Q3 2020 Select Interior Concepts Inc Earnings Call

Good morning, everyone and welcome to the select interior concepts third quarter Twenty-twenty earnings Conference call. All participants will be englishly only that should you need assistance. They received my copy specialist by pressing the snarky follow up at zero.

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Please go ahead Sir.

Thank you operator, good morning, everyone and welcome to our third quarter Twenty-twenty financial results conference call joining.

Joining me on the call today is our Chief Executive Officer Bell burner.

During our discussion today will be referring to our earnings presentation, which is available on the Investor Relations section of our website.

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 of 1995.

Actual results could differ materially because of issues and unknown that needs to be considered in evaluating our financial outlook and operating performance.

Please see our recent SEC filings, which identified the principal risks cannot announce that could affect future performance, we assume no obligation to update publicly any forward looking statements.

Specific conditions issues and unknown factors that may represent forward looking statements are noted in detail on this wide.

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

Please see that pen next for a reconciliation of these non-GAAP measures to their most directly comparable gap measure.

I would now like to turn the call over to our C. L Bell.

Thanks, Adeem and thank you everyone for joining our call. This morning, I'll start with an overview of our third quarter highlights on slide three of the presentation.

As detailed in this morning's press release, we generated $150 million of revenue and $14 million of adjusted EBITDA in the third quarter, demonstrating strong sequential improvement over two two as we continue to see the housing and construction market gain strength.

Cash flow from operations was $2.4 million for the third quarter and $19.9 million year today, reflecting the conversion rate of over 65% year to date.

I'm happy with this performance, but we have much more to achieve in the coming months. We're just in the early innings of what we plan to accomplish.

In mid September both.

Both bring outstanding capabilities and experience that will be critical to EPS I see success.

I also continued visiting our locations so that I could do a deeper dive into rds and ASG their value propositions branding and market positions among other attributes.

The visitations, including underperforming as well as performing locations.

In the process.

Gathered excellent ideas and feedback from many employees.

Crafting them into common methods that all of our offices can use to optimize process and enhanced employee productivity.

Our second initiative focuses on strategic sourcing and logistics across the company.

We are closely examining opportunities such as optimizing minimum purchase levels preference pricing in terms and making sure that supply in sales are properly connected.

In the process, we plan to eliminate operational inefficiencies that were inherent as sicu different businesses were acquired.

Additionally, we are balancing imports with local sourcing to derisked the company from tariffs and supply chain risks.

Exams.

As mentioned in this mornings press release, we are pleased to announce that the D. Moyes has been appointed Chief operating Officer. In addition to his continuing role as Chief Financial Officer.

Games promotion recognizes his essential inside to improving the operating performance of our entire organization the ongoing integration of acquisitions and the respected commands throughout the company and board of directors congratulations on the deal.

Our drive to generate organic growth through the introduction of high value high margin home interior products at ASV.

As cheese metric courts brand, which provides the entry level engineered stone launched six new color offerings that are generating solid traction.

Additional pencil brand product launches are planned for early 2021, as we get ready for the spring selling season.

Before turning the call over to Dean to review, our Q3 performance in detail I'd like to spend a few moments on the way the housing market is shaping up for the remainder of 2020 and the coming year.

Expanded role.

Starting on slide six at $150.1 million, our sales for the period were down 6% compared to Q3 2019.

Sales have recovered steadily since April which are presented the trough for the year as you may recall from our last conference call sales in that month fell 25% year over year.

Audio sales fell $6 million or approximately 6% to $91 million compared to last year. The decrease was largely due to a sales decline related to negative price mix, partially offset by positive growth in volume, particularly in California and Arizona.

Is she sales fell $3 million or approximately 5% to 60 million due to lower natural stone courts and tile sales volume. Although these volume declines were partially offset by price mix improvement for core EPS.

$1 million year to date, we're presenting a solid 65% of our adjusted EBITDA for the same period.

We ended the quarter with liquidity of 68 million.

Net debt off $155.8 million, and 3.7 times and net debt to LTM adjusted EBITDA.

We remain committed to strict cost discipline to preserve cash there.

The cost and cash actions, we've taken along with the transformative work streams.

In operations, which bill discussed will position us to grow our EBITDA and generate cash flow.

Ensuring we have liquidity to support continued investments and strategic growth initiatives.

With respect to the market. We're excited about positive developments in single family, New construction, which drives most of our business for Rds and portion of our business for ASG.

Hi, snakes and trends related to price makes you know you've seen the homebuilders show their I S. PS categorically all the homebuilders are really down on S. P's and in particular in the West Coast. So you know we are price makes it is a reflection.

Off that where you know obviously, we're focused on is increasing value to the homebuilder uhm through things like momentum design and continue to focus on operational cost efficiencies. The work streams, we highlighted but you know the price mixed pressure there were.

They are so we're very positively encouraged with the volumes as we look forward.

