ADEN Adentra Inc

Third quarter 2023 sales of US$558.7 million
Cash flow from operations of US$59.1 million
Quarterly dividend increased by 8% to C$0.14 per share

LANGLEY, BC, Nov. 8, 2023 /CNW/ - ADENTRA Inc. ("ADENTRA" or the "Company") today announced financial results for the three and nine months ended September 30, 2023. ADENTRA is one of North America's largest distributors of architectural building products to the residential, repair and remodel, and commercial construction markets. We currently operate a network of 85 facilities in the United States and Canada. All amounts are shown in United States dollars ("U.S. $" or "$"), unless otherwise noted.

Financial Highlights for Q3 2023

• Generated sales of $558.7 million (C$749.4 million)
• Achieved gross profit of $118.3 million, representing a gross margin percentage of 21.2%
• Excluding the one-time impact of trade case duties which were accrued in the quarter, operating expenses decreased $5.6 million, or 6.1%
• Net income of $8.1 million, or basic earnings per share of $0.36. Adjusted net income of $20.7 million, or Adjusted basic earnings per share of $0.93
• Adjusted EBITDA of $51.8 million (C$69.4 million)
• Generated cash flow from operating activities of $59.1 million (C$79.3 million). Reduced bank debt by $49.6 million
• Declared a dividend of C$0.14 per share, payable on January 26, 2024 to shareholders of record as of January 15, 2024

"As anticipated, sales for the third quarter were down 15% as we did not expect our Q3 results to keep pace with the record results generated during the exceptional conditions of fiscal 2022," said Rob Brown, ADENTRA's President and CEO. "The sales decrease was comprised of approximately two-thirds product price deflation and one-third lesser volumes as compared to the same period in the prior year. Despite these headwinds, our gross margin percentage of 21.2% was consistent with what we achieved in the third quarter last year, underscoring our disciplined operational execution."

"We also demonstrated the ability to tightly manage costs, with operating expenses (excluding the one-time impact of trade case duties accrued in the quarter) decreasing $5.6 million year-over-year in what has been a higher inflationary environment over the past twelve months. Our strong gross margin percentage and tight management of costs drove an Adjusted EBITDA margin of 9.3% for the quarter, our best performance since the third quarter of last year." 

"In the quarter we further demonstrated the business's ability to convert a high percentage of adjusted EBITDA into operating cash flow before changes in working capital, and to release working capital and generate additional cash flow in periods of reduced economic activity. Third quarter operating cash flow was $59.1 million, and this strong cash flow generation enabled us to further reduce bank debt by $49.6 million during the quarter, bringing to $181.5 million the total net debt reduction we have achieved in the first nine months of 2023. Our strong cash flow generation also supported the 8% dividend increase announced today, bringing our quarterly dividend to C$0.14 per share, or C$0.56 per share on an annualized basis."

"Looking forward, market headwinds are expected to persist in the near term but our business model and strategies are designed for success. Our performance in this period of reduced demand and product price deflation underscores the success of our strategies to grow and broaden our end-market participation, expand our channels to market, diversify and strengthen our product mix, and deepen our geographic coverage."

Outlook

The combined impact of recent inflation and interest rate hikes is expected to have a continued near-term negative effect on economic activity. This, in turn, is resulting in a moderation of demand for our products as compared to 2022, and could lead to a continuation of softer product pricing and volumes.

In the third quarter of 2023 our sales were down 15%, and we expect fourth quarter sales to be down similarly when compared to the same period in the prior year.

As we have demonstrated in previous business cycles and most recently through the first nine months of 2023, we are adept at managing our business and cash flows effectively in challenging market conditions. Our size and scale, together with the diversity in our product categories, customer channels and end-markets, provide important stability while reducing our exposure to any one geography or segment of the industry. Our strong balance sheet provides financial stability as we move through periods of changing market conditions, and our business model is expected to continue converting a high proportion of EBITDA to operating cash flows before changes in working capital. In addition, our investment in working capital typically decreases during periods of reduced activity, resulting in an additional source of cash.

Over the longer term our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock. We continue to see a multi-year runway for growth in the repair and remodel, residential, and commercial markets we participate in.

