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Select Interior Concepts, Inc (NASDAQ:SIC)
Q2 2020 Earnings Call
Aug 6, 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 Second Quarter Results Conference Call. [Operator Instructions]. I would now like to turn the call over to your host, Mr. Nadeem Moiz, CFO. Thank you, Mr. Moiz, you may begin.

Nadeem Moiz -- Chief Financial Officer

Thank you, David. Good morning everyone and welcome to our second quarter 2020 financial results conference call. Joining me on the call today is our new 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'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'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 directly comparable GAAP measures.

I would now like to turn the call over to our CEO, Bill Varner.

Bill Varner -- Chief Executive Officer

Thank you, Nadeem. It's a pleasure to be here and speaking with you today. On my inaugural call as SIC's Chief Executive Officer, I want to share with you my initial observations of the company and its two segments; RDS and ASG, the playbook for optimizing operations that I'm bringing into the company based on my career experiences and my near-term priorities to put SIC on track to build shareholder value over the long term. To begin with, SIC is a great company with strong talent and committed employees whom I think it's a pleasure to lead. I'm incredibly impressed with their hard work and focus during these unprecedented times with the pandemic. Since joining the company almost 60 days ago, I'm even more excited today regarding the growth prospects of SIC beyond what I originally thought.

With that having been said, and when I accept CEO appointment in early June, I saw a company that was underperforming relative to its potential, a situation I have seen before and a set of challenges I have overcome before. As you know, SIC is a corporate entity has come together to a series of acquisitions over the past three years. During the last 18 to 24 months, SIC has taken many turns in direction, causing business disruptions and employee unease. The company has been growing and moving forward, while simultaneously backfilling corporate functions and trying to complete the integration of acquired businesses. The work is unfinished and there is, in my opinion, a great deal of waste in redundancy as I see today low-hanging fruit to harvest and create a solid foundation for long-term value creation. We still have multiple IT systems, desperate compensation and benefit plans, a lack of coordination between RDS and the ASG, duplication in the back office and our supply chain as well as opportunities in other areas.

There also appears to be an under optimization of current facilities at both RDS and ASG. There are compelling integration opportunities at both the enterprise and the segment level. I expect to be well down the road to integration optimization within the next six months. Operational inefficiencies, the absence of a complete corporate shared service infrastructure, and lack of cohesion across the company, all impediments to capitalizing on a favorable secular trends in the residential construction market and on emerging opportunities created by the shift from brick-and-mortar showrooms to hybrid Brick and Click sales strategies.

In addition, further enhancement of the current capital structure is another opportunity for the company to realize its full potential. What I've seen at SIC is not unlike what I saw in my prior position as Chief Executive Officer of United Subcontractors or USI. When I joined USI, the company was a collection of businesses [Indecipherable], which have been acquired in a roll-up strategy. The businesses have not been fully integrated nor have they taken advantage of back-office and supply chain synergies or even the soft synergies or sharing ideas and leveraging sales forces in common territories. Corporate headquarters was viewed as a payroll and reporting center. Brand identity was weak. The company was capital constrained.

Given the situation I pulled together 30 plus branches or former companies with multiple locations together as one culturally and economically and then include the company organically as well as through acquisitions to expand its geographic reach and product portfolio using technology to support and enhance earnings. Because of this experience, I have a proven playbook that I have already begun to implement at SIC to improve operations and to align performance and compensation with shareholder value creation.

I'd like to describe my playbook as a three-legged stool. The first leg is focusing on organic revenue growth and core earnings. We must have a strong foundation in place to support future growth. With a more efficient business, we will be in a much better position to take advantage of inorganic growth opportunities. What does that entail? It starts with the corporate infrastructure. Corporates should be built as a service organization with a mandate to make operations better the unified back office functions so the operating entities can narrow the aperture and focus on market and competitive trends while driving organic sales. We need to round out the corporate functions that are critical to our success.

A corporate level human capital executive is imperative for service organization like SIC. We expect to announce the appointment of a highly experienced and talented Chief Human Resource Officer very shortly. Our corporate level IT executive is essential to ensuring SIC has the technology tools to operate efficiently and to capitalize on the trends in the residential construction market. I am therefore in the process of recruiting a Vice President of IT and expect to announce this appointment before the end of the year. At the segment level, it means getting Patrick Dussinger, our new President of ASG, up and running and holding the operating performance and online growth prospects in that business. Near-term, I plan to move quickly working with the operating teams of the segment level, to fully leverage the assets we have and pruning what we don't need to drive earnings growth.

