Select Interior Concepts, Inc.

Thank you, operator. Good morning, everyone and welcome to our fourth quarter 2020 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 detail in the 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 fourth quarter and full year performance.

After that, I will turn to the meat of today’s call, a discussion of our plans and our outlook for 2021. As detailed in this morning’s release for Q4, we reported net sales of $144 million and adjusted EBITDA of $11 million.

This reflects a seasonally slower period, particularly for repair and remodel on the architectural surfaces side, consistent with past quarterly cadences. For the full year, we reported net sales of $554 million and adjusted EBITDA of $40.2 million.

Given the very difficult circumstances we faced in 2020 with the pandemic and the fact that people were hesitant to let contractors into their homes, the company performed well. I particularly want to give a shout out to SIC’s employees for their hard work and commitment during a tough year.

Their dedication helped us greatly exceed the internal forecast for 2020 that was reset last summer as the pandemic took hold. As many of you know, when I joined SIC in June of last year, I saw a company that had excellent business prospects and many talented employees, but it was not living up to its potential.

My first goal was to implement an operational transformation plan. On our Q3 call in November, I laid out a series of steps designed to bring SIC together as a single, efficient organization realizing substantial cost savings in the process.

As of year end, all of those initiatives were underway not just being explored, but actually being implemented. Over the last several months, we have made great strides in sourcing and logistics.

We are in the process of harmonizing our benefits and insurance programs, and we are continuing work on maximizing organizational design and facilities rationalization. The business is on track to deliver the $4 million to $5 million in structural cost savings for 2021 and to reach the remainder of our annualized earnings improvement target of $8 million to $10 million run-rate in 2022.

With 2020 in the rearview mirror, let’s turn to Slide 4. I want to share with you why I am excited about our growth prospects for 2021 and our opportunity to participate in the upside we are seeing in the homebuilding market.

While COVID continues to impact the contractor-supported repair and remodel market and thus our ASG business, we are seeing encouraging signs of increased homeowner comfort with contractors working in their homes for extended periods of time. We expect increased vaccine availability, combined with strong housing fundamentals to accelerate demand for our products throughout the year.

To fully leverage the encouraging trends in the homebuilding and enhance shareholder value, we have a wide array of growth initiatives underway for 2021. Let me first speak to RDS.

As planned, Kendall Hoyd, formerly President of RDS, left the company in early January. We embarked on an aggressive search to find the best possible person to fill that position and we were pleased to announce 2 weeks ago that Karl Adrian had joined the group as President of RDS.

Karl brings a strong background of both commercial and operational expertise that will help move RDS to greater heights. Just last week, we announced an expansion into Boise, Idaho, one of the country’s faster-growing areas.

We are making this move in partnership with one of our key builders, Woodbridge Pacific Group. RDS has worked closely with Woodbridge for over two decades as it built high-quality homes in very desirable areas of Southern California.

So, it’s especially exciting to extend our partnership into a new region. RDS will provide design installation services for multiple communities.

Construction is scheduled to take place in several phases starting in mid-2021. We have also had preliminary conversations with other customers who have entered the market, and we are very excited about this opportunity.

We are working to sell more products through our existing locations, utilizing existing domain knowledge and in-house expertise. This evolution transforms a traditional flooring location into a cabinet and flooring business, for example.

While still in the beta phase, we continue to develop Momentum Design to make it an even more robust visual and business tool, both for our customers and for SIC. Our pilot has expanded to 5 communities and has received positive feedback.

On the ASG side, we are expanding our geographic presence with plans to move into Florida in 2021. Entry into this fast-growing market will help develop our footprint in a key geography with strong demographics.

Additionally, we are expanding our sales team into 6 promising territories as a steppingstone to future Greenfield locations. We recently launched a builder sales initiative.

This effort will target mostly larger and midsized production builders who have not been on ASG’s radar screen in the past and represents a whole new sales channel for the business. In terms of our product offering, we are emphasizing our new palette of MetroQuartz and Pental products for the spring selling season.

With this refocused brand launch, we have been experiencing a positive impact on mix and margin since launching. When I first came to SIC, I said I wouldn’t pursue acquisitions right out of the gate.

My top priority was to bring the company together as a single, efficient organization and build a solid foundation for growth. As we are now well down the path of integrating businesses and leveraging synergies, we are beginning to explore additional opportunities to enhance our growth.

We all know scale matters, and it can drive value and thoughtful acquisitions will play an important role over time in augmenting our drive for growth. In summary, we are making good progress in improving SIC’s operational effectiveness, have our new leadership team fully in place and are in the process of implementing many growth initiatives for 2021.

Given the transformation of our company that is underway, industry tailwinds and our enthusiasm about our prospects for growth, we believe this is an appropriate time to start the practice of providing guidance to the investment community. As such, the company is estimating adjusted EBITDA to be in the range of $54 million to $58 million in 2021.

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 $144.2 million, our sales for the quarter were down $11 million or 7% year-over-year compared to Q4 2019.

