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Select Interior Concepts, Inc (SIC)
Q3Â 2020 Earnings Call
Nov 5, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, everyone, and welcome to the Select Interior Concepts' Third Quarter 2020 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Mr. Nadeem Moiz. Please go ahead, sir.
Nadeem Moiz -- Chief Financial Officer
Thank you, operator. Good morning, everyone, and welcome to our third quarter 2020 financial results conference call. 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. 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 on this slide. In addition, we'll be discussing or providing certain non-GAAP financial measures today, including EBITDA, adjusted EBITDA and adjusted EBITA 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 our CEO, Bill.
Bill Varner -- Chief Executive Officer
Thanks, Nadeem, and thank you, everyone, for joining our call this morning. I'll start with an overview of our third quarter highlights on slide three of the presentation. As detailed in this morning's press release, we generated $150 million of revenue and $14 million of adjusted EBITDA in the third quarter, demonstrating strong sequential improvement over Q2 as we continue to see the housing and construction market getting strength. Cash flow from operations was $2.4 million for the third quarter, and $19.9 million year-to-date, reflecting the conversion rate of over 65% year-to-date. I'm happy with this performance, but we have much more to achieve in the coming months. We are just in the early innings of what we plan to accomplish. Turning to slide four. When we spoke for the first time in early August I talked about the many compelling opportunities I saw at SIC and the steps I'd identified since joining the company to begin creating a solid foundation for long-term value creation. I described my playbook as a 3-legged stool. The first leg focusing on generating accelerated organic revenue and growth earnings. The second on enhancing the SIC's existing capital structure so we have additional revenues for long-term organic and inorganic growth. Excuse me, additional avenues for long-term organic and inorganic growth. And the third, on formulating a long-term growth strategy that combines buy-and-build tactics to develop our footprint in key markets with strong demographics. During the past quarter, we quickly began moving forward to create the first leg of the stool with an operational transformation plan. These are the steps I'll focus on in our call today. To augment our corporate infrastructure and enhance with services we offer our business units, we appointed a new Human Resource leader, Deme Christian, in mid-August and SIC's first Chief Technology Officer, Satish Kalala, and mid-September.
Both bring outstanding capabilities and experience that will be critical to SIC's success. I also continued visiting our locations so that I could do a deeper dive into RDS and ASG, their value propositions, branding and market positions among other attributes. The visitations including underperforming as well as performing locations. In the process I gathered excellent ideas and feedback from many employees. The visits confirmed my original assessment of SIC's promise and the actions we need to take to realize its potential. With that information gathering completed, we've begun implementing a program that will bring SIC together as a single efficient organization rather than different businesses that operate very independently from each other. In the process of creating cohesion and commonality, we intend to make the business more customer-focused and to increase employee engagement and shareholder value. To accomplish these goals, our leadership team has implemented four work streams, and where appropriate we have brought in domain experts to accelerate the process. Our first initiative focuses on organizational design and productivity enhancement, particularly in our RDS cycle. We have had teams examining every detail of our operations to determine how we can make them more effective while leveraging the capabilities of acquired companies. For example, we've looked at our warehouse and fabrication operations, delved into workflow and begun assessing our labor, leasing and bidding practices. In addition, we aim to identify best practices and ideas across our locations, crafting them into common methods that all of our offices can use to optimize process and enhance employee productivity. Our second initiative focuses on strategic sourcing and logistics across the company. We are closely examining opportunities such as optimizing minimum purchase levels, preference pricing and terms, and making sure that supply and sales are properly connected.
In the process, we plan to eliminate operational inefficiencies that were inherent as SIC's different businesses were acquired. Additionally, we are balancing imports with local sourcing to de-risk the company from tariffs and supply chain risks. Our third initiative, a review of health benefits and insurance programs will bring SIC's compensation and benefit programs into alignment to ensure that we are market-driven and focused on recruiting and retention while rewarding success. This team will also look for savings opportunities from evaluating our overall insurance programs such as property and casualty, which in some cases have been handled separately by our different offices. Our fourth initiative is facilities utilization and rationalization, including design showrooms, fabrication shops and warehouses. SIC has over 50 facilities, some of which are near each other. We plan to make sure our footprint is as efficient as possible and that our workforce is assigned to the best possible set of locations so they can maximize their sales and effectiveness. We have identified multiple actionable opportunities across these work streams. Some are short-term in nature, and we expect to begin enacting operational improvements in Q4. We have identified an overall annualized earnings target opportunity in the range of $8 million to $10 million, which represents a recurring structural improvement in our future earnings. Our goal is to achieve approximately 50% of this annualized target in calendar year 2021 and the remainder in 2022. We do plan to provide periodic updates of our progress on enacting these initiatives across the company. Regarding our leadership team, I have two updates for you that have developed since quarter's end. As mentioned in this morning's press release, we are pleased to announce that Nadeem Moiz has been appointed Chief Operating Officer in addition to his continuing role as Chief Financial Officer.
