Q2 2020 Select Interior Concepts Inc Earnings Call

The businesses have not been fully integrated nor have they taking advantage of back office and supply chain synergies or even the soft synergies of sharing ideas and leveraging sales forces in common territories.

Corporate headquarters was viewed as a payroll and reporting center.

Brand identity was weak the company with capital constraints.

In view of this situation I pulled together 30, plus branches or former companies with multiple locations together as one culturally and economically and then grew to accompany organically as well as so acquisitions to expand its geographic reach and product portfolio using technology.

To support and enhance earnings.

Because of this experience I have a proven playbook that have already begun to implement it src to improve operations and to align performance and compensation with shareholder value creation.

I'd like to describe my playbook as a three legged stool.

The first leg is focusing on organic revenue growth and core earnings.

We must have a strong foundation in place to support future growth.

With a more efficient business, we will be in a much better positioned to take advantage of inorganic growth opportunities.

What does that entail.

It starts with the corporate infrastructure.

Corporate should be built as a service organization with a mandate to make operations better to unify back office functions. So the operating entities can narrow the aperture and focus on market and competitive trends, while driving organic sales.

We need to round out the corporate functions that are critical to our success.

A corporate level human capital Executive is imperative for service organization like as I see.

We expect to announce the appointment of a highly experienced and talented chief human resource officer very shortly.

Our corporate while the light key executive is essential to ensuring SNC has the technology tools to operate efficiently tend to capitalize on the trends in the residential construction market.

I am therefore in the process of recruiting the vice president of IP and expect to announce disappointment before the end of year.

At the segment level. It means getting Patrick does singer, our new president of ASG up and running and honing the operating performance and online growth prospects in that business.

Near term I plan to move quickly working with the operating teams at the segment level to fully leverage the assets. We have improved what we don't need to drive earnings growth.

I will also focus my attention on bringing cohesion and commonality to what is presently a sub optimal organization.

We can do that my sharing best practices and ideas across locations crafting set some common methods and optimizing processes.

As a leader I believe in working together on a collaborative manner, reaching out to employees for input than making decisions expeditiously and executing on those decisions.

Recruiting training and development of future leaders will be driven by our new Chr.

At the same time, I, clearly set expectations for performance and hope everyone accountable, including myself.

The second leg is further enhancing the existing capital structure to give the company additional avenues for long term organic and inorganic growth.

Our current lenders have been very constructive and remain supportive of our growth objectives and will be key partners as we move forward on this firm.

The third leg is formulating a long term growth strategy that combines buying build tactics to develop our footprint in key markets with strong demographics.

If you think about the demographics smile of the United States from the Atlantic States in sell through to southwest and up the west coast to the northwest.

That is where most homebuilding takes place and we need to be there.

I shared with you my assessment of S&P, but those are just initial observations.

I have not yet been able to visit many of our locations because of the pandemic.

Although I am starting to embark upon a deep dive process into our individual segments, Rds and USG value propositions branding market positions in the light.

Plan to make considerable progress during this quarter and look forward to meeting our employees in person as soon as practical.

From my perspective, however, assessing a business is not a discrete time stamped exercise rather it is an ongoing continual business discipline to.

The building products industry is not static and customer taste and preferences change and we need to be nimble and ready to adjust the way we approach the market and what we sell to satisfy changing dynamics.

But I want you to take away from my remarks today is that I am laser focused on creating value for all stakeholders, our shareholders customers suppliers partners and employees.

At the end of the day, we need to perform better with a capital already deployed and look towards smarter allocation of capital combined with strong execution of a business plan.

To enhance returns.

I am confident with dedicated team members, we have we will be successful.

And then I'll turn it over to redeem to review the Q2 financial performance.

Thank you Bill I'll start with an overview of second quarter highlights on slide three up the presentation.

During these unprecedented times in Q2, our entire team remains focused on ensuring the safety of our employees to our coated 19 response team.

Moving to operational efficiency and liquidity management.

When we held our first quarter call in May we mentioned that April sales fell 25% year over year.

Reflecting on the full quarter April proved to be the trough for the quarter with each subsequent month, reflecting improved sales activity in summary, our sales for the quarter at 125.4 million were down approximately 27% compared to Q2 2019.

Adjusted EBITDA for Q2 at 10.4 million versus 16.6 million last year, However, up 5.8 million on a sequential basis from Q1 2020.

Cash flow from ops was 9.7 million, reflecting a cash for conversion rate up 93%.

As discussed in the last earnings call in response to the expected or sales, we implemented a comprehensive cost savings and cash preservation plan in early April.

During second quarter, we realize approximately 7 million and cost savings and are on track to realize 14 to 16 million in total cost savings from these initiatives in 2020.

Measures to rationalize costs and preserve cash included hiring freezes targeted furloughs reductions of workforce across business units reduce bonuses cutting management salaries and spending payment of board of director fees, along with enforcing strict controls on non critical expenditures.

Moving to slide four per segment uptake.

