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Operator: 00:07 Good day and welcome to the Doman Building Materials Group Ltd. Fourth Quarter 2021 Financial Results Conference Call. Today's conference is being recorded.

00:21 At this time, I'd like to turn the conference over to Ali Mahdavi. Please go ahead.

Ali Mahdavi: 00:28 Thank you, operator. Good morning everyone and thank you for joining us for Doman Building Materials Limited fourth quarter and full year 2021 financial results conference call. Joining me this morning are Amar Doman, Chairman and Chief Executive Officer and Jay Code, Chief Financial Officer.

00:44 If you've not seen the news release which was issued yesterday, it is available on the company's website as well as on SEDAR along with our MD&A and financial statements. I would also like to remind you that a replay of this call will be accessible until midnight on March 18. Following management's presentation, we will conduct a Q&A session for analysts only. Instructions will be provided at that time for you to join the queue for questions. 01:09 Before we begin, we are required to provide the following statements regarding forward-looking information, which is made on behalf of Doman Building Materials Group Limited and all of its representatives on this call.

Remarks and answers to your questions today may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Any information regarding forward-looking statements is made as of the date of this call and the company does not undertake to update any forward-looking statements. 01:45 Please read the forward-looking statements and risk factors in the MD&A as these outlines the material factors which could cause or would cause actual results to differ. The company will not provide guidance regarding future earnings during today's call and management does not anticipate providing guidance in future quarterly or interim communications with investors.

02:05 I'd like to turn the call over to Amar now. Amar?

Amar Doman: 02:08 Thanks, Ali, and good morning everybody, and thank you for joining us on the call today. Let me begin by highlighting some of our key financial metrics, followed by some color on our operations during the fourth quarter and then I'm going to hand the call over to Jay Code, who will review the numbers in further detail. 02:24 I'll start by highlighting the efforts of all of our employees across the various business segments during these continued extraordinary times in which we are living. Our team's steadfast focus and attention on health and safety, combined with solid execution on all business fronts resulted in yet another strong quarter of financial results and with some of our key financial metrics surpassing previous record levels on a quarterly and annual basis.

02:48 Overall, I am very pleased with how our growth strategy continues to unfold, resulting in record annual sales and net earnings, while remaining focused on margin protection. The price volatility we experienced from May to August subsided in the fourth quarter resulting in improved gross margin levels when compared to the third quarter. We continue to see robust activity and pricing in our markets. However, we're also very mindful of the macro economic backdrop of increasing interest rates, and other similar factors which may impact market dynamics. The strength in our full year results came from the combination of continued strong pricing, albeit with some volatility and strong volumes in all of our markets, which resulted in full year revenues exceeding $2.5 billion.

03:33 Further, our ongoing cost management, and focus on operational efficiencies enabled the company to realize much of the revenue line gains to the EBITDA and bottom lines. We are very proud of the strength of our financial performance and believe that there is a lot to be gained from the strength and momentum, which has resulted from our successes in 2021 and particularly in the fourth quarter as we pave the path forward into 2022. 03:59 Despite these challenging times, we maintain focus and discipline on servicing the needs of our customers with the utmost level of quality and service, while working through a highly volatile pricing environment for our wood products throughout the year. In parallel, we continued our pursuit of strategic growth opportunities, which resulted in a significant expansion of our footprint and presence in the US market through the acquisition of Texas-based Hixson Lumber sales. The combination of these efforts resulted in revenues, gross profit, EBITDA and net earnings reaching new record levels.

04:32 As a result, during the fourth quarter, we continued to experience topline growth posting an increase of 60% when compared to the same period in 2020. We continue to see robust demand and strong pricing resulting in once again achieving excellent fourth quarter results with revenues increasing 60% to $642 million. Gross margin at 13.8% or $88.7 million, adjusted EBITDA increasing to $37.1 million, net earnings came in at $11.6 million, and lastly, our quarterly dividend of $0.14 per share was declared. 05:10 We are extremely encouraged with our fourth quarter and full year 2021 results and continue to build on the decisive steps we took earlier in the year. We were able to deliver these strong operating results with leaner inventory levels in certain categories, while continuing to meet or exceed customer expectations of product availability.

05:29 Despite the daily headlines concerning procurement, logistics issues and challenges we have and continue to maintain pace across all of our plants and distribution centers on both sides of the border and we've done everything we can to provide best in class reliable supply and service to our customers. 05:46 Looking ahead, despite the continued volatility in commodity pricing around the world, we continue to be healthy in premium levels. Combined with the robust demand we are seeing in our key markets, driven by the do-it-yourself and home renovation end user, we remain excited and optimistic as we entered the New Year. We remain confident in our ability to work through these extraordinary times diligently while protecting our employees and servicing our customer's needs with the highest level of service. 06:13 Lastly, let me touch on inflation.

