ADEN Adentra Inc

Third quarter 2024 sales of US$568.8 million

Earnings per share of US$0.42 and Adjusted EBITDA of US$48.0 million

Quarterly dividend increased by 7% to C$0.15 per share

LANGLEY, BC, Nov. 13, 2024 /CNW/ - ADENTRA Inc. ("ADENTRA" or the "Company") today announced financial results for the three and nine months ended September 30, 2024. 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 86 facilities in the United States and Canada. All amounts are shown in United States dollars ("US $" or "$"), unless otherwise noted.

Highlights for Q3 2024 (as compared to Q3 2023)

• Generated sales of $568.8 million (C$775.9 million), as compared to $558.7 million (C$749.4 million)
• Gross margin of $121.4 million, up from to $118.3 million
• Gross margin percentage increased to 21.3%, a 10 basis points improvement
• Operating expenses decreased by $4.2 million, or 4.1%
• Net income increased by 28.7% to $10.4 million; Basic earnings per share grew 16.7% to $0.42 (C$0.57)
• Operating cash flow before changes in working capital increased $12.6 million to $38.6 million, from $25.9 million
• Increased the quarterly dividend to C$0.15 per share from C$0.14 per share, payable on January 31, 2025 to shareholders of record as of January 20, 2025
• On July 29, 2024, announced the US$130 million acquisition of Woolf Distributing Company, Inc. ("Woolf"), a US Midwest-based value-added distributor of architectural building and millwork products for residential and commercial markets.

"We achieved a solid third-quarter performance, marked by disciplined execution and steadfast adherence to our strategic roadmap, effectively navigating headwinds in select markets," stated Rob Brown, President and CEO of ADENTRA. "Notably, affordability constraints and the slower-than-anticipated pace of interest rate reductions in the U.S. contributed to tempered activity levels during the period."

"Despite these challenges, our third-quarter performance held steady. Organic sales volumes decreased by just 1%, with total sales growing by 1.8% year-over-year, including two months of revenue contribution from our recent acquisition of Woolf.

"We also saw early signs of relief from the prolonged product price deflation that has impacted the past two years. Third-quarter price deflation of  3% represented the lowest rate of decline over the past five quarters, a substantial improvement from the year-to-date rate of 6%. Encouragingly, we achieved a modest increase in average product prices compared to Q2 2024, signaling a potential easing in product price pressures."

"Our gross margin performance of 21.3%, up 10 basis points year-over-year, further underscores the stability of our operations. Organically, our operating expenses remained consistent with Q2 2024 levels, demonstrating our continued tight control over costs across the business."

"A key highlight of the quarter was our strong cash flow generation, totaling $66 million. We strategically leveraged this cash flow, along with our credit facility, to complete the acquisition of Woolf, closing the quarter with a solid balance sheet and a pro forma leverage ratio of 2.5x. This places us comfortably within our target leverage range of 2-3x, providing us with the financial agility to advance our strategic priorities."

"Reflecting on our business's strength and our positive outlook for the coming year, I am pleased to announce that our Board of Directors has approved a 7% increase in our quarterly dividend to $0.15 per share—our 12th dividend increase in 12 years," Mr. Brown concluded.

Outlook

Affordability pressures stemming from the cumulative impact of consumer price inflation in the broader economy, alongside continued market challenges related to elevated interest rates, will impact Q4 2024 as compared to Q4 2023. We anticipate that these headwinds will be offset by strong operational execution and the inclusion of Woolf, resulting in fourth quarter Adjusted EBITDA aligning closely with Q4 2023 levels.

Amid the market conditions described above, our 2024 results have remained strong. Year-to-date, we achieved stable volumes, improved our gross profit margin by 110 basis points to 21.7%, and sustained consistent Adjusted EBITDA and Adjusted EPS compared to the same period in 2023. Our results underscore the critical competitive advantages embedded in our business model and strategic approach.

Our size, scale, and operational sophistication enable us to implement impactful initiatives that are challenging for smaller regional competitors to replicate. Core strategies include our global sourcing and vendor management programs, which grant access to branded, exclusive, and semi-exclusive products under favorable terms. We've also enhanced our focus on high-value, installation-ready products. Furthermore, we employ advanced data analytics and digital platforms to strengthen asset management, uphold pricing discipline, and expand online sales. Our tight control of operating expenses continues to support profitability.

