ADENTRA Inc. (ADEN) Earnings Call Transcript & Summary

Good morning. Welcome to the ADENTRA Second Quarter 2026 Results Conference Call. [Operator Instructions] With me on today's call are Rob Brown, President and Chief Executive Officer; as well as Faiz Karmally, Vice President and Chief Financial Officer. ADENTRA's earnings release, financial statements and MD&A for the quarter ended June 30, 2026, and are available on the Investor Relations section of its website and on SEDAR+. Before we begin, I'd like to remind listeners that management's comments today may include forward-looking statements. Actual results could differ materially due to risks and uncertainties discussed in our public filings. All dollar amounts referenced today are in U.S. dollars unless otherwise noted. I'll now turn the call over to Rob Brown.

Thanks, operator, and good morning, everyone. We delivered another strong quarter despite continued macroeconomic uncertainty and the demand environment that remains below historic levels. Our second quarter results demonstrate the strength of ADENTRA's operating model and the benefits of remaining focused on the areas within our control. We generated low single-digit organic sales growth, achieved a strong gross margin, exercised disciplined cost control and delivered meaningful operating leverage, resulting in healthy growth in both adjusted EBITDA and adjusted earnings per share. Importantly, these results reflect the work we've done over the past several years to build a stronger, more resilient business capable of creating value across market cycles. They also reflect several attributes we believe are important for long-term value creation. Positive organic growth in a soft market, gross margin expansion, positive operating leverage, double-digit adjusted basic earnings per share growth and disciplined capital returns. Before discussing the quarter in more detail, I'd like to briefly revisit the strategic priorities guiding our decisions. These priorities remain unchanged and continue to be centered on creating sustainable long-term shareholder value rather than reacting to short-term market fluctuations. The first is advancing an AI and digitally enabled operating model. Over the past several quarters, we've continued developing digital capabilities that support pricing, inventory management and commercial decision-making. Certain of these tools are now in pilot programs, and we believe they have the potential to improve consistency across our network while driving structurally higher margins, stronger organic growth and higher returns on invested capital over time. Second is strengthening our global supply chain. We continue to diversify sourcing across more than 30 countries while expanding access to differentiated and proprietary products. Third is maintaining a disciplined approach to capital allocation and acquisitions. Our balance sheet remains in an excellent position, providing us with the financial flexibility to invest in our business, return capital to shareholders, reduce leverage where appropriate and pursue strategically aligned acquisitions. Shortly after quarter end, we completed the tuck-in acquisition of Mount Storm in Northern California, which is expected to add approximately $20 million of annualized sales, strengthens our existing platform and is expected to be immediately accretive to earnings. We also continue to maintain a deep pipeline of acquisition opportunities and we will remain disciplined in pursuing businesses that enhance our platform, generate attractive returns on invested capital and create long-term shareholder value. Taken together, these priorities are designed to make ADENTRA a stronger business regardless of where we are in the cycle. Now turning to the quarter. Sales increased 1.7% to $607.1 million, reflecting organic growth despite a softer demand environment. Improved pricing more than offset modestly lower volumes, while our price pass-through model continued to support a strong gross margin of 22%. Just as importantly, we maintained disciplined cost control. Excluding tariff recoveries and other comparable items, operating expenses were essentially flat year-over-year despite an inflationary environment. That discipline generated positive operating leverage, allowed adjusted EBITDA to grow more than 6% with adjusted EBITDA margin expanding 40 basis points to 9.5%. Strong operating performance, lower financing costs and our ongoing share repurchase program contributed to adjusted basic earnings per share growth of more than 11% year-over-year. Our capital allocation strategy also continued to deliver results. During the quarter, we returned capital to shareholders through dividends and share repurchases, continued to strengthen the balance sheet and maintain significant financial flexibility to execute on our strategic priorities. Overall, the quarter demonstrates that our strategy is working. While we cannot control the macroeconomic environment, we can control how we operate the business, allocate capital and position ADENTRA to create long-term value. With that, I'll turn the call over to Faiz.