I will also focus my attention on bringing cohesion and commonality to what is presently a sub-optimal organization. We can do that by sharing best practices and ideas across locations, crafting sets on common methods and optimizing processes. As a leader. I believe in working together in a collaborative manner, reaching out to employees for input then making decisions expeditiously and executing on those decisions. Recruiting, training and development of future leaders will be driven by our new CHRO. At the same time, I clearly set expectations for performance and hold everyone accountable, including myself.

The second leg is further enhancing the existing capital structure to get the company additional avenues for long-term organic and inorganic growth. Our current lenders have been very constructive and remain supportive of our growth objectives and will be key partners as we move forward on this front.

The third leg is formulating a long-term growth strategy that combines buy and build tactics to develop our footprint in key markets with strong demographics. If you think about the demographic smile of the United States, from the Atlantic state in South through the Southwest and up the West Coast to the Northwest that is where most homebuilding takes place. And we need to be there. I shared with you my assessment of SIC. But those are just initial observations. I have not yet been able to visit many of our locations because of the pandemic although I am starting to a bar component deep dive process into our individual segments RDS and ASG, their value propositions, branding, market positions and the like.

I plan to make considerable progress during this quarter and look forward to meeting our employees in person as soon as practical. From my perspective, however, assessing a business is not a discrete timestamp exercise. Rather it is an ongoing continual business discipline. The building products industry is not static and customer tastes and preferences change and we need to be nimble and ready to adjust the way we approach the market and what we sell to satisfy changing dynamics. But I want you to take away from my remarks today that I am laser focused on creating value for all stakeholders; our shareholders, customers, suppliers, partners and employees. At the end of the day, we need to perform better with the capital already deployed and look toward smarter allocation of capital, combined with strong execution of a business plan to enhance returns. I am confident with the dedicated team members we have, we will be successful.

And I'll now turn it over to Nadeem to review the Q2 financial performance.

Nadeem Moiz -- Chief Financial Officer

Thank you, Bill. I'll start with an overview of second quarter highlights on Slide 3 of the presentation. During these unprecedented times in Q2, our entire team remains focused on ensuring the safety of our employees through our COVID-19 response team driving operational efficiency and liquidity management. When we held our first quarter call in May, we mentioned that April sales fell 25% year-over-year. Reflecting on the full quarter, April proved to be the trough for the quarter with each subsequent months reflecting improved sales activity. In summary, our sales for the quarter at $125.4 million were down approximately 21% compared to Q2 2019. Adjusted EBITDA for Q2 was $10.4 million versus $16.6 million last year, however, up $5.8 million on a sequential basis from Q1 2020. Cash flow from ops was $9.7 million, reflecting a cash flow conversion rate of 93%.

As discussed in the last earnings call, in response to the expected lower sales, we implemented a comprehensive cost savings and cash preservation plan in early April. During the second quarter, we realized approximately $7 million in cost savings and are on track to realize $14 million to $16 million in total cost savings from these initiatives in 2020. Measures to rationalize costs and preserve cash, included hiring freezes, targeted furloughs, reductions of workforce across business units, reduced benefits, cutting management salaries, and suspending payment of board of director fees along with enforcing strict controls on non-critical expenditures.

Moving to Slide 4 for segment update. Despite the challenges associated with lower volumes in both segments, we continue to advance key strategic initiatives during the second quarter. In the RDS segment, for example, we continue to gain traction with Momentum Design as certain key builders adopted and utilized the technology. Momentum Design is our proprietary online 3D rendering tool for the selection of interior finishes. The technology seamlessly integrate builder sales activities with our internal systems and reduces build time for the builders. Further, it allows homebuyers to visualize, get prices and select all their interior finishes without visiting a physical design center. Construction was deemed essential in all our RDS markets. However, activity remained at lower levels as expected and while showrooms have been opened after having been closed in April and May, many appointments are now being conducted online. Price/mix pressure resulting from the shift toward more entry to mid-level homes continued. And finally, our backlog in RDS remained stable during Q2.

Moving to the ASG segment. Repair and remodel-based sales activity proved to be resilient and programmed and builder sales also continued markets where showrooms are closed during the quarter. We also continue to successfully launch new quartz products and colors as part of the planned product refresh and global supply chain was managed well by the team with no major interruptions and product supply, quality or delivery. In addition, we completed the implementation of a common ERP system in all our ASG locations.

Moving to Slide 5, our year-over-year net sales bridge. Year-over-year sales at $125.4 million decreased by 21% compared to last year. RDS sales fell $19.4 million or approximately 21% to $73.4 million compared to last year. Lower volumes in construction slowdowns resulting from COVID-19 along with unfavorable price/mix growth drove the decrease. Construction paused in a number of locations during Q2 due to local regulations in certain regions, particularly in Northern California. However, as of the end of Q2, our operations had resumed in all locations. ASG sales fell $13.9 [Phonetic] million or approximately 21% to $52.5 [Phonetic] million due to lower sales, volume and price/mix in all product categories, including natural stone, quartz and tile.

