ADENTRA Inc. (ADEN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the HDI 2020 Year-End and Q4 Results. [Operator Instructions] Also note that the call is being recorded today, Friday, March 12, 2021. And I would like to turn the conference over to Rob Brown. Please go ahead, sir.

Thank you, Sylvie, and good morning. Welcome, everyone. Thanks for joining us. HDI turned in a record-breaking financial performance in 2020 as we executed on our strategies and created value for our shareholders against the backdrop of a global pandemic. I'm going to start today with a brief overview of our achievements. Faiz Karmally, our CFO, will follow with our fourth quarter and full year financial results. Then I'll return to talk about our positive outlook going forward. I'm very pleased to report that we achieved our 11th consecutive year of growth in 2020 as we generated revenues of $1.25 billion, and we paired it with a gross margin percentage of 19.2%, a new record for us. The combination of our best-ever sales and gross margin percentage helped us achieve record adjusted EBITDA results. At $97.5 million, adjusted EBITDA was up over 23% year-over-year, and we boosted adjusted profit per share to $2.09 from $1.49 in 2019, which was an increase of over 40%. These are exceptional results and keep in mind that they were achieved while managing through a pandemic and a significant decrease in economic activity that impacted our second and third quarter results. Our team moved quickly to adapt to the pandemic conditions, keeping our people safe and our operations open for business. We reduced expenses and working capital as we learned to do more with less, and we captured market share. At the same time, we continue to execute on our business strategies. We further strengthened our proprietary global supply capabilities. By the second half, this program was operating at peak performance and contributing strong margins. We were also successful in growing our high-margin door segment. It now represents about 16% of our revenues as compared to 0 just 5 years ago. Importantly, we also continued to grow through acquisition, completing 3 transactions during the year. The first of these was Diamond Hardwoods, which broadened our service capabilities in Northern California. We completed that acquisition in March. In December, we added 6 more locations in Northern California with our purchase of Aura Hardwoods. In that same month, we acquired River City Millwork, an Illinois-based distributor that increased our presence in the high-margin door business. Combined, these 3 acquisitions represent annualized sales of $90 million. These acquisitions were immediately accretive to earnings while also strengthening our market position in specific ways aligned with our strategy. Overall, it was a year of excellent operational and strategic execution under demanding circumstances. And I want to thank everyone on the HDI team for their remarkable performance. I also want to emphasize that our results were achieved without the benefit of significant increases in product prices during fiscal 2020. Moving into fiscal 2021. We're entering a greatly improved macroeconomic environment. What's more, we're entering these strong markets from a position of operational, financial and competitive strength. I'll talk more about this when I return to speak about our outlook. Before I turn the call over to Faiz, I want to add that thanks to a business model that very efficiently transforms EBITDA into cash, we were able to generate returns for our investors again in 2020. In November, we increased our quarterly dividend to $0.10 per share. That was up 17.6% and represents our eighth dividend increase in 8 years. Overall, it was an exceptional year for HDI, and I'll now ask Faiz to review our financial results with you in some more detail. Faiz?

Thank you, Rob, and good morning, everyone. I'm going to provide a general overview of our results for the fourth quarter and full year 2020. Then I'll provide some comments on our financial position and capital allocation plans for 2021. Starting with the fourth quarter consolidated revenue. We generated strong sales of $308.4 million. That was 7.1% or $20.6 million higher than a year ago. And it breaks down as follows: acquired businesses added $13.6 million or 4.7% to our fourth quarter sales and a return to organic sales growth added an additional $10.4 million or 3.6%. This was partially offset by a $3.4 million negative foreign exchange impact related to a stronger Canadian dollar when translating U.S. sales to Canadian dollars for reporting purposes. In the U.S., fourth quarter sales increased by USD 13 million or 6.7% year-over-year, reflecting the positive impact of acquisitions as well as organic growth we achieved. In Canada, fourth quarter sales were up $6.6 million or 20.1% year-over-year, reflecting strong performance and increased volume-based demand. Our fourth quarter gross profit was up 12.2% year-over-year to $59.1 million. This improvement reflects the higher sales and an increase in our gross profit margin percentage to 19.1% from 18.3% last year. Operating expenses were $4.3 million higher at $46.5 million, with acquired businesses and an impairment loss on the sale of the HMI business accounting for most of this increase. This was partially offset by the benefits of a number of cost-saving initiatives undertaken during the year. Our improved sales performance, together with a higher gross profit margin percentage and well-controlled organic expenses, resulted in a very strong bottom line performance. We generated fourth quarter adjusted EBITDA of $24.3 million, which was up nearly 27% year-over-year. Adjusted profit grew 43.2% to $10.5 million and adjusted profit per share improved to $0.49 from $0.35 a year ago. Overall, it was a very strong end to the year. Turning to our results for the full year ended December 31, 2020. We increased total sales by 6.3% to $1.245 billion, a year-over-year improvement of $73.4 million. This was driven by a combination of acquisition-based growth and positive foreign exchange impact. Sales in the U.S. were up by USD 41.8 million or 5.4% year-over-year and sales in Canada grew by $6 million or 4.3%. Gross profit for the year increased by 13% to $239.5 million. This reflects higher sales and a stronger gross profit margin percentage of 19.2% as compared to 18.1% last year. Operating expenses increased by $17.2 million, mostly due to the addition of acquired businesses. Adjusted EBITDA grew to $97.5 million, an increase of 23.5%, reflecting the higher sales and record gross profit margin results. We also generated profit per share of $1.78 and adjusted profit per share of $2.09, both of which set new records. Looking now at our financial position and our capital allocation priorities. We ended the year in a very strong financial position with a responsible balance sheet, strong cash-generating capabilities and significant liquidity. We have no term debt and maintain revolver facilities with springing covenants, secured against high-quality working capital. As of the end of the fourth quarter, our net debt to adjusted EBITDA after rents ratio was only 1.3x, and our net debt to capital ratio was just 24%. We also had over $90 million of liquidity available in the form of cash on hand and unused debt capacity. We remain confident in our ability to support our business strategies and continue creating value for shareholders. On that note, our capital allocation priorities going forward will continue to include executing on our acquisitions pipeline, supporting the organic growth and returning value to shareholders in the form of our dividend while remaining opportunistic as it relates to share repurchases. Now I'll turn the call back over to Rob.