Thanks, Rob, and good morning, everyone. As a reminder, all figures discussed today are in U.S. dollars unless otherwise noted. For the second quarter, sales increased 1.7% year-over-year to $607.1 million. The increase was driven by a 2.9% improvement in pricing, partially offset by a 1.2% decline in sales volumes. In the U.S., sales increased 1.7% as stronger pricing more than offset lower volumes. Canadian sales increased 1.4% in Canadian dollars, driven by higher sales volumes despite lower pricing. Gross profit increased to $133.4 million and gross margin expanded 20 basis points to 22%, demonstrating the effectiveness of our pricing strategy and our ability to maintain profitability in a softer demand environment. Operating expenses increased 2.7% year-over-year. However, this comparison includes differences in tariff recoveries between periods. Excluding these items, normalized operating expenses increased only 0.1%, reflecting continued discipline across the organization and the benefits of our ongoing efficiency initiatives. Reported EBITDA also benefited from a $7.5 million net recovery of trade duties and tariffs. Because this recovery was nonrecurring in nature, it is excluded from adjusted EBITDA, which better reflects the underlying operating performance of the business this quarter. This operating discipline translated into strong operating leverage. Adjusted EBITDA increased 6.2% to $57.7 million, while adjusted EBITDA margin improved to 9.5% from 9.1% last year. Net income increased 6.5% to $23.5 million or $0.97 per basic share. Adjusted net income increased 7.8% to $23.6 million, while adjusted basic earnings per share increased 11.4% to $0.98, benefiting from stronger operating performance, lower interest expense and the positive impact of our share repurchase program. For the first half of 2026, sales increased 2.6% to $1.17 billion, including 0.6% volume growth, demonstrating that ADENTRA has continued to grow despite a market environment that remains below historic levels. Cash flow from operations before changes in working capital remained strong at $55.7 million. As expected, seasonal inventory purchases resulted in higher working capital investment during the quarter, which is typical for this time of year and supports customer demand heading into the second half. From a balance sheet perspective, we ended the quarter with a leverage ratio of 2.5x. This continues to provide significant financial flexibility while supporting our balanced capital allocation strategy. During the quarter, we returned approximately $5.6 million to shareholders through dividends and share repurchases. Since July of last year, our outstanding share count has declined by just over 2%, supporting continued growth in earnings per share. Our capital allocation priorities remain unchanged. First, investing in the business to support long-term organic growth; second, maintaining a strong and flexible balance sheet; third, pursuing disciplined, strategically aligned acquisitions. And finally, continuing to return capital to shareholders through dividends and opportunistic share repurchases. With that, I'll turn the call back to Rob. Rob?

Thanks, Faiz. As we look to the balance of 2026, the macro environment remains uncertain, and we remain cautious on near-term demand. That said, our focus remains on disciplined execution and on the areas of the business that we can control. We will continue to manage pricing, costs, purchasing and inventory carefully while advancing the strategic initiatives that we believe will strengthen ADENTRA over time, including our digital and AI-enabled capabilities, supply chain diversification and disciplined capital allocation. Our balance sheet remains strong, giving us the flexibility to invest in the business, return capital to shareholders and pursue strategically aligned acquisitions where they enhance our platform and create attractive long-term returns. While the near-term environment is difficult to predict, the long-term fundamentals supporting residential construction remain compelling. We believe ADENTRA is well positioned to continue compounding value through the cycle, supported by organic growth, margin durability, operating leverage, disciplined capital allocation and accretive acquisitions. Thank you for joining us this morning. Operator, we'd now be pleased to take any questions.

[Operator Instructions] First question comes from Kyle McPhee from ATB Cormark.

I'm hoping to get some color on M&A. Nice to see a deal get done in August, but it was small. So curious how active the pipeline is for more deals, maybe larger deals. I know timing is tough to control, but is it back to the drawing board now ahead of another deal? Or do you have some advanced talks going on and not too far from being able to deploy your very healthy capital position?

On the M&A front, yes, it was very positive to complete the Mountain Storm acquisition. It's a really nice tuck-in, and we got a number of good employees joining the company that I think it's going to be a very nice fit regionally for our business. With respect to further M&A, yes, we're always active. I think as most people know, we've got a full-time senior VP who's always curating and feeding and developing the pipeline. So this one got to the finish line just after the quarter ended, but we've always got multiple efforts in motion in parallel. It's -- with respect to your comment about size, there's always going to be a range in there of small, medium and large opportunities that we're pursuing. There's obviously more small and medium than there are large, but there are more scale opportunities that are always also either in play or relationships being managed for when they might be in play in the future. So I would not describe it at all as a restart now that we've completed Mount Storm.

Got it. Okay. And then on Mount Storm, you disclosed revenue. What can you tell us about the margin profile pre and post integration? I know it's a small moving piece, but it would still be helpful to have some color on that, notably given that I think they have some value add in the mix.

Yes. I would describe the margin profiles, gross and EBITDA as similar to our core business. So nothing -- no big outliers there. As it relates to synergies, yes, we're bringing a very strong, albeit regional competitor into a larger scale company at ADENTRA that's going to bring certain skills and strengths and synergies to it, which we will capture over time. We typically describe those as taking 4 to 6 quarters. And we are keeping in mind, of course, the size of this acquisition, but we do think we improve margins over time just by bringing it into the fold of what ADENTRA can bring to the table.

Next question is from Nikolai Goroupitch from CIBC.

Last quarter, I believe you mentioned the pull forward in roofing product demand. Is the volume decline this quarter a normalization of that dynamic? Or is that a function of lower general demand or something else?

Yes. So, the first quarter was slightly unusual in that we did have a lot more roofing sales, particularly just in the month of March that some of those were oriented towards folks getting ahead of a price increase. I would not describe it as a significant move in terms of pull-forward demand. There's a little bit of timing in there and it related to resulted rather in roofing, which is really only about 5% of our sales being closer to 7% or 8% in the first quarter. That's more normal now in the second quarter, I would say, with respect to your volume comment, I think that's just reflective of underlying demand conditions in -- that we're seeing in the economy. But we're doing a good job on pricing, price pass-through through the model that more than offset any weakness in that area.

