Q4 2019 Earnings Call

Greetings and welcome to the select interior concepts 2019 fourth quarter results conference call.

At this time, all participants or no listen only mode.

Brief question answer session will follow the formal presentation.

And then once you require operators just mentioned during the conference you May Press Star then zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the call over to your host Mr. di di Moyes CFO. Thank you and you may begin Mr. Mike.

Thank you operator, good morning, everyone and welcome to our fourth quarter 2019 financial results Conference call.

Joining me on the call today tie Johnson, our Chief Executive Officer.

During our discussion today, we'll be referring to our earnings presentation, which is available on the investor section of our website.

I will start with fly to where I would like to remind everyone that any forward looking statements contained in this presentation or commented on today are subject to the safe Harbor provisions of the private Securities Litigation Reform Act up 1995.

Actual results could differ materially because up issues and unknowns they need to be considered in evaluating our financial outlook and operating performance.

Please see our recent SEC filings, which identify the principal risk and I noticed that could affect future performance.

We assume no obligation to update publicly any forward looking statements.

Most of it conditions issues and I've known factors that may represent forward looking statements are noted in detail on the flight.

In addition, we will be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margins.

Please see the appendix for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measure I.

I would now like to turn the call over to tie Johnson.

Thanks to the good morning, everyone and thank you for joining us today.

I will begin on slide three with a brief business update.

D. will follow with a review of our financials.

Only 19 was a year of strong growth and process improvement as we navigated shifting market dynamics.

We focused on strengthening our platform to reach further into the sizable addressable market in both our installation and distribution businesses.

We continued to execute our multi faceted strategy to grow faster than our markets cross sell products and integrate acquired businesses.

We had some significant accomplishments for 2019, which I would like to mention.

We achieved record full year results.

This includes net sales up 25% to 610 billion.

Gross profit grew 23% to 164 million.

And adjusted EBITDA increased to 60 million.

We were especially pleased to convert a more significant amount of adjusted EBITDA.

Operating cash flow, which totaled 31 million for the year and 11 million for the quarter.

Lean initiatives and working capital management helped to drive this improvement remains amongst our top priorities.

Turning to slide four.

For the year, we posted record sales in both our installation and distribution businesses.

That growth was mainly first half weighted.

Previously disclosed market pressures within our Rds segment in supply chain changes in our legacy segment adversely impacted our operating results during the second half of 2019.

I will take a moment to discuss the impact of these dynamics on fourth quarter results and more importantly, I will provide some details on steps we have taken to solidify our positions in each business given changing market dynamics.

At already yes, we grew sales 32% into fourth quarter.

Primarily through geographic diversification of this business into several new regions over the past year.

Organic sales were relatively flat during the quarter was stronger volume in nearly all served market.

Early in Northern California, Phoenix, and the mid Atlantic.

We were pleased to received 2019 best in Class Awards for our services performed for builders, including toll brothers threes homes and whatnot.

Similar trends seen earlier in the year.

Yes price mix has been adversely impacted by the increasing ship builders to entry to mid level homes.

Well, it's a build to rent market.

This means smaller homes are being built at lower price points with fewer options and upgrades.

So while our unit volume is up.

We are seeing you left installs product for home and in many cases fewer upgrades.

This dynamic is evident across our footprint.

Most pronounced in or southern California market, which we have disclosed in the past.

In response to this rapidly evolving environment.

Have strengthened our sales teams and reallocated resources helped drive market share as projects come up for bid.

We are adjusting our product offerings in lockstep with a growing share of new communities that target entry level and mid priced homes.

We have put in place new leadership at several divisions to improve operations efficiencies and cross selling capabilities.

In addition, we have invested in proprietary product selection technology.

Older can customized to offer a tailored designed experiments to home buyers with or without physically stopped showrooms.

We also believe this tool will enable builders to decrease their construction cycle times by reducing time spent by homebuyers selecting options and upgrades.

We have recently rolled this tool out in several markets and it has already resulted in new customer relationships.

The feedback has been very positive and we believe this tools to be a competitive differentiator. We're very excited by the prospects for this new technology.

