Select Interior Concepts, Inc.
Q4 2020 Earnings Call Transcript

Published: 15 Mar 2021

[Operator:]

Good morning, everyone and welcome to the Select Interior Concepts Fourth Quarter 2020 Earnings Conference Call. Please also note today’s event is being recorded. At this time, I’d like to turn the conference call over to Mr. Nadeem Moiz. Sir, please go ahead.

[Nadeem Moiz:]

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, Bill Varner. During our discussion today, we 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 unknowns that need to be considered in 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. 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 in the presentation. In addition, we will 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 comparable GAAP measure.

[Bill Varner:]

Thanks, Nadeem and thank you everyone for joining our call this morning. I will start on Slide 3 with a quick overview of our fourth quarter and full year performance. After that, I will turn to the meat of today’s call, a discussion of our plans and our outlook for 2021. As detailed in this morning’s release for Q4, we reported net sales of $144 million and adjusted EBITDA of $11 million. This reflects a seasonally slower period, particularly for repair and remodel 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 and the fact that people were hesitant to let contractors into their homes, the company performed well. I particularly want to give a shout out to SIC’s employees for their hard work and commitment during a tough year. Their dedication helped us greatly exceed the internal forecast for 2020 that was reset last summer as the pandemic took hold. As many of you know, when I joined SIC in June of last year, I saw a company that had excellent business prospects and many talented employees, but it was not living up to its potential. My first goal was to implement an operational transformation plan. On our Q3 call in November, I laid out a series of steps designed to bring SIC together as a single, efficient organization realizing substantial cost savings in the process. As of year end, all of those initiatives were underway not just being explored, but actually being implemented. Over the last several months, we have made great strides in sourcing and logistics. We are in the process of harmonizing our benefits and insurance programs, and we are continuing work on maximizing organizational design and facilities rationalization. The business is on track to deliver the $4 million to $5 million in 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 in the rearview mirror, let’s turn to Slide 4. I want to share with you why I am excited about our growth prospects for 2021 and our opportunity to participate in the upside we are seeing in the homebuilding market. While COVID continues to impact the contractor-supported repair and remodel market and thus our ASG business, we are seeing encouraging signs of increased homeowner comfort with contractors working in their homes for extended periods of time. We expect increased vaccine availability, combined with strong housing fundamentals to accelerate demand for our products throughout the year. To fully leverage the encouraging trends in the homebuilding and enhance shareholder value, we have a wide array of growth initiatives underway for 2021.

[Nadeem Moiz:]

Thank you, Bill. Starting on Slide 5, at $144.2 million, our sales for the quarter were down $11 million or 7% year-over-year compared to Q4 2019. RDS sales decreased $9.5 million or 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 in sales volume. We were encouraged to see year-over-year volume growth in just all our geographic regions during the quarter. Price mix was negative in most of our regions during the quarter as the business experience continuing shift towards entry-level homes and option packages. For the quarter, ASG sales at $56 million were lower by $2 million or approximately 3%. Year-over-year volume was down primarily due to end customers that remain apprehensive to large home renovation projects. Offsetting the volume decline was strong positive price/mix. This is a result of new products and colors launched in quartz and natural stone. In addition, we implemented price increases in second half of 2020 on certain products. As such, price/mix across all product categories was higher on a year-over-year basis in the fourth quarter. Moving now to Slide 6, 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 in SG&A. During the quarter, RDS margins were negatively impacted by price/mix headwinds from an ongoing mix shift to entry-level homes, although this trend was partially offset by higher volumes. ASG experienced positive price/mix, partially offset by negative volume.

[Bill Varner:]

Thanks again for joining us this morning. Based on both the favorable macro trends, macro environment and SIC’s many growth and operational improvement plans, we believe we have a very promising year in front of us. We look forward to updating you on our results in future calls. With that, we’ll turn it over to the operator for Q&A.

[Operator:]

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

[Keith Hughes:]

Thank you. A couple of questions. First, you’ve given us EBITDA range for the year. Can you give us some sort of feel on revenue, particularly the pace of revenue as you progress through the year? And first quarter, will you be up year-over-year in revenue?

[Nadeem Moiz:]

Yes. Hey, Keith, this is…

[Bill Varner:]

We can’t hear you.

[Nadeem Moiz:]

This is Nadeem. It’s very difficult to hear you. It’s muted.

[Keith Hughes:]

I’m sorry, is that better?

[Nadeem Moiz:]

Much better.

[Bill Varner:]

Much better. Thank you.

[Keith Hughes:]

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 in the homebuilders? And specifically, will you be up year-over-year in the first quarter in revenue?

[Nadeem Moiz:]

Yes. Thanks for the question, Keith. Yes, certainly, what we are experiencing is delays on the builder side. So, in the first quarter for RDS, we would expect to be sort of in line with last year in terms of revenue ramp up. And then ASG, probably a little bit faster on a year-over-year basis in revenue. Obviously, we expect a much higher margin flow-through in Q1 this year vis-à-vis last year.

[Keith Hughes:]

[Nadeem Moiz:]

Absolutely. So, first quarter is typically the weakest quarter for RDS, just given the billing cycle, and it ramps into Q2 with Q3 being the peak and then starts tailing off in Q4 as builders start closing out work orders for RDS.

[Keith Hughes:]

And a question on ASG, you had talked in the release about lower sales volume from the COVID delays in the West Coast. Where does that stand now in March, have those started to lighten up yet?

