ADENTRA Inc. ($ADEN)

Good morning. Welcome to the ADENTRA Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] With me on the call today are Rob Brown, ADENTRA's President and Chief Executive Officer; and Faiz Karmally, Vice President and Chief Financial Officer. ADENTRA's earnings release, financial statements and MD&A for the year ended December 31, 2025, are available on the Investors section of our website and on SEDAR. Before we begin, I'd like to remind listeners that management's comments may include forward-looking statements. Actual results could differ materially due to risks and uncertainties outlined in our filings. All dollar figures mentioned today are in U.S. dollars unless otherwise stated. I will now turn the call over to Rob Brown. Please go ahead.

Thanks, operator, and good morning, everyone. I'll start with a few comments on our performance in 2025 and the progress we made across our strategic priorities. Faiz will then walk through the fourth quarter financial results in more detail. And I'll return at the end to discuss current trends and our outlook. Looking back on 2025, I'm pleased with how our team executed in what remained a relatively muted construction environment. Residential activity across North America continued to face headwinds, particularly from affordability challenges tied to mortgage rates and limited housing inventory. Against that backdrop, our focus remains firmly on the things we can control, operating excellence, margin discipline and strong cash generation. That approach, once again, allowed ADENTRA to deliver steady results. For the year, sales increased to $2.25 billion, representing 3% growth compared to 2024, while adjusted EBITDA rose to $187.9 million. Pricing conditions also stabilized during the year after a period of deflation across several product categories, removing a headwind, which helped support our performance. Importantly, the business continued to generate strong cash flow. We produced over $160 million in operating cash flow, which allowed us to strengthen our balance sheet while continuing to return capital to shareholders. During the year, we bought back 3.5% of our outstanding shares, while returning $29.5 million to shareholders through dividends and share repurchases. At the same time, we continued to reduce leverage, finishing the year at 2.2x net debt-to-EBITDA, which positions us well as we look forward toward future growth opportunities. The consistency of these results reflects the strength of ADENTRA's platform. Today, we operate 81 distribution facilities across North America, connecting more than 2,500 suppliers with over 60,000 customers. We're a vital part of the supply chain, bridging the gap between manufacturers who produce large volumes of specific products and customers who require credit, small volumes of many products and often delivered on a just-in-time basis. Our model builds on this core function in the supply chain by combining strong local operating brands with centralized capabilities to provide purchasing power, shared services and digital infrastructure. This creates a sustainable competitive advantage. During 2025, we continued to build on our platform in several important ways. First, supply chain excellence remained a focus. Our sourcing network now spans more than 30 countries, giving us flexibility to manage trade dynamics, while continuing to provide customers with a superior suite of products. Supply chain excellence includes stringent compliance, the success of which was underscored by our recovery of $25.5 million of trade duties, including interest, following the successful outcome of the U.S. Department of Commerce trade case related to hardwood plywood products from Vietnam. Second, we continue to invest in digital capabilities across the organization. Our digital sales platform is increasingly embedded in our operating model, providing customers with 24-hour access to inventory and automated quoting tools, while supporting more than 20% of our annual sales. And third, acquisition-driven growth remains a core part of our long-term strategy. During 2025, we continued integrating Woolf Distributing, which we acquired in 2024. The business contributed $159 million in revenue during the year, expanded our presence in the U.S. Midwest and strengthened our exposure to specialty outdoor living products and the pro-dealer customer channel. Overall, the progress we made during the year further reinforce the competitive advantages of our platform and the strength of our operating model. With that overview, I'll now turn the call over to Faiz to review the financial results in more detail. Faiz?