Q3 2023 Investor Call

ADENTRA will hold an investor call on Thursday November 9, 2023 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-888-664-6392 or (416) 764-8659 (GTA) at least five minutes before the call begins. A replay will be available through November 23, 2023 by calling toll free 1-888-390-0541 or (416) 764-8677 (GTA), followed by passcode 110261.

Summary of Results

Results from Operations - Three Months Ended September 30, 2023

For the three months ended September 30, 2023, we generated total sales of $558.7 million, as compared to the $659.7 million we achieved in Q3 2022 during a period of unusually high demand and increasing product prices prices. The $101.0 million, or 15.3%, year-over-year decrease is comprised of approximately two-thirds product price deflation and one-third lesser volumes as compared to the same period in the prior year. Sales results also include a $1.2 million unfavorable foreign exchange impact related to the translation of Canadian sales to U.S. dollars for reporting purposes.

Our U.S. operations generated third quarter sales of $516.5 million, as compared to $610.4 million in the same period in 2022. The $93.9 million, or 15.4%, decrease primarily reflects lower product prices and volumes as compared to the same period last year.

In Canada, third quarter sales of C$56.5 million were C$7.9 million, or 12.3%, lower than the same period in 2022. The year-over-year change in Canadian sales primarily reflects product price deflation and to a lesser extent, lower volumes. 

We generated third quarter gross profit of $118.3 million, as compared to $139.0 million in the same period last year. The $20.7 million, or 14.9%, decrease primarily reflects lower sales. At 21.2%, our third quarter gross margin percentage was slightly higher than the 21.1% achieved in Q3 2022.

For the three months ended September 30, 2023, operating expenses increased to $100.9 million (18.1% of sales), from $90.9 million (13.8% of sales) in the same period last year. The $10.0 million increase was primarily driven by accrued trade duties of $15.5 million relating to the U.S. trade case affecting certain hardwood plywood products produced in Vietnam.

Excluding the accrued trade duties, third quarter operating expense decreased by $5.6 million year-over-year to $85.3 million, while operating expenses as a percentage of sales were 15.3% as compared to 13.8% in Q3 2022. The decrease in underlying operating expenses primarily reflects lower people costs, including a reduction in variable compensation, and a decrease in premise costs.

For the three months ended September 30, 2023, depreciation and amortization increased to $17.4 million, from $16.8 million in Q3 2022. Included in the depreciation and amortization was $5.5 million of amortization on acquired intangible assets, consistent with the same period last year. 

For the three months ended September 30, 2023, net finance expense increased to $12.7 million, from $8.9 million in Q3 2022. This included $8.9 million of interest on bank borrowing, as compared to $8.6 million in Q3 2022, primarily reflecting higher interest rates, partially offset by lower bank indebtedness. We implemented an interest rate swap during the third quarter which is expected to mitigate some interest rate variability risk going forward.  

For the three months ended September 30, 2023, we recognized an income tax recovery of $3.3 million as compared to an income tax expense of $9.3 million in the same period last year. Current period income tax recovery primarily reflects changes in estimates which lowered our taxable income, in addition to the benefits resulting from other restructuring. 

We generated third quarter Adjusted EBITDA of $51.8 million, as compared to $66.0 million during the same period in 2022. This $14.2 million, or 21.5%, year-over-year change largely reflects the $20.7 million decrease in gross profit, partially offset by the $6.5 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, and accrued trade duties).

Net income for the third quarter of 2023 was $8.1 million (basic earnings per share of $0.36), as compared to $29.9 million (basic earnings per share of $1.28) in Q3 2022. Accrued trade duties and a moderating economic environment were the primary factors in the year-over-year change. The $21.8 million, or 72.9%, decrease in net income includes lower EBITDA of $30.1 million, an increase in net finance expense of $3.7 million, and an increase in depreciation and amortization of $0.6 million, partially offset by a $12.6 million reduction in income tax expense. 

After adjusting for accrued trade duties and LTIP expense, third quarter adjusted net income was $20.7 million, as compared to $30.8 million in Q3 2022 and Adjusted basic earnings per share were $0.93, as compared to $1.32 in Q3 2022.