These strategies are integral to our Destination 2028 plan, which targets $800 million in additional run-rate revenue through acquisitions by 2028, along with achieving a 10%+ EBITDA margin and 12%+ ROIC. Our third quarter acquisition of Woolf has put us on pace to meet these goals, delivering immediate benefits while positioning us for continued growth. As one of North America's largest distributors of architectural building products, with approximately 6% market share, we are well-positioned to pursue further growth, and we maintain a robust pipeline of acquisition opportunities.

Looking ahead, forecasters indicate a favorable outlook for building market conditions in the second half of 2025 and beyond. This optimism is bolstered by anticipated interest rate reductions and strong end-market fundamentals, including a historic undersupply of housing, favorable demographic trends, solid home equity levels, and an aging housing stock. We are confident in our multi-year growth trajectory across core markets in repair and remodel, residential, and commercial sectors.

Q3 2024 Investor Call

ADENTRA will hold an investor call on Thursday, November 14, 2024 at 8:00 am Pacific (11:00 am Eastern). Participants should dial 1-888-510-2154 or (437) 900-0527 (GTA) at least five minutes before the call begins. A replay will be available through November 27, 2024 by calling toll free 1-888-660-6345 or (289) 819-1450 (GTA), followed by passcode 76588 #.

Summary of Results

Results from Operations - Three Months Ended September 30, 2024

For the three months ended September 30, 2024, total sales grew by $10.1 million to $568.8 million, from $558.7 million in Q3 2023. This increase reflects the positive impact of the newly acquired Woolf business which contributed sales of $31.4 million over two months of operations, partially offset by a $20.5 million, or 3.7%, decrease in organic sales. The change in organic sales reflects an approximately 3% decrease in product prices and a 1% decrease in sales volumes as compared to Q3 2023. Third quarter sales results were not significantly impacted by foreign exchange translation of Canadian sales to US dollars for reporting purposes. 

In our US operations, third quarter sales grew by $8.4 million to $524.9 million, from $516.5 million in the same period in 2023. The year-over-year improvement reflects the $31.4 million contribution from the acquired Woolf business, partially offset by the $23.0 million, or 4.4% decrease in organic sales. Approximately 3% of the change in organic sales related to product price deflation, with 2% attributable to lower sales volumes.

In Canada, third quarter sales of C$59.9 million increased by C$3.3 million, or 5.9%, from Q3 2023 levels. The year-over-year improvement in Canadian sales reflects an approximate 10% increase in sales volumes, partially offset by a 4% decrease in product prices.

Third quarter gross margin increased to $121.4 million, a $3.1 million, or 2.6%, improvement from Q3 2023, primarily related to the increase in sales. Gross margin percentage of 21.3% was 10 basis points higher than the same period in the prior year.

For the three months ended September 30, 2024, we lowered operating expenses to $96.7 million, from $100.9 million in the same period last year. This $4.2 million, or 4.1%, improvement was primarily driven by $15.6 million of accrued trade duties recognized in Q3 2023, which did not recur in the current period (discussed further in section 7.0). This decrease was partially offset by $2.3 million of expense related to two months' operation of our new Woolf business, as well as $1.9 million of transaction costs related to the acquisition. Additionally, variable compensation increased by $2.5 million compared to Q3 2023, primarily as a result of the reduction in accruals in Q3 2023. People costs were also $3.5 million higher in the current period, primarily due to inflationary adjustments and an increase in employee benefits expense. 

For the three months ended September 30, 2024, depreciation and amortization increased to $19.3 million, from $17.4 million in Q3 2023. The year-over-year increase was primarily driven by higher premise leases. Depreciation and amortization included $6.3 million of amortization on acquired intangible assets, representing an increase of $0.8 million compared to Q3 2023, primarily due to   intangible assets acquired from the Woolf acquisition.

For the three months ended September 30, 2024, net finance expense decreased to $11.2 million, from $12.7 million in Q3 2023. The $1.4 million improvement was attributable both to lower bank indebtedness and lower interest rates as compared to Q3 2023. 

