Doman Building Materials Group Ltd. ($DBM)

Greetings, and welcome to Doman Building Materials Group First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ali Mahdavi. Thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for Doman Building Materials First Quarter 2026 Financial Results Conference Call. Joining me this morning are Amar Doman, Chairman and Chief Executive Officer; and Darren Gwozd, our new Chief Financial Officer. Please join me in welcoming Darren to his first conference call at Doman. . If you have not seen the news release, which was issued on Friday, it is available on the company's website at domanbm.com as well as on SEDAR+, along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on May 25, 2026. Following the presentation of the first 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. Good morning, everyone, and thank you for joining us today. Before we get into the results, I would like to take a moment to introduce you all to Darren, and welcome him to the team. Darren has been in the CFO seat for just over a month, and we are very pleased to have him on board. I also want to acknowledge Jay Code, who retired last month and will be missed by all of us. We'll always appreciate Jay's dedication to Doman during his many years working closely with the company. On behalf of myself, the Board of Directors and the entire Doman organization, thank you, Jay. Enjoy your retirement. I'll begin with a summary of our first quarter results followed by some perspective on market conditions and our outlook for the remainder of the year. For the first quarter of 2026, Doman delivered revenues of $762 million compared to $793 million in the same period last year. The year-over-year decline was primarily driven by lower pricing across key construction material categories, including SPF lumber, OSB and plywood, partially offset by increases later in the quarter in Southern allow pine in the United States. Despite that pricing pressure, our performance reflects the resilience of our operating model. We maintained strong shipment volumes and continue to execute effectively across our network. Gross margin for the quarter was $130 million, with margin percentage improving to 17%, up from 16.7% last year. This improvement highlights our continued focus on disciplined pricing, procurement and cost management. EBITDA came in at $68 million compared to $70 million last year. While slightly lower year-over-year, this represents a solid result given the pricing environment and the macro picture including fuel. Net earnings for the quarter were $24 million, essentially in line with the prior year. We also remain committed to returning capital to shareholders. During the quarter, we declared a dividend of $0.14 per share, which was paid in April. As we move through the first quarter, we continue to see volatility in commodity pricing, particularly in SPF, OSB and plywood. While pricing trends were weaker year-over-year, we saw some signs of stabilization in the U.S. market in Q1. That said, the broader macroeconomic environment remains uncertain. Interest rates, housing affordability and overall construction activity continues to influence demand patterns across our markets. In this context, our priorities remain clear: maintaining strong cost disciplines, optimizing our product mix, leveraging our scale and distribution capabilities and preserving balance sheet strength. Our diversified product offering with 83% of revenues from core construction materials and the remainder from specialty and allied products continues to provide stability across cycles. Looking ahead, we expect market conditions to remain dynamic as we move further into 2026. early indicators suggest some pricing stability in certain regions, Visibility remains limited, and we are planning the business with a cautious and disciplined approach. We believe Doman is well positioned to navigate this environment. Our experienced team, strong supplier relationships and focus on operational efficiency give us confidence in our ability to continue delivering solid financial performance. In closing, I'm pleased with our start to the year despite pricing headwinds, we delivered stable earnings, expanded margins and continue to generate value for our shareholders. We will remain focused on execution and disciplined capital allocation as we move throughout the year. I will now turn the call over to Darren.