In our industry segment, let me first say that the challenges associated with our supply chain disruption that we discussed last quarter were largely resolved by year end.

As a reminder, ahead of expanded U.S. tariffs on courts imports. During early 2019, we entered into new partnerships with additional global suppliers that resulted in some initial inefficiencies.

We're pleased with the hard work of our team to streamline processes and return cost to normalized levels.

During the fourth quarter, most of our product lines performed well within a relatively competitive environment.

The decline in volume was primarily attributable to one haiyan courts product line, formerly supplied by a Chinese partner.

The reproduction of certain high individuals far new suppliers has been a harder to replicate than initially anticipated.

We believe this to be an industry wide dynamic where by certain products formally purchased from try to have proven difficult to source from new partners.

We are taking several actions to improve our operations as well as our market positioning.

We are trimming cost improving processes and leveraging technology to simplify the business.

We plan to introduced several new courts, and porcelain product lines throughout the year.

Beyond Countertops, we're re energizing or Tawanda six new product launches later this year.

Overall as we entered the new year, we're encouraged by the improving homebuilding landscape there remain focused on continuing to drive efficiencies throughout the business.

We will maintain are focused on delivering best in class service to our customers as we execute our product channel and geographic diversification strategy.

We are committed to generating improvements across all areas of our growing business and rightsizing our structure.

The ERP implementation and Rds is complete and the last several branches that AMC will be complete within the next few months.

ERP implementations, providing enhanced control over labor product in sourcing management as well, it's better visibility on market demand and individual project costs.

Before concluding my remarks, I wanted to take a few moments to speak about the Corona virus.

We are committed to the health and wellbeing of our employees their families and the communities in which we operate well at the same time continuing to service our customers.

We are mindful of the potential impact associated with this situation and are taking recent developments very seriously and our monitoring the situation continuously.

We are in regular contact with our customers and suppliers and have not seen meaningful impact to the business at this time.

We have created a cross functional response team to oversee the issue and it's a pet its potential impact where operations and employees.

Our goal is to strike the right balance between public health and what's required to manage our business and take care of our employees and customers.

We are in the early stages of a very attractive market opportunity and remain confident in our ability to continue to drive improvements within our business solidify our premier market positions and generate attractive returns for our shareholders. Once again, thank you for joining and with that I'll turn the call over Trinity.

Thank you tie and once again good morning, everyone.

Moving to slide five for review of net sales.

Fourth quarter, net sales increased $22.3 million or 16.8% 255.2 million compared to prior year.

Looking at our segments in our RTL segment sales growth of 31.5% was driven primarily by acquisitions.

Organic volume was stronger across the Rds footprint, including our design and installation business in southern California.

This volume growth was mostly offset by pricing pressures, resulting from the shift towards more entry to mid level homes, which is consistent with the direction of the market.

And he has G sales declined 2.9% driven primarily by lower volume as tie covered earlier.

Yes, you did not have any contributions from acquisitions in the fourth quarter.

Moving to slide six in the fourth quarter.

Adjusted EBITDA increased to 12.1 million from 8.7 million in the prior year quarter.

Adjusted EBITDA was 13.7 million compared to 14.9 million in the prior year.

Acquisitions, where margin accretive and added $2.9 million to adjusted EBITDA.

3.8 million decline inorganic flow through to adjusted EBITDA is primarily a result up the mix shift we experienced NRT, yes.

On slide seven.

Net sales for the full year 2019 improved 24.6% to 610.4 million compared to last year.

Acquisitions completed during 2018, and 2019 drove 22.9% growth.

The remaining organic increase up 1.8% was driven by 5.8% expansion in his Gi and offset by 1.5% production NRT, yes.

Full year, adjusted EBITDA increased to 60 million up 10% compared to prior year.

Incremental EBITDA 15.4 million from acquisitions was partially offset by 3.5 million of unfavorable mix impact.

Again, primarily in Rds, and 6.4 million of other costs, reflecting full year impact of corporate costs and expansion related investment in Rds any is cheap.

Moving to slide eight.

During 2019, we generated cash flow from operation is a $31 million, which increased significantly compared to 12.2 million in the prior year.

