Q4 2020 Select Interior Concepts Inc Earnings Call

Good morning, everyone and welcome to the select interior concepts fourth quarter 2020 earnings conference call.

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At this time I would like to turn the conference call over to Mr. Maybe and Moyes Sir. Please go ahead.

Thank you operator, good morning, everyone and welcome to our fourth quarter 2020 financial results Conference call.

Joining me on the call today is our Chief Executive Officer Bells Warner.

During our discussion today, we'll 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 are.

<unk> commented on today are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

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

Please see our recent SEC filings, which identify the principal risks and unknowns that could affect future performance.

Assume no obligation to update publicly any forward looking statements.

Pacific conditions issues and unknown factors that may represent forward looking statements.

Are noted in detail and the presentation.

In addition, we'll be discussing or providing certain non-GAAP financial measures today.

Including EBITDA, adjusted EBITDA and adjusted EBITDA margins.

Please see the appendix for a reconciliation of these non-GAAP measures to their most direct <unk>.

Terrible GAAP measure.

I would now like to turn the call over to Bill.

Thanks Nadeem.

And thank you everyone for joining our call this morning ill.

I'll start on slide three with a quick overview of our fourth quarter and full year performance.

After that I will turn to the meat of today's call.

Our discussion of our plans on our outlook for 2020 one.

As detailed in this morning's release for Q4, we reported net sales of $144 million and adjusted EBITDA of $11 million.

And this reflects a seasonally slower period, particularly for repair and remodel.

Model on the architectural surfaces side, consistent with past quarterly cadences.

For the full year, we reported net sales of $554 million and adjusted EBITDA of $40 2 million.

Given the very difficult circumstances, we faced in 2020 with the pandemic.

<unk> and the fact that people were hesitant to let contractors into their homes and the company performed well on.

And I, particularly wanted to give a shout out to <unk> employees for their hard work and commitment during the day of tough year.

Their dedication helped us greatly exceed the internal forecast.

2020, there was reset last summer as the pandemic took hold.

As many of you know when I joined SAIC and June of last year I saw a company that has excellent business prospects and many talented employees, but it was not living up to its potential.

My first goal.

<unk> was to implement and operational transformation plan.

On our Q3 call in November I laid out a series of steps designed to bring together as a single efficient organization, realizing substantial cost savings and the process.

As of year and all of those initials.

Initiatives were underway.

Not just being explored but actually being implemented.

Over the last several months, we've made great strides and sourcing and logistics, we're in the process of harmonizing, our benefits and insurance programs and we're continuing work on maximizing organizational design and facilities.

Externalization debt.

Business is on track to deliver the $4 million to $5 million and structural cost savings for 2021 and to reach the remainder of our annualized earnings improvement target of $8 million to $10 million run rate in 2022.

With 2020 and the.

<unk> <unk> mirror, let's turn to slide four.

I wanted to share with you why I'm excited about our growth prospects for 2021, and our opportunity to participate in the upside we're seeing and the homebuilding market.

While COVID-19 continues to impact the contractor supported repair and remodel market.

The rearview ISR ISG business, we are seeing encouraging signs of increased homeowner comfort with contractors working and their homes for extended periods of time.

We expect to increase vaccine availability combined with strong housing fundamentals to accelerate demand for our products throughout.

And gear.

To fully leverage the encouraging trends and the homebuilding and enhance shareholder value, we have a wide array of growth initiatives underway for 2021.

Let me first speak to Rds.

As planned Kendall Hoy, formerly president of Rds left.

The lean and early January.

We embarked on and aggressive search to find the best possible person to fill that position and we were pleased to announce two weeks ago that Carl Adrian had joined the group as president of Rds and <unk>.

Carl brings a strong background of both commercial and operational expertise.

The company that will help move Rds to greater Heights.

Just last week, we announced an expansion and the Boise, Idaho, one other countries faster growing areas.

We're making this move and partnership with one of our key builders Woodbridge Pacific Group.

Rds has worked closely with Woodbridge for.

TS took decades as it built high quality homes, and very desirable areas of southern California. So it is especially exciting to extend our partnership into a new region.

Rds will provide design installation services for multiple communities construction.

Construction is scheduled to take place and several things.

Overstocking and mid 2021.

We've also had preliminary conversations with other customers who have entered the market and we're very excited about this opportunity.

And we're working to sell more products through our existing locations utilizing existing domain knowledge and in house expertise.

This evolution transforms a traditional flooring location into a cabinet and flooring business for example.

