Select Interior Concepts, Inc.

Thank you, operator. Good morning, everyone and welcome to our first quarter 2021 financial results conference call.

Joining me on the call today is our Chief Executive Officer, Bill Varner. During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website.

I would like to remind everyone that any forward-looking statements contained in this presentation or commented on today are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially because of issues and unknowns that need to be considered in evaluating our financial outlook and operating performance.

Please see our recent SEC filings, which identify the principal risks and unknowns that could affect future performance. We assume no obligation to update publicly any forward-looking statements, specific conditions, issues and unknown factors that may represent forward-looking statements are noted in the detailed presentation.

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

I would now like to turn the call over to Bill.

Thanks, Nadeem and thank you everyone for joining our call this morning. I will start on Slide 3 with a quick overview of our first quarter performance.

As detailed in this morning’s release, we reported net sales of $138 million and adjusted EBITDA of approximately $9.7 million for the period. Through several initiatives I detailed in our recent year end earnings call, I am pleased to say that the year is off to a strong start in both the ASG and RDS segments of our business.

As we expected, both are performing to plan. We have been taking advantage of the opportunities in today’s active homebuilding market and the entire SIC team has been working hard to implement our growth plans, improve our company’s operational effectiveness and in the process, enhance shareholder value.

I will take just a few minutes to run through the business initiatives I outlined to you in mid-March as they continue to be the building blocks for further strong performance in the coming months. Starting on Slide 4 with ASG, we are moving ahead with our plans to expand our geographic presence in 2021 by entering the fast growing Florida market.

Over the last few weeks, we’ve identified and locked down a specific location and are currently recruiting and staffing for the market. We expect to begin generating revenue in 3Q.

Additionally, as I mentioned in March, we are in the process of expanding ASG sales team into 6 promising territories as a stepping stone to future greenfield locations. The builder sales initiative, I described, has been launched, targeting mostly larger and midsized production builders, who were not on ASG’s radar screen in the past.

They represent an entirely new sales channel for the business, and we expect the program to ramp in the second half of the year. In terms of ASG’s product offering, we are, of course, continuing to emphasize our new color palette of MetroQuartz and PentalQuartz products for the spring and summer selling season.

We have been realizing continued improvements in mix and margin with this refocused product launch. I also want to congratulate our team on managing global supply chain disruptions and cost inflation.

We are actively managing these challenges. However, industrial logistics remain extremely tight and global COVID outbreaks continue, even while we are seeing improvement here in the United States.

Turning now to RDS, Karl Adrian joined us as President in the first quarter and is already starting to make a positive impact. Considering the ongoing construction delays due to labor and market supply constraints, we saw 4.3% revenue growth in Q1 despite cycle time extensions.

As you may remember, RDS is at the tail end of the build cycle. To further accelerate organic growth, you will also recall in March that we announced an expansion into the rapidly growing Boise, Idaho area.

This move is in partnership with one of our key and long-standing builders, Woodbridge Pacific Group. RDS will provide design installation services for multiple communities and construction will take place in several phases starting in mid-2021.

We are planning to expand quickly with other customers, who have entered this emerging market. On the Momentum Design front, we have further advanced our development and support strategy to make Momentum Design an even more robust visual and business tool.

We continue to stay close to our pilot communities and have received very positive feedback. As you will recall, given the considerable progress we made last year in strengthening SIC, we began the practice of providing annual guidance in March.

For 2021, we estimated that adjusted EBITDA would be in the range of $54 million to $58 million. We are currently right on track to achieve those results and although supply chain disruptions and material inflation do present some potential headwinds for everyone in the industry, we feel very comfortable reaffirming that range today.

I will now turn the call over to Nadeem to provide more details on our financial results and guidance.

Thank you, Bill. Starting on Slide 5, at $137.8 million, our sales for the quarter were up $3.4 million or 2.5% year-over-year compared to Q1 2020.