Thank you, Amar, and good morning to everyone. Sales for the 3 months ended March 31, 2026, were $762 million versus $793 million in 2025, representing a decrease of $31 million or approximately 3.9%, largely due to the decreases in year-over-year pricing in certain construction material categories. The company's sales in the year were made up of 83% of construction materials compared to 81% last year, with the remaining balance of sales resulting from specialty and allied products of 14% and other sources of 3%. Doman's gross margins were $129.5 million versus $132.5 million in 2025, a decrease of $3 million as a result of lower sales. Gross margin was 17% during the quarter compared to 16.7% achieved in 2025. Expenses for the first quarter of 2026 were $85.6 million as compared to $87 million, a decrease of $1.4 million or 1.6%. As a percentage of sales, 2026 expenses were 11.2% compared to 11% in 2025. Distribution, selling and administration expenses decreased by $1.1 million or 1.8% to $61.4 million in the first quarter of 2026 from $62.5 million in the same period of 2025, mainly due to the company's continued efforts to manage costs. As a percentage of sales, these expenses were 8.1% compared to 7.9% in the same quarter in 2025. Depreciation and amortization expenses decreased by $0.3 million or 1.3% from $24.5 million to $24.2 million and are consistent across periods. Finance costs for the first quarter of 2026 were $16.6 million compared to $19.4 million in 2025, a decrease of $2.7 million, largely as a result of lower net debt, including lower utilization of the revolving loan facility and lower unsecured notes balances during the quarter. For the 3 months ended March 31, 2026, EBITDA was $68.1 million compared to $70 million in the comparative period of 2025, a decrease of $1.9 million or 2.8%. EBITDA during the quarter was impacted by the previously discussed decreases in year-over-year pricing in certain construction material categories. As a result of the foregoing factors, net earnings for the first quarter of 2026 were $23.9 million compared to $23.6 million for the same period in 2025, an increase of $0.3 million. Turning now to the statement of cash flows. Operating activities before noncash working capital changes generated $37.4 million in cash compared to $44.5 million in 2025. Operating cash flows during the period were primarily impacted by the previously discussed decline in construction pricing and materials pricing. The company generated $146.1 million of cash from overall financing activities related to the funding of seasonal -- working capital compared to $121 million in 2025. Shares issued net of transaction costs generated $1 million of cash compared to $0.8 million in 2025. The company also returned $12.3 million to shareholders through dividends paid during the 3-month period, largely in line with 2025. Repayment of lease liabilities, including interest consumed $8.8 million of cash compared to $7.9 million in 2025. The company's lease obligations generally require monthly installments, and these payments are all current. The company was not in breach of any of its lending covenants during the 3 months ended March 31, 2026. Investing activities consumed $10.6 million of cash compared to generating $11 million in 2025. Investing activities in the first 3 months of the comparative period included a nonrecurring sale of a portion of the company's timberlands for total cash proceeds of $14.4 million. Additionally, the company invested $16.2 million in new property plant and equipment during the period compared to $3.5 million in 2025. This concludes our formal commentary, and we'd now be happy to respond to any questions that you may have.

[Operator Instructions] Our first question comes from Hamir Patel with CIBC.

Amar, your gross profit margins were stronger than we expected in Q1. In what sort of normalization would you expect into Q2? And when you think on kind of an annual basis, just given the improvements in your mix, should we think of Doman generating margins north of 16% now going forward?

Yes. If I have that crystal ball, I probably wouldn't be on the call. But I'll tell you that right now, the lumber market is doing sort of two different things. The Canadian markets take one thing. The U.S. is doing another. It's all over the map. So -- what's really assisted us in that gross margin in '17 in the first quarter with some good astute buying by our company, taking advantage of low lumber pricing in the fall. And that executed well as the market grows, especially on the U.S. side or part of the first quarter, a very slow quarter as far as volumes go for us as usual. But the margin picked up due to us having some nice price material on the ground at the right time. Going forward, Hamir, it's anyone's guess SYP is obviously coming off now. Having said that, we're holding our margins not too bad. So -- let's hope that the margin trend continues, but going to depend on all what the lumber market is up to for the rest of the year.

Fair enough. And Amar, I think last quarter, you were highlighting some investments you're making on the fencing side to grow that business. Maybe you can update us how that progressing?

Yes, things are on track in still. We're starting to produce trials of fencing there. And by June, we'll have some more new equipment in place to produce a heavy load of fencing on the East Coast. A lot of 1 by 6 tickets for retail customers out there that we currently import a lot of, which we're going to eliminate and produce all in the United States. And then we've got a little bit more happening in Texas, and we purchased some property in Hawaii, which was coming up and available to us. So that was all part of that larger CapEx number you saw. We took advantage of those opportunities, and that's kind of delay the on CapEx.

Our next question is from Matthew McKellar with RBC Capital Markets.