Half the business repairing model and the projections for repairing model are anywhere from 2% to 3% depending on what what economic indicators you're looking at.

So were you know as we use or make our way out of it.

It pretty hefty comp in third quarter last year into fourth quarter, and then look forward, we're very positively encourage and sort of that low single digit growth and repair remodel.

And then within your facility utilization of rationalization efforts is there an opportunity to sell certain real estate assets into or maybe consider sale leaseback to raise some cash that could then be redeployed into your core business or future M&A.

Yes look great great question. So we don't own any assets. So I would say it would have a great Avenue. If we had some actual ownership what we're really focused there to give a little bit more color is improved utilization in the fab shops.

We're looking at improved utilization in the warehouses and consolidation of warehouses, where it makes sense.

And investing in.

Some material handling equipment and the right facilities to improve.

The throughput and the velocity and the distribution centers, so that's where the focus is.

On the Rts side.

And in particular, the design centers, the focus is going to be perpetually evaluating in the shift to panic.

Click and click.

I can break sort the momentum and so we're looking at the design centers world, which centres makes sense and and so you will expect to see a little bit more come forward on that as we as we make our way into 2021.

Thank you I'll get back in the queue.

Okay. Thanks.

Our next question comes from Keith Hughes with short Securities. Please go ahead.

Thank you a couple of questions.

Start with his g. so excellent margins.

Gross profit growth despite the revenue decline.

You talk about what's going on there in terms of pricing and mix within your within your business and what do you think that will look like here going into the fourth early part of next year.

Yes, Okay, great. Great question, we're very happy with the margin performance up as she is.

In Q3 that team did an outstanding job there.

They are very focused and going into 2021, new introduction of colors on on our Pentelic brand, which is our premium porch brand.

We've been implemented price increases that went into effect.

And really in in fourth quarter or early fourth quarter, we will start to see benefit of that going into 2021, we.

We are re launch the metro courts, which is the entry level course, which fits really well with builder programs and sort of the lower.

Yes piece, if you will with respect to homebuilders, so that fits really well with the team has done a great job and redoing the supply chain.

A leading up to 2020 and so we.

We expect price mix to positively trend in that business given the all actions the team has taken.

Okay. So you discussed a lot of course is that primarily where the pricing is coming.

Hey.

Yeah, that's where we're focused on natural stone as well.

The natural stone to it's a little bit for different animal given that.

It varies by.

In a type of core.

Natural stone marble versus granted and those kinds of things. So it's a little bit more complicated analysis. There we are.

Do you expect some pricing on the natural stone as well, but certainly the bigger opportunities on the on the port side and quite frankly, that's where the majority of our sales are today and as cheese on the court's eye on engineered stone side and quite frankly, the growth and the builder segment and in the homes is really shifting increasing.

So as you know over the last five years towards engineered stone.

Okay.

The pricing driven but just supply demand aspects or is there.

Just the impacts of the.

That's coming out of China, the push for a while now John's mostly shut off yes.

It's rather more.

Yeah No great question on the tariffs were were from our perspective in the portfolio, we're dealing with or beyond that this is really around quality of the product the service and having the inventory.

And having their relationships with our EPS.

And customer both on the bowler side and the fabrication and dealers network that we operate in.

And that has allowed us to command that pricing in the the demand.

Aspects of the business have have continue to be fairly strong so that helps the environment as well.

Okay.

Final question, you talked about in the introduction about looking to do more domestic sourcing.

I assume that's in a history is that correct and what type of products.

Yes that definitely correct.

Four is gee it will be more on engineered stone.

It was we look at international supply chain, it's fairly fragmented.

And you have seen considerable risk with respect to tear ups supply chain works.

Work stoppages at ports those kinds of things and as we continue to to evaluate.

Hi quality products to maintain the service level and the margins that we are shooting for there's there's opportunity there is opportunity to get some local sourcing which de risks the supply chain aspect in the tariff aspect of the business.

And we'll be continue to evaluate there.

The domestic supply, which which has continued to grow over the last couple of years.

On engineered stone side.

Oh and always assume it's the opposite to US Yes go ahead sorry.

Yes, one of the thing on the domestic sourcing just kind of switching over to Rds.

Are you looking to do more of your LD LPT domestically.

As well with that remain heavily important.

Yes, so it's mainly domestic today on the LDP side that as you know on the Rts side, a significant portion of that is bolder specified for us so.

So and that's predominantly domestic there's some international or we do there, but it's mainly domestic already today. So we feel fairly good about their risk element on that where we've really don't want to make sure that we're de risking the company on the ASP side with respect to international supply.

Okay. Thank you very much.

Great. Thank you very much.

That concludes are there any other questions.

Oh I was just going to say, there's nobody left in the queue. So if you would like to give any further closing remarks, I will turn it over to you Bill.

Thank you once again I just want to thank everyone for their time.

And we look forward to.

Future communications with you.

Yes.

The conference is now concluded. Thank you for attending today's presentation you may now disconnect.

Good.

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