Adjusted for planned product category exits, revenue increased 5% on a year-over-year basis. RDS sales at $80.4 million increased 1% year-over-year or 4.3% adjusted for product exits.

The increase was primarily due to positive volume growth in all regions, slightly offset by unfavorable price mix. ASG sales at $57.8 million increased approximately 4% year-over-year or up 6% adjusted for product exits.

We continue to see solid success with introduction of new products, new colors, launched in quartz and natural stone. As a result, year-over-year price mix continued to improve, but was partially offset by slightly lower volumes.

Moving now to Slide 6, Q1 2021 adjusted EBITDA for SIC was $9.6 million, an increase of $5 million or 111% compared to first quarter last year. ASG contributed nearly $3 million of the adjusted EBITDA increase as ASG continued to benefit from positive price mix.

RDS contributed slightly over $2 million on better volume and operating leverage. In addition, approximately $1 million from the various operational cost savings initiatives is reflected in the quarterly results of both segments.

Now, turning to Slide 7, let’s take a look at cash flow from operations and liquidity. We executed on a wide range of actions over the last year to preserve liquidity and reduce costs in direct response to COVID.

For Q1 2021, operating cash flow was $5.7 million compared to $7.8 million last year as working capital increased slightly on the better growth environment. We ended the quarter with liquidity of $79 million, net debt of approximately $153 million and 3.4x in net debt to adjusted EBITDA.

For 2021 as we switch to growth mode, we will continue our judicious management of working capital and capital allocation for strategic growth initiatives to maximize shareholder value. Moving to Slide 8 for the outlook, as expected, we are experiencing very positive momentum in both segments as we get ramped up in Q2.

For the full year 2021, our outlook remains unchanged. You may recall, our outlook is based on a macro framework of high single-digit growth in single family starts, which is consistent with various industry forecasts.

We see our business improving through the year as robust order growth from the latter part of 2020 translates into increasing sales and build-up of backlog. Industry expectations are for current supply chain bottlenecks to improve through the year.

We note that logistics and material inflation continues. We expect continued market shift to entry-level homes and lower ASPs.

Additionally, we expect large interior repair or remodel projects to grow at a healthy double-digit rate as homeowners are now more willing to allow contractors into their homes. Additionally, we are very excited about new markets in 2021.

As previously discussed, we announced our entry into the Boise, Idaho market for RDS and have plans to add ASG greenfield in Florida in the second half of this year. As 2021 will be a ramp up year, we expect both these organic growth initiatives to start contributing positive earnings in 2022.

On the cost side, as we previously highlighted, we expect to achieve $4 million to $5 million in structural savings in 2021 from our four key areas of operational initiatives that were launched late last year. Taken together, the combination of positive industry indicators supporting our growth, new initiatives to drive incremental organic growth and cost savings give us line of sight into our estimated adjusted EBITDA in the range of $54 million to $58 million for 2021.

And now, I will turn over the call to Bill for his closing remarks.

Thanks again for joining us this morning. As you have heard, we are forging ahead with our many plans to improve SIC’s business and in the process, shareholder value.

We believe we have a very promising year ahead and look forward to updating you into the future. And with that, we will turn the call over to the operator for Q&A.

Thank you. If you could talk about your business in April, is it starting – particularly in RDS, is it starting to accelerate as the home starts turn into completions?

And if you can particularly talk about it versus maybe, say, ‘19, because I know the ‘20 comps are pretty easy comparable with what’s gone on in April of last year.

Keith, good morning. This is Nadeem.

Yes. So we’re off to a very solid start in the second quarter, as I highlighted in my script.

April is going to be very positive for both the businesses, and we’ve seen sequential growth in both segments during the first 4 months here. And as you get into the comps for second quarter versus last year, certainly, those are going to be very attractive.

And then certainly, we will start to exceed the 2019 comps as well as we get into the year.

Okay. If you – if we look at ASG, when we’ve seen the positive price mix for several quarters now, of course, there is negative volume associated with that.

Do you foresee – is that going to flip and volume turn positive given some of your initiatives in the market as a whole?