We are certainly in an inflationary environment and there is no shortage of economic indicators and commentary to support this. We are also seeing this in our markets. However, we are not seeing consumer behavior shifting when it comes to their spending habits and patterns when it comes to home projects. We are off to a roaring start in 2022. 06:34 With that, I would like to ask Jay Code, our CFO to take over, provide a review of the company's fourth quarter and full financial results in greater detail.

And then we look forward to opening up the call for questions for everybody, Jay?

James Code: 6:46 Thank you, Amar. Good morning, everyone. Sales for the year ended December 31, 2021 were $2.54 billion versus $1.61 billion in 2020 representing an increase of $930 million or 58%. The increase is largely due to the results from our acquisitions in 2021 with the balance attributable to improvements in product pricing experienced by the company's legacy operations. 07:20 Quarantine related activities continued to drive both demand and unprecedented price escalation through the first half of 2021 before reaching a peak in May and declining sharply until August, but only partially offsetting the earnings impact of the pricing increases in the first half of the year.

07:44 The company sales by product group in the year were made up of 74% construction materials, compared to 65% in 2020 with the remaining balance resulting from specialty and allied products of 22% and other sources of 4%. Our gross margin increased to $391 million in the current year versus $256.2 million in 2020, an increase of $134.8 million. Our gross margin percentage was 15.4% during the year, a slight decrease from the 15.9% achieved in 2020. The company's margins benefited from the results achieved by our acquisitions as well as improvements in construction materials pricing for the company's legacy operations during the first half of 2021. 08:40 These price driven margin improvements in our first half were partially offset by the impact of price declines during the second half of the year driving lower margin percentages for the third and fourth quarters of 2021 relative to the same periods in 2020.

Expenses for this year were $219.1 million versus $157.8 million in 2020, an increase of $61.3 million or 39% due to factors to be discussed. These expenses amounted to 8.6% of sales in 2021 versus 9.8% in 2020. 09:27 Distribution, selling and administration expenses increased by $50.9 million to 45% to $164.1 million versus $113.2 million in 2020 largely due to additional expenses of the acquisitions. The S&A expenses were 6.5% of sales in 2021 compared to 7% in 2020. Depreciation and amortization expenses increased by $10.4 million or 23.3% from $44.6 million to $55.1 million.

10:09 Finance cost for 2021 were $27.1 million versus $15.7 million in 2020, an increase of $11.4 million or 73% largely as a result of the additional finance cost related to our 2026 unsecured notes issued in May of 2021. 10:33 Our 2021 EBITDA was $220.7 million and adjusted EBITDA was $225.6 million compared to EBITDA and adjusted EBITDA of $142.4 million and $143 million, respectively in 2020. The increase in adjusted EBITDA of $82.5 million was driven by strong contributions from our newly acquired businesses as well as Doman's legacy operations. Our net earnings in 2021 were $106.5 million versus $59.6 million in 2020, an increase of $46.9 million. 11:24 Turning now to the statement of cash flows.

The significant factors affecting the company's operating cash flows in 2021 were largely related to significantly improved net earnings, offset partially by changes in net non-cash working capital. Operating activities before these non-cash working capital changes generated $163.8 million in cash, compared to $129.8 million in 2020. In 2021, we made a net investment in non-cash working capital totaling $114.5 million compared to a net reduction in non-cash working capital of $34.4 million in the prior year. 12:12 Moving out of the financing section. The company generated a total of $454.5 million of cash from financing activities compared to using $157.7 million of cash in 2020.

This year shares issued net of transaction cost generated $82 million of cash compared to $671,000 in 2020 largely as a result of our public share offering completed in May of 2021. And in 2021, the company borrowed an additional $131.6 million on its revolving loan facility compared to net repayments of $83.1 million in 2020. The significant year-over-year increase in usage of the revolving loan facility is a result of the previously discussed increase in working capital investments, as well as utilization of our revolver as partial financing for the Hixson and LA Lumber acquisitions in 2021. 13:22 The issuance of the previously mentioned 2026 unsecured notes in May 2021 resulted in net proceeds of $316.5 million of cash. While scheduled repayments of our non-revolving term loan consumed $2.7 million which was consistent with 2020.