Thanks, Rob. Good morning, everyone. As a reminder, all dollar figures mentioned today are in U.S. dollars, unless otherwise indicated. For the 3 months ended December 31, 2025, ADENTRA generated sales of $517.5 million, a decrease of 2.5% compared to Q4 2024. The decline was primarily attributable to lower volumes, partially offset by improved product pricing. In the U.S., fourth quarter sales were $477.9 million, down 2.4% year-over-year, reflecting a 4.7% decline in volumes that was partially offset by a 2.2% increase in product prices. In Canada, sales totaled CAD 55.2 million, representing a 3.3% decrease year-over-year, also primarily driven by lower volumes with modest pricing improvements. Despite the softer demand environment, our margin profile remains strong. Fourth quarter gross margin was $114.4 million, representing 22.1% of sales, an improvement from 21.7% in the prior year quarter. This reflects the continued effectiveness of our procurement discipline and pricing strategy. Operating expenses totaled $94.7 million, essentially flat compared to the prior year. The slight increase reflects higher costs associated with lease premises, which were largely offset by a favorable adjustment related to contingent consideration from the Woolf acquisition. Adjusted EBITDA for the quarter was $43.7 million, up 3.7% year-over-year, demonstrating the resilience of our operating model even in softer market environment. On a reported basis, net income was $32.1 million or $1.32 per share, compared to $8.4 million in the prior year quarter. The increase was primarily driven by lower finance expense relating primarily to foreign exchange gains in the quarter, and the recognition of deferred tax assets related to an internal restructuring completed during the fourth quarter. On an adjusted basis, adjusted EPS for the quarter was $0.67, an increase of $0.16 compared to $0.51 in Q4 2024. Turning to cash flow. We generated $41.9 million of operating cash flow before changes in working capital, and working capital reductions contributed an additional $57.8 million, bringing total operating cash flow for the quarter to $99.6 million. The working capital release reflects our seasonal inventory normalization in the second half of the year, reflecting the slower winter construction period. From a balance sheet perspective, we ended the year with a net debt-to-EBITDA leverage ratio of 2.2x, well within our target range and providing significant financial flexibility heading into 2026. Our capital allocation priorities remain unchanged. We continue to focus on maintaining a strong balance sheet, investing in organic growth initiatives, pursuing accretive acquisitions and returning capital to shareholders through dividends and opportunistic share repurchases. With that, I'll turn the call back over to Rob. Rob?

Thanks, Faiz. As we look forward to 2026, we continue to approach the near-term environment with measuring caution. Elevated U.S. mortgage rates and limited housing inventory remain key challenges for affordability and geopolitical tensions and evolving trade policies continue to contribute to macroeconomic uncertainty. In the first two months of the year, sales were down approximately 2% compared to the same period in 2025, partly reflecting the impact of unfavorable winter weather to start the year. At the same time, we are encouraged by several potential developments that could improve the environment over time. Interest rates began easing during 2025, and government policy initiatives aimed at increasing housing affordability and supply could support residential construction demand in the years ahead. Over the longer term, the underlying fundamentals of the housing market remain intact. Structural housing undersupply in North America, favorable demographic trends and an aging housing stock continued to support long-term demand for the products we distribute. Within that context, ADENTRA remains well positioned. Our platform is diversified across geographies, products and customer channels, and we continue to benefit from our national footprint, strong supplier relationships and global sourcing capabilities. Our scalable operating model allows us to maintain margin discipline during softer periods, while also positioning the business to capture operating leverage as volumes recover. Looking ahead, we will continue executing within our full value -- full cycle value creation framework, focusing on operational excellence, disciplined capital allocation and accretive acquisitions in our large and highly fragmented market. We believe this approach will allow us to continue generating strong returns on invested capital and long-term growth for our shareholders. With that, we'll open the line for questions. Operator?

[Operator Instructions] And your first question will be from Kyle McPhee at ATB Cormark.

First one for me, just on your OpEx for Q4. It was down meaningfully. I'd looked through all the moving pieces like premise costs being up a bit, that favorable impact of the Woolf contingent consideration change that flowed through your OpEx. And after adjusting for all this, it looks like, you still had additional OpEx decline. So that's probably your ongoing cost optimization. But that is what I want to confirm. Have you been ratcheting down the OpEx levels to match the top line environment you are facing? And are these cuts that we can see implied in these Q4 results durable throughout 2026, maybe even more on the come.