Okay. Thanks, Faiz. I'll close today with a few comments on our outlook and growth prospects going forward. Starting with market conditions. Our customers today are the busiest that they've been since the onset of the pandemic. Housing permits, housing starts are both up sharply driven by record low mortgage rates, favorable demographic trends and a lack of housing supply caused by a decade of housing starts significantly lacking or lagging, rather, population growth. The COVID-19 pandemic has further accelerated housing demand with more people working from home and many households seeking more living space. And millennials, who represent the largest segment of the population, are at the stage in their lives where they're actively seeking home ownership. Forecasts suggest we're entering a multiyear period of demand growth. At the same time, the outlook for the repair and renovation market is very positive, with North Americans spending more of their time and disposable income on their homes. Looking at the commercial and other markets. This is more of a mixed situation. Keep in mind that for us, commercial and other encompasses everything from recreational vehicle manufacturing and furniture manufacturers to institutional builders of hospitals and schools and commercial builders of retail and hotel projects. It's a broad market. Some of these markets are performing better than others, but the diverse nature of our own participation reduces the impact of dynamics in any one geography or end market. Our strategy going forward will be to capitalize on the multiyear positive outlook for our various markets, and we have a business model and strategy that enables us to do so. First, as the largest distributor in our industry, we're uniquely positioned to capitalize on growing demand. The pandemic has reinforced the benefits that our size and scale bring to the architectural building products value chain, both for suppliers and for our customers. And the investments we've made in our platform, such as our global sourcing capabilities, our dedicated specification sales team and IT systems that make it easier to do business with us, strongly differentiate us from many of our regional competitors. Second, our business model enables us to benefit financially from demand growth. We operate a price pass-through model that helps us keep selling prices closely aligned with product prices. That's going to be important in 2021 with product costs starting to increase as a result of demand/supply imbalances. And because we maintain a strong and stable gross margin on our sales, higher product prices boost our profits and EBITDA, which, in turn, converts efficiently to operating cash flow. Third, our balance sheet is in excellent shape, with significant cash-generating ability, no term debt and significant liquidity available. This means we can act on opportunities to win new market share, advance our product and technology strategies and take advantage of growing demand. We're also well positioned to pursue acquisitions and our pipeline today is robust. Our industry remains highly fragmented with many accretive acquisition targets to consider. We also benefit from a dedicated M&A team and a proven formula for identifying, assessing and integrating targeted customers or targeted opportunities. M&A is a core competency here at HDI. In summary, I believe HDI is as well positioned today as we have been at any point in my 16 years with the company. We're entering the strongest macro demand environment we've had in years and approaching it from a place of operational, financial and competitive strength. We have a business model that captures and capitalizes on organic demand with a strong balance sheet and a track record of profitable organic and acquisition-based growth. And we have a long track record of translating top line growth into EBITDA, cash flow and EPS. We're very optimistic about HDI's future and our ability to continue creating value for shareholders. So with that, I thank you very much for your attention. I'm going to now turn the call back to our operator, Sylvie, to provide instructions for the Q&A period. Sylvie?

