Doman Building Materials Group Ltd. (DBM) Earnings Call Transcript & Summary

Good day, and welcome to the Doman Building Materials Group Limited Second Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ali Mahdavi. Please go ahead.

Good morning, everyone, and thank you for joining us for Doman Building Materials Second Quarter 2026 Financial Results Conference Call. Joining us on today's call 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 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 August 20. Following the presentation of the second quarter results, we will conduct a Q&A session for analysts only. Instructions will be provided at that time for you to join the queue for questions. Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Doman Building Materials Group Limited and all of its representatives on this call. Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Any information regarding forward-looking statements is made as of the date of this call, and the company does not undertake to update any forward-looking statements. Please read the forward-looking statements and risk factors in the MD&A as these outline the material factors which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today's call, and management does not anticipate providing guidance in future quarterly or interim communications with investors. I'll now turn the call over to Amar.

Thanks, Ali. Good morning, everyone. We appreciate you taking the time to be with us as we review Doman's second quarter 2026 financial results and discuss the current market environment. Overall, our second quarter performance demonstrates the resilience of our business model and the strength of our diversified product offering. Despite a market that continues to be influenced by economic uncertainty and uneven demand across construction markets, we delivered another solid quarter, highlighted by record second quarter numbers on revenue, stable margins and improved net earnings. Revenue for the quarter reached a record $904 million, an increase from $887 million in the second quarter of last year. This performance was primarily driven by higher year-over-year pricing in several construction materials categories. Construction materials continued to represent the largest component of our business, accounting for approximately 84% of sales with specialty and allied products contributing 13% and other sources making up the balance. Our ability to deliver record revenues while maintaining disciplined pricing and customer service reflects the effectiveness of our distribution network, the breadth of our product portfolio and the long-standing relationships we have built with customers across North America. Gross margin dollars increased modestly to $146 million, while our gross margin percentage remained stable at 16.1%. Maintaining margin in today's environment speaks to the disciplined approach our teams continue to take in managing inventory procurement and pricing across a dynamic market. Adjusted EBITDA for the quarter was just under $79 million, broadly consistent with the prior year quarter despite continued market volatility. While EBITDA was slightly below last year's level, we were pleased to generate net earnings of $31.2 million, an improvement over the $27.7 million reported in the second quarter of '25. Looking at the first 6 months of the year, revenues totaled $1.67 billion with adjusted EBITDA of $147 million. Gross margin percentage improved slightly to 16.5% and net earnings increased to $55.1 million compared to $51.2 million in the same period last year. These results demonstrate our ability to generate consistent profitability while navigating a market that remains far from uniform. As always, our priorities remain unchanged. We continue to focus on disciplined execution, operational efficiency, prudent working capital management and providing exceptional service to our customers. These fundamentals have enabled us to perform consistently across different market cycles and position the company to capitalize on opportunities as demand improves. Our balance sheet and cash generation continue to support our capital allocation strategy, including returning capital to shareholders. Consistent with that commitment, we declared our quarterly dividend of $0.14 per share, reflecting our confidence in the long-term strength of the business. Looking ahead, while macroeconomic uncertainty remains, we believe Doman is well positioned. Our diversified product mix, broad geographic footprint, experienced management team and disciplined operating model 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 support. With that, I'm going to turn the call over to Darren, our CFO, to review the financial results in more detail before we open the line up for analyst questions. Thanks. Darren?