For the three months ended September 30, 2024, income tax expense was $3.1 million, representing an effective tax rate of approximately 22.7%.  The effective tax rate is lower than the U.S. statutory rates, reflecting the benefits of our tax structuring initiatives.

Third quarter Adjusted EBITDA decreased 7.2% to $48.0 million, from $51.8 million during the same period in 2023. This $3.7 million change reflects a $6.8 million increase in operating expenses (before changes in depreciation and amortization, LTIP expense, accrued trade duties, and transaction expense), partially offset by the $3.1 million increase in gross margin.

Net income for the third quarter of 2024 increased 28.7% to $10.4 million (basic earnings per share of $0.42), from $8.1 million (basic earnings per share of $0.36) in Q3 2023. The $2.3 million improvement includes the $9.1 million increase in EBITDA and the $1.4 million decrease in net finance expense, partially offset by the $6.4 million increase in income tax expense and the $1.9 million increase in depreciation and amortization.

Third quarter adjusted net income decreased by 26.1% to $18.6 million, from $25.2 million in Q3 2023. Adjusted basic earnings per share for Q3 2024 were $0.75, compared to $1.12 in the same period of the prior year, a decrease of 33.0%.

Results from Operations - Nine Months Ended September 30, 2024

For the nine months ended September 30, 2024, we generated total sales of $1.65 billion, as compared to $1.72 billion in the first nine months of 2023, a decrease of $71.0 million or 4.1%. Organic sales decreased by $100.9 million, or 5.9%, primarily driven by product price deflation of approximately 6%. Sales volumes remained stable year-over-year. The decrease in organic sales was partially offset by the $31.4 million, or 1.8%, acquisition-based revenue growth generated by the acquired Woolf business. Foreign exchange fluctuations in the Canadian dollar also had an unfavorable $1.4 million impact on sales results.

Our US operations generated nine-month sales of $1.52 billion, compared to $1.59 billion in the same period in 2023. The year-to-date results include a $103.0 million, or 6.5%, year-over-year decrease in organic sales driven by product price deflation of approximately 6% and a sales volume decrease of approximately 1%. This was partially offset by revenue contribution from Woolf of $31.4 million.

In Canada, sales for the first nine months increased to C$178.8 million, up C$2.8 million, or 1.6%, from the same period in 2023. The year-over-year improvement reflects an approximate 7% increase in sales volume, partially offset by a 5% decrease in product prices.

Gross margin in the first nine months increased to $358.8 million, up $4.1 million, or 1.2%, from the same period last year. This improvement was driven by an increase in our gross margin percentage to 21.7%, from 20.6% in the same period last year. The organic improvement in gross margin percentage reflects the positive impact of strategic initiatives, including our growing focus on high-value installation-ready products, strong performance from our global sourcing program, and our leveraging of data analytics and digital platforms to maintain strong asset management and pricing discipline.

For the nine months ended September 30, 2024, operating expenses were lower at $282.7 million, as compared to $287.7 million in the same period last year. This $5.0 million, or 1.7%, decrease is primarily attributable to $15.6 million of accrued trade duties recognized in the third quarter of 2023 which did not recur in the current period (discussed further in section 7.0), and $4.0 million of lower premise costs. These decreases were partially offset by $2.3 million of operating expenses and $1.9 million of transaction costs related to the Woolf acquisition, together with  inflationary increases in people costs. 

For the nine months ended September 30, 2024, depreciation and amortization increased to $55.6 million, from $52.1 million in the prior-year period. The year-over-year increase was attributable to  depreciation and amortization related to higher cost of premise leases and additional amortization of intangible assets.  Included in the depreciation and amortization was $17.4 million of amortization on acquired intangible assets, an increase of $0.8 million compared to the first nine months of 2023, driven by intangible assets acquired from the Woolf acquisition.   

For the nine months ended September 30, 2024, net finance expense decreased $4.3 million to $32.7 million, from $37.0 million in the same period 2023. The primary driver of this improvement was a decrease in our average bank indebtedness balance over the first nine months of the year.

For the nine months ended September 30, 2024, income tax expense was $5.3 million, compared to $3.0 million in the first nine months of 2023. In May 2024, Canada substantively enacted the Excessive Interest and Financing Expenses Limitation ("EIFEL") legislation which limits our ability to deduct interest and increases our expected taxable income in Canada.  During the nine months ended September 30, 2024, we recognized $4.3 million (C$5.8 million) of deferred tax assets based on the expected utilization of operating loss carry forwards.