Yes, absolutely. That is what we are planning, and that’s what we’re expecting, and that’s what we’re seeing in the market.

Okay. And what products are shifting you to the positive side within ASG?

Yes. So it’s predominantly around quartz.

And we highlighted the introduction of new colors, update of palettes. That is all starting to shift a lot of momentum towards our new categories and then to a lesser extent expansion into tile and builder program are all accretive incremental volumes for us.

Bill, would you like to add anything to it?

No. I would just add that those are all opportunities that have yet to be realized, but they are very close on the horizon.

Okay. Is the – we’ve seen quartz imports – countertop imports are coming back up now from some different locations.

Is that an opportunity for you? I know you import a lot of yours or just how does that affect your business, I guess is the question?

Well, we source mostly from – on a global basis. So we expect our quartz business to continue to grow with the market.

There is a trend more and more towards going towards quartz at not only the entry-level up to the mid-level homes and as you’re well aware, in the mid- to upper-level homes, they, say, move more towards natural stone, which has a very, very positive price mix for us.

Okay. Thank you.

Thanks you. Good morning gentlemen.

A very nice quarter.

Hey, good morning, Alex.

Good morning. A couple of quick questions here.

First, margins expanded nicely in the quarter. Over the next couple of years, how much upside do you see to gross profit margins?

Yes. So look, we’ve got quite a bit of structural initiatives underway, price mix positive momentum.

We’re – on the gross margin side, over the next couple of years, we expect to see 200 to 300 basis points expansion in our gross margin compared to what we’ve seen last year, 2020. So I’d like to think about it.

That’s sort of the baseline there. And you saw good progress in first quarter, and we will continue pushing that through, again, operating leverage, price mix enhancements and new product introduction that are higher margin.

And I’m assuming you expect margins to expand despite making some investments into new geographic expansion and new sales initiatives. In the short-term, can you talk about sort of what the margin headwind or cost headwind is associated with those new geographic expansions and how you’re absorbing them?

Yes. I would say on the ASG side, in particular, we’re facing headwinds in the area of logistics for the most part.

And as you know that the global access to containers and getting products on time is right now very much of a challenge and costs have increased quickly, but our team, as I mentioned in my script, has done an amazing job in containing that and managing that on the part of our business. So I think we’re – once again, we’re comfortable with our direction.

We don’t see it having a major impact at all on our expansion and growth opportunities, and we’re reiterating our guidance.

And then lastly, as Momentum Design gains traction, can you talk about the incremental margin on that business relative to your core business right now?

Yes. So Momentum Design is still in early days, Alex.

And like we mentioned, in five communities today, we do believe it’s going to deliver incremental margin sort of reflected in this 200 to 300 basis point expansion, I was talking about, sort of on an overall aggregate basis. It’s – what it’s trying to do is give you a visual virtual design selection opportunity.

So it will have some accretion on the margin vis-à-vis packages and things like that. But overall, what we’re trying to do is really take up the volume aspect of our business and get organic growth through online design selection through that opportunity.

And actually, one last question. Clearly, labor availability out there in the marketplace has been a challenge for a lot of other companies in the construction space.

Can you comment on your success at adding headcount?

Yes. So I would say kind of it’s in two categories.

When we think about direct labor for installation, such as on the RDS segment, it’s clearly a challenge. I mean there is clearly a war for competent labor out there.

And we attempt to use the very top skill labor available in the marketplace. To this point, we’ve been very successful.

We’ve maintained the crews that we’ve had for years and the relationships with outside installers. So we have not really experienced a lot of headwinds in that area.

As it relates to professionals and management employees, it’s tough. I mean it’s a very consolidated market.

COVID, I think, has created an environment where, certainly, people don’t want to relocate, they want to stay at home and so it has become more of a challenge, but we’re finding success. And part of what we’re doing on the ASG front is we’re going into their backyard, and therefore, being able to recruit accordingly.

Very helpful. Thank you.