Nadeem's promotion recognizes his essential insight to improving the operating performance of our entire organization, the ongoing integration of acquisitions and the respect he commands throughout the company and Board of Directors. Congratulations, Nadeem. Kendall Hoyd, President of RDS will be leaving the company at year end. And I want to thank him for his many contributions to the organization. We are undertaking a search process to find the best possible person for this position. Now going back to our ongoing business. Please turn to slide five. I'm happy to report that we continue to gain traction with Momentum Design, RDS' proprietary online 3D rendering tool for selecting interior finishes. For those in our audience who are not familiar with Momentum Design, this unique technology seamlessly integrates builders' sales activities with our internal systems and reduces construction cycle time for the builders. It also allows home buyers to visualize, price out and select their interior finishes without visiting the physical design center. Most recently, we partnered with Woodside Homes, one of the nation's top 30 home builders, to offer Momentum Design at both of its new Heritage Crossing's and Cypress Ridge home developments in Phoenix. Early feedback from both the sales team and buyers has been very positive. We are seeing continued interest and enthusiasm from several leading home builders around Momentum Design. We're also making progress in our drive to generate organic growth through the introduction of high-value, high-margin home interior products at ASG. ASG's MetroQuartz brand, which provides the entry-level engineered stone launched six new color offerings that are generating solid traction.
Additional Pental brand product launches are planned for early 2021 as we get ready for the spring selling season. Before turning the call over to Nadeem to review our Q3 performance in detail, I'd like to spend a few moments on the way the housing market is shaping up for the remainder of 2020 and the coming year. Despite challenges in the overall economy, we are seeing very positive indicators, reflecting today's variable interest rate -- very favorable interest rates and households' interest in having more space among other factors. We're optimistic that the homebuilding and remodel spaces will remain robust and look forward to the lift this will provide to our industry. From SIC's perspective, the elimination of our company's operational inefficiencies, the creation of a complete and effective corporate service infrastructure and the addition of cohesion will help us capitalize on the favorable trends in residential construction and the new opportunities being created by the shift from brick-and-mortar showroom to hybrid brick-and-click sales strategies. I would also like to touch briefly on our efforts around inorganic growth to further drive shareholder value. As we execute our plans for operational improvement, driving shareholder value in the near term, we continue to explore opportunities to acquire businesses at accretive multiples and to enter new markets and services that align with our strategic objectives.
I'd like to turn the call over to Nadeem to discuss our third quarter financial results.
Nadeem Moiz -- Chief Financial Officer
Thank you, Bill. I'm excited about the continuing developments at SIC and look forward to leading in the additional expanded role. Starting on slide six. At $150.1 million, our sales for the period were down 6% compared to Q3 2019. Sales have recovered steadily since April, which are represented the trough for the year. As you may recall from our last conference call, sales in that month fell 25% year-over-year. RDS sales fell $6 million or approximately 6% to $91 million compared to last year. The decrease was largely due to a sales decline related to negative price/mix, partially offset by positive growth in volume, particularly in California and Arizona. ASG sales fell $3 million or approximately 5% to $60 million due to lower natural stone, quartz and tile sales volume, although these volume declines were partially offset by price/mix improvement for quartz. The lower sales volume was attributable to a variety of factors, including the closure of our small location in Charlotte and San Antonio and a decline in ASG commercial business in California, primarily due to COVID-19. Moving to slide seven. Year-over-year adjusted EBITDA at $14 million decreased by $3 million or 17% compared to last year's third quarter. Negative price/mix and lower volumes contributed $3.5 million to the decline on a net basis and was partially offset by $0.5 million decrease in operating expenses on a net basis. COVID-19-pandemic-related savings of approximately $5 million during the quarter positively benefited both cost of sales and operating expenses and are netted in the appropriate categories of the EBITDA bridge. On a year-to-date basis, these cost initiatives have generated over $12 million in savings. While some of these costs will return to the business as sales increase, we still expect these initiatives to provide an estimated cost benefit of $14 million to $16 million to our full year 2020 financial results as previously communicated. Turning to slide eight. During Q3 we maintained our focus on preservation of liquidity and strict cash deployment as sales increased.