[Operator Instructions] And your first question will be from Roshni Luthra at CIBC.

Can you tell us where prices are year-over-year in Q1 for hardwood plywood, hardwood lumber and doors?

Sure, Roshni. It's a bit of a mix. I think as you know, we're involved in really all of the major architectural building product categories, and there's different dynamics going on in each. I probably won't run through the big, all big 8 categories but touch on a few of them. So domestic hardwood lumber, which is about 25% of our sales, is up in the 30% range year-over-year compared to where we were a year ago. And that's really driven by solid domestic demand as well as a return to export markets, which is driving the supply/demand balance that's pushing prices up. I would note, though, on that category, that's really a recovery. We had seen price deflation in that product category the year prior. In domestic plywood, prices are rising really more now, certainly in double digits. And this is just reflective of seeing the prices we see in softwood lumber, which for domestic plywood is often used in the cores in manufacturing that product. So there's a bit of a secondary effect of softwood lumber prices filtering into domestic hardwood plywood prices. So again, we're seeing strengthening there. On the MDF side of the business, and this also includes laminates, which ride on top of MDF. There's significant, very close to capacity in terms of supply/demand there. So we're also seeing some increases in prices there again. Double digit is not out of the question, but this is relatively new phenomenon, not something we experienced in 2020. And then there's a few other factors going on. I'll maybe leave it with this comment, which is, for a number of these products, MDF and particle board use binding agents that there's some shortages in with respect to resins around the world, methanol, for instance, used as a precursor of making that product. So we're not quite sure actually where that one is going to shake out, but we have our eye on it as well.

Great. Just one more question for me. Just in regards to your M&A pipeline, are there any categories or regions that look more attractive right now? And has there been any change in vendor expectations?

So in terms of regional views, we continue to just cast a very wide net. We have 7. But frankly, there's lots of room for us to continue to fill out the map and even add to the map in geographies where we're already participating. So nothing there that I would call out as kind of a limiting factor. In terms of expectations on pricing from vendors, really depends a little bit based on size. So for a small to midsized vendor, not a lot of change there that I would call out. And of course, some of them are coming off a year where they had some impacts with COVID in their trailing results. With the larger acquisitions, there's certainly greater strength today in multiples than we've seen in the recent past.

[Operator Instructions] And your next question will be from Zachary Evershed of National Bank.

Congrats on the quarter. I had some quick one for you. What's the revenue and EBITDA impact of the sale of HMI?

Yes. I think that I'll kind of walk you through that. So HMI last year did USD 25 million in sales and just under USD 1 million in EBITDA. So you can convert that on your own to Canadian dollars if you're looking at it on a consolidated basis, but those were the performance metrics last year. On the HMI sale, I'll maybe just add a couple of comments as well. We did disclose, we entered into agreement on March 10 to sell that business. It's a single location, has generated nice cash flows for us in the past. The numbers that I gave you, Zach, are pretty good results considering, as Rob mentioned, there was actually price deflation in the hardwood lumber category last year, and they were still able to put together some good results. But we got an attractive price for that asset, and it is more of a manufacturing asset. And we are, as you know, we're squarely in the distribution lane. So for a number of reasons, that made sense for us.

That's clear. And will that have any impact on your rate of CapEx going forward?

A little bit, a little bit, Zach. Yes. I mean, our CapEx spend over the last couple of years, the trend was kind of $3 million, plus or minus. And with HMI being a mill, it was a little more CapEx intensive. So you're kind of heading down the right path, but not materially, no. I mean, their spend was $200,000 to $400,000 a year in CapEx. So that might come off. So a little bit, but not material.

Then one last one for me. Has the recovery from the pandemic been uneven among your competitors? And do you think that your position as industry leader has allowed you to gain market share in the return to organic growth?

Yes. I think everybody's had a slightly different pandemic experience when we think of our competitors. We do get a look obviously at that through our acquisitions pipeline, and we think that we've performed, on a relative basis, quite well. One differentiator between the 2 is many of those businesses would have taken PPP money in the U.S. So they had government assistance. And HDI did not do that along the way, but that's a onetime event. With respect to the question about market share, I do think that we have done proportionately better in winning business during the pandemic. And I do think our scale has paid dividends there, whether it's market access or how we have supported our sellers when they've had to work from home with greater digital assets to sell to customers or provide training or simplifying global solutions from around the globe with our import program. There's a number of things, which, with the disruption in the market, some of those platform advantages we have shone through a little bit more brightly.

[Operator Instructions] And at this time, we have no further questions. Please proceed.

Okay. That's great. Thanks, Sylvie, and we'll let everybody get on with their day. If you've got some follow-up questions, please do reach out directly to Faiz or myself. We'll be happy to chat with you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.