[Bill Varner:]

Yes. We are seeing things improve clearly. Consumers are more comfortable with contractors coming into their homes, and as we participate in what I would call the heavier R&R market, it does require outside installers to more often times than not enter residences of the purchaser, and that is improving considerably as we sit here today.

[Keith Hughes:]

Okay. And I guess finally, on imports on – particularly on quartz. We’ve seen some of the import numbers actually turn around after some of this tariff action. Are you having any availability issues in ASG on products at this point, whether it’s countertops or backsplashes or things of that nature?

[Bill Varner:]

We actually are not having any negative impact. In fact, I think the business worked diligently in 2019 to fix any repercussions from potential tariffs, and so we feel very comfortable with where we are. We have a broad range of sourcing opportunities. So, we feel good about our position as we sit here today.

[Keith Hughes:]

Okay, thank you.

[Nadeem Moiz:]

Thanks, Keith.

[Operator:]

And our next question comes from Alex Rygiel from B. Riley. Please go ahead with your question.

[Alex Rygiel:]

Thank you. Good morning, Bill and Nadeem.

[Bill Varner:]

Good morning, Alex.

[Nadeem Moiz:]

Good morning, Alex.

[Alex Rygiel:]

Quick questions here. First, coming back to the commentary about 1Q, a lot of your comments seem to kind of be around RDS. I suspect the ASG business had some negative impact from weather in the first quarter. Can you help us to sort of better understand that impact?

[Nadeem Moiz:]

Yes, absolutely. So, February was where we experienced some weather, in particular in Texas, Portland, Seattle, in the middle of the country where branches were just shut down for at least a week. So, we would expect probably in that $2.5 million to $3 million sales impact in the first quarter in the ASG business.

[Alex Rygiel:]

That is helpful. And then it would appear that you’re going to probably start to inflect higher EBITDA in the first quarter, and then start to see kind of that same sort of inflection point for positive revenue in the first half of the year. Do those assumptions sound fair?

[Nadeem Moiz:]

Yes, absolutely. That’s exactly right. So the way – as you’ve seen in our business, first quarter is usually our weakest quarter given the belt cycle heavily – that heavily impacts RDS and ASG is just starting to ramp up. And so, 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, ASG is ramping up as well. That’s our – probably the second-best quarter, and then our best biggest quarter is usually the third quarter and then starts tailing off into fourth quarter with seasonal holidays, in particular impacting the repair and remodel work on the ASG side.

[Alex Rygiel:]

And Bill, it sounds like some of your long-term growth initiatives are starting to take hold with expansion of the sales team, new Greenfields markets. How should we think about some of these long-term organic growth initiatives adding to annualized revenue growth? Is this something that we should think about maybe in 2021, these actions could add sort of 1% to 3% of organic revenue growth layered on top of sort of macro market growth?

[Bill Varner:]

Yes, I would clearly say the Boise marketplace we know we are moving in there right now. And as mentioned in my comments, on the ASG side, we are moving into Florida in the latter half of the year. I would expect real revenue ramp-up on both of those to take place late in Q4 and into 2022 with significant expansion beyond. Additionally, I certainly wouldn’t underestimate our efforts, particularly on the ASG side and moving into several new markets. We’re really excited about that, and we see these particular efforts as an ongoing opportunity to continue to Greenfield new locations, something that the business has a great deal of experience with.

[Alex Rygiel:]

That’s great. And then your price/mix had a little bit of a headwind, understanding the shift to entry-level homes. Can you talk about how this is sort of benefiting your Momentum Design business, it sounds like the pilots now expanded to five communities. How should we think about that pilot expansion growing even further in 2021?

[Nadeem Moiz:]

Yes, that’s a great question, Alex. Look, the whole purpose of developing Momentum Design about 1.5 years ago was to give a product to the builders in light of shift to lower and entry point homes. And the momentum designed today is in five communities, it’s on a run rate to do about 800 homes so that’s going to be very good for builders and end consumers. And what it’s allowing end users and homebuyers to do is pick a set up options and packages with much more flexibility and choices that otherwise would not be available in your sort of traditional option package setting that the builders are offering. So we think this allows us to option upgrade in a virtual setting. And counteract the negative price/mix that the builders are experiencing on the ASPS. So we think this is going to be a great tool plus. You get the convenience of virtual shopping, which, as you know, is a growing trend in the homebuilding space.

[Alex Rygiel:]

One last question, Bill, you have added and changed a lot of senior executives inside the company, can you update us on sort of where we stand on sort of those adjustments? Is your team at fully in place now? Any comments are helpful?

[Bill Varner:]

Yes. Thank you for the question. I’ll go directly to the punch line. The team is in place. As you can see, the efforts that have been undertaken by Patrick Dustinger since taking over the ASG business, which had been void of leadership for some 6 months before his joining the company, have been really significant. And you can see that if nothing else through all the initiatives that are underway. But we’re also very excited about Karl. We approached and took a while and embarked upon a very thoughtful search to replace Kendall, and we’re very comfortable with Karl, his guidance. He has been on the job now a couple of weeks and is traveling exhaustively getting up-to-date and already making decisions and driving the business forward. So I think we’re in a really good place to execute on our plan for this year and we are thrilled to get going.

[Alex Rygiel:]

Great. Thank you.

[Nadeem Moiz:]

Thanks, Alex.

[Operator:]

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.