Results from Operations - Nine Months Ended September 30, 2023

For the nine months ended September 30, 2023, we generated total sales of $1.72 billion, as compared to $2.0 billion in the same period in 2022. The $280.4 million, or 14.0%, decrease primarily reflects a $302.0 million reduction in organic sales, partially offset by $28.0 million of incremental revenue from our acquisitions of Mid-Am and Rojo. The decrease in organic sales is comprised of approximately one-quarter product price deflation and three-quarters lesser volume as compared to the same period in the prior year. An unfavorable foreign exchange impact related to the translation of Canadian sales to U.S. dollars for reporting purposes accounted for the remaining $6.4 million of sales impact. 

Nine month sales from our U.S. operations were $1.59 billion, as compared to $1.85 billion in the same period in 2022. The $253.8 million, or 13.7%, decrease reflects a $281.8 million year-over-year market-driven reduction in organic sales following the record-setting pace achieved in 2022. Organic sales in the U.S. were primarily impacted by lower volumes and to a lesser extent, product price deflation, partially offset by the addition of $26.4 million of incremental revenue from a full nine months of Mid-Am's results, as compared to just under eight months' contribution in the same period last year. Year-to-date U.S. sales also include $1.6 million of contribution from the Rojo business acquired in the first quarter.

In Canada, sales for the first nine months decreased by C$25.9 million to C$176.0 million, from C$201.9 million in the same period in 2022. This 12.8% change primarily reflects lower volumes and product prices.

We generated gross profit of $354.7 million in the first nine months of 2023, as compared to $440.6 million in the same period last year. The $85.8 million, or 19.5%, year-over-year decrease reflects lower organic sales and a gross profit percentage of 20.6%, as compared to 22.0% in the same period in 2022. Our prior-year gross profit percentage was temporarily elevated due to favorable market dynamics, including strong demand and tight supply.

For the nine months ended September 30, 2023, operating expenses increased by $19.2 million to $287.7 million (16.7% of sales), from $268.5 million (13.4% of sales) in the same period last year.  The $19.2 million increase primarily reflects accrued trade duties of $15.5 million.

Excluding the accrued trade duties, operating expenses were $272.2 million, $3.6 million higher than in the same period in 2022, and operating expense as a percentage of sales was 15.8%, as compared to 13.4%. The increase in operating expenses was primarily driven by $3.2 million of incremental operating expenses from the inclusion of a full nine months' results from the recently acquired Mid-Am operations and $1.0 million of amortization on intangible assets acquired in connection with the Mid-Am acquisition, partially offset by a $0.6 million decrease in organic expenses.

For the nine months ended September 30, 2023, depreciation and amortization increased to $52.1 million, from $48.5 million in the same period of 2022. This $3.6 million increase includes $1.5 million of incremental depreciation and amortization related to the Mid-Am acquisition, and $2.1 million attributed to higher depreciation on premise leases in our existing operations. Included in the $52.1 million total is $16.6 million of amortization on acquired intangible assets, as compared to $16.1 million in the prior-year period.

For the nine months ended September 30, 2023, net finance expense increased to $37.0 million, from $20.1 million in the same period last year. Year-to-date net finance expense included $28.2 million of interest on bank borrowing, as compared to $17.1 million last year, reflecting higher interest rates on bank indebtedness in the current period. We have entered into an interest rate swap to mitigate some of our exposure to interest rate variability.  

For the nine months ended September 30, 2023, income tax expense decreased to $3.0 million, from $36.7 million in the same period of 2022, primarily reflecting lower taxable income. The effective tax rate for the first nine months was 10.0%, as compared to 24.1% in the same period last year, which the decrease in effective tax rate primarily reflects the benefit of other restructuring.   

We generated Adjusted EBITDA of $140.8 million in the first nine months of 2023, as compared to $224.4 million during the same period in 2022. The $83.6 million, or 37.3%, change primarily reflects the $85.8 million decrease in gross profit and the $2.2 million decrease in operating expenses (before changes in depreciation and amortization, LTIP expense, and accrued trade duties).

Net income for the first nine months of 2023 was $27.1 million, as compared to $115.3 million in the same period in 2022. The $88.2 million, or 76.5%, decrease primarily reflects $101.4 million lower EBITDA, a $3.6 million increase in depreciation and amortization, and a $16.9 million increase in net finance expense, partially offset by a $33.6 million decrease in income tax expense.