We converted just over half of our adjusted EBITDA into cash flow from operations through improved working capital management tax planning initiatives and a lower interest rate.

Into 2020, we're optimistic about or prospects to grow our business and generated cash flow for the full year.

Hi discussed we have a range if initiatives in place to improve performance in both segments.

Keep in mind in Rts, the shifting more entry to mid level homes is expected to continue.

NSG, we're continuing to manage our diversified global supply chain and our exciting new product launches of high end courts products.

Our actions to mitigate mix shifts in the market include continued vigilant management up costs and cash flow into 2020.

Our recently implemented ERP in Rds will enable higher productivity levels and tighter project cost management.

Our investment in the implemented proprietary product selection technology, and Rds will allow us to better serve all our builder customers at various price points.

Our ERP investment and rollout in years GE is also expected to drive back office integration and network efficiencies in that segment.

Given that our technology implementation for the most part is complete we have line of sight on deficiencies and we expect the benefits to be more impactful as we move later into the year.

Well look forward to further building on our 2019 progress as the leading installer and distributor high end into your product in 2020 in coming years.

And operator, we'd like to open up for Q1 at this point.

Thank you at this time, we will be conducting a question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.

A confirmation total indicate your line is in the question Q.

One moment, please while we poll for questions.

Our first question has come from the line of Alex where I go from B. Riley FBR. Please proceed with your question.

Thank you good morning, gentlemen.

Hi, Alex.

Two quick questions here.

First our operating cash flow of 11 million in the quarter 31 billion for the year that was nicely solid can you comment on your outlook for 2020.

And then comment.

And how you think about operating cash flow longer term with this business model.

Absolutely Alex just Nadine look we're very happy with our performance in cash flow in in 2019 in the fourth quarter obviously.

You know this the business has a very strong cash flow profile as you could see.

That that EBITDA conversion into cash was extremely high it's almost 80% in fourth quarter and roughly 50% for the full year, there's some seasonality into cash flow, it's or second half a fourth quarter based on the way the building cycle works and you know as we as we think about cashflow components certainly.

You know that strong EBITDA that we generated in 2019, we expect that to continue.

Working capital will continue to be tightly manage and he and even more so than we did in 2019 as the ERP systems called come online.

Our where our capex requirements as as you've seen our fairly limited and and you know very much focused on growth initiatives in the past maintenance capital as is very very low in the business and and so that that's a very nice profile for us to have.

And.

You know, we launched a number of tax planning initiatives in 2019, which benefit better than in 2019, and and we'll have some additional initiatives in 2020. So overall the way you think about this is a high cash what conversion surfing that 80 ish percent rate. That's that's the way we we'd like to think about it and you know.

As we sort of model forward that that's that would be good or thinking about it.

[noise] helpful.

Secondly, homebuilder backlog is up real strong.

New home construction starts data for the last seven months has been trending nicely positive.

How should we think about that backlog build and how and when it starts to up sort of come through your your piano over the next couple of quarters and then if you could also blend into that answer a comment on the mix in your backlog and how that might be different there maybe a year ago.

Sure Alex Happy to help you with that question. So you know our backlog remains very very strong.

You know even in southern California, where we've had some of the more severe mixed shifts backlog continues to grow in every single one of our territory. So we're we're happy about that.

The issue rightfully noted as the mix in the backlog mix is changing it's really just a function of the homes that are builders are building. It as you well know a builders are now building disproportionately at the lower to mid price point and as a result, that's where the opportunities exist for the Rds business.

So while the backlog continues to remain strong the.

The profile of the homes or within the backlog are different than they were this time last year, given the focus on entry level and mid priced homes.

And then lastly, you talked to.

Many different times.

Through your prepared remarks about focus on cost of cost control and reducing costs.

As it relates to gross margin how should we think about those those.

Cost reductions affecting gross margin in 2020 versus 2019, and then as we think about SGN a.

On an absolute basis assessed you nave sort of topped out here and should we expect us janeda start to decline from these efficiency opportunities.

Any comments there would be helpful.

Absolutely.

So on the gross margins you know we would expect.

You know the gross margins for 2020 <unk> to be served in line with the 2019 gross margin in the business because you've got really two things going on we've got that mix shift happening and rds and offset by efficiencies and cost reductions that were.