Maybe just to start following up on the purchase of property in Hawaii. Can you give us any more kind of sense of what your intentions are there? And how significant that was in the quarter?

Yes, just opportunistic. So when land becomes available in Hawaii, you'll see us be nontraditional there. We will buy property there because there's just such a scarcity of industrial land opportunities there, some landlord on stuff for a long time came available and we put together a deal directly with the owners and it will eliminate rent for us going forward. So we quickly moved on that. So -- it's opportunistic. It's not a massive strategy, but as it happens, we took advantage of it.

Okay. And moving on, can you just speak a bit about the conditions in the U.S. and Canada, you're seeing so far in the quarter? Are you seeing an impact of sort of late spring? And then just also around Q2, could you give us a sense of maybe how we should think about any kind of implications downstream of conflict of Iran, most notably fuel costs and others may impact your results?

Sure. We're having an okay spring, depending on the region when weather is good, we seem to be moving material. So it's nice to see the consumer is not dead for sure. So we're seeing that. Lumber pricing being a bit lower, that definitely makes us more advantageous to other decking opportunities for your top board. So numbers back in vogue, which is always good. And then when we look at the fuel and, yes, we believe fuel is going to be up here for a while. We're doing the best we can with our customers for fuel surcharge -- is trying to pass on what we can. We can't grab all of it sadly, but we're doing the best we can to take advantage of recovery if we can -- where we can because we're paying for it as soon as it leaves the mill as soon as we have to haul anything anywhere, there's fuel surcharges on everything. So we're doing the best we can to navigate through that. There's nothing super positive or negative about it, but we're just trying to break even if we can, on it and push it through.

Perfect. And last for me, Consumer confidence, I guess, is looking a little bit soft at the moment. Are you seeing that in your mix at all? I mean trade down going on, consumers looking for maybe lower end ranges specialty and allied products. Any observations, I guess, you've seen over the past couple of quarters?

Yes. Just coming into the second quarter here, the trends don't seem to be too different. The SKUs were moving are fairly traditional in what we normally sell. But really weather-driven. It does seem like we have some good weather in certain regions. It's great. Other days, where it's raining and cool in the spring like the East Coast of Canada or our Matthew, it hasn't been great, and sales are sluggish in those particular markets. But really, the patterns on volumes of SKUs seem to be fairly traditional.

Our next question is from Zachary Evershed with National Bank Financial.

Congrats on the quarter. Wondering if you're seeing any difference in communication from customers on either side of the border around their expectations for the rest of the year?

Everybody is fairly cautious just do. I think everyone is watching the Iran thing and nobody is that bullish. No one is terribly bearish, but I couldn't find you a bit my life dependent on it. Everyone is just kind of in the fog here, hoping the smoke clears over in the Middle East. But -- having said that, not just us, but you see earnings are pretty healthy out there despite all this noise. I think some of that's baked in. But tough to find anyone getting too excited about the economy. Rates are kind of creeping up and not much there. Any you want to add, Darren?

No, I think that covers it. That's what I'm hearing as well.

Got you. And so where does that leave your thinking on the M&A playbook this year?

No difference there. Economy is up or down, whatever fuel is doing. We're going to continue on our M&A path and strategy when those rate transactions come over the plate, we're going to hit them. The balance sheet is primed and ready for anything. So we're going to be very selective, opportunistic and buy things of value what it makes sense for us and grow the company and do things that are important for our customers. So nothing's changed there, Zach. It's -- we haven't hit the pedal or hit the brakes just looking for those opportunities to hit the sweet spot.

And then if we think about the new fencing capacity coming online, when do you expect that to start contributing? And what will it do to your overall mix in terms of margin?

Yes. Probably Q3, Q4 will be good production there with the new mill. We've upgraded our Gilmer, Texas sawmill, which is every day, approaching our targets, which is excellent. We're going to look at upgrading another 3 or 4 fence mills that we have in Arkansas and Texas. So stay tuned for those. But I can't really give you a margin increase number, but certainly bringing that manufacturing in-house and avoiding the risk and tariffs coming out of Brazil where a lot of that material comes from now is certainly -- we hope not only enhance margins perhaps a little bit, but also give us security of supply, and that's what our customers are looking for in the U.S. is U.S. made, nothing coming over the water that's got tariff risk and other challenges. So we like the strategy. I think you're going to see us continue to build into that. So Q3, Q4, you'll start to see some numbers appear.