Despite the challenges associated with lower volumes in both segments. We continued to advance key strategic initiatives during the second quarter in the RTL segment. For example, we continued to gain traction with momentum design at certain key builders adopted and utilize the technology.

Momentum design with our proprietary online kribi rendering tool for the selection of interior finishes.

The technology seamlessly integrates builders sales activities, whether internal systems and reviews is build time for the builders further it allows homebuyers to visualize get prices and select alder interior finishes without visiting in physical design Center.

Construction reviewed essential in all our Rds markets. However activity remained at lower levels as expected and loss terms have reopened after having been closed in April and May change. Many appointments are now being conducted online.

First pressure, resulting from the shift towards more entry to mid level homes continues and finally, our backlog and Rds remained stable during Q2.

Moving to the ASG segment.

The repair and remodel base sales activity proved to be resilient.

And programmed in builder sales also continued market where showrooms are closed during the quarter.

We also continued to successfully launched new courts products and colors as part of the planned product refresh and global supply chain with managed well by the team with no major interruptions in product supply quality or delivery.

In addition, we completed the implementation of our common ERP system in all our a few locations.

Moving to slide five our year over year net sales bridge.

Year over year sales at 125.4 million decreased by 21% compared to last year Rts sales fell 19.4 million or approximately 21% to 73.4 million compared to last year.

Lower volumes and construction slowdowns, resulting from covered 90, along with unfavorable price mix drove the drove the decrease.

Construction pause in the number of location during Q2 due to local regulations in certain regions, particularly northern California. However, as at the end of Q2, our operations had resumed in all locations.

As GE sales fell $13.9 million are approximately 21% to 52.5 million due to lower sales volumes and price mix in all product categories, including natural stone courts and Kyle.

Regarding market conditions in the remainder of 2020.

We are encouraged by improving trends and positive sentiment in the homebuilding sector.

Permit issuances for new single family construction, a leading indicator for our business increased 25% in June versus Maine.

Recent estimates for full year 2020, new single family starts published by various industry trackers contemplate an approximately 15% decrease from 2019 to 2020.

However, these have been tempered from original forecast at the end of first quarter as the demand for single family housing in key markets has continued to recover.

Moving to slide six.

Year over year adjusted EBITDA Bridge.

Year over year, adjusted EBITDA at 10.4 million decreased by 6.2 million or 38% compared to last year Q2.

On a sequential basis Q2, EBITDA increased by 5.8 million compared to Q1.

Lower volumes, along with lower margin make in both segments contributed to a 12.8 million decline.

This negative impact from lower volume price mix was partially offset by 6.6 million decrease in operating expenses.

Moving to slide seven.

During Q2, our focus remains our preservation of liquidity and strict cash deployment.

Cash flow from operation for the quarter was $9.7 million for presenting a solid 93% conversion into cash of our adjusted EBITDA up 10.4 million for the quarter.

We ended the quarter with liquidity of 62.6 million net debt of 156.7 million and threefold 3.4 times in net debt to LTM adjusted EBITDA.

Year to date, we've generated 17.6 million in cash from operations and continue to expect to deliver positive operating cash flow for the year.

We remain committed to strict cost discipline to preserve cash the cost in cash actions, we've taken and our resilient business model positions us to maintain EBITDA profitability and positive cash flow for 2020, ensuring we have liquidity to support continued investments in strategic.

Yes.

To conclude.

Our team executed successfully during Q2, given the unprecedented environment.

We're very encouraged by the positive trends and the housing sector. During the second half of 2020 and are well positioned to capitalize on the coming opportunities.

With that I'd like to pass it back to bell for his concluding thoughts.

Thank you again.

Prior to opening the lines for questions I want to thank you all for calling in today.

I am proud of our employees efforts during Q2 in driving strong execution is during an incredibly difficult time.

While uncertainty remains for the second half of the year, we're seeing strong indications of improving demand in both the short and medium term.

Considering these positive market signals, we see an opportunity for improving results as market activity picks up.

During the second half the year, we will look to complete the integration of acquired businesses and begin to realize synergies between Rds and may as chief.

And we'll continue to execute on the strategic initiatives, including momentum designed with Rds and planned product launches in the pay as cheese segment.

Looking past 2020, I'm most excited about what EPS IC will accomplish in driving shareholder value through the various initiatives and work streams as mentioned earlier.

Over time I'm confident in our ability to bring about positive change combined with improved results.

With that I'd like to open up the.

Q in a session on David.

Thank you the question and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing the star key followed by the digital one on your touched on telephone.

Speakerphone. Please make sure your mute function is turned off the layer signal to reach our equipment. Once again, ladies gentlemen, Please press star one to ask a question and we'll take our first question from Alex Riegelwood B. Riley.

And bill immediate.

A morning yelling Alex.

Bill just want to welcome you.

The conference calls into select and wish you. The best of luck in your opening remarks, you mentioned youre more excited today.

The day before you started anything in particular that kind of stands out that makes you more excited today.

Yes, I would say the growth prospects for both businesses are much higher than what I had anticipated in my early evaluations of the business.