Regarding market conditions in the remainder of 2020, we are encouraged by improving trends and positive sentiments in the homebuilding sector. Permit issuances for new, single-family construction, a leading indicator of our business, increased 25% in June versus May. Recent estimates for full year 2020 new single-family starts published by various industry trackers contemplate an approximately 15% decrease from 2019 to 2020. However, these have been tempered from original forecast at the end of first quarter, as the demand for single-family housing in key markets has continued to recover.

Moving to Slide 6, year-over-year adjusted EBITDA bridge. Year-over-year adjusted EBITDA at $10.4 million, decreased by $6.2 million or 38% compared to last year Q2. On a sequential basis, Q2 EBITDA increased by $5.8 million compared to Q1. Lower volumes, along with lower margin mix in both segments contributed to $12.8 million decline. This negative impact from lower volume/price/mix was partially offset by $6.6 million decrease in operating expenses.

Moving to Slide 7. During Q2, our focus remained our preservation of liquidity and strict cash deployment. Cash flow from operations for the quarter was $9.7 million, representing a solid 93% conversion into cash of our adjusted EBITDA of $10.4 million for the quarter. We ended the quarter with liquidity of $62.6 million, net debt of $156.7 million and 3.4 times in net debt-to-LTM adjusted EBITDA. Year-to-date, we've generated $17.6 million in cash flow from operations and continue to expect to deliver positive operating cash flow for the year.

We remain committed to strict cost discipline to preserve cash. The cost and cash actions we have taken and our resilient business model positions us to maintain EBITDA profitability and positive cash flow for 2020, ensuring we have liquidity to support continued investments and strategic growth initiatives. To conclude, our team executed successfully during Q2 given the unprecedented environment. We are very encouraged by the positive trends in the housing sector during the second half of 2020 and are well positioned to capitalize on the coming opportunities.

With that, I would like to pass it back to Bill for his concluding thoughts.

Bill Varner -- Chief Executive Officer

Thank you, Nadeem. Before opening the line for questions, I want to thank you all for calling in today. I am proud of our employees' efforts during Q2 in driving strong execution during an incredibly difficult time. While uncertainty remains for the second half of the year, we are seeing strong indications of improving demand in both the short and medium term. Considering these positive market signals, we see an opportunity for improving results as market activity picks up. During the second half of the year, we will look to complete the integration of acquired businesses and begin to realize synergies between the RDS and ASG, and we'll continue to execute on the strategic initiatives, including Momentum Design with RDS and planned product launches in the ASG segment.

Looking past 2020, I am most excited about when SIC will accomplish in driving shareholder value through the various initiatives and the work streams I have mentioned earlier. Over time, I'm confident in our ability to bring about positive change combined with improved results. With that, I'd like to open up the Q&A session. David?

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Alex Rygiel with B Riley.

Alex Rygiel -- B. Riley -- Analyst

Good morning Bill and Nadeem.

Bill Varner -- Chief Executive Officer

Good morning Alex.

Alex Rygiel -- B. Riley -- Analyst

Bill, I just want to welcome you to the conference call and to select and wish you the best of luck. In your opening remarks, you mentioned you're more excited today than the day before you started. Anything in particular that kind of stands out that makes you more excited today?

Bill Varner -- Chief Executive Officer

Yes, I would say the growth prospects for both businesses are much higher than what I had anticipated in my early evaluations of the business.

Alex Rygiel -- B. Riley -- Analyst

And are those growth prospects -- are they organic growth prospects or are they acquisitive growth prospects?

Bill Varner -- Chief Executive Officer

No Alex, both. I think, organically. there is significant room to grow. Both with the locations we currently have as well as opening up new facilities organically in key markets in that demographic smile that I mentioned. But in addition to that, there are other opportunities for us to grow in what I would call the white space that we have in that demographic smile through acquisition to accelerate growth.

Alex Rygiel -- B. Riley -- Analyst

And understanding that in your first 60 days, you probably spent an enormous amount of time focusing internally on the people and the business itself, but have you had an opportunity to talk to some of the customers, and what are the customers saying today about the macro environment?

Bill Varner -- Chief Executive Officer

Yes, quite frankly due to pandemic situation, it's been very difficult for me to communicate directly with customers. So, what I've attempted to do is to stay as connected as -- I'm sure most people here on the phone are leading as much as I can and maintaining the pulse of what's going on in the marketplace combined we're talking with the thought leaders within our own business continue to determine what they are saying directly in their day-to-day communications.