Hi, Kyle, it's Faiz here, good morning. I can take that one. So you're right. When you peel back the noise, operating expenses were down a little more than if you were comparing to the pace we were at the trailing couple of quarters. There's two things there. One, that's just acknowledging the slower volumes that we had in Q4, right? So some of that is just some variable costs coming in lower because top line volumes were lower in the fourth quarter than the previous quarters. Some of that is also what you described, which is we have made some proactive changes to our cost base. We've talked about this previously, particularly around warehouse space. We have less warehouse space today than we did a year ago as an example. And we've done some things around head count as well. So I would describe those things as durable, but are just part of the story. And then as you head into 2026, we will be facing some inflationary increases on larger pieces of our expenses, which, as you know, are going to be really premise and people costs. So that's going to be around leasing costs for our 80 facilities that we lease and inflationary type increases in certain places around wages and benefits. So that might be in the order of magnitude, low single digit, like it might be 2% this year. So that's the color I would offer you.

Got it. Okay. And then aside from lease like premise costs going up, is there an opportunity to eliminate more of your warehouses based on your kind of lease maturity schedule throughout the year. Is that in the cards at all?

That's something we're always looking to do. So we've got 80 leases and in terms of expiry, they're laddered. So every year, you're going to have a handful come up that you're going to make decisions around whether it's to renew it or to take less or more leasing space. So we'll look at that. I think we did a lot in 2025 in terms of just if you look at just the warehouse count, again, this time a year ago, it was more like 86, now we're 81. So I think we've done things there to rightsize for the pace that we are expecting in 2026, if that's different, we'll have opportunities to look at that, as you mentioned.

Next question will be from Frederic Tremblay at Desjardins Bank Capital Markets.

I'm just curious if given the current environment that we're in, are you seeing or are you expecting a meaningful customer rotation within your good, better and best offerings. I guess I'm just trying to better understand if customers moving to lower price items is a possibility? And if so the kind of impact we should expect from -- on a margin perspective from that, if any?

Good morning, Frederic, it's Rob. Yes, possibly. I wouldn't call it out as some big substantial shift, however. We always do have what you said, which is options at different price points for people to participate in any given product set. We've seen a little bit of that, which is reflective also in margin. But I think it's not a thesis that I would overly focus on. It's just part of the overall mix, and there's going to be some moving around within that mix from time to time, but it's not kind of a real theme that we're seeing or talking about here.

Got it. And just on the trend so far in Q1, you mentioned sales being on 2% in the first 2 months of the year. Just wondering if you can maybe break that down a little more? We saw pricing in Q4 being positive. Was that still the case in Q1? And therefore, your volumes are down more than 2% just to the extent that you can comment on just the pricing and volume trends within that 2% decline.

Yes. So a few points, more volume than price. We've not really seen a pullback in the pricing. So this is more volumetric. And then as we also discussed in the release, there were some weather-related impacts in January, February, I think we all tracked the big storm. We don't typically talk a whole bunch about weather, but it was a prolonged event that did cost us some sales days geographically in some parts of the network. January and February are also, as we know, just the entry points into the year, they tend to be the seasonally slowest. So we'll have to see how things transpire through the balance of the quarter through March, which is a longer sales period, if you count the number of days and gets closer to entering to a spring selling season. So I think we have to stay tuned a little bit on that.

Next question will be from Nikolai Goroupitch at CIBC Capital Markets.

Following the announcement of the preliminary antidumping and countervailing duties on hardwood and plywood imports from China, Indonesia and Vietnam. Do you expect these measures to drive up product prices of domestic products?