For the nine months ended September 30, 2023, we generated basic earnings per share of $1.21, as compared to $4.89 in the same period last year. Adjusted net income was $44.0 million, as compared to $118.5 million in the first nine months of 2022, and Adjusted basic earnings per share were $1.97, as compared to $5.03 in the same period last year.

About ADENTRA

ADENTRA is one of North America's largest distributors of architectural building products to the residential, repair and remodel, and commercial construction markets. The Company currently operates a network of 85 facilities in the United States and Canada. ADENTRA's common shares are listed on the Toronto Stock Exchange under the symbol ADEN.

Non-GAAP and other Financial Measures

In this news release, reference is made to the following non-GAAP financial measures:

• "Adjusted EBITDA" is EBITDA before long term incentive plan ("LTIP") expense, professional fees and transaction expenses. We believe Adjusted EBITDA is a useful supplemental measure for investors, and is used by management, for evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
• "Adjusted net income" is net income before LTIP expense, professional fees and transaction expenses. We believe adjusted profit is a useful supplemental measure for investors, and is used by management, for evaluating our profitability, our ability to meet debt service and capital expenditure requirements, our ability to generate cash flow from operations, and as an indicator of relative operating performance.
• "EBITDA" is earnings before interest, income taxes, depreciation and amortization, where interest is defined as net finance income (expense) as per the consolidated statement of comprehensive income. We believe EBITDA is a useful supplemental measure for investors, and is used by management, for evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
• "Organic growth" and "acquisition-based growth" consists of quantifying the change in total sales as either related to organic growth or acquisition-based growth, or the impact of foreign exchange related to the translation of Canadian sales to U.S. dollars. Total sales earned by acquired companies in the first 12 months following an acquisition is reported as acquisition-based growth and thereafter as organic growth. Organic growth excludes the impact of acquisitions and foreign exchange impact related to the translation of Canadian sales to U.S. dollars. From time to time, we also quantify the impacts of certain unusual events to organic growth to provide useful information to investors to help better understand our financial results.

In this news release, reference is also made to the following non-GAAP ratios: "adjusted basic earnings per share", "adjusted diluted earnings per share", "Adjusted EBITDA margin" and "Leverage Ratio". For a description of the composition of each non-GAAP ratio and how each non-GAAP ratio provides useful information to investors and is used by management, see "Non-GAAP and Other Financial Measures" in the Company's management's discussion and analysis for the year ended December 31, 2022 (which is incorporated by reference herein).

Such non-GAAP financial measures and non-GAAP ratios are not standardized financial measures under International Financial Reporting Standards ("IFRS") and might not be comparable to similar financial measures disclosed by other issuers. For reconciliation between non-GAAP measures and the most directly comparable financial measure in our financial statements, please refer to the "Summary of Results".

Forward-Looking Statements

Certain statements in this press release contain forward-looking information within the meaning of applicable securities laws in Canada ("forward-looking information"). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.

The forward-looking information in this press release includes, but is not limited to: In the quarter we further demonstrate the business's ability to convert a high percentage of adjusted EBITDA into operating cash flow before changes in working capital, and to release working capital and generate additional cash flow in periods of reduced economic activity; looking forward, market headwinds are expected to persist in the near term but our business model and strategies are designed for success; our performance in this period of reduced demand and product price deflation underscores the success of our strategies to grow and broaden our end-market participation, expand our channels to market, diversify and strengthen our product mix, and deepen our geographic coverage; the combined impact of recent inflation and interest rate hikes is expected to have a continued near-term negative effect on economic activity; this, in turn, is resulting in a moderation of demand for our products as compared to 2022, and could lead to a continuation of softer product pricing and volumes; in the third quarter of 2023 our sales were down 15%, and we expect fourth quarter sales to be down similarly when compared to the same period in the prior year; as we have demonstrated in previous business cycles and most recently through the first nine months of 2023, we are adept at managing our business and cash flows effectively in challenging market conditions; our size and scale, together with the diversity in our product categories, customer channels and end-markets, provide important stability while reducing our exposure to any one geography or segment of the industry; our strong balance sheet provides financial stability as we move through periods of changing market conditions, and our business model is expected to continue converting a high proportion of EBITDA to operating cash flows before changes in working capital; in addition, our investment in working capital typically decreases during periods of reduced activity, resulting in an additional source of cash; over the longer term our business is supported by strong fundamentals in our end markets which include historic under-building of homes, positive demographic factors, strong home equity, and an aging housing stock; we continue to see a multi-year runway for growth in the repair and remodel, residential, and commercial markets we participate in.