We also note the company's equipment loans were fully repaid during the fourth quarter of 2021. 13:52 The company was not in breach of any of its lending covenants during the year ended December 31, 2021. Dividends paid to shareholders during the year amounted to $42.6 million compared to $42 million in 2020. The company updated its dividend policy during the fourth quarter of 2021 resulting in a quarterly dividend increase from $0.12 to $0.14 beginning with the dividend paid on January 14, 2022. Payment of lease liabilities, including interest consumed $23.6 million of cash compared to $24.7 million in 2020 and the company's lease obligations generally require monthly instalments and these payments are all current.

14:46 Investing activities consumed a total of $503.3 million of cash compared to $2.9 million in 2020. Investing activities in 2021 included the Hixson and LA Lumber acquisitions for total cash consideration of $498.3 million, whereas 2020 included the much smaller Island Trust acquisition. Cash investments in property, plant and equipment, net of proceeds from dispositions were $5 million this year compared to $682,000 in 2020. 15:28 This concludes our formal commentary and we'd now be happy to respond to any questions you may have. Thank you.

Operator?

Operator: 15:37 Thank you. And we will go ahead and take our first question from Hamir Patel with CIBC Capital. Please go ahead.

Hamir Patel: 16:14 Hi, good morning. Amar, you sounded quite upbeat about the demand that you're seeing.

I was just wondering, what are your home center customers planning for in terms of volumes this year? Are they pointing you towards sort of volume year-over-year growth or kind of in line with 2021?

Amar Doman: 16:39 Yeah, pretty much in line with 2021, Hamir. We think that listening to our partners in the big box channel certainly would be very happy if we get those levels or even a little bit of a bump up after all of the new housing that's coming in. A lot of our product lines go into the fencing side, the decking side which compost are usually done custom after a home is built. So we're pretty excited about, even the overhang of houses that are completed but haven't got their decks and fences finished in all markets despite what housing starts do as well, so we believe along with our big box partners, will at least do 2021 .

Hamir Patel: 17:19 Great.

Thanks, Amar. That's helpful. And just turning to the cost side. In terms of the chemical inputs, what sort of inflation are you seeing there? And what's the sort of lag or pricing protection that you have? And is that going to be -- because that going to hit you more in the back half of this year or should we assume pretty much immediate Q1 impact?

Amar Doman: 17:43 No impact at all. We're contracted and protected right through 2022.

And as we reset into 2023 and the new contracts will pass those chemical increases on to our customer base next year.

Hamir Patel: 17:57 Okay. And are you able to speak to sort of the magnitude of chemical increases you're seeing for the -- some of the major inputs?

Amar Doman: 18:04 Well, we're not having any, so I can't speak to that. And we won't get next year pricing till the fall of this year and we're protected, so it's not really on our worry list.

Hamir Patel: 18:15 Fair enough.

And just the last question for Jay. Could you give us an update on expected CapEx for 2022? And are there any larger capacity expansion initiatives as part of the budget?

James Code: 18:33 Sure Hamir. You should think about CapEx along the lines of about $5 million to $6 million in 2022. No major initiatives. We're continuing to implement new technology as part of the Hixson integration and rolling that forward through other US operations in '22, that's probably the most significant project on the horizon unless something changes.

Amar Doman: 19:05 Yeah. And the second project would be kiln capacity, we're doubling in Summerville, Arkansas at our sawmill there, so that's going to have a good impact for later in the year as far as us being able to hopefully double our production at that particular facility.

Hamir Patel: 19:24 Great. That's all I had. Thank you.

Amar Doman: 19:27 Thanks, Hamir.

Operator: 19:30 And we'll go ahead and take our next question from Zachary Evershed with National Bank Financial. Please go ahead.

Zachary Evershed: 19:37 Good morning everyone, thanks for taking my question.

Amar Doman: 19:40 Good morning, Zach.

Zachary Evershed: 19:43 Given the shift in pricing in the second half of Q4, we were thinking gross margins might come in a little stronger, especially with how fast your inventories turning, could you walk us through the mechanics and timing of how the pricing on inventory purchases flows through to pricing to customers in your major product categories again?

Amar Doman: 20:04 Yeah. I mean, it does vary a little bit with all the different markets we're in. And of course, geographically Canada was in December, you're not moving a lot of treated lumber or November for that matter. So we still had over hang and that's what cause that kind of minor, and again, we feel it's very minor gross margin pain, which is turned around and well behind us now. So the cycle, we'd like to try to say it's 3 to 4 weeks in those busy times and construction season is in full swing.

It obviously gets a little more weighted in the winter. We were fortunate that the weather in the US was quite favorable to building all the way through Christmas, a little colder recently, but our turns have been good, our margin is back and strong and our volumes are high. So again, we've got a very strong start to the first quarter here and I think we will see a nice recovery back to our traditional stronger margins and all of that's in the rearview mirror.

Zachary Evershed: 20:59 That's great color. Thanks.