RDS sales decreased $9.5 million or close to 10%, coming in at $89 million for the quarter. The decrease was primarily due to unfavorable price/mix and discontinuation of two ancillary product lines, which contributed approximately $2.5 million of the decline.

This decline was partially offset by growth in sales volume. We were encouraged to see year-over-year volume growth in just all our geographic regions during the quarter.

Price mix was negative in most of our regions during the quarter as the business experience continuing shift towards entry-level homes and option packages. For the quarter, ASG sales at $56 million were lower by $2 million or approximately 3%.

Year-over-year volume was down primarily due to end customers that remain apprehensive to large home renovation projects. Offsetting the volume decline was strong positive price/mix.

This is a result of new products and colors launched in quartz and natural stone. In addition, we implemented price increases in second half of 2020 on certain products.

As such, price/mix across all product categories was higher on a year-over-year basis in the fourth quarter. Moving now to Slide 6, adjusted EBITDA was $11.2 million, a decrease of $2.5 million or 18% year-over-year compared to fourth quarter last year.

Negative price/mix and lower volumes contributed $3.5 million to the decline on a net basis and was partially offset by a $1 million decrease in SG&A. During the quarter, RDS margins were negatively impacted by price/mix headwinds from an ongoing mix shift to entry-level homes, although this trend was partially offset by higher volumes.

ASG experienced positive price/mix, partially offset by negative volume. Now, commentary on a full year basis, full year revenue of 2020 was $554 million, down $56 million or 9% on a year-over-year basis.

RDS sales declined approximately 10% year-over-year. This was driven primarily by lower price/mix.

ASG sales declined 9% year-over-year, driven by lower volume, which was partially offset by better price/mix. Adjusted EBITDA was $40 million, down from $60 million in the prior year as the company experienced negative impacts from COVID-related disruptions and price/mix in RDS markets.

SG&A cost savings initiatives across our operating footprint offset declines by $8.5 million on a net basis. Now, turning to Slide 7, let’s take a look at cash flow from operations and liquidity.

During 2020, we continued to execute on a wide range of actions to preserve liquidity and reduce costs in direct response to COVID. For Q4, operating cash flow was $0.7 million compared to $10.6 million last year.

For the full year, cash flow was $20.6 million. We ended the quarter with liquidity of $70.4 million, net debt of approximately $157 million and 3.9x in net debt to adjusted EBITDA.

Further, we’ve increased financial flexibility by negotiating our leverage covenant to 4x net debt to pro forma adjusted EBITDA effective March 2021 till maturity of our term loan. For 2021, as we switch to growth mode, we will continue our judicious management of working capital and capital allocation for strategic growth initiatives.

Moving to Slide 8 for the outlook, our outlook for 2021 is based on a macro framework of high single-digits growth in single family starts, which is consistent with various industry forecasts. We see our business improving through the year as a robust order growth from the latter part of 2020 translates into increasing sales and industry expectations of supply chain bottlenecks subside.

We do expect a continued shift in the market to entry-level homes and lower ASPs, which could result in negative price/mix for the RDS business. As it relates to ASG, we expect large interior repair and remodel projects to grow at a healthy double-digit rate as homeowners are now more willing to allow contractors into their homes.

We are seeing these early signs in consumer trends across our ASG branches. Additionally, we are excited about new markets in 2021.

As you may have seen, we announced our entry into the Boise, Idaho market last week and have plans to add an ASG Greenfield 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 initiatives that we launched last year. Taken together, the combination of positive industry indicators supporting our growth, new initiatives to drive incremental 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.

In closing, I would like to thank the entire SIC team for performing well in a difficult year with COVID-related challenges during 2020. I’m very excited about our growth prospects, many initiatives that are underway and the energized management team that will be leading our business in 2021 and beyond.

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

Thanks again for joining us this morning. Based on both the favorable macro trends, macro environment and SIC’s many growth and operational improvement plans, we believe we have a very promising year in front of us.

We look forward to updating you on our results in future calls. With that, we’ll turn it over to the operator for Q&A.

Thank you. A couple of questions.

First, you’ve given us EBITDA range for the year. Can you give us some sort of feel on revenue, particularly the pace of revenue as you progress through the year?

And first quarter, will you be up year-over-year in revenue?

Yes. Hey, Keith, this is…

We can’t hear you.

This is Nadeem. It’s very difficult to hear you.

It’s muted.

I’m sorry, is that better?

Much better.

Much better. Thank you.

Okay. So, let me ask the question again.

So can you give me any sort of feel on pacing of revenue growth for the year, particularly given this delay in the homebuilders? And specifically, will you be up year-over-year in the first quarter in revenue?

Yes. Thanks for the question, Keith.

Yes, certainly, what we are experiencing is delays on the builder side. So, in the first quarter for RDS, we would expect to be sort of in line with last year in terms of revenue ramp up.

And then ASG, probably a little bit faster on a year-over-year basis in revenue. Obviously, we expect a much higher margin flow-through in Q1 this year vis-à-vis last year.

Okay. And will that revenue ramp in RDS as the year progresses?

Absolutely. So, first quarter is typically the weakest quarter for RDS, just given the billing cycle, and it ramps into Q2 with Q3 being the peak and then starts tailing off in Q4 as builders start closing out work orders for RDS.