There's always some interrelatedness between what's going on in import markets and domestic markets. I would say, however, that those outcomes were well telegraphed and understood that will probably be the case, and there's already been appropriate supply chain shift. So we don't view them as those announcements as something that's going to meaningfully shift markets.

Okay, I see. And I guess given the volatile market conditions, could you highlight specific areas of strength and weakness across the various product categories within the business?

We're always selling the mix. I mean, that's the value of distribution. So we're not particularly power focused on any one category. When we're going to a customer, it's with a wide variety of products on that. So the overall product set tends to move not perfectly aligned, but generally in lockstep with one another. I wouldn't call out any specific product categories that are underperforming or outperforming. I would just go back to the earlier comments that I had to Frederic's question around no big movements in pricing that we're seeing so far in 2026.

[Operator Instructions] Next, we will hear from Zachary Evershed at National Bank Capital Markets.

Congrats on the quarter. So just circling back on the pressure around good, better, best. Minor, but gross margins were great despite that. So were there any one-timers that help boost gross margins above that 22% level, or is that fairly sustainable outside of guidance for Q1 here?

Yes. The only thing that is always moves around a little bit more in Q4 as we end up doing our full year true-up on vendor rebates. So that was a little bit of a tailwind to the margin in the quarter. Other than that, it was normal course, Zach.

Got you. And with the reduction in tariff rates, as we switch to S-122, do you think there's going to be any pressure on pricing in the next few months?

No, not really, nothing we would call out materially. I think the Section 122, you saw has eased the burden a little bit in terms of the proportion of our goods that are subject to tariffs and the weighted average rate that's also attached to them. I think it gives us enough certainty to plan the business over the upcoming period. The whole trade landscape remains a little bit of a moving target, but this is where our import supply line can shine because we can pivot between various supply sources, both country and vendor and kind of be nimble to if the goalposts do move that we continue to have very good product options for our customers. We've seen that so far, and we'll continue to bring that to market. But nothing specific around the 122 position that I think is going to move markets around here in the short term.

Got you. On your digital sales platform, it's supporting over 20% of annual sales, is that trending upward generally?

It is, yes. When you've got the USD 2.25 billion sales base, when you add some dollars that you're rather excited about, sometimes it doesn't turn into a big percentage immediately. But the overall trend month-over-month and quarter-over-quarter is for continued penetration of sales through that channel. And that's been very encouraging. We continue to kind of twist the dials on how to utilize our digital sales platform even better.

Good color. Question on your corporate restructuring and tax recovery. Can you unpack the maneuver there for us? And what's your steady state tax rate now?

Hi, Zach, it's Faiz here. Unpacking it, we can probably chat after the call, and I can give you more detail. It was quite complex as you saw we outlined in the note. At a high level, the way I would describe it is in the fourth quarter, we did some things internally to actually simplify our structure, our internal structure. And the rationale for that was really -- and this may sound familiar about a year ago, a little more than that. We had changes in certain tax rules, both Pillar 2, which is a global tax regime that Canada has adopted. And then Canadian specific rules around the deductibility of interest expense. But in response to those changes, it made sense for us to simplify our structure in the fourth quarter. In simplifying our structure, we were able to unlock certain benefits that previously were unavailable to us in terms of tax benefits that, for lack of a better term, were previously stranded. And so that's really what you're seeing here is the recognition of those. Those are expected to be onetime. And so that's also why in our MD&A, you would have noticed we pull those out of the adjusted numbers because we don't expect that to be recurring. I would just mention before I talk about the tax rate, that is still USD 15 million of benefit we're going to get even though it's an adjusted number. So we're very pleased with the outcome there. In terms of the effective tax rate, the way I would describe that is if you normalize for the kind of onetime tax noise, there were some other things to you, but this was the main thing that you're keying on here, Zach. But if you took the onetime items out of the tax noise this year, we would have been very close to the statutory rate of about 27%. So again, notwithstanding any onetime items in 2026, and I don't foresee any at this point. I would say you should expect around 27% is the effective rate for 2026.