Pushing through in with respect to the ERP implementation and then as she did <unk>, we talked a little bit about the that the product new product changes. So it will we'll be launching those new products and continue to make investments in S.G. growth, which was which was great and in 2019, So I I would.

Look we will have marginal improvement in these in the gross margins, which is exactly what we're targeting you know we've talked about 20 to 20 to 40 basis points increase on a year over year basis in the past. So we're in oversell feel good about that and that's where I would think about that that all the question around operating.

Expand Suresh DNA.

That you know, we're expecting to get operating leverage as we as we consolidate the backend in both these businesses are the ERP is our our separate as she has its own ERP Rds is on ERP. So we're expecting further integration in those verticals and efficiencies to be pushed through and you know the.

The idea was always a scalable platform and shows we continued to grow and do Greenfields and acquisitions. We think this platform as they're very very scalable.

Yes, I do have one last question.

Can you prioritize your use of free cash flow generation over the next 12 months in light of where your stock prices with broader market outlook looks like and so on.

Yeah, absolutely look it's a it's a question on capital allocation and and you know where where are definitely still in growth mode. Right. So we'll continue to be focused very much show on on growth initiatives, we think there's.

Number of growth initiatives that we believe our are very accretive you know we're going to have our discussions internally as.

As well on the on the other ideas, but definitely a big part of that discussion, it's going to be growth oriented capital deployment.

Thank you very much.

Our next question has come from the line of Keith Hughes of Suntrust Robinson Humphrey. Please proceed with your questions.

Keith could you check if your phone some you please.

I'm sorry can you hear me now we could area, yes, okay, sorry, I'm, having some connection problems just real quickly questions on a SG.

The you talked about why the volume is down the quarter are you seeing any impact from inventory build given that's been a lot of tariffs and the products today yesterday. So there is your inventory pressure in the channel right now.

Keith its tie up we think there is some but we think and we think it's easy. This time last year. There was much more pressure. So so there's still some some inventory build up there, but we think that's starting to make its way through so to answer. Your question. There is somebody is improving.

Okay, and the or do you.

On that.

You had difficult time sourcing outside of China is not fixed or is that going to be a drag for interference.

So Keith you broke up a little bit I think your question was a with respect to the issues on sourcing outside of China do we feel like issues are behind us or whether or not there they're going to persist for a while that the question.

That's correct yes.

Yeah. So so we what we think you know we've we've made a lot of progress they'll still be a little bit of headwind associated with that as new products come on line, but in terms of finding the right partners and finding product that meets the market's needs, we feel like where there. It's just a function of getting that product or you know sampled in the marketplace and.

Display towers out in the Salesforce selling itself. So that's what we all but we feel a lot better today than we did you know many months ago about the up the actual performance other suppliers and the ability to merchandise it.

Okay, and the margins that I asked you actually were up year over year. Despite this disruption as that's what does that driven from.

Well one element as you know we had a number of price increases within a steep but particularly on some.

Some of the courts lines and that would certainly helpful and I think that probably be one of the.

Larger components to why the margins are up.

Okay and final question Rds.

The is a combating this mix down the which probably gonna be with us for awhile.

New products part of that or is this more just cost customer type initiatives to deal with the situation.

Oh, well new products are part of it Keith and insofar as being more important to your customers and creating more sticky and it's adding more value getting more overall share of the wallet, but we think in terms of the overall financial performance you know, it's really the cost structure improvement play.

Theres a lot of volume out there for sure.

You're just not having the same square footage opportunity or the same upgrade opportunity as we've had in the past. So it's really incumbent upon us to off you know rightsize the business to match the the level of revenue and the margin associated with that revenue. So I think most of the work to you know kind of hold what we.

I think to be a reasonable adjusted EBIT tomorrow margin needs to happen within the operation and hence the ERP implementations and some of the process improvements. So we're excited about the progress, we're making but there's still work to do there.

Okay. Thank you.

Yeah sure if you're welcome.

We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.

Thank you operator, and thank you everyone for joining us today, we appreciate your support and we look forward to speaking with you again next quarter.

This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great tech.