And our those growth prospects are they organic growth prospects or are they acquisitive growth prospects.

Yes, Alex or both.

I think organically there is significant room to grow.

Both with the locations. We currently have as well as the opening up new facilities organically in key markets and that is demographic smile that I mentioned, but in addition to that there are other opportunities for us to grow in what I would call. The white space that we haven't met demographic smiles.

Two acquisition.

Accelerate growth.

And understanding that in your first 60 days you probably spent an enormous amount of time focusing internally on the people in the business itself, but have you had an opportunity to talk to some of the customers and what are the customers, saying today about the macro environment.

Yes, quite frankly due to.

Pandemic situation is being very difficult for me to communicate and directly with customers. So what I have attempted to do is to stay is connected as im sure. Most people here on the phone our of leaving as much as I can and maintaining the pulse of what's going on in the marketplace combined with talking with the thought.

Leaders within our own business to determine what they are seeing directly in their day to day communications.

And lastly, your playbook sounds very exciting I suspect the board of directors is onboard with that as well, but any thoughts on sort of the board of directors sort of priorities are to they seem to fall in line with yours as well.

No I think there I think there clearly in line.

I had a.

An extensive call with them most recently to share with them. My first 60 days and I found the boards to be incredibly supportive.

And excited quite frankly about prospects for the company and the combined with the new people to we're bringing into the business and the changes that we will be affected.

Very helpful. Maybe can you remind us how your business lags building permits and construction starts and how we should incorporate that lag into our modeling for third quarter and fourth quarter.

Sure.

Alex as you know.

In particular on building starts and permits that really start.

Impacting the Rds business, because that's really where the single family focuses and as you now.

We're in the back end of the construction cycle. So typically we're getting in month five.

Up a six month looked at build cycle.

Sure as we've seen housing starts and permit activity take up in May June we'd expect to see that coming into four to five month out from that that typically the lag.

We see.

The second data point I would share with you is what we have seen as orders have gone now.

On a we've seen our traffic go off and and we've seen that pretty much in line with the magnitude that we've seen on.

Permitting and order activity. So those are all very positive trends for us.

Very helpful. And then other as it relates to momentum design are there any data points you could provide to us that could indicates the early successes are enough its number of customers or number of homes worked on or geographies that you've rolled this out in but.

Randy data points, you provide to us about momentum.

Yeah, absolutely look it's it's it did that customer number of customers has definitely expanded.

Where it's very targeted launch at this point.

We started with a soft launch late last year very successful.

Where were in discussions with some very.

Names that you would now.

We are.

In month, five and six in some of the other customers that have already launched this and it's just the possibilities are a really quite significantly in our ability to capitalize on a fully integrated backend model, which is.

Loosely integrated to online portals.

Elders in as you now.

And consumers are getting more and more accustomed to buying online, including homes and the builders are pushing that traffic towards the online portals in light of the current endemic so this is a great.

Great Great solution.

For us and the where we think about that as VW by our competitive set and as you know it's a fairly fragmented market that have not made investments in technology have not tested this.

We believe that this is going to be a huge opportunity for us to continue growing faster than the market growth rate.

And be quite successful and being having a very sticky short the business, which is another aspect of this once you're fully integrated into a backend it's really difficult to displace so.

We are worth thinking up the as a strategic.

Technology game changer for us.

And we haven't really seen much out in the market because the competitive set.

Thank you may begin and welcome aboard Bill.

Thanks again.

Okay.

And as a reminder, ladies and gentlemen, if you'd like to ask a question at Star one on your telephone keypad and next we're going to go to Keith Hughes with through it.

Thank you.

Two questions first big push Big picture question for Bill you had discussed a lot of.

Office infrastructure work totally good.

Question more as on the.

Integration between the two segments, specifically, what kind of synergies can you pool what areas what would these businesses look like a couple of years down the road Asus successful.

Yes, I keep I think I would say most simply there as a a significant amount of duplications.

Between the two businesses.

Youre kind of part and parcel and understood. What we did you assign in that regard where it had a very similar situation.

And while we will do over time news, we will take away what I would call all the distractions from the operating entities in focus them on selling and executing on what they sell.

And we will handle the.

What I would call the administrative back office components of apps at corporate.

Okay and second question, a little more near term.

How is July been have you seen business of substantially improve if you could.

In contrast that with how our June one.

For both segments.

Yeah, absolutely key.

Yes.

Very encouraged by July.

Trend.

Pretty much in line with the.

The growth that we've seen from May to June from certainly the inclined from May to June was higher but definitely it continues to.

Pick up the activity in both segments continues to pick up.

The concerns there do concerns in certain regions as cobot cases have increased in the last two three weeks or sale and.

Texas, and Florida, and California that we've all been reading about that so theres, obviously concerns or sell lingering in certain states.

Generally we are very encouraged in the trends and the positive trends in the month of July coming from June.

Okay. Thank you.

Got it.

Okay.

That does conclude todays.

Thank you for your participation you may now disk.

Thank you.

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