Alex Rygiel -- B. Riley -- Analyst

And lastly, your playbook sounds very exciting. I suspect the Board of Directors is on board with that as well. But, any thoughts on sort of the Board of Directors sort of priorities or do they seem to fall in line with yours as well.

Bill Varner -- Chief Executive Officer

No, I think they're, I think they're clearly in line. I had a extensive call with them most recently to share with them my first 60 days and I found the Board to be incredibly supportive and excited, quite frankly, about the prospects for the company and combined with the new people that we're bringing into the business and the changes that we will be effecting.

Alex Rygiel -- B. Riley -- Analyst

Very helpful. Maybe can you remind us how your business lags building permits and construction starts and how we should incorporate that lag into our modeling for third quarter and fourth quarter?

Nadeem Moiz -- Chief Financial Officer

Sure, Alex. As you know, in particular on building starts and permits, that really starts impacting the RDS business because that's really where the single-family focus is. And as you know, we're in the back end of the construction cycle. So typically, we're getting in month five of a six month build cycle. As we've seen housing starts and permit activity tick up in May, June, we would expect to see that coming in the four to five months out from that. That's typically the lag that we see. The second data point I would share with you is what we have seen as orders have gone up, we've seen our traffic go up and we've seen that pretty much in line with the magnitude that we'd seen on permitting an order activity. So those are all very positive trends for us.

Alex Rygiel -- B. Riley -- Analyst

Very helpful. And then as it relates to Momentum Design, are there any data points you could provide to us that could indicate the early successes, I don't know if it's number of customers or number of homes worked on or geographies that you rolled this out in but random data points you can provide to us about Momentum?

Nadeem Moiz -- Chief Financial Officer

We absolutely look -- it's the customer -- number of customers has definitely expanded where it's very targeted launch at this point. We started with a soft launch late last year, very successful. We're in discussions with some very names that you would know, we are in month five and six and some of the other customers that have already launched this. It's just the possibilities are really quite significant in our ability to capitalize on a fully integrated back-end model, which is seamlessly integrated to online portals of builders and as you know end consumers are getting more and more accustomed to buying online, including homes and the builders are pushing their traffic toward the online portals in light of the current pandemic.

So this is a great, great, great solution for us and the way we think about this is vis-a-vis by our competitive set. And as you know, it's a fairly fragmented market that have not made been less in technology, have not tested this, we believe that this is going to be a huge opportunity for us to continue growing faster than the market growth rate, and be quite successful and being, having a very sticky sort of the business, which is other aspect of this. Once you are fully integrated into our back-end, it's really difficult to displace this. So we're thinking of this as a strategic technology game changer for us. And we haven't really seen much out in the market within the competitive set.

Alex Rygiel -- B. Riley -- Analyst

Thank you, Nadeem and welcome aboard Bill.

Bill Varner -- Chief Executive Officer

Thank you again.

Operator

[Operator Instructions] And next we're going to go to at Keith Hughes with SunTrust [Phonetic].

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. two questions, first, a big question, -- big picture question for Bill, you had discussed a lot of back-office infrastructure work totally to get that my question more is on the integration between the two segments, specifically, what kind of synergies, can you pull, what areas, what would these businesses and look like a couple of years down the road, if this is successful?

Bill Varner -- Chief Executive Officer

Yes, Keith, I think I would say it more simply, there is a significant amount of duplication between the two businesses in, mostly in the area of administrated capacities. You're kind of part and parcel and understood what we did at USI in that regard. We've had a very similar situation and what we will do over time is we will take away what I would call all the distractions from the operating entities, and focus them on selling and executing on what they sell and we will handle the what I would call the administrative back office components of that at corporate.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And second question, a little more near-term how is July been, have you seen business and substantially improve. If you could, in contrast that with how June went for both segments?

Bill Varner -- Chief Executive Officer

Yes, absolutely, Keith. We very encouraged by July trend pretty much in line with the growth that we've seen from May to June and certainly the incline from May to June was higher, but definitely it continues to pick up the activity in both segments continues to pick up. The concerns -- there are few concerns in certain regions as COVID cases had increased in the last two to three weeks or so in Texas and Florida and California is that we've all been reading about that, So there's obviously concerns of sales lingering in certain states but generally, we are very encouraged in the trends -- in the positive trends in the month of July coming from June.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Nadeem Moiz -- Chief Financial Officer

Bill Varner -- Chief Executive Officer

Alex Rygiel -- B. Riley -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

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