Cash flow from operations for the quarter was $2.4 million and $19.9 million year-to-date, representing a solid 65% of our adjusted EBITDA for the same period. We ended the quarter with liquidity of $68 million, net debt of $155.8 million and 3.7 times in net debt to LTM adjusted EBITDA. We remain committed to strict cost discipline to preserve cash. The cost and cash actions we've taken, along with the transformative work streams and operations, which Bill discussed, will position us to grow EBITDA and generate cash flow, ensuring we have liquidity to support continued investments and strategic growth initiatives. With respect to the market, we're excited about positive developments in single-family new construction, which drives most of our business for RDS and portion of our business for ASG. Recent quarterly results reported by public homebuilders have shown increases in deliveries and new orders in our key geographies. All of the California market has been slow to recover. Industry forecast for total national 2020 housing activity have been revised upwards since lows in April, with continued growth expected in 2021. National activity levels for repair and remodel, which drives approximately half of our business in ASG, has remained stable with continued steady growth anticipated into 2021. To conclude, our team executed successfully during Q3 despite the uncertain environment. As Bill indicated, we are very encouraged by the positive trends in the housing sector and are taking a series of actions to capitalize on the opportunities we see.
With that, I will turn the call back to Bill for his concluding thoughts.
Bill Varner -- Chief Executive Officer
Thanks again for joining us today. As you've heard, we've implemented a series of initiatives to eliminate operational inefficiencies, create cohesion across the company and help realize SIC's full potential. We're happy with the progress we're starting to make, and we look forward to giving you a update early next year.
So operator, I think we're ready to open up for Q&A.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Alex Rygiel with B. Riley. Please go ahead.
Alex Rygiel -- B. Riley -- Analyst
Thank you. Good morning, Bill and Nadeem, very nice quarter.
Nadeem Moiz -- Chief Financial Officer
Good morning, Alex. Thank you.
Alex Rygiel -- B. Riley -- Analyst
You had positive volume growth in the RDS segment, which is fantastic, but price/mix was unfavorable. Based upon your backlog today, when might we see price/mix turn positive? And then kind of expanding upon that a little bit. What's your view on volume growth heading into 2021 based upon on all that real strong order flow in trends by your customers over the last three or four months?
Nadeem Moiz -- Chief Financial Officer
Alex, this is Nadeem. I'll take that question. The first part of the question is price/mix and trends related to price/mix. As you've seen the homebuilders show their ASPs, categorically, all the homebuilders are really down on ASPs, in particular in the West Coast. So we -- our price/mix is a reflection of that. We're obviously, we're focused on is increasing the value to the homebuilder through things like Momentum Design and continue to focus on operational cost efficiencies, their work streams we highlighted. But the price/mix pressure that we're seeing in home building, we expect that to continue into 2021 for sure. Certainly, for us at a less exacerbated rate given our premium homes we were focused on in California in the last couple of years. However, the trend will continue. The second part of the question is around volumes and growth rate. We're very encouraged with the volumes. And as you know, our volumes come in four to six months after the permits and the starts begin, just given where we are in the cycle. And so, I would say that's pretty much in line with the markets that we're in, in terms of national averages. California is a little bit slower to recover, but we're positively encouraged on the market growth for 2021.
Alex Rygiel -- B. Riley -- Analyst
And then turning over to the ASG business, sort of the same question. You had negative volume in the quarter. When might we see the volume with the ASG business sort of inflect to positive?
Nadeem Moiz -- Chief Financial Officer
Yes. So, Q3 was -- had a number of things like I highlighted. We did have two locations, really small locations that were underperforming. So, that's part of the adjustment in Q3. And then, there was some commercial business in California in the ASG segment that relate to COVID that went -- was lower this year than last year. And then, 3rd part of it is last year's 3rd quarter we had a very strong performance in certain locations in the middle of the country and the West Coast, in particular in the commercial sector. So we're very positively encouraged with ASG volumes as we look forward. Half of the business is repair and remodel, and the projections for repair and remodel are anywhere from 2% to 3% depending on what economic indicator you're looking at. So, we're -- as we sort of make our way out of a pretty hefty comp in 3rd quarter last year into 4th quarter and then look forward, we're very positively encouraged in sort of that low single-digit growth on repair and remodel.
Alex Rygiel -- B. Riley -- Analyst
And then, within your facility utilization or rationalization efforts, is there an opportunity to sell certain real estate assets and/or maybe consider sale leaseback to raise some cash that could then be redeployed into your core business or future M&A?
Nadeem Moiz -- Chief Financial Officer
Yes. Look, great question. So, we don't own any assets. So, it would have been great avenue if we had some actual ownership. What we're really focused there, to give a little bit more color, is improved utilization in the fab shops. We're looking at improved utilization in the warehouses and consolidation of warehouses where it makes sense, and investing in some material handling equipment in the right facilities to improve the throughput and the velocity in the distribution centers. So, that's where the focus is. On the RDS side and in particular in the design centers, the focus is going to be -- we're perpetually evaluating in the shift to click, click and brick sort of the momentum. And so we're looking at the design centers, what centers makes sense. And so, we'll expect to see a little bit more come forward on that as we make our way into 2021.
Alex Rygiel -- B. Riley -- Analyst
Thank you.
