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Select Interior Concepts, Inc (NASDAQ:SIC)
Q1 2020 Earnings Call
May 21, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Select Interior Concepts 2020 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

I would now turn the call over to your host, Mr. Nadeem Moiz, CFO. Thank you, and you may begin, Mr. Moiz.

Nadeem Moiz -- Chief Financial Officer

Thank you, operator. Good morning, everyone, and welcome to our first quarter 2020 financial results conference call. Joining me on the call today is Ty Johnson, the Chief Executive Officer.

During our discussion today, we'll be referring to our earnings presentation, which is available on the Investors section of our website. I will start with Slide 2, where I'd 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 on the slide.

In addition, we will be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margins. Please see the appendix for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measure.

I would now like to turn the call over to Ty Johnson, beginning on Slide 3.

Tyrone Johnson -- Chief Executive Officer

Thanks, Nadeem. Good morning, everyone, and thank you for joining us today. I will provide an update on our business and COVID-19 response, Nadeem will follow with a review of our financials.

Since our last earnings call in early March, we have seen many economies around the nation effectively shut down for weeks or months, and now begin to partially reopen. The unprecedented COVID-19 situation has created a great deal of uncertainty. But as you leave this call today, I want you to feel assured that Select Interior Concepts is well-situated to effectively navigate the evolving industry landscape. We have a high-quality business, a talented group of employees, and sufficient financial resources to effectively navigate the downturn. The strategic investments in recent years to expand our footprint, broaden our product offerings, and enhance our online tools have strengthened our position to win into the recovery.

During the first quarter, we focused on strengthening our platform to reach further into the sizable addressable market in both our installation and distribution businesses. We continue to execute our multifaceted strategy to grow faster than our markets, cross-sell products and integrate acquired businesses. The progress was evident in our meaningful volume gains throughout most of the quarter, despite a late March deceleration in activity related to COVID-19.

First quarter sales of $134.4 million, declined 2% compared to the prior year. As we have identified on prior calls, this was due to unfavorable regional product mix dynamics, including the shift to more entry to mid-level homes. This entirely offset the benefit of volume gains and acquisitions. Adjusted EBITDA was similarly impacted, coming in at $4.5 million, compared to $12.5 million a year ago. Recent investments and key initiatives already under way, helped to offset these negative mix elements.

In our design and installation business, we rolled up proprietary product selection technology to better serve our customers at various price points. In our distribution segment, we made additional progress to seamlessly integrate our global supply chain and prepare for several exciting product launches in 2020. Across the Company, we implemented ERP systems to enable higher productivity levels, and tighter project cost management to back office integration and network efficiencies. The results of these efforts and aggressive working capital management produced cash flow from operations of $7.8 million, well in excess of adjusted EBITDA.

Moving to Slide 4. Our entire team remains committed to our longer-term objectives, and they have done an exceptional job responding quickly to the initial economic shock of COVID-19. We have enhanced our focus on safety, operational efficiency and liquidity management. We created a cross functional team to oversee the implementation of business continuity measures that strike the right balance between public health, and what's required to manage our business, and take care of our employees and service our customers.

Again, our top priority is protecting our employees. Safety protocols include temperature checks, guidelines for protective coverings, sanitation practices, social distancing, remote work accommodations and travel restrictions, as well as a plan for addressing potential COVID-19 exposure. Our coronavirus response team has led the way and serves as an informed resource to our branches as circumstances arise. Not only is this good for business, but it is good for the well-being and morale of our employees.

As it relates to our global supply chain, we are carefully managing our inventory levels and working closely with our suppliers to continue to address customer needs. So far, we have not experienced any significant disruptions to our global supply chain. In terms of cash and liquidity, we have taken proactive steps to enhance our financial flexibility. Our cash flow from operations remains positive, and we expect this to continue for the balance of the year. Nadeem will provide more detail on the significant enhancements to our capital resources and cost structure.

Moving to Slide 5. At RDS, our prior geographic diversification of this business into several regions, provides a more stable picture, as local economies cautiously reopen at varying speeds. Furthermore, our sales teams continue to aggressively pursue project bids to enhance our geographic exposure to markets outside of Southern California. And importantly, while certain projects are delayed, our backlog remained stable through the quarter.

