Q1 2021 Select Interior Concepts Inc Earnings Call

B pad should you need assistance during the conference call any signal of an operator by pressing star Zero I would now like to turn the conference over to Mr. Nadeem Moyes Chief Financial Officer. Please go ahead Sir.

Thank you operator, good morning, everyone and welcome to our first quarter 2021 financial results conference call join.

Joining me on the call today is our Chief Executive Officer Bill Varner.

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

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 1095.

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

Please see our recent SEC filings, which identify the principal risks and unknowns 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 the detailed.

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 GAAP non-GAAP measures.

Their most direct comparable GAAP measure.

I'd now like to turn the call over for Bill.

Thanks for the theme.

Thank you everyone for joining our call this morning.

I'll start on slide three with a quick overview of our first quarter performance.

As detailed in this morning's release, we reported net sales of $138 million and adjusted EBITDA of approximately $9 $7 million for the period.

Through several initiatives I detailed in our recent year end earnings call I'm pleased to say that the year is off to a strong start in both the AFG and Rds segments of our business as.

As we expected both are performing to plan.

We've been taking advantage of the opportunities in today's active homebuilding market and the entire FSIC team has been working hard to implement our growth plans.

Prove our company's operational effectiveness.

And in the process enhance shareholder value.

I'll take just a few minutes to run through the business initiatives I outlined for you in mid March as they continue to be the building blocks for further strong performance in the coming months.

Starting on slide four with ISG, we're moving ahead with our plans to expand our geographic presence in 2021 by entering the fast growing Florida market over the last few weeks, we've identified and locked down the specific location and are currently recruiting and staffing for.

Of the market.

We expect to begin generating revenue in <unk>.

Additionally, as I mentioned in March we are in the process of expanding <unk> sales team into six promising territories as a stepping stone to future Greenfield locations.

Of the builder sales initiatives I described has been launch targeting mostly larger and midsized production builders, who were not on Afg's radar screen in the past.

They represented an entirely new sales channel for the business and we expect the program to ramp in the second half of the year.

In terms of <unk> product offering we are of course, continuing to emphasize our new color palette of metro courts, and pedal of quartz products for the spring and summer selling season.

We have been realizing continued improvements in mix and margin with this refocused product launch.

I also want to congratulate our team on managing global supply chain disruptions and cost inflation. We are actively managing these challenges however industry of logistics remained extremely tight and global COVID-19 outbreaks continue even while we are seeing improvement here in the United.

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Turning now to Rds call Adrienne joined US as present in the first quarter and is already starting to make a positive impact.

<unk> the ongoing construction delays due to labor and market supply constraints, we saw for 3% revenue growth in Q1, despite cycle time extensions.

As you May remember Rds is at the tail end of the build cycle.

To further accelerate organic growth you will also recall in March that we announced an expansion into the rapidly growing Boise Idaho area.

This move is in partnership with one of our key and longstanding builders Woodbridge Pacific Group.

Rds will provide design installation services for multiple communities and construction will take place from several phases starting in mid 2021.

We are planning to expand quickly with other customers who have entered this emerging market.

On the momentum.

We have further advanced our development and support strategy to make momentum of design and even more robust visual and business tool. We continue to stay close to our pilot communities and have received very positive feedback.

As Youll recall, given the considerable progress we made last year and strength in U S. IC, we began the practice of providing annual guidance in March.

For 2021, we estimated that adjusted EBITDA would be in the range of $54 million to $58 million.

We are currently right on track to achieve those results and all of those supply chain disruptions and material inflation do present, some potential headwinds for every one of the industry, we feel very comfortable reaffirming that range today.

I'll now turn the call over to Nadeem to provide more details on our financial results and guidance.

Thank you Bill starting on slide five at $137 8 million our sales for the quarter were up $3 4 million or two 5% year over year compared to Q1 2020.

Adjusted for planned product category exits the revenue increased 5% on a year over year basis.

Rds sales at $84 million increased 1% of year over year or for 3% adjusted for product exits the increase.

Was primarily due to positive volume growth in all regions slightly offset by unfavorable price mix.

ESG sales at $57 8 million increase of approximately four percentage of every year or up 6% adjusted for product exits.