Great color. And then just last one for me. With the new capacity ramping up, how are you looking at CapEx for Q2 and Q3? And what's your run rate OpEx with the new capacity online as well?

Yes. Well, I can't give you the exact number because these invoices and stuff come in chunks when we're doing things, but that kind of first quarter spend was a little bit heavy because we bought some of that property. That's not traditional, as you know, you followed us for a while Zack. So that was to buy some properties as well, not just CapEx of mills or maintenance CapEx, we'll fall back into the traditional line here as we're in Q2, Q3, it will lighten up.

And for the run rate OpEx on the go forward?

There is not expected to be much change what we've done historically there. It's pretty flat.

Our next question comes from Kasia Kopytek with TD Cowen.

Back to the fencing question. Amar, what percentage of your mix do you expect fencing to ultimately be once you get to your target build-out?

I don't have a percentage, Kasia, but let us grow into it and see what happens, and I can probably give you a better number in Q3 once we get into production there. But I think long, long term, if we can get to 15% to 18%, which should be a big number. We'd like to set big goals here at the company. That would be great in a couple of years. A lot of that's going to come through efficiencies in our current bills that are a little bit tired. And this modern efficiency that we're seeing in Gilmer, Texas, is very impressive. We're fine-tuning there and things work out the way we think. I think we can achieve those numbers in a couple of years. It's going to be exciting.

Okay. And Amar, for the fencing products, correct me if I'm wrong, those are not linked to random lengths, right? Those are on a negotiated list price?

Correct. The trends -- the pricing of SYP does tend to move around directionally. But no, there's no printed price that we're fixed on, on those that are negotiated.

Right. It'd be similar to some of the exciting list prices that you guys would carry somewhere in terms of pricing dynamics?

Exactly.

Okay. Got it. Amar, can you give some context on the Q1 volume trends and maybe frame it against the adverse weather in the U.S. during the quarter as well as the difficult comp relative to some of the hurricane activity, order volume you guys saw supporting last year's results?

Yes. And the hurricanes, we haven't had now coming into the second year. So last year, we really didn't have any to So I can't look back and blame anything on that, certainly. But the volumes in the first quarter, again, when weather was good, we were tracking kind of identical to 2025. But we had some days and when we're sitting here in Maine, we forget how bad things were the Carolinas were shut down for certain days, we couldn't ship. California had a ton rain and an unseasonable rain where there were days sales were Having said all that, volumes were just off a couple of points in certain regions. And in Canada, our whitewood volumes on OSB panels and lumber were up. You're not going to see that in our top line because pricing was down, but we actually moved a lot of lumber and material at lower margin, but it's basically a fair war going on in Canada for lumber materials right now that are do the exempt, if you will, to stay home.

Got it. So for Q1, down low single digits on unit volumes, is that a fair characterization in that carrying into April and May?

Yes, April-May getting a little bit of a pickup, again, as the weather clears, like the weather in Toronto, Montreal, Chicago, like those kind of areas are starting to come to life. And we're seeing decent volumes come back as soon as the weather turns on. The issue we have, Kasia, is that those days that back in April that were dark and bleak they don't come back. But having said that, we're pleased with what we're seeing now. So hopefully, Q2 will be a little bit of a catch-up on some of those, I guess, numbers that were just a little bit off on volume, which kind of forecasted for, for this year with all that's going on.

Okay. Fair enough. And last one for me. Back to the M&A deal pipeline, what are you finding to be the biggest obstacles or challenges to getting things over the line at the moment?

It's just the usual stuff. The pricing is not where we want it to be. We're patient. We're not going to overpay for industrial assets. It's going to fit into a cost-saving mode that comes in when we acquire. It also has to fit with our customer needs. I don't think there's any flagship light that's preventing us from doing M&A. It's just right ones at the right time as you know, we're patient, disciplined. Sometimes we don't do anything for a year or 2, then we do 3 in one year. That's what you're going to see with us, but you're going to see us do the right deals.