Appreciate that. Then just one last one. A bit of an uptick in CapEx in the quarter. What did that go towards? And what are your plans for 2026?

Yes. On the quarter, it can move around a little bit just depending on timing of spend. So if you look at the CapEx on a full year basis, I think it's right in our wheelhouse, as we described it typically. But again, as you go through the year, you can have a couple of quarters where it's lesser than a quarter right a little more, but standing back looking at the full year, that met our expectations around what we were going to spend on CapEx. The nature of the spend, Zach, is exactly what you think it's maintenance CapEx in our different operations, nothing unusual to report there.

And then for 2026?

Same expectation, it's going to be in that kind of $10 million to $12 million range. I wouldn't -- you shouldn't expect anything different than that.

Next is Kyle McPhee at ATB Cormark.

Just a follow-up on some of the color you gave on the gross margin performance. So you mentioned the vendor rebate true-up was a minor impact. I mean how minor are we talking? Can you quantify it for us?

I'm not -- well, here's maybe a way I'll describe it. I'm not sure I want to call out the number, Kyle, but the way to think about it is, if you looked at our gross margin percentage in Q4 compared to Q4 of last year, it wasn't that different. Q4 of 2024 was also a stronger performance. Part of that was also for the same reason. So when we get to the end of the year, that's when you do your final accounting on rebates, we take a bit of a conservative approach on estimates for all those reasons. Some of them are just -- are just cliff in nature. You need to hit a threshold before you get them. They're very meaningful. If you look at our Q4 performance relative to the other three quarters, we were more like mid-21 plus or minus. And then Q4 was 22. And I would describe a lot of that is driven by the rebates. If you think of our gross margin percentage on a normalized basis for 2024, I think the mid-21s would be fair. So maybe that's how I would put some guardrails around it for you, Kyle.

Got it. Okay. So that was one of the moving pieces in gross margin. I see you got your pricing gains to successfully offset the kind of cost of inventory inflation related to tariffs. Was there other tactics you were utilizing as well to deliver gross margin performance, like were you shifting around your supply chain and sourcing by region to optimize that way as well? Was that a meaningful moving part?

I would describe that as normal course that we're always doing that. I wouldn't say there's so many bps of advantage or disadvantage around that, but we are very nimble with the supply chain to provide the most effective sourcing for customers in the market environments that we've got. I would say that the overall approach to margin remains the same, which is we are increasingly putting more data analytics behind how we price. We are being more disciplined around the utilization of price listing. It is fine-tuned very regularly across the entire business. We continue to look at businesses from an acquisition perspective that can be net helpers generally on gross profit margin. And then what you said, our import business generally contributes very well to our margin profile. So that's a strategy that you've heard about for a number of years now that's continuing and is providing support above the numbers that you see in terms of our long-term value creation framework and your expectations how we can run the company from a gross profit perspective.

Got it. Okay. And then last one for me, a different topic. I see you're active on the NCIB fourth quarter in a row. It's a nice incremental source of value creation, but not massively active on the NCIB so in the way you have the capacity to be. So should I read this as ADENTRA has a much better use of capital very near term, probably in the form of M&A, maybe you're close to resuming your M&A playbook in a meaningful way. Your balance sheet leverage position certainly seems to support funding of deals internally now. So is my read-through on time here, anywhere close to accurate?

I think you're bringing a very good perspective. And look, the inorganic growth and our track record in M&A is a real important part of the corporate growth opportunity that we see here. We intend to be back in the market active on M&A. We did a very good deal, as you know, in 2024 with Woolf Distributing. It took our leverage up to closer to the higher end of our normal range, and we spent last year generated $160 million of cash flow that brought that leverage back down to the lower end of our range and sets us up really well to go out in the market and buy businesses to the extent we find ones that are a good fit. And in that regard, we've got an active pipeline. We've got fully staffed M&A capability with a full-time Senior VP of Acquisitions, who's out there, making sure that we've got good corporate opportunities. So the NCIB is a nice kind of participating feature. We were able to take some shares off the table, which is very accretive to shareholders last year without spending a lot of money on it and without moving our leverage up in any meaningful way. So that's how you should think about the balance. The primary focus is growing the business through M&A. And now we've got the balance sheet to go out in the market and do that in the coming year, and we're working hard on that.