We continue to see solid success with introduction of new products, new colors launch in the courts and natural stone.

As a result year over year price mix continued to improve but it was partially offset by slightly lower volumes.

Moving now to slide six.

Q1, 2021, adjusted EBITDA for <unk> was $9 6 million, an increase of $5 million or 111% compared to first quarter last year.

<unk> contributed nearly $3 million of the adjusted EBITDA increase as <unk> continued to benefit from positive price mix.

Rds contributed slightly over $2 million on better volume and operating leverage.

In addition, approximately $1 million from the various operational cost savings initiatives is reflected in the quarterly results of both segments.

Now turning to slide seven.

Let's take a look at cash flow from operations and liquidity, we executed on a wide range of actions over the last year to preserve liquidity and reduce cost in direct response to COVID-19.

For Q1, 2021 operating cash flow was $5 7 million compared to $7 8 million last year as working capital increased slightly on the better growth environment. We're in.

Ended the quarter with liquidity of 79 million net debt of approximately $153 million and three four times and net debt to adjusted EBITDA.

For 2021, as we switched the growth mode. We'll continue our judicious management of working capital and capital allocation for strategic growth initiatives.

Maximize shareholder value.

Moving to slide eight for the outlook.

As expected we are experiencing very positive momentum in both segments as we get ramped up in Q2.

For the full year 2021, our outlook remains unchanged.

You may recall.

Outlook is based on our macro framework of high single digits growth in single family starts which is consistent with various industry forecasts.

We see our business improving through the year as robust order growth from the latter part of 2020 translates into increasing sales and buildup of backlog.

Industry expectations are for current supply chain bottlenecks to improve through the year we.

We note that logistic and material inflation continues we expect continued market shift to entry level homes and lower asps.

Additionally, we expect large interior repair remodel projects to grow at a healthy double digit rate as homeowners are now more willing till our contractors into their homes.

Additionally, we're very excited about new markets in 2021, as previously discussed we announced our entry into the Boise, Idaho market for Rds and half the clients, who added ESG Greenfield in Florida in the second half of this year.

<unk> 2021 will be of ramp up here, we expect both of these organic growth initiatives.

Start contributing positive earnings in 2022.

On the cost side as we've previously highlighted we expect to achieve 4 million to.

The $5 million and the structural savings in 2021 from our four key areas of the operational initiatives.

<unk> launched late last share taken together the combination of positive in the industry indicators supporting our growth new initiatives to drive incremental organic growth and cost savings give us line of sight into our estimated adjusted EBITDA in the range of 54 million to $58 million for two.

'twenty one.

And now I'll turn it over the call to Bell for his closing remarks.

Thanks again for joining us this morning, as you've heard we're forging ahead with our many plans to improve fsic's business and in the process shareholder value.

We believe we have a very promising year ahead and look forward to updating you in the future and with that we'll turn the call over to the operator for Q&A.

Thank you.

We will now begin the question answer session for joined the question queue. You May Press Star then one on your telephone keypad.

We'll hear at sales acknowledging your request.

Youre using a speakerphone please pick up your handset before pressing any key the withdraw your question. Please press Star then two.

We'll pause for a moment as clueless joined the queue.

The first question comes from Keith Hughes from choice. Please go ahead.

Thank you.

If you could talk about your business in the April.

Is it starting particularly of Rds is the starting to accelerate.

As the.

<unk> starts to turn into completions.

And if you could particularly talk about the versus maybe say 19, because I know that the.

The 'twenty comps of pretty pretty easy comparable what was going on in April of last year.

Hey, good morning, this is naveen.

So okay.

After a very solid start in the second quarter as the highlighted in my script.

April.

It's going to be very positive for both the businesses.

We've seen sequential growth in both segments.

During the first four months here.

And.

As you get into the comps for second quarter versus last year, certainly those are going to be very attractive and then certainly we will start to.

Exceed the 2019 comps as well as we get into the year.

Okay.

If you if we looked at ASB when we've seen the.

Positive price mix growth.

Several quarters now of course of the negative volume associated with that.

Do you foresee that going to slip in volume terms.

From positive given some of your initiatives in the market at all.