And then I guess on that point we're seeing very strong cash lumber prices and an uptick in back month lumber futures across the board, but not at the same level. What's your take on the supply demand balance and where prices are going? And what are you hearing from customers in terms of backlogs? And does that align with your order book.

Amar Doman: 21:22 Yeah. There is some back lag certainly, but when we look at SPF in isolation, which is the futures market, it's been wounded as we know here in BC because of transportation, railcar shortages and snafus there with the floods that tangled up a lot of shipping here. So the rest of the market when you look into the SYP or bring done far on the West they are strong and building season is extremely strong already there in the states.

21:49 So we're getting good takeaway. Spruce, we got to be a little careful on, we're being very careful with our inventories because, again, it's more of a not is there enough out there problem, it's there is no way to get it to market right now problem. And in West Fraser you might have seen has gone down to 3 shifts a week just because they are piling so much wood up, it's sold but they can get the railcars to move it. So we're a little careful on spruce and we're watching that one and we're behaving very responsibly with our SPF wood piles.

Zachary Evershed: 22:20 That's actually a great segue to my next question, how are you guys navigating the freight disruptions, particularly in the rail space?

Amar Doman: 22:26 Yeah.

We're using a lot more trucks, we're utilizing different mills that have trucks available, more Alberta product when we can, but everybody's after the same trucks. So there is a truck shortage, but we're going to be in good shape for spring. We don't see any issues in our inventories as far as having any holes and we should be pretty good here. 22:45 Again, speaking of SPF. And then in the Western markets Hawaii and the Hixson landscape, we're in pretty good shape with the exception of decking is tight in the US, but we're hoping to get some new strategies to move some other species around to get that back in order as well, but the demand is there, Zach, and we're going to be ready for good spring market here.

Zachary Evershed: 23:06 That's great news. So you're not too worried about sales being pushed to the right with delivery delays?

Amar Doman: 23:12 No, we're are going to be okay. I think these rail thing has happened in 2018. Not as severe, but it will solve itself at some point and the cars will get there. Nobody knows when, but in the meantime I'm not panicked about us being at a material in any of our facilities.

But it's going to carry lighter.

Zachary Evershed: 23:32 Thanks for answering my question. I'll turn it over.

Amar Doman: 23:36 Thanks Zac.

Operator: 23:37 And we'll go ahead and move on to our next question from Paul Quinn with RBC Capital Markets.

Please go ahead.

Paul Quinn: 23:44 Yeah, thanks very much. Good morning, guys. Just a question on outlook for Q1 here, last year you generated $60 million in EBITDA. It looks like the setup is pretty similar to last year.

In fact, building material prices have track up higher earlier for Q1 and plus you've got the acquisition of LA Lumber in Hixson, just wondering how you're thinking about Q1 as well as Q2?

Amar Doman: 24:09 Yeah. It's been a very strong start to the year from all angles, whether it's volume, pricing, margin, we're having a very good first quarter. So you'll see I think some good numbers here carrying on into Q2, unless there is a major collapse or world event, we think the first half is going to look pretty good. 24:32 And looking at it year-over-year, not having Hixson in, of course, last year, etcetera. We've got a pretty special first quarter here as we navigate with nice inflation on lumber.

And more importantly, the margin side is all back cleaned up and looking good.

Paul Quinn: 24:50 Okay. And then in the release you mentioned the information technology strategy at Hixon, what is that and what are you doing across your business line?

Amar Doman: 25:00 Yeah. So when we bought the company, there was some more older, let's say, antiquated technologies there and we studied in our due diligence and we put in the DSI system which we use, it's called agility. We use it on the West Coast of the US, we now have an operating it at 3 facilities, we will have all 19 up and running by the end of April, and then we'll go into the sawmills and get those done on the more complicated Hixson lines, which will help us achieve a lot of efficiencies, real-time information and this was all planned for, it's not a risky one going in, we know the system will use it and it's a much newer version than we even use on the West Coast and the implementation has been going well.

Paul Quinn: 25:40 Okay. So just so I understand it. That (ph) system is more on the sales side or it's more on the production side?

Amar Doman: 25:48 It's all angles, it soup to nuts system, it tracks every piece of lumber through your whole manufacturing process from receipt to ship. The inventory VMI controls everything and it has excellent reporting. We're going to start scaling all of our plants.

Poor purchasing on supplies, so there's a lot of great things we're going to get to once this technology is deployed, which is happening now and again it's already in place.

James Code: 26:16 And Paul, it's Jay here, just want to let you know too that that system is being utilized in California Cascade. So we're very familiar with the product and it's working well for us in California. So it's not like it's a new product to us.