And a question on ASG, you had talked in the release about lower sales volume from the COVID delays in the West Coast. Where does that stand now in March, have those started to lighten up yet?

Yes. We are seeing things improve clearly.

Consumers are more comfortable with contractors coming into their homes, and as we participate in what I would call the heavier R&R market, it does require outside installers to more often times than not enter residences of the purchaser, and that is improving considerably as we sit here today.

Okay. And I guess finally, on imports on – particularly on quartz.

We’ve seen some of the import numbers actually turn around after some of this tariff action. Are you having any availability issues in ASG on products at this point, whether it’s countertops or backsplashes or things of that nature?

We actually are not having any negative impact. In fact, I think the business worked diligently in 2019 to fix any repercussions from potential tariffs, and so we feel very comfortable with where we are.

We have a broad range of sourcing opportunities. So, we feel good about our position as we sit here today.

Okay, thank you.

Thanks, Keith.

Thank you. Good morning, Bill and Nadeem.

Good morning, Alex.

Good morning, Alex.

Quick questions here. First, coming back to the commentary about 1Q, a lot of your comments seem to kind of be around RDS.

I suspect the ASG business had some negative impact from weather in the first quarter. Can you help us to sort of better understand that impact?

Yes, absolutely. So, February was where we experienced some weather, in particular in Texas, Portland, Seattle, in the middle of the country where branches were just shut down for at least a week.

So, we would expect probably in that $2.5 million to $3 million sales impact in the first quarter in the ASG business.

That is helpful. And then it would appear that you’re going to probably start to inflect higher EBITDA in the first quarter, and then start to see kind of that same sort of inflection point for positive revenue in the first half of the year.

Do those assumptions sound fair?

Yes, absolutely. That’s exactly right.

So the way – as you’ve seen in our business, first quarter is usually our weakest quarter given the belt [ph] cycle heavily – that heavily impacts RDS and ASG is just starting to ramp up. And so, from an overall year basis, that’s going to be our lowest earnings quarter.

And then as you get into Q2, spring selling season on the house side and then RDS is ramping up, ASG is ramping up as well. That’s our – probably the second-best quarter, and then our best biggest quarter is usually the third quarter and then starts tailing off into fourth quarter with seasonal holidays, in particular impacting the repair and remodel work on the ASG side.

And Bill, it sounds like some of your long-term growth initiatives are starting to take hold with expansion of the sales team, new Greenfields markets. How should we think about some of these long-term organic growth initiatives adding to annualized revenue growth?

Is this something that we should think about maybe in 2021, these actions could add sort of 1% to 3% of organic revenue growth layered on top of sort of macro market growth?

Yes, I would clearly say the Boise marketplace we know we are moving in there right now. And as mentioned in my comments, on the ASG side, we are moving into Florida in the latter half of the year.

I would expect real revenue ramp-up on both of those to take place late in Q4 and into 2022 with significant expansion beyond. Additionally, I certainly wouldn’t underestimate our efforts, particularly on the ASG side and moving into several new markets.

We’re really excited about that, and we see these particular efforts as an ongoing opportunity to continue to Greenfield new locations, something that the business has a great deal of experience with.

That’s great. And then your price/mix had a little bit of a headwind, understanding the shift to entry-level homes.

Can you talk about how this is sort of benefiting your Momentum Design business, it sounds like the pilots now expanded to five communities. How should we think about that pilot expansion growing even further in 2021?

Yes, that’s a great question, Alex. Look, the whole purpose of developing Momentum Design about 1.5 years ago was to give a product to the builders in light of shift to lower and entry point homes.

And the momentum designed today is in five communities, it’s on a run rate to do about 800 homes so that’s going to be very good for builders and end consumers. And what it’s allowing end users and homebuyers to do is pick a set up options and packages with much more flexibility and choices that otherwise would not be available in your sort of traditional option package setting that the builders are offering.

So we think this allows us to option upgrade in a virtual setting. And counteract the negative price/mix that the builders are experiencing on the ASPS.

So we think this is going to be a great tool plus. You get the convenience of virtual shopping, which, as you know, is a growing trend in the homebuilding space.

One last question, Bill, you have added and changed a lot of senior executives inside the company, can you update us on sort of where we stand on sort of those adjustments? Is your team at fully in place now?

Any comments are helpful?

Yes. Thank you for the question.

I’ll go directly to the punch line. The team is in place.

As you can see, the efforts that have been undertaken by Patrick Dustinger since taking over the ASG business, which had been void of leadership for some 6 months before his joining the company, have been really significant. And you can see that if nothing else through all the initiatives that are underway.

But we’re also very excited about Karl. We approached and took a while and embarked upon a very thoughtful search to replace Kendall, and we’re very comfortable with Karl, his guidance.

He has been on the job now a couple of weeks and is traveling exhaustively getting up-to-date and already making decisions and driving the business forward. So I think we’re in a really good place to execute on our plan for this year and we are thrilled to get going.

Great. Thank you.

Thanks, Alex.