Nadeem Moiz -- Chief Financial Officer
Okay. Thank you.
Operator
Our next question comes from Keith Hughes with Truist Securities. Please go ahead.
Keith Hughes -- Truist Securities -- Analyst
Hello, thank you. Couple of questions. Let's start with ASG, some excellent margins and gross profit growth despite the revenue decline. Can you talk about what's going on there in terms of pricing and mix within your business? And, what do you think that will look like here going into the fourth and early part of next year?
Nadeem Moiz -- Chief Financial Officer
Yes. Keith, great, great question. We're very happy with the margin performance of ASG. In Q3 the team did an outstanding job there. They are very focused in going into 2021, new introduction of colors on our Pental brand, which is our Premium Quartz brand. We've implemented price increases that went into effect in -- really in 4th quarter, early 4th quarter. We'll start to see benefit of that going into 2021. We relaunched the MetroQuartz, which is an entry-level quartz which fits really well with builder programs and sort of the lower ASPs, if you will, with respect to homebuilders. So, that's really well with -- the team has done a great job in redoing that supply chain leading up to 2020. And so we expect price/mix to positively trend in that business given the, all actions the team has taken.
Keith Hughes -- Truist Securities -- Analyst
Okay. So, you discussed a lot of quartz. Is that primarily where the pricing is coming?
Nadeem Moiz -- Chief Financial Officer
Yes, that's -- we're focused on natural stone as well. The natural stone is a little bit of a different animal given that it varies by type of natural stone, marble versus granite and those kinds of things. So, it's a little bit more complicated analysis there. We do expect some pricing on the natural stone as well. But certainly, the bigger opportunities on the quartz side. And quite frankly, that's where majority of our sales are today in ASGs on the quartz side on the engineered stone side. And quite frankly, the growth in the builder segment and in the homes is really shifting increasingly, as you know, over the last five years toward engineered stone.
Keith Hughes -- Truist Securities -- Analyst
Okay. Is the pricing driven by just supply demand aspects? Or is this the impacts of the tariff that's coming out of China? It's been in place for a while now. China is basically shut off, but what [Indecipherable].
Nadeem Moiz -- Chief Financial Officer
Yes. Well great question on the tariff. From our perspective in the portfolio we're dealing with, we're beyond that. This is really around quality of the product, the service and having the inventory and having the relationships with our end customer, both on the builder side and the fabrication and dealers' network that we operate in. And, that has allowed us to command that pricing. And, the demand aspects of the business have continued to be fairly strong. So that helps the environment as well.
Keith Hughes -- Truist Securities -- Analyst
Okay. And final question, you talked about in the introduction about looking to do more domestic sourcing. I assume that's in ASG, is that correct? And what type of product?
Nadeem Moiz -- Chief Financial Officer
Yes. That's absolutely correct. For ASG, it will be more on engineered stone. As we look at international supply chain, it's fairly fragmented. And you have considerable risk with respect to tariffs, supply chain, work stoppages at ports, those kinds of things. And, as we continue to evaluate high-quality products to maintain the service level and the margins that we are shooting for, there's opportunity to get some local sourcing which de-risks the supply chain aspect and the tariff aspect of the business. And we'll be -- continue to evaluate the domestic supply which has continued to grow over the last couple of years on the engineered stone side.
Keith Hughes -- Truist Securities -- Analyst
And one other thing on the...
[Speech Overlap]
Nadeem Moiz -- Chief Financial Officer
Go ahead, sorry.
Keith Hughes -- Truist Securities -- Analyst
Yes. The one other thing on the domestic sourcing, just kind of switching over to RDS, are you looking to do more of your LVT domestically as well? Will that remain heavily imported?
Nadeem Moiz -- Chief Financial Officer
Yes. So it's merely domestic today on the LVT side. And as you know, on the RDS side, a significant portion of that is builder-specified for us. So -- and that's predominantly domestic. There's some international that we do there, but it's merely domestic already today. So we feel fairly good about the risk element on that where we really want to make sure that we're de-risking the company on the ASG side with respect to international supply.
Keith Hughes -- Truist Securities -- Analyst
Okay. Thank you very much.
Nadeem Moiz -- Chief Financial Officer
Right. Thank you very much.
Bill Varner -- Chief Executive Officer
Operator, is there any other question?
Operator
I was just going to say there's nobody left in the queue. So if you would like to give any further closing remarks, I'll turn it over to you, Bill.
Bill Varner -- Chief Executive Officer
Thank you. Once again, I just want to thank everyone for their time. And we look forward to future communications with you. [Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Nadeem Moiz -- Chief Financial Officer
Bill Varner -- Chief Executive Officer
Alex Rygiel -- B. Riley -- Analyst
Keith Hughes -- Truist Securities -- Analyst