Thank you, Amar. Good morning, everyone. Sales for the 3 months ended June 30, 2026, were $904.5 million versus $886.7 million in 2025, representing an increase of $17.8 million or 2%, largely due to increases in year-over-year pricing in certain construction material categories. The company's sales in the quarter made up of 84% of construction materials with the remaining balance resulting from specialty and allied products of 13% and other sources of 3%. Gross margin dollars were $145.8 million in the 3 months ended June 30, 2026, versus $142.7 million in 2025, an increase of $3.1 million or 2.2%, mainly driven by the increase in sales. Gross margin percentage was 16.1% during the period, unchanged from the same period in 2025 despite the volatility experienced in the past year with respect to lumber pricing, further reinforcing the resilience of our business model. Expenses for the 3 months ended June 30, 2026, were $90.9 million as compared to $87.9 million, an increase of 3% to 3.4% and $3 million. As a percentage of sales, 2026 expenses were 10.1% compared to 9.9% in 2025. Distribution, selling and administration expenses increased by $4.3 million or 6.9% to $67 million in the second quarter of 2026 from $62.7 million in the same period in 2025, primarily due to broad inflationary pressures. As a percentage of sales, these expenses were 7.4% compared to 7.1% in the same quarter in 2025. Depreciation and amortization expenses decreased quarter-over-quarter by $1.4 million or 5.5% to $23.9 million for the 3 months ended June 30, 2026, compared to $25.3 million for the same period in 2025, mainly due to dispositions of property, plant and equipment. Finance costs for the second quarter of 2026 were $17.6 million compared to $19.3 million in 2025, a decrease of $1.7 million, largely as a result of overall net debt, including lower utilization of the revolving loan facility during the quarter. This quarter's EBITDA was $76.8 million (sic) [ $78.8 million ] compared to $80 million in the comparative quarter of 2025, a decrease of $1.3 million (sic) [ $1.46 million ] or 1.8%. EBITDA during the quarter was generally stable versus prior quarter despite some slightly elevated inflationary pressures from freight and fuel costs. Doman's net earnings for the quarter were $31.2 million compared to $27.7 million for the same period in 2025, an increase of $3.5 million. Turning now to the statement of cash flows. Operating activities for the 6 months ended June 30, 2026, consumed $2.3 million in cash and cash equivalents versus generating $1.2 million in the comparative prior year. The following activities during the period accounted for the change in the cash. Operating activities before noncash working capital changes generated $96.5 million in cash compared to $100.7 million in the same period in 2025. Operating cash flows during the period were impacted by the timing of income tax payments. During the 6 months ended June 30, 2026, the company generated $35.9 million of cash from overall financing activities related to the funding of seasonal working capital compared to $6.9 million in 2025. Payment of lease liabilities, including interest, consumed $17.7 million of cash compared to $15.8 million in 2025. The company's lease obligations generally require monthly installments, and these payments are all current. Total net advances of the revolving loan facility were $84.9 million compared to $46.8 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 $24.6 million to shareholders through dividends paid during the 6-month period, largely in line with 2025. The company was not in breach of any of its lending covenants during the 6 months ended June 30, 2026. Investing activities consumed $15.3 million of cash compared to generating $8.6 million in 2025. Investing activities for the first 6 months of the comparative 2025 period included the sale of a portion of the company's Timberlands for total cash proceeds of $14.4 million. Additionally, the company invested $21 million in new property, plant and equipment during the period, $16 million of which was spent in Q1 compared to $6.1 million spent in the 6 months in 2025. This concludes our formal commentary. We would now be happy to respond to any questions that you may have. Thank you, Operator.

[Operator Instructions] The first question comes from Matthew Keller with -- sorry, that's Matthew McKellar with RBC Capital Markets.

First, I know you don't provide quarterly guidance, but just at a high level, what is your sense of how Q3 is shaping up relative to Q2? Last year we kind of slowed quite a bit sequentially with what was going on in the market. I'd be curious to know how you're seeing demand trends so far through Q3 in each of Canada and the U.S. And with that, how you're thinking about the sequential progression in your results?

Yes. Good question, Matthew. We've got July in the books now. And I can tell you, it's fairly similar to what we're seeing. So the economy hasn't changed much. I think the consumer hasn't changed much. The Middle East is still going on and these kind of things that are just not that bullish for the market. So kind of steady as she goes. Again, nothing crazy on the way up, nothing crazy on the way down, just hitting a lot of singles and getting it done.

Okay. And could you talk about any impacts even if indirect that you might be expecting from recently announced tariffs on Brazil and Canada, maybe particularly as it might relate to fencing?

Yes, sure. That's a net benefit to Doman. So when we look at -- of course, we don't really cross the border with a lot of materials. So the import sort of severe tariffs have been put on in South America are benefiting. We're getting a lot of inquiry for fencing. And I think that's going to continue to go well is a long-term story as we continue to ramp up our fencing production in the U.S. and pretty much stop all imports coming in. So that's certainly going to help demand as the quarters go on.

Our next question is from Hamir Patel with CIBC Capital Markets.

Amar, I just wanted to follow up on the fencing side. I know you've got various growth initiatives underway there. Maybe if you could just give us an update on how that's progressing.

Yes. We've got our Gilmer sawmill operating. It's not quite at 100% capacity yet with the upgrades we did down in Texas, but it's coming along now, which is excellent and reduced our labor cost significantly there in our automation. And then we've got our Estill sawmill that is going to start production kind of any day now. It's kind of as promised. So we'll start to get into that later in the third quarter and fourth quarter to see sales of 1-inch fence products, picket products and some 1-inch that we're going to take back to Texas as well out of Estill. So pretty excited about that. Everything is on track as far as our CapEx goes.

Great. And just on the wood decking side, it feels like you're gaining share within your product categories. But do you have a sense as to how wood is faring versus composites this year?