Across our footprint, we are better prepared for the increasing shift of builders to entry to mid-level homes, resulting in smaller jobs at lower price points, with fewer options and upgrades. In line with this effort, last quarter, we conducted the soft launch of our web-based proprietary selection technology, which we call Momentum Design, that builders can customize to offer tailored design experience to homebuyers without a physical showroom. We designed this differentiated tool to enable builders to decrease their construction cycle times, by reducing time spent by homebuyers selecting options and upgrades. This timely introduction is also clearly well-adapted to the current social distancing environment. Initial feedback has been very positive, and it has already resulted in new customer relationships. We are in process of rolling the tool out to all RDS markets, and remain very excited by the prospects for this new technology.

In ASG, beyond cost actions already enacted, we plan to introduce several new quartz and porcelain countertop product lines throughout the year. We are also reenergizing our tile lines with new product launches. In our existing lines, we continue to work with our new and streamlined supplier base to replicate the high-end quartz product lines formally supplied, by a Chinese partner prior to the introduction of tariffs. Finally, our processes and technology enhancements to simplify our distribution business to our ERP implementation will completed -- will be completed in the last several ASG branches by mid-year. These ERP implementations will provide us better control over product and sourcing management, as well as better visibility on local market demand and individual project costs.

In summary, I'm extremely proud of how our employees have responded to this crisis. I think, all of our associates for their perseverance and dedication during these challenging times, particularly those in our facilities whose essential jobs necessitate an onsite presence. Even though the months ahead will be challenging for everyone, I know that we will meet this challenge, and be an even stronger business as the demand environment continues to recover. As such, we remain committed to executing on the long-term potential of our business to capitalize on a very attractive market opportunity, solidify our premium market position, and generate attractive returns for our shareholders. Once again, thank you for joining.

And with that, I will turn the call over to Nadeem.

Nadeem Moiz -- Chief Financial Officer

Thank you, Ty, and good morning everyone.

Moving to Slide 6, for a review of net sales. First quarter net sales decreased by $2.5 million or 1.9% to $134.4 million, compared to the prior-year quarter.

Now looking at our segments. In RDS, sales declined by 0.8% for the quarter. We had another quarter of strong unit volume growth in the high-single-digit percent range. However, total organic sales declined by 4%, primarily driven by price/mix pressures, resulting from the shift toward more entry to mid-level homes, which continues to be consistent with the direction of the market. In ASG, sales declined 3.4%, driven primarily by unfavorable mix with an increase in engineered stone unit volumes, more than offset by other categories. ASG did not have any contributions from acquisitions in the first quarter.

Moving to Slide 7. Adjusted EBITDA was $4.5 million, compared to $12.5 million in the prior year. The decline in adjusted EBITDA was a result of lower margin mix in both segments, primarily related to the shift to entry-level homes in RDS. SG&A was a benefit to adjusted EBITDA, driven by cost reductions and efficiencies.

Moving to Slide 8. The actions that Ty discussed earlier to enhance our operations and liquidity are especially important, given the rapid transformation of the US economy in our markets, due to COVID-19. During March, our team moved quickly to evaluate the situation and develop a comprehensive cost reduction and cash preservation plan. As a result of this effort, we expect enacted cost saving measures to benefit 2020 results by $14 million to $16 million in the remaining three quarters of this year. Several actions that were part of our original 2020 operating plan have been accelerated, and new additional cost measures have been put in place, as a direct response to COVID-19-related impact. These wide ranging actions include a combination of reductions in workforce, and furloughs across the network, reduction in management salaries, and cash incentive compensation, hiring freezes, elimination of Board fees, reduction in employee benefits, expenses and halting of all non-essential expenditures, including travel, consulting and other professional support.

In addition to these enhancements, we've restricted new capital expenditures to only safety-related maintenance for the remainder of the year. In working capital, we've adjusted inventory purchasing plans with global suppliers for 2020, and forced stricter customer credit and collections program, and plan to take advantage of all tax deferral benefits provided by the CARES Act. These actions have resulted in an immediate positive benefit to our results. In April, despite a drop of 25% in year-over-year sales, we generated positive adjusted EBITDA. I thank our dedicated team for their support and diligence, as we align our business to perform in the current environment.

Moving to our balance sheet and liquidity on Slide 9. During the first quarter, we generated cash flow from operations of $7.8 million. This was in excess of adjusted EBITDA, as we focused on driving working capital improvements and managed other cash spend. With respect to liquidity enhancements, during the first quarter, we drew down $35 million under our existing ABL facility out of an abundance of caution. As a result of these actions, at quarter end, we had cash on hand of approximately $37 million, and total liquidity of $72 million. At quarter end, we had net debt outstanding of $164 million, consisting of $153 million on the term loan, plus borrowings on our ABL facility net of cash. We ended the quarter at 3.2 times net debt-to-EBITDA, and we were within our covenant threshold.