Our next question is from Ian Gillies with Stifel.

Over the last number of years, the focus on investment in some of these value-added products has been on the U.S. It seems like Canada may actually start to get a bit better here in the next couple of years. Has there been much thought process? Or have you started considering putting any additional CapEx to any of your Canadian located facilities to try and take up some of the trying, I guess, gain from some of these benefits that may or may not show up?

Yes. Ian, it's a good question. Up here in Canada, we're doing different things. We're not as manufacturing heavy year. We're heavier to distribution, which doesn't require a lot of investment in technologies. We have upgraded our treating plants as far as our computer systems go there. So we're doing that. There's a couple left to go in the East. So we are investing in that. But really, there isn't sort of a new shiny toy in the treated business that's going to change the dials for us. We need more volume. We need Canadian housing to be healthier than it is. We need the economy better than it is here and hoping that the new regime is going to deliver on some of the things they're talking about. So let's all hope. Interest rates are in a good spot, so we can't blame that. So we're hoping more for the economy to drive better results in Canada. In the U.S., we have a lot of room for efficiencies that, as you mentioned, we're describing, we're investing in and we're going to continue to do that over the next several years, and that should hit our bottom line nicely.

Our next question comes from Frederic Tremblay with Desjardins Capital Markets.

Wanted to just come back quick on the fencing. Just on the growth ambition you mentioned. I was curious to see if that growth you're envisioning is mainly with your existing customers or serving them across more locations? Or does that imply gaining new customers as well?

Yes, combination. So certainly, the current customers, we would stop or replace imports, as mentioned out of South America coming in. That's our #1 goal is to be producing on the East Coast. So that will hopefully drive a lot of margin that will make sense and volume, I should say. So we're looking at that. And then number two, organic growth through our current customers on the mainland U.S. as well. So Texas, Arkansas and North shipping to some other points that take Southern Yellow Pine and then driving those efficiencies. If we can get them out of the mill, which we've seen in Gilmer, Texas, and we start to cross-pollinate those same efficiencies at other mills that we have. We should be able to extend our reach and more importantly, produce more for the markets that we're in and go a little bit further on freight. So all to say, we're going to continue to focus on that. And hopefully, execute very well over the next 2 years.

Yes, helpful. Has it been your experience with maybe other products that are made in USA product is a meaningful contributor to market share gains. Is that something that you're enduing for fencing beginning as well adding the product produced domestically would be helpful?

I mean I think it will add to our bottom line. It will add additional margin. I think we want to wait and see how things fall out before we kind of give you more definitive answers and you'll see those in our results, and you'll see those kind of starting later this year and into next year.

We have a follow-up question from Kasia Kopytek with TD Cowen.

I just wanted to circle back to operating leverage. You remain cost down in a subdued environment. I'm just wondering thinking about maintaining enough slack on eventual upturn, just maintaining that balance between those two push and pull elements? And if possible, if you could quantify how much basis points of slack that would represent in your EBITDA, current EBITDA margin or potential flat?

For fencing or for just...

No. Sorry, this is for your overhead costs. So selling, distribution and administrative expenses, you have some fixed costs in there, right? I'm just curious how you're balancing having to keep those relatively contained given the current market backdrop, but also giving yourself enough runway for once the market turns that you're ready and you're able to respond accordingly. Just curious how much operational stack you have right now built in there?

Yes. Those costs are largely fixed. And I would say kind of fresh set of eyes here on the business. So if we do see things moving up, like I'm going to be kind of looking at things a little closer going forward. And if there's kind of some margin points we've got to get back on inflation. I'm hoping to get those kind of back on efficiencies. So generally expecting those to be largely flat. You might see a little bit of creep with CPI, but I'm hoping not to do that.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Ali Mahdavi for closing comments.

Thank you. Once again, on behalf of the Doman team, we appreciate you joining us today. We look forward to reporting and speaking with you again on our Q2 2026 conference call. That concludes today's call. I'll turn it over back to the operator to close it.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.