Okay. And then I guess you touched on this briefly, but you're seeing divergent price and volume trends between U.S. and Canada. Could you elaborate some more on the underlying dynamics driving the difference there?

Yes. Some of that just relates to mix and timing, but I would maybe step back from that and just say there's more tariff-related inflation in the U.S. than in Canada for reasons we all understand. And so that's finding its way into the price pass-through in a more meaningful way than we're seeing in Canada.

Next question is from Ian Gillies from Stifel.

I was hoping to maybe start on organic growth. It was obviously a bit better than we thought in the second quarter. It seems to be going pretty well through July. Are you able to provide much in the way of insight on where you think it's heading in August, September or even if you want to step like a little further out like Q3, Q4? Because it feels like the pricing seems to have a pretty good tailwind on it right now.

Yes. I mean it's helpful stepping into the third quarter to be able to describe how July went, and we're encouraged by the 3%. And if you remember back when we reported Q1, at that time, we reported the first month of Q2, and it was actually off a little bit. And then, of course, we ended up with some growth. So we kind of gained momentum through the second quarter, it's fair to say, through the latter half, I would say, and that's continued into Q3, certainly through July. It's hard to say how that plays out over the full second half, but I think it's encouraging here for now, and it just displays what we described at the business model that we're able to pass through price inflation as it comes to us in cost of sales. That's obviously helpful. And then I also think we're doing some things to help ourselves around pricing and going to market in a more organized and better fashion than perhaps we were able to achieve in the past. Some of that is digitally enabled, but the teams are just also doing a very good job at the moment.

Okay. That's helpful. There's no great way to do trend analysis on how margins move from 2Q to 3Q over the last few years for a variety of reasons. So with that in mind, can you maybe talk a little bit about the durability of the cost controls you have in place and the impact on margins or whether a whole bunch of stuff maybe went right in the second quarter and it may not hold in future quarters?

Yes. Ian, it's Faiz here. I can answer that. So -- and when you say margins, you're talking about bottom line margins presumably?

Gross or EBITDA because they were both, quite frankly, quite good.

Yes. Okay. I mean on the gross margin percentage line, it was a very good performance at 22%. As you know, by now, there's a number of things in there. There's not one item we've talked about. Price pass-through, you're going to have timing of rebates as an example, which aren't always perfect through the year. Mix was different in Q2 than Q1, which Rob talked -- we just talked about dynamics in Q1. So a number of things that are really contributing to the gross margin percentage strength. It's not abnormal for us to see that move around a little just depending on some of those things, particularly with just the number of SKUs we sell, as you know, over 160,000 SKUs that can have different dynamics. So I think we're in a range. The Q2 was maybe towards the top end of the range, I would say. But notwithstanding the mix considerations we talked about in Q1, our business has been in the 21 percentages now for well over 3 years. So I think we feel very good about the range we performed in. And I think certainly, this quarter was maybe top end of the range. We're very pleased with the performance in Q2. From a bottom line margin perspective, we're really talking about operating costs. And we've done a number of things on operating costs. A lot of that was done in the prior year. We're seeing the benefits of that now. One example would be we took out certain locations last year where it made sense to do so, either combining or closing down locations. So our footprint was still 81 locations, but not the 86 we had at the beginning of 2025. So 5 locations less, I think, has been meaningful. You're seeing some of that now in terms of our ability to control rent inflation. We've also -- we're also down 2 years now in terms of headcount as well. So really rightsizing the headcount for the level of demand we're seeing today. If you take our rent costs and our people costs, that's about 70% of our operating expenses. So we've done things in the majority of our expenses here to really control how that's unfolding this year. And I think we're seeing the benefits of that now. Your question around sustainability of those operating costs as an example, I think they're quite sustainable. We've not cut so deep that we're in a position where we need to add more square footage or more people if we continue to see some sort of low single-digit growth here, particularly if that's price, you really don't need those things for price and our model is passing through additional costs now. So overall, I think you saw in Q2 what the power of a little bit of top line can do in terms of positive operating leverage. And I think you should expect that to continue.

Next question comes from Zachary Evershed from National Bank of Canada.

Congrats on the quarter. As things stand now, any more to come on the tariff front that you're keeping your eye on, either on the recovery front or incremental investigation conclusions?

I mean it's a fairly dynamic trade and tariff environment right now. So I'd probably be safe to say something new will transpire. I think we saw the big move, though, with the replacement of the Section 122 tariffs with the 301 tariffs. So that gives a lot of operating certainty going forward. For a reminder, call it, 30% of our sales being imported into the United States from countries that would be subject to the tariff, and it ranges from 10% to 12.5%. That's very manageable for us. It's a level playing field for within our industry and frankly, across economies. And we'll manage that through the price pass-through mechanism as we have in the past. And I don't think those numbers are prohibitive to what we need to do in terms of global sourcing. We'll keep our eye on the other various separate and distinct trade cases that arise from time to time that we note in the financial statements as they come up.