The forecasts and projections that make up the forward-looking information are based on assumptions which include, but are not limited to: there are no material exchange rate fluctuations between the Canadian and U.S. dollar that affect our performance; the general state of the economy does not worsen; we do not lose any key personnel; there is no labor shortage across multiple geographic locations; there are no circumstances, of which we are aware that could lead to the Company incurring costs for environmental remediation; there are no decreases in the supply of, demand for, or market values of our products that harm our business; we do not incur material losses related to credit provided to our customers; our products are not subjected to negative trade outcomes; we are able to sustain our level of sales and earnings margins; we are able to grow our business long term and to manage our growth; we are able to integrate acquired businesses; there is no new competition in our markets that leads to reduced revenues and profitability; we can comply with existing regulations and will not become subject to more stringent regulations; no material product liability claims; importation of components or other innovative products does not increase and replace products manufactured in North America; our management information systems upon which we are dependent are not impaired; we are not adversely impacted by disruptive technologies; an outbreak or escalation of a contagious disease does not adversely affect our business; and, our insurance is sufficient to cover losses that may occur as a result of our operations.

The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. The factors which could cause results to differ from current expectations include, but are not limited to: exchange rate fluctuations between the Canadian and U.S. dollar could affect our performance; our results are dependent upon the general state of the economy; impacts of COVID-19, further mutations thereof or other outbreaks of disease, could have significant impacts on our business; we depend on key personnel, the loss of which could harm our business; a labour shortage across multiple geographic locations could harm our business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm our business; we may incur losses related to credit provided to our customers; our products may be subject to negative trade outcomes; we may not be able to sustain our level of sales or earnings margins; we may be unable to grow our business long term or to manage any growth; we are unable to integrate acquired businesses; competition in our markets may lead to reduced revenues and profitability; we may fail to comply with existing regulations or become subject to more stringent regulations; product liability claims could affect our revenues, profitability and reputation; importation of components or other innovative products may increase, and replace products manufactured in North America; disruptive technologies could lead to reduced revenues or a change in our business model; we are dependent upon our management information systems; disruptive technologies could lead to reduced revenues or a change in our business model; our information systems are subject to cyber securities risks; our insurance may be insufficient to cover losses that may occur as a result of our operations; an outbreak or escalation of a contagious disease may adversely affect our business; our credit facility affects our liquidity, contains restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by us and certain of our subsidiaries; the market price of our Shares will fluctuate; there is a possibility of dilution of existing Shareholders; and, other risks described in our annual information form and in our management's discussion and analysis for the year ended December 31, 2022, each of which are available on the Company's profile at www.sedarplus.ca.

This news release contains information that may constitute a "financial outlook" within the meaning of applicable securities laws. The financial outlook has been approved by management as of the date of this news release. The financial outlook is provided for the purpose of providing readers with an understanding of the Company's anticipated financial performance. Readers are cautioned that the information contained in the financial outlook may not be appropriate for other purposes.

All forward-looking information in this news release is qualified in its entirety by this cautionary statement and, except as may be required by law, we undertake no obligation to revise or update any forward-looking information as a result of new information, future events or otherwise after the date hereof. 

Third-Party Information

Certain information contained in this news release includes market and industry data that has been obtained from or is based upon estimates derived from third-party sources, including industry publications, reports and websites. Although the data is believed to be reliable, we have not independently verified the accuracy, currency or completeness of any of the information from third-party sources referred to in this news release or ascertained from the underlying economic assumptions relied upon by such sources. We hereby disclaim any responsibility or liability whatsoever in respect of any third-party sources of market and industry data or information.

SOURCE ADENTRA Inc.