Next question will be from Jonathan Goldman at Scotiabank.

Maybe just circling back to the outlook, how many fewer selling days did weather impact in January and February, and is like the total 2% decline quarter-to-date solely due to weather. I guess I'm just trying to parse out here if we were to compare days versus days on a like-for-like basis, would sales have been up year-on-year?

I know what you're trying to do, yes. I think it's -- we're going to leave it a little bit fuzzy because just to be honest, Jonathan, it's always an estimate around weather impacts. We don't actually usually mention it at all. But it was meaningful this time. It affected a portion of the 80 location network, some were closed for a couple of days, some for day and a half, some had residual hangover if customers were open or not. So it's hard to put an exact pin in the numbers. So what we chose to do was just say, "Hey, factually, this is where we're at through January and February." And by the way, there was a big old storm that had an impact in that. So I think we just need to stay tuned to the end of the quarter and see where things settle.

That's a fair comment. I guess, maybe also relatedly, have you seen any change in end market demand given all the macro stuff in the housing market, or things kind of stable-ish from where we were in Q4?

Pretty -- I mean, there's seasonal impacts between Q4, Q1. Q1 is obviously going to be a stronger quarter from a sales perspective, activity-wise than Q4. So keeping in mind that seasonal impact, of course, I would describe the market is still continuing to be fairly steady, stable. We can make good money in this market. And even if we are still in what I would describe as closer to trough conditions. We're really well positioned if there is a pickup. But in the meantime, we can provide very good returns to shareholders. And we hope as we move through the year that we see some loosening in the housing market that gets activity levels to a higher base, but we don't need that. We can continue to do our thing and execute our strategy and put good numbers on the board.

Okay. Fair enough. And I guess one last one, Faiz, maybe a housekeeping one. Working cap expectations for 2026, if Q1 could be a little lower in terms of volume or sales, do we expect maybe working cap to be down a bit year-on-year?

No. So you should expect the same pattern you've seen in previous years, where December is a low point. We do build inventory through the first half of the year in anticipation of a stronger -- and this is sequential, right? My comments are sequential, a stronger spring and summer period. So relative to where we were in December, spring and summer will be stronger. It's a question of how much is our anticipation. So you will see some inventory build through the first half of the year. And again, if sales pace is more muted, you should expect that to come out in the back half of the year like you did last year. And when you get to the end of the year, if sales pace again has been more muted, you shouldn't expect much of an investment for the full year in inventory, which means we would be paying down meaningful portions of debt, again, like we did last year. So that's what you should expect in terms of pattern of working capital through the year in the environment we know today.

And like on a year-over-year basis, like full year to full year, we're thinking maybe flat.

Yes. I mean the market is saying not much is going to happen for the year. And so if you track along with that, that should be your expectation that when you get to the end of the year, we shouldn't have put a lot of dollars into working capital. That was the case for us last year. It was the case the year before as well. And that's really a feature of our business model in years where it is a bit slower. We can control working capital in this way, and we can generate a lot of very good cash flows. So that should be the expectation in this environment, yes.

And at this time, Mr. Brown, it appears we have no other questions registered. Please proceed.

Okay. Thanks, Sylvie, for hosting the call today, and thanks, everybody, who dialed in and appreciate all the questions. If you've got follow-ups, please do reach out to Faiz and I. We're very accessible. We'd be happy to take your call and address your questions. And with that, we'll say, hope everybody has a great day.

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.