Excluding this tax recovery, income tax expense was $9.5 million, representing an effective tax rate of 22.1%, compared to 10.0% in the first nine months of 2023. The year-over-year increase in the effective tax rate reflects the benefits of restructuring activities realized in the prior year. 

For the nine months ended September 30, 2024, Adjusted EBITDA grew 0.9% to $142.1 million, from $140.8 million during the same period in 2023. This $1.3 million improvement largely reflects the $4.1 million increase in gross margin, partially offset by the $2.8 million increase in operating expenses (before changes in depreciation and amortization, LTIP expense, accrued trade duties, and transaction costs).

Net income for the first nine months of 2024 grew 40.8% to $38.1 million (basic earnings per share of $1.62), from $27.1 million (basic earnings per share of $1.21) in the same period 2023. The $11.0 million increase was driven by $12.5 million higher EBITDA and $4.3 million lower net finance expense, partially offset by an increase in depreciation and amortization of $3.5 million and an increase in income tax expense of $2.3 million.

Adjusted net income for the first nine months of the year grew 4.7% to $59.1 million, from $56.4 million in the same period in 2023. Adjusted basic earnings per share was $2.52, no change from prior-year period.

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 operates a network of 86 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 2024, we revised our calculations of Adjusted net income, Adjusted basic earnings per share, and Adjusted diluted earnings per share to exclude the amortization of acquired intangible assets and foreign exchange gain (loss).  The historical presentation of these measures within this news release has also been updated to reflect the revised calculations.  We believe that excluding the amortization of acquired intangible assets and foreign exchange gain (loss) from these non-GAAP financial measures helps management and investors in understanding our underlying operating performance. 

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, accrued trade duties, and transaction costs. 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, accrued trade duties, transaction costs, foreign exchange gain (loss), and amortization of intangible assets acquired in connection with an acquisition. We believe adjusted net income is a useful supplemental measure for investors, and is used by management to assist in 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, to assist in evaluating our ability to meet debt service requirements and fund organic and inorganic growth, and as an indicator of relative operating performance.
• "Working capital" is accounts receivable, inventory, and prepaid expenses, partially offset by short-term credit provided by suppliers in the form of accounts payable and accrued liabilities. We believe working capital is a useful indicator for investors, and is used by management, to evaluat the operating liquidity available to us.

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 quarter ended September 30, 2024 (which is incorporated by reference herein).

Such non-GAAP financial measures and non-GAAP ratios are not standardized financial measures under IFRS and might not be comparable to similar financial measures disclosed by other issuers.  For a reconciliation between non-GAAP measures and non-GAAP ratios 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 is included, but not limited to: Leverage within our target range of 2-3x, providing us with the financial agility to advance our strategic priorities; Our positive outlook for the coming year; Affordability pressures stemming from the cumulative impact of consumer price inflation in the broader economy, alongside continued market challenges related to elevated interest rates, will impact Q4 2024 as compared to Q4 2023; We anticipate that these headwinds will be offset by strong operational execution and the inclusion of Woolf, resulting in fourth quarter Adjusted EBITDA aligning closely with Q4 2023 levels; These strategies are integral to our Destination 2028 plan, which targets $800 million in additional run-rate revenue through acquisitions by 2028, along with achieving a 10%+ EBITDA margin and 12%+ ROIC; our third quarter acquisition of Woolf has put us on pace to meet these goals, delivering immediate benefits while positioning us for continued growth; As one of North America's largest distributors of architectural building products, with approximately 6% market share, we are well-positioned to pursue further growth, and we maintain a robust pipeline of acquisition opportunities; Looking ahead, forecasters indicate a favorable outlook for building market conditions in the second half of 2025 and beyond; and We are confident in our multi-year growth trajectory across core markets in repair and remodel, residential, and commercial sectors.

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 US 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 US dollar could affect our performance; our results are dependent upon the general state of the economy; the 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 December 31, 2023, 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 our management as of the date of this news release. The financial outlook is provided for the purpose of providing readers with an understanding of our 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.