As a further precautionary measure, in early April, we negotiated an amendment to our term loan agreement to enhance our financial flexibility. This included the suspension of leverage covenant testing for the remainder of 2020, relaxing of our fixed charge coverage ratio to 1 time through year end, and relief on excess cash flow sweep that was planned for second quarter of this year. Our ability to quickly amend our term facility reflects the resiliency of our business model and recognition of our strong cash flow performance by our lenders. Although, we continue to monitor the debt capital markets for future potential opportunities, our existing credit agreement continues to provide us with a long-term maturity window until 2023. Overall, we ended the quarter with a strong capital position, and ample financial flexibility to effectively navigate the developing economic environment. We have put in place additional processes to monitor daily cash conditions to ensure that we are able to generate positive cash flow for the remainder of the year.

To conclude, our teams are executing successfully in this unprecedented environment, and we're better prepared today to deal with future market shifts. While the second quarter is likely to remain challenging as the recovery continues, we believe SIC is well-positioned across our business units to benefit from our enacted cost savings, capital discipline, recent technology rollouts and planned product launches. As we move through this period and beyond, we look forward to further building on our progress, as a leading installer and distributor of high-end interior products.

Operator, we would now like to open up for Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]

The first question comes from Alex Rygiel from B. Riley FBR. Please go ahead.

Alex Rygiel -- B. Riley FBR -- Analyst

Thank you. Good morning, gentlemen. It's good to hear that you're both very healthy.

Nadeem Moiz -- Chief Financial Officer

Hey, good morning.

Tyrone Johnson -- Chief Executive Officer

Good morning, Alex.

Alex Rygiel -- B. Riley FBR -- Analyst

A couple of quick questions. First, can you talk about your ability to improve working capital this year and the possible range of cash to be converted into the balance sheet?

Nadeem Moiz -- Chief Financial Officer

Yeah, absolutely. So we're very focused on the working capital as you saw in the first quarter. We'll continue to drive that further into the rest of this year. Cash flow conversion in 2019 was about 50% for us. We're expecting higher than that in this year. We're, obviously, cash flow from operations positive in the first quarter, and we expect to remain that way throughout the rest of the year.

Alex Rygiel -- B. Riley FBR -- Analyst

And then secondly, as it relates to the technology platform, super exciting, it's great to hear that you're picking up new customers with this product. Can you talk a little bit about how we should think about number one, sort of the cannibalizing market share that it might take from sort of your existing platforms? And as this transitions through the P&L, what the margin implications are in sort of that mix shift toward the technology platform?

Tyrone Johnson -- Chief Executive Officer

Yeah. Hey, Alex, it's Ty. So with respect to cannibalization, we really don't expect much in the way of cannibalization. This is really targeted for builders that are using packages today. And we think this enhances not only the selection process, but also the margin profile given there are a large number of selections that can be made via the Momentum Design tool that can't be made with just an A, B or C package. So we think, there'll be very little in the way of cannibalization. With respect to margin implications, as I just mentioned, I think this could enhance our margins, as it will give certain builders the opportunity to provide consumers with additional selections beyond what they're able to display today. And by virtue of that, we think we'll get some mix shift -- positive mix shift as a result of having more upgrades available to them.

Alex Rygiel -- B. Riley FBR -- Analyst

And lastly, Nadeem, can you talk a little bit about the cadence of the savings of $14 million to $16 million? Is all that in place today? Or is that sort of in -- will that be in place over the next three months to six months, and sort of what quarter later this year should we sort of be at that full run rate savings level?

Nadeem Moiz -- Chief Financial Officer

Yeah. Great question, Alex. All in place, effective April. And, we've taken a very deep look at this, and a lot of analysis and sensitivities. And really, we approach them from a phasing standpoint. So this is the sort of phased approach. So all -- everything that we're talking about the $14 million to $16 million has all been actioned.

Alex Rygiel -- B. Riley FBR -- Analyst

Very helpful. I'll get back in the queue. Thank you.

Operator

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Tyrone Johnson.

Tyrone Johnson -- Chief Executive Officer

Thank you, everyone, for joining us today. We appreciate your support of Select Interior Concepts, and look forward to updating you on our progress next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Nadeem Moiz -- Chief Financial Officer

Tyrone Johnson -- Chief Executive Officer

Alex Rygiel -- B. Riley FBR -- Analyst

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