. That could pump up the redwood market, which we're in the California area as well. Again, selfishly benefiting from a tough announcement.
Great. Thanks. Thanks, Amar. That's all I had. I'll turn it over.
Our next question will come from Paul Quinn from RBC. Please go ahead.
Yeah, thanks. Morning, guys. Just a question on haven't seen the gross margin dip below 13% for a while. Just wondering if there's anything specific on the integration cost side with Hixson and the LA Lumber in the quarter.
Simple as this, Paul. $1800-$400. That's it. I think we managed very well, you know, offsetting losses on lumber, you know, from a point we've never seen before. That's all it is. It's recovered out, and we're heading right back to normal gross margins. I think our company did extremely well with that hammer, that was put onto us by the market. A lot of our pricing on the sales side is done on contracts to Random Lengths. You're just staring at the red going down. Of course, we banked a ton on the way up, so we did very well on the ride, and certainly tried to give back as little as possible. I compliment our team on that.
Here we are now back to, and you can see the confidence in our dividend and where we see the company going. We're recovered out of it, and we're on our way back out.
Yeah. I wanna ask you about the dividend. I mean, you've, you know, you decreased it in a period of uncertainty and it. You know, I thought it would come back. I just didn't think it'd come back as quickly. What gives you the increased confidence right now?
Yeah. Real simple, Paul. We've doubled the company on a very, very nice basis with the Hixson acquisition. We're extremely excited about that. The rest of the company, Hixson is going berserk. It's so busy down there. The timberlands are extremely profitable right now for us as well. We went through one dip in, you know, kind of a 3.5-month period of the lumber collapse. Shouldn't have been at 1,800, we all know that. It goes down, and now it's back up 35% from that low. Company doing extremely well. We have full confidence in the dividend, full confidence in our cash flow and our growth plan.
Okay. Just lastly on you know, your leverage came up with, obviously, with the acquisitions. Is there a you know, spot that you feel more confident to get to be able to continue the growth strategy?
Yeah. You know, we've got a lot of room in our revolver. Of course, when we did that note, we kind of repositioned the balance sheet to do two things. One, absorb Hixson, and then number two, be able to fuel other growth opportunities without having to tap the market for more bonds or equity. We've got room. We've got some tuck-in acquisitions we're eyeing up that will help augment in the U.S., so we're looking at those currently and pretty confident. Anything else, Jay, to add?
Sure, Amar. Just wanna point out too that any free cash flow excess after the dividend is certainly going to go towards reducing debt going forward. You know, we expect some positive change coming from that going forward.
All right. That's all I have. That's luck, I'd say.
Thanks, Paul.
Again, if you have a question, please press star then one. Our next question comes from Zachary Evershed from National Bank Financial. Please go ahead.
Morning, everyone. Thanks for taking my question. You mentioned that inventories are a little lean and you're living hand-to-mouth in some areas. Are you having any issues with transportation, given the supply chain madness that we're seeing out there, with actually getting inventories into you or out to customers?
We are particularly in the U.S., you know, the Hixson acquisition. That area is plagued with truck shortages. It's everybody. It's the sawmills. It's us. It's whatever business you're in, it's tough to find truck drivers just, you know, just like labor and everything else right now. That is a struggle in the South, getting material to us. We do have our own truck fleet. We are looking for some more drivers on the West Coast of the U.S. and in Texas, as well. It's a strain. It's not crippling us, but, you know, it's not helping us right now. It's not gonna, at this point, I would say, move the dial on being material, but it's just a pain in the ass.
Understood. Could you give us a little more color on the integration of Hixson, how that's proceeding, and where you expect it to end up by year-end and then into next year?
Yeah. It's going extremely well. The team at Hixson is strong. We're ahead of our scheduled plans on implementing some new technologies to upgrade. That's going well. The shipping volumes are huge after the summer dip when lumber was correcting. We're right back, in fact, exceeding margins that we saw earlier in diligence on the company right now. That's why you can probably feel and hear the confidence we have in the company.
Absolutely. Last one for me on SG&A and the pace of CapEx, as Hixson joins the fold, where should we look to see those settle?
Yeah, Zach, it's Jay here. Just, if you look at our Q3 results with the first full quarter of Hixson included in those results, I would expect, you know, similar levels of SG&A going forward to what you see there in Q3.
Thank you. On the pace of CapEx for next year, what are you expecting?
You know, Hixson is going to increase the CapEx rate, we believe to about CAD 6.5 million, CAD 6.5-7 million. Of course, Amar mentioned we're looking at some technology upgrades in Hixson. That's going to be an investment we're making over the next six-8 months. You'll see some CapEx on that side of things. You know, we're going from, say, CAD 5 million pre-Hixson to CAD 6.5-7 post-Hixson on CapEx.
That's very helpful. Thanks. I'll turn it over.
Thanks, Zach. This concludes our question and answer session. I'd like to turn the conference back over to Ali Mahdavi for any closing remarks.
Thank you, operator. Once again, everyone, thank you for joining us this morning. Should you have any questions, please feel free to follow up with myself, and we look forward to speaking with you again on our year-end conference call. That concludes today's call. I'll wrap it up and hand it over to the operator to close things off.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.