While still and the beta phase, we continue to develop momentum design to make it and even more robust and visual and business tool both for our customers and for FSIC.

Pilot has expanded to five communities and has received positive feedback.

On the ESG side.

And we're expanding our geographic presence with plans to move into Florida and 2021.

Entry into this fast growing market will help develop our footprint and a key geography was strong.

Our graphics.

Additionally, we are expanding our sales team into six promising territories as a stepping stone to future Greenfield locations.

We recently launched a builder sales initiative.

This effort will target, mostly larger and midsized production builders who have not.

Not been on Afg's radar screen and the past and represents a whole new sales channel for the business.

In terms of our product offering.

Emphasizing our new palette of metrocorp and panel products for the spring selling season.

With this refocus brand launch we have been experiencing a positive.

Impact on mix and margin since launching.

When I first came to us I see I've said I wouldn't pursue acquisitions right out of the gate.

My top priority was to bring the company together as a single efficient organization and build a solid foundation for growth.

As we are now.

And on the path of integrating businesses and leveraging synergies, we're beginning to explore additional opportunities to enhance our growth.

We all know scale matters and it can drive value and thoughtful acquisitions will play an important role overtime and augmenting our drive for growth.

And.

In summary, we're making good progress and improving <unk> operational effectiveness.

Our new leadership team fully in place and are in the process of implementing many growth initiatives for 2021.

Given the transformation of our company that is underway industry tailwind and our enthusiasm about.

About our prospects for growth. We believe this is an appropriate time to start the practice of providing guidance to the investment community.

As such the company is estimating adjusted EBITDA to be and the range of $54 million to $58 million in 2021.

I'll now turn the call over to Nadeem.

And the deemed to provide more details on our financial results and guidance.

Thank you Bill.

Starting on slide five at $144 2 million, our sales for the quarter were down $11 million or 7% year over year compared to Q4 2019.

<unk> net sales decreased $9 five.

And we're close to 10% coming in at 89 million for the quarter.

The decrease was primarily due to unfavorable price mix and discontinuation of two ancillary product lines, which contributed approximately $2 5 million of the decline.

This decline was partially offset by growth and sales volume.

And we were encouraged to see year over year volume growth and just about all of our geographic regions during the quarter.

Price mix was negative and most of our regions during the quarter as the business experience continuing shift towards entry level homes and option packages.

Volume quarter is she sales at $56 million were lower by $2 million or approximately 3%.

Year over year volume was down primarily due to and customers that remain apprehensive to large home renovation projects.

Offsetting the volume decline was strong positive price mix.

Further this is a result of new products and colors launched and courts and natural stone. In addition, we implemented price increases and second half of 2020 on certain products as such price mix across all product categories was higher on a year over year basis, and the fourth quarter.

Now to slide six.

Adjusted EBITDA was $11 2 million, a decrease of $2 5 million or 18% year over year compared to fourth quarter last year.

Negative price mix and lower volumes contributed $3 5 million to the decline on a net basis and was partially offset by a $1 million decrease.

Moving to G&A.

During the quarter Rds margins were negatively impacted by price and mix headwinds from and ongoing mix shift to entry level homes. Although this trend was partially offset by higher volumes.

<unk> experienced positive price mix, partially offset by negative volume.

And our commentary on a full year basis full year revenue of 2020 was $554 million down $56 million or 9% on a year over year basis.

Rds sales declined approximately 10% year over year. This was driven primarily by lower price mix.

ESG sales.

9% year over year, driven by lower volume, which was partially offset by better price mix.

Adjusted EBITDA was 40 million down from $60 million and the prior year as the company experienced negative impacts from Covid related disruptions and price mix and Rds markets.

SG&A cost savings.

Declined and it's across our operating footprint offset declines by $8 5 million on a net basis.

Now turning to slide seven let's take a look at cash flow from operations and liquidity.

During 2020, we continued to execute on a wide range of actions to preserve liquidity and reduce costs and.

Direct response to Covid.

For Q4 operating cash flow was 0.7 million compared to $10 6 million last year for the full year cash flow was $20 6 million.

We ended the quarter with liquidity of $70 4 million net debt of approximately 157 million.

<unk> and issue nine times and net debt to adjusted EBITDA.

Further we've increased financial flexibility by negotiating our leverage covenant to four times net debt to pro forma adjusted EBITDA effective March 2021, so the maturity of our term loan.

And for 2020, one as we switched to a growth mode will continue.

And its just management of working capital and capital allocation for strategic growth initiatives.

Moving to slide eight for the outlook.

Our outlook for 2021 is based on our macro framework of high single digits growth and single family starts which is consistent with various industry.

Our judicious.

We see our business improving through the year as a robust order growth from the latter part of 2020 translates into increasing sales and industry expectations of supply chain bottlenecks subside we.

And we do expect a continued shift and the market to entry level homes and lower.

Asps.

Could result in negative price mix for the Rds business.

As it relates to ESG, we expect large interior repair and remodel projects should grow at a healthy double digit rate as homeowners are now more willing to allow contractors into their homes.

We are seeing.

Seeing these early signs and consumer trends across our ASU branches.

Additionally, we're excited about new markets and 2021 as you may have seen we announced our entry into the Boise, Idaho market last week and have plans to add and ESG Greenfield and the second half of this year.

And that's 2000.

And in 'twenty, one will be a ramp up here, we expect growth these organic growth initiatives to start contributing positive earnings and 2022.

On the cost side as we previously highlighted we expect to achieve $4 million to $5 million and structural savings in 2021 from our four key areas of initiatives that we launched.

Last year.

Taken together the combination of positive industry indicators supporting our growth new initiatives to drive incremental growth and cost savings give us line of sight into our estimated adjusted EBITDA and the range of 54 million to $58 million for 2021.

In closing I would like to thank the entire FSIC team for performing well and have difficulty or with COVID-19 related challenges during 2020.

I'm very excited about our growth prospects. Many initiatives that are underway and are energized management team there'll be leading our business and 2021 and beyond and.

And now I would like to turn.

It over the call to bell for his closing remarks.

Thanks again for joining us this morning based on both the favorable macro trends macro work environment and S. ICD mini growth and operational improvement plans. We believe we have a very promising year and front of US we look forward to updating you.

<unk> on our results and future calls.

With that we'll turn it over to the operator for Q&A.

Ladies and gentlemen at this time, we'll begin the question and answer session.

Ask a question you May press Star and then one to withdraw your question you May press Star and two.

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Once again that is star and then one to ask a question.

Our first question today comes from Keith Hughes from Truest. Please go ahead with your question.

Thank.

Couple of questions first you've given us EBITDA range for the year can you give us some sort of fuel and a revenue and particularly the pace of revenue.

As you progress through year end.

The first quarter.

Up year over year and revenue.

Yes.

And Keith This is we can't hear you nadeem.

And it's very difficult to hear you.

Muted.

I'm, sorry is that better.

Much better much better. Thank you. Okay. So let me ask the question again.

So can you give me any sort of feel on pacing of revenue growth for the year, particularly given this delay and the homebuilders and specifically will you be up.

Year over year, and the first quarter and revenue.

Yeah. Thanks, Thanks for the question Keith.

Certainly what we're experiencing is delays on the builder side.

And so on.

And the first quarter for Rds, we would expect to be sort of in line.

Line with last year in terms of revenue ramp up and then <unk>.

She probably little bit faster on a year over year basis, and and revenue obviously.

We expect a much higher margin flow through in Q1 this year VW last year.

Okay and.

And will that revenue ramp.

<unk> and Rds as the year, because the euro per grosses.

Absolutely. So first quarter is typically the weakest quarter.

Quarter, four Rds, just given the building cycle and.

And it ramps into Q2 with Q3 being the peak and then starts tailing off in Q4 as builders sharp.

Closing out work orders for Rds.

And question on ESG.

Talks and the release about lower sales volume.

From a COVID-19 delays and the West Coast, where does that stand now in March are those store and to lighten up yet.

Yes, we.

We are seeing things improve clearly.

<unk>.

Consumers are more comfortable with contractors coming into their homes and as we participate and what I would call the heavier R&R market. It does require outside and installers to more often times and not.

And to our residents residences of.

The purchaser and.

And that is improving considerably as we sit here today.

Okay.

And I guess finally on imports.

Imports on a per.

And of course, we've seen some of the important numbers actually turnaround after some.

Not tariff action or are you having any.

Availability issues and ESG products at this point, whether it's kinda countertops or back splashes and things of that nature.

We actually are not having any negative impact in fact, I think the business worked diligently and 2019.

Two.

Yeah.

Fix any repercussions from.

Potential tariffs and so we feel very comfortable with where we are and we have a broad range of.

Sourcing.

Opportunities. So we feel good about our positions and we sit here today.

Okay. Thank you.

Thanks Keith.

And our next question comes from Alex <unk> from B Riley. Please go ahead with your question.

Thank you good morning, Bill and ATM.

Good morning, Alex.

Quick questions here first coming back to the commentary about.

<unk> Q.

And what are your comments seem to kind of be around Rds I suspect the ESG business had some negative impact from weather in the first quarter can you help.

Help us to sort of under that or understand.

Net book.

Yeah, absolutely. So you know February.

February was.

And where we experience from weather and particular in Texas, Portland, and Seattle, and the med middle of the country or.

Branches were just shut down for at least a week so we'd expect.

Probably and that two and half to $3 million sales impact.

And.

This quarter and and the ESG business.

That is helpful and then.

It would appear that youre going to probably start to inflect higher.

EBITDA and the first quarter, and then start to see kind of that same sort of inflection point for <unk>.

Positive revenue and the first half of the year do those assumptions some fair.

Yeah, and absolutely that's exactly right. So the way it is.

As you've seen and our business first quarter is usually are our weakest quarter, given the build cycle heavily impacts already.

Already asked and is she's just starting to ramp up and.

And so you know.

From an overall year basis, that's going to be our lowest earnings quarter, and then as you get into Q2.

Spring selling season on the house side, and then Rds is ramping up <unk> is ramping up as well.

And that's that's our probably the second best quarter.

And then you know.

Our best biggest quarter is usually a third quarter and then it starts tailing off into fourth quarter, where these no holidays and particular impacting the repair and remodel work on the ESG side.

And bill it sounds like some of your long term growth initiatives are starting to take hold with expansion and the sales team a new greenfields markets. How should we think about some of these long term.

Organic growth and.

Initiatives.

Adding to annualized revenue growth.

And we should think about maybe in 2020 one these actions.

Could you know add sort of 1% to 3% of organic revenue growth layered on top off sort of neck macro market growth.

Yes, I would clearly say the Boise marketplace, we know.

This is something we're moving and there right now and as mentioned in my comments on the <unk> side, we are moving into Florida, and the latter half of the year I would expect.

Real revenue ramp up.

And on both of those to take place late in Q4 and into 2020.

And with significant expansion beyond.

Additionally, I certainly wouldn't underestimate.

Our efforts, particularly on the ISG side and moving into <unk>.

Several new markets.

<unk>.

We're really excited about that and we see these particular.

<unk> efforts has ongoing opportunity to continue to greenfield new locations something that the business has a great deal of experience with.

That's great and then.

And your price makes that a little bit of a headwind understanding.

Sure.

Shift to entry level homes.

Can you talk about how this is sort of benefiting your momentum and design business. It sounds like the pilots now extended the five communities how should we think about that pilot expansion.

Growing even further in 2021.

Yes, that's a great.

Question, Alex look the whole purpose self.

Developing momentum design about year, and a half ago was to give a product to the builders and.

In light of shifts.

And to lower and entry point homes and.

And the momentum designed today's and five communities.

It's it's on a run rate to do about 800 homes.

So that that's going to be very good for for builders and and consumers and what it's allowing.

And users and home and home buyers to do is pick a set of options and packages with much.

And our flexibility and choices that otherwise would not be available and your sort of traditional.

<unk> option package and setting to the builders are offering. So we think this allows us to two option upgrade and a virtual setting.

And and counteract the negative price mix at the builders are.

And more experiencing on the Asp's. So we think this is going to be great to have plus you get the convenient self virtual shopping which as you know is a growing trend and the homebuilding space.

One last question Bill.

And bill you've added.

And changed.

A lot of senior executive.

Our side inside the company.

Can you update us on sort of where we stand on sort of those adjustments if your team fully in place now.

Any comments are helpful.

Yes. Thank you for the question.

And I will go directly to the punch line and the team is in place.

As you can see the efforts.

That had been undertaken by Patrick Dustin Gerson has taken over.

The ASP business, which had been void of leadership for some six months before his.

Joining the company I've been really significant.

And you can see that if nothing.

Through all the initiatives that are underway.

We're also very excited about but Karl we we approached and took out.

For a while and embarked upon a very thoughtful search to replace Kendall and we're very comfortable with Carl.

His guidance.

Sales and he's been on the job now a couple of weeks and is.

Travelling exhaustively getting up to date and already making decisions and and driving the business forward. So.

I think were and are really good place to execute on our plan for this year and we're thrilled to get going.

Great. Thank you.

Thanks, Alex.

And ladies and gentlemen, with that we've reached the end of the allotted time for today's question and answer session.

I'd like to conclude today's conference call. You May now disconnect. Your lines. Thank you for joining.

And.