Yes, absolutely that's debt.

That is what we are planning and that's what we're expecting and Thats what were seeing in the market.

Okay, and what products are shifting to the positive side within the industry.

Yes, it's predominantly around Cork.

And we highlighted the introduction of new colors update of pallets.

That is all starting to share.

A lot of momentum towards the new categories, and then to the to a lesser extent expansion into Thailand buildup program are all of our all accretive incremental volume for us.

<unk> would you like to add anything to know.

Just had debt those are all opportunities that have yet to be realized.

That are very close on the horizon.

Yes.

Okay.

Is the.

We've seen quartz imports.

The top of imports are coming back up now.

From different locations.

Is that an opportunity for you in the court of lot of yours or just how does that affect your business I guess the question.

Yes.

Well, we sourced mostly from on a global basis.

We expect.

Our courts business to continue to grow with the market.

There is a trend.

The more and more towards going towards courts.

The app.

Not only of the entry level up to the mid level homes.

And as you are well aware in the mid to upper level Homestake's day move more towards natural stone, which has a very very positive price mix for us.

Okay. Thank you.

Yes.

For the next question comes from Alex Rygiel from B Riley. Please go ahead.

Thank you good morning, gentlemen of very nice quarter.

Thank you good morning, Alex.

Good morning couple of quick questions here first margin expanded nicely in the quarter over the next couple of years, how much upside do you see to gross profit margins.

Yes, so look.

We've got quite a bit of structural initiatives underway price mix positive momentum.

On the gross margin side.

Over the next couple of years, we expect to see two to 300 basis points of expansion in our gross margin.

<unk> two.

We have seen last year of 2020, so wed like to think about at that sort of the baseline there.

And you saw good progress in first quarter, and we'll continue pushing that through again operating leverage price mix enhancement.

And new product introduction that are higher margin.

And I'm assuming.

Expect margins to expand despite of making some investments into.

The new geographic expansion of new sales initiatives in the short term can you can you talk about sort of what the margin headwind or cost headwind is associated with those new geographic expansions and how you are absorbing them.

Okay.

Yes, I would say.

For the ISG side in particular.

We're facing headwinds in the area of logistics for the most part and as you know that the.

Global access to <unk>.

Containers.

And getting product on time is right now very much of a challenging cost of increased.

Quickly about our team as I mentioned in my script has done an amazing job.

The containing that and managing that on on the part of our business. So I think we are once again, we're comfortable with our direction.

We don't see it having the major impact at all on our <unk>.

Expansion and growth opportunities.

We are reiterating our guidance.

And then lastly as.

Momentum design gains traction can you talk about the incremental margin on that business relative to your core business right now.

Okay.

Yes.

The momentum design is still in early days, Alex and like we mentioned the five communities today, we do believe it's going to deliver incremental margin.

Sort of reflected in this.

Two the 200 basis points of expansion I was talking about sort of on an overall aggregate basis.

<unk>.

What it's trying to do is just give you a visual of virtual <unk>.

Design selection opportunity on so you'll have some accretion on the margin EBIT packages and things like that.

But overall, what we're trying to do is really take up the.

Volume aspect of our business and get organic growth through online design selection through that through that opportunity.

And actually one last question.

Clearly labor availability out there in the marketplace for the challenge for a lot of other companies in the construction space can you comment on your success at adding head.

Head count.

Yes, so I would say kind of.

Two categories, when we think about direct labor for installation such as on the Rds segment.

It's clearly a challenge I mean, there is a <unk>.

Clearly the war for competent labor out there and we.

Attempt to use the very top skill labor available in the marketplace.

To this point, we've been very successful.

We've maintained the crews that we've had for years and the relationships with.

Outside of installers. So we have not really experienced a lot of headwinds in that area as it relates to professionals and.

The management employees.

It's tough I mean, it's a very consolidated market.

COVID-19 I think has created an environment, where certainly people don't want to relocate the wanted to stay at home.

So it is it has become more of a challenge but.

We're finding success and part of what we're doing on the ESG front as we're going into their backyard, and therefore being able to recruit accordingly.

Very helpful. Thank you.

Thank you.

This concludes the question and answer session.

Today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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