Paul Quinn: 26:37 Okay, great.

And I appreciate you're still probably digesting Hixson and ramping, but what is the current M&A look -- market look like right now?

Amar Doman: 26:50 Yeah, we're in dialog as always with different opportunities and we're certainly taking more of a blend on an average lumber price when we look at purchasing a business today. So we're being conservative as we always are, same kind of EBITDA multiple targets that we look at being responsible to our balance sheet and we're seeing some things that could be interesting later in the year. Nothing right now. 27:17 Again, to your point, we are working hard on Hixson and all the other divisions, because we've got a lot of volume. It's busy and challenging with pricing levels and shipping shortages, so we're just very busy.

But I think we later in the year will get focused on a couple of more things, but we're in dialog on a couple of things, Paul, but nothing imminent.

Paul Quinn: 27:36 Okay. That's all I had. Best of luck guys.

Amar Doman: 27:38 Thank.

James Code: 27:39 Thank you.

Operator: 27:41 And we'll go ahead and take our next question from Steve Hansen with Raymond James. Please go ahead.

Steve Hansen: 27:49 Yeah, good morning guys. Apologies if I missed it, but just thinking about any of other constraints that might be in the system.

How is the people situation down South, in particular at Hixson? Are you in good shape there? Is that posing any challenges on in terms of meeting the demand you've described?

Amar Doman: 28:05 Getting a little bit better as people coming back to work, it's still a challenge in certain regions, but not where its wounding us. And of course, the COVID absences of decline now and it looks like that's behind us, which is nice to see as well. So nothing that's penalizing us, Steve, to answer your question.

Steve Hansen: 28:24 Okay, great. That's helpful.

And just a follow-up again on sort of the front half outlook for the year. I think you described it as being a very special first quarter. The margin expectations or say the margins that we saw last year through the first quarter were obviously outsized again. Is it safe to say that those are going to be too hard to reach again this time with Hixson involved or is it there still a possibility to get up to that same levels?

Amar Doman: 28:50 Yeah. I think near that zip code that was a pretty high watermark with what the lumber market was doing last 2020 and 2021, it was just on fire, where here it's moving up, but it's kind of been in the zip code for a while.

So we were getting some extra margin on that rocket launch of pricing and everyone was out of stuff. This year it's different, everyone has material, but it's priced higher. So the margins are a little bit more normal. 29:15 Having said that, our volumes will be a lot higher with Hixson, et cetera, but just seeing some of the guys on numbers, just I think to carried away and we're having fantastic results here. It's just that the market is too high I think on lumber and people have to be careful I think just looking at their research, we're not a sawmill and we are value-adding.

And we've had the one bit of margin pain last year, we're through that and we should be back our traditional margin pattern, Steve, with a little bit of, I would say, extra push because of the way the trajectory of the lumber market is today and panels in OSB.

Steve Hansen: 29:53 Very good color, I appreciate that. Thanks.

Amar Doman: 29:56 Thanks, Steve.

Operator: 29:59 And we will go ahead and take our next question from Yuri Lynk with Canaccord Genuity.

Please go ahead.

Yuri Lynk: 30:07 Hey, good morning guys. Just a housekeeping question from me, I guess for Jay. DSNA, Jay, it was down almost $2 million bucks sequentially to about $10 million. It's not a good quarterly run rate excluding right of use?

James Code: 30:25 Yeah.

Yuri, just keep in mind, seasonally we would have a little bit of a decline in DSNE, so as a run rate it would increase a little bit as we go into the busier season, especially in Canada.

Yuri Lynk: 30:45 Got it. Makes sense. And any color on working capital for 2022, at least in the first half of the year. Should we expect continue investment in working cap just given where pricing and volumes?

James Code: 31:04 Yeah, of course, it really depends where pricing goes for the balance of this year.

We put together a budget back in November, December, and we're already wrong on pricing on that. So we would expect if pricing stays at these levels, then working capital will be fairly flat year-over-year. But if it comes off to more historic pricing, then we could pick up some cash with the decline in pricing.

Yuri Lynk: 31:46 That's it from my guys.

Thanks
Operator: 31:51 And with that, that does conclude our question-and-answer session.

I would now like to hand the call back over to Ali for any additional or closing remarks. Please go ahead.

Ali Mahdavi: 32:02 Thanks again operator. On behalf of the management team, I would like to thank you for joining us this morning for an update on the fourth quarter results. We look forward to speaking to you again on the back of our Q1 2022 financial results.

That concludes today's call. I'll ask the operator to wrap up the call. Have a great day.

Operator*: 32:23 And with that, that does conclude today's call